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IMPACT ON ECONOMIC ACTIVITIES BY ADOPTION

OF INTERNATIONAL FINANCIAL REPORTINGSTANDARDS BY INDIAN COMPANIES

A thesis submitted to Christ University for the Degree of

DOCTOR OF PHILOSOPHY

IN

COMMERCE

RAM KESH GUPTA

Research Scholar

UNDER THE GUIDANCE OF

Dr D. N. S. KUMAR

Professor and Associate Director

Centre for Research-ProjectsChrist UniversityBangalore - 29

Centre for Research

Christ University, Bangalore-560029

March 2012


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IMPACT ON ECONOMIC ACTIVITIES BY ADOPTION

OF INTERNATIONAL FINANCIAL REPORTINGSTANDARDS BY INDIAN COMPANIES

A thesis submitted to Christ University for the Degree of

DOCTOR OF PHILOSOPHY

IN

COMMERCE

RAM KESH GUPTA

Research Scholar

UNDER THE GUIDANCE OF

Dr D. N. S. KUMAR

Professor and Associate Director

Centre for Research-ProjectsChrist UniversityBangalore - 29

Centre for Research

Christ University, Bangalore-560029

March 2012


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i

CERTIFICATE

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

BY ADOPTION OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS BY INDIAN COMPANIES submitted by Ram Kesh Gupta to

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

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

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

University for the award of any degree or diploma.

Place: Bangalore Dr D. N. S. Kumar

Date: Professor and Associate Director

Centre for Research-Projects

Christ University

Bangalore - 29


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DECLARATION

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

ACTIVITIES BY ADOPTION OF INTERNATIONAL FINANCIAL

REPORTING STANDARDS BY INDIAN COMPANIES is an original research

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

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

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

OF PHILOSOPHY IN COMMERCE.

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

University for the award of any degree or diploma.

Place: Bangalore Ram Kesh Gupta

Date: Research Scholar


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ACKNOWLEDGEMENT

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

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

journey.

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

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

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

and support has enabled me to complete this work.

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

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

opportunity to do this research.

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

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

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

encouragement.

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

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

insights into my work.

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

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

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

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

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

me in my research.


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

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

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

Pandya, Indian Institute of Management, Bangalore for providing valuable

contributions.

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

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

encouragement and appreciation of what I do.

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

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

Ram Kesh Gupta


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TABLE OF CONTENTS

Certificate i

Declaration ii

Acknowledgement iii

Table of Contents v

List of Tables ix

List of Graphs xi

List of Acronyms and Abbreviations xii

Chapter I INTRODUCTION 1

I.0 Introduction 2

I.1 Brief History of International Financial Reporting Standards 5

I.2 Related Literature 9

I.3 Statement of Problem 13

I.4 Research Question 14

I.5 Scope and Significance of the Study 15

I.6 Objectives of the Study 16

I.7 Hypotheses of the Study 17

I.8 Operational Definitions 17

I.9 Major Findings 19

I.10 Limitations of the Study 21

I.11 Chapter Scheme 21


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Chapter II LITERATURE REVIEW 23

II.0 Introduction 24

II.1 Brief History of the International Accounting Standards

Committee 24

II.2 Origin of International Accounting Standards Board 26

II.2.i International Accounting Standards Board 26

II.2.ii International Financial Reporting Interpretations

Committee 27

II.3 Popularity and Acceptance of International Financial

Reporting Standards Worldwide 28

II.4 Literature Review 30

II.5 Description of International Financial Reporting Standards 38

II.6 Description of International Accounting Standards 40

II.7 Indian Accounting Standards with relevant International

Accounting Standards/International Financial Reporting

Standards 44

II.8 Overview of International Financial Reporting Standards in

Summarized Form 46

II.9 Summarization of Indian Accounting Standards 65

II.10 Major Differences between Indian Generally Accepted

Accounting Principles and International Financial Reporting

Standards/International Accounting Standards 148

Chapter III RESEARCH DESIGN AND METHODOLOGY 168

III.0 Purpose of the Study 169

III.1 Research Methodology 169

III.1.i Study Design 169

III.1.ii Data Collection 170

III.1.iii Companies under Study 171


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

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

III.1.vi. Graphical Presentation 172

Chapter IV COMPANIES UNDER STUDY 173

IV.0 Accounting Regulations and International Financial Reporting

Standards in India 174

IV.1 Legal Recognition for Accounting Standards 176

IV.1.i Presentation of Financial Statements 177

IV.2 Convergence with International Financial Reporting Standards 179

IV.2.i Applicability of International Financial ReportingStandards to Small and Medium Size Entities 181

IV.3 Companies under Study 182

IV.3.i Dabur India Ltd 182

IV.3.ii Infosys Ltd 186

IV.3.iii Noida Toll Bridge Company Ltd 189

IV.3.iv Rolta India Ltd 191

Chapter V ANALYSIS AND INTERPRETATION 194

V.0 Data Analysis and Measurement 195

V.1 Measurement of Variables 195

V.2 Data Analysis 196

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

Financial Reporting Standards 196

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

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


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


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

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

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

International Financial Reporting Standards 212

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

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

V.2.iv Hypothesis 4-Diversification activities and

International Financial Reporting Standards 221

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

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

V.3 Interpretation of Results 229

Chapter VI CONCLUSION, SUGGESTIONS, AND SCOPE FOR

FURTHER RESEARCH 233

VI.0 Conclusion 234

VI.1 Contributions 235

VI.2 Suggestions 238

VI.3 Scope for Further Research 241

REFERENCES 244


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LIST OF TABLES

Sl. No. Table No. Title Page No.

1. I.8.i Operationalisation of Variables 18

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

Reporting Standards with Indian Generally

Accepted Accounting Principles 40

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

Standards and Indian Generally Accepted

Accounting Principles 42

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

International Accounting Standards/International


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

Accounting Principles and International Financial

Reporting Standards/International Accounting

Standards 148

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

selected for study 182

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

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

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

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

and IGAAP for Hypothesis 1 200

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

(Hypothesis 1) 201

12. V.2.i.a.av Descriptive Statistics of Financial Risks(Hypothesis 1) 202

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

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

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


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


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

(Hypothesis 2) 209

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

(Hypothesis 2) 210

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

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

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

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


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

(Hypothesis 3) 218

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

Activities (Hypothesis 3) 218

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

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

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

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


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

(Hypothesis 4) 226

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

(Hypothesis 4) 226

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


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LIST OF GRAPHS

Sl. No. Graph No. Title Page No.

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

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

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

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


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ACRONYMS and ABBREVIATIONS

(In alphabetical order)

AS : Accounting Standards of India

ASB : Accounting Standards Board of India

CRISIL : Credit Rating and Information Services of India Ltd.

DEPS : Diluted Earnings per Share

DIL : Dabur India Limited

ER : Equity Ratio

FAT : Fixed Asset Turnover Ratio

FMCG : Fast Moving Consumer Goods

IAS : International Accounting Standards

IASB : International Accounting Standards Board

IASC : International Accounting Standards Committee

ICAI : Institute of Chartered Accountants of India

IFAC : International Federation of Accountants

IFRIC : International Financial Reporting Interpretations Committee

IFRS : International Financial Reporting Standards

IGAAP : Indian Generally Accepted Accounting Principles


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ILFS : Infrastructure Leasing and Financial Services Ltd.

InvCF : Investing Cash Flows

InvFA : Investments in Fixed Assets

IRDA : Insurance Regulatory and Development Authority

EPS : Earnings per Share

EU : European Union

FASB : Financial Accounting Standards Board

GAAPs : Generally Accepted Accounting Principles

GDR : Global Depository Receipt

GR : Gearing Ratio

MCA : Ministry of Corporate Affairs of India

NACAS : National Advisory Committee on Accounting Standards

NASDAQ : National Association of Securities Dealers Automated Quotations

NSE : National Stock Exchange of India

NTBCL : Noida Toll Bridge Company Limited

NZGAAP : New Zealand Generally Accepted Accounting Principles

OpCF : Operating Cash Flows

PE : Price Earnings Ratio

QR : Quick Ratio


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RBI : Reserve Bank of India

ROA : Return on Assets

ROE : Return on Equity

SAGR : Sales Growth

SEBI : Securities and Exchange Board of India

SEC : Securities Exchange Commission

SICs : Standing Interpretations Committee Standards

SMC : Small and Medium sized Companies

USA : United States of America

USSEC : United States Securities Exchange Commission

USGAAP : United States Generally Accepted Accounting Principles


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CHAPTER I

INTRODUCTION


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I.0 INTRODUCTION

The importance of international accounting practice studies has grown over

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

international business practices. It is essential to understand that international

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

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

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

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

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

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

introduction of International Financial Reporting Standards (IFRS) for listed

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

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

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

being recognized as the premier global reporting standards of accounting information

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

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

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

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

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

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

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

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

companies and benefits more efficient allocation of capital.


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

standards emphasized the need for harmonization of accounting standards to deliver

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

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

1)

The standards should include a core set of accounting pronouncements that

constitute a comprehensive, generally accepted basis of accounting.

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

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

meaningfully analyse performance across time periods and among companies.

3)

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

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

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

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

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

is the objective of common standards will get eroded.

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

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

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

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

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

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

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

IFRS.

With the economy growing and increasing integration among the global

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


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

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

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

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

then, an Indian corporate having global aspirations should consider voluntary

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

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

accounting standards known as Indian Generally Accepted Accounting Principles

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

MCA, Government of India.

The proponents of IFRS argue that accounting standards harmonization via

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

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

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

to information asymmetry is through better accounting disclosure policies. The

accounting quality pertains to better information disclosure quality. Various

accounting standards and GAAPs (Generally Accepted Accounting Practices)

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

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

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

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

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

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

corporate transparency, increases quality of financial reporting and thus benefits

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


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

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

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

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

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

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

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

Indian companies.

I.1 BRIEF HISTORY OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS

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

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

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

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

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

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

in.

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

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

each other while exchanging and sharing financial results of their international

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

international stakeholders. One school of thought believes that since business

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

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


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

solve the problem of diversity of accounting practices across borders.

Historically, countries around the world have had their own national

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

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

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

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

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

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

talk to each other in a common language.

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

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

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

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

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

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

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

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

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

comparison of published financial statements of entities using IFRS difficult.

Debate still rages amongst accountants and auditors globally on many burning

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

interpretation of these standards.

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

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


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

standards would solve the conundrum of diversity in accounting practices worldwide

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

follow and rely upon?

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

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

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

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

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

and financial reporting standards worldwide.

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

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

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

a strong possibility of the USSECs accepting IFRS ultimately. Judging from the

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

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

SECs road map to convergence with IFRS goes through successfully without any

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

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

standards, namely the IFRS.

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

standards that are equivalent to IFRS.

Economic activities such as investments, mergers and acquisitions, and

diversifications are key activities of development, survival and sustainability.

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

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

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

mergers and acquisitions and diversification do not impact statistically on economic

activities even though differences are seen in absolute numbers.

An important step towards accounting standards harmonization through IFRS

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


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proposal that all European Union companies listed on organized stock exchanges

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

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

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

significant revolution concerning accounting standards and accounting practices ever

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

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

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

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

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

I.2 RELATED LITERATURE

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

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

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

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

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

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

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

other streams of IFRS literature that examine factors influencing disclosure on

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

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

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

Regulators and investors have commonly expressed the view that more the

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

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


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

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

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

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

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

Raffounier 1998; GAAP 2000).

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

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

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

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

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

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

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

adopting countries make concurrent efforts to improve enforcement and governance

regimes.

Moreover, several studies provide empirical evidence suggesting that IFRS is

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

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

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

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

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

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

standards or improved information quality by IFRS.

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

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


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quantity or leveland a firms voluntary adoption of IFRS. Ding et al. (2005) report

that IFRS require more comprehensive disclosures than the domestic standards of

most countries.

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

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

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

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

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

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

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

Finnish companies by considerably increasing the profitability ratios and gearing ratio

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

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

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

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

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

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

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

implementation on financial performance of the company. Financial statements

prepared under Czech accounting standards showed the company healthier than

financial statements drawn under IFRS.

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

indicators of 37 English companies suggested divergence between IFRS and

USGAAP, indicated significant correlation between differences of these indicators.

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


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

disclosures as measured by disclosure indexes constructed from Balance Sheets and

Income Statements of 100 publicly listed companies in Philippines. Multiple

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

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

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

expressed in terms of Balance Sheet and Income Statement indices.

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

sample country, investigated whether firms adopting IFRS have higher earning

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

some improvement in the quality of accounting information associated with the

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

mechanism of accounting standards in emerging markets. Enforcing the same

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

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

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

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

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

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

market mechanisms.

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

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

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

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


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

IFRS implementation by banking industry.

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

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

firms voluntary adoption of IFRS can be viewed as commitment to better disclosure,

which may have various economic impacts on the firm.

I.3 STATEMENT OF PROBLEM

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

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

acquisitions and other key functions of finance after adoption of International

Financial Reporting Standards by Indian companies and to study whether disclosures

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

not.

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

impacted key economic activities such as:

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

companies?

2)

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

Indian companies?

3)

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

of IFRS by Indian companies?

4)

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

by Indian companies?


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I.4 RESEARCH QUESTION

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

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

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

activities, merger and acquisition activities and diversification activities.

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

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

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

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

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

risks improved after adoption of IFRS voluntarily.

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

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

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

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

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

The researcher hypothesizes that investment activities increased after the adoption of

IFRS voluntarily.

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

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

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

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

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

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

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


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

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

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

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

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

hypothesizes that diversification activities increased after the adoption of IFRS

voluntarily.

I.5 SCOPE AND SIGNIFICANCE OF THE STUDY

This study is significant because Indian companies have started going abroad

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

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

standard across the globe.

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

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

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

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

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

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

This research will significantly contribute to accounting and finance

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

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

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

how these activities are affected by better disclosures through IFRS.


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I.6 OBJECTIVES OF THE STUDY

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

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

objectives are as follows:

i. To study the existing accounting and disclosing norms;

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

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

iv.

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

with such economic activities.

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

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

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

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

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

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

and reduce the cost of raising capital.

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

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

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

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

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

companies and increases the economic activities like investment activities,

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


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I.7 HYPOTHESES OF THE STUDY

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

following:

Hypothesis 1:

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

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

Hypothesis 2:

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

voluntarily.

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

Hypothesis 3:

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

IFRS voluntarily.

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

voluntarily.

Hypothesis 4:

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

voluntarily.

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

I.8 OPERATIONAL DEFINITIONS

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

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

hypotheses.

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


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

hypotheses to operationalize these variables.

The definitions for variables operationalization are supported from the

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

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

Table I.8.i: Operationalization of Variables

Hypothesis Economic

activity

Ratios Definition Related literature

Hypothesis 1 Financial risk Liquidity Quick ratio Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Profitability Return on

equity

Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Leverage Gearing ratio Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Market based

ratio

Price earnings

ratio

Lantto &

Shalstrom (2009)

Hypothesis 2 Investment

activities

Investment in

fixed assets

Gross value to

be used

Aubert &

Grudnitski (2011)

Investing

cash flow

As originally

reported incash flow

statements

Aubert &

Grudnitski (2011)

Return on

assets

Ratio between

total assets and

net income

Kabir et al. (2010),

Padrtova &

Vochozka (2011)


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Hypothesis Economic

activity

Ratios Definition Related literature

Hypothesis 3 Mergers and

acquisitions

activities

Diluted EPS As reported Aubert &

Grudnitski (2011)

Equity ratio Equity ratio Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Operating

risk

Fixed asset

turnover ratio

Aubert &

Grudnitski (2011),

Padrtova &

Vochozka (2011)

Hypothesis 4 Diversification

activities

Growth Sales variation

over previous

year

Byard et al. (2010)

Operating

cash flow

As originally

reported in

cash flow

statements

Aubert &

Grudnitski (2011)

I.9 MAJOR FINDINGS

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

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

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

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

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

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

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

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


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

companies.

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

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

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

IFRS voluntary adoption.

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

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

voluntary adoption.

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

significance to suggest that there is improvement in mergers and acquisitions

activities under IFRS voluntary adoption.

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

significance to suggest that there is improvement in diversification activities under

IFRS voluntary adoption.

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

showed improvement statistically with IFRS voluntary adoption by Indian companies,

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

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

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

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

no significant differences in earnings management between companies using adopted

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

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

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


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I.10 LIMITATIONS OF THE STUDY

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

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

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

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

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

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

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

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

control all reporting indicators.

This research encompasses an empirical investigation of impact of voluntary

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

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

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

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

I.11 CHAPTER SCHEME

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

Chapter 1: Introduction

This chapter deals with a brief history of Indian Generally Accepted

Accounting Principles, International Financial Reporting Standards, International

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

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

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

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

organization.


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Chapter 2: Literature Review

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

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

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

Chapter 3: Research Design and Methodology

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

tools and financial matrices used for analysis.

Chapter 4: Companies under study

This chapter covers accounting regulations and IFRS reporting and

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

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

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

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

company are covered.

Chapter 5: Analysis and Interpretation

This chapter covers data analysis and measurement of variables from the

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

by testing of the hypotheses through the statistical tools.

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

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

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

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

future research studies.


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CHAPTER II

LITERATURE REVIEW


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II.0 INTRODUCTION

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

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

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

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

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

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

as rules-based standards.

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

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

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

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

II.1 BRIEF HISTORY OF THE INTERNATIONAL ACCOUNTING

STANDARDS COMMITTEE

The International Accounting Standards Committee (IASC), the predecessor

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

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

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

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

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

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

structure and functioning. For example, by the year 2000, IASCs sponsorship grew

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

all professional accounting bodies that were members of the International Federation

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


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

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

process.

As part of their membership in IASC, professional accountancy bodies

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

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

published financial statements to comply with International Accounting Standards.

This also drew the worlds attention to the fact that there exists a truly representative

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

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

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

stated in its Constitution, were:

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

understandable, and enforceable global accounting standards that require

high quality, transparent, and comparable information in financial

statements and other financial reporting to help participants in the various

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

decision;

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

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

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

emerging economies; and

d. To bring about convergence of National Accounting Standards and

International Financial Reporting Standards to high-quality solutions.


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II.2 ORIGIN OF INTERNATIONAL ACCOUNTING STANDARDS BOARD

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

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

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

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

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

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

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

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

specifically formed to take a fresh look at-the then IASCs structure and strategy.

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

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

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

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

IFRS. New interpretations issued by the International Financial Reporting

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

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

Interpretations.

II.2.i International Accounting Standards Board

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

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

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

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

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

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


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

Board members. These criteria are:

Demonstrated technical competency, knowledge of financial accounting and

reporting, and ability to analyse,

Effective communication skills,

Awareness and understanding of the global economic environment,

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

and consideration for one anothers views and the views of the constituents, and

Capability to take into consideration varied viewpoint presented, weighing the

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

supportable decisions in a timely fashion.

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

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

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

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

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

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

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

has the complete responsibility for all IASB technical matters including preparation

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

the IFRS.

II.2.ii International Financial Reporting Interpretations Committee

The Trustees appoint the members of the International Financial Reporting

Interpretation Committee (IFRIC). The IFRIC is the IASBs interpretive body and has

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


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

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

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

diversity of international business and market experience in the practical application

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

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

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

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

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

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

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

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

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

Interpretation requires the IASBs approval before its final issuance.

II.3 POPULARITY AND ACCEPTANCE OF IFRS WORLDWIDE

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

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

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

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

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

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

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

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

replaced national accounting standards and requirements as the basis for preparing


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

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

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

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

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

Philippines, and Singapore had adopted national accounting standards that mirrored

IFRS.

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

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

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

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

GAAPs in China and Japan to IFRS.

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

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

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

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

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

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

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

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

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


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II.4 LITERATURE REVIEW

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

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

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

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

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

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

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

other streams of IFRS literature that examine factors influencing disclosure on

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

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

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

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

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

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

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

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

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

Regulators and investors have commonly expressed the view that more the

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

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

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

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

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


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

1991).

It is generally accepted that under internationally recognized standards such

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

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

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

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

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

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

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

measure the comparability between accounting measures prepared under IFRS and

USGAAP.

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

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

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

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

companies.

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

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

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

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

estimating the cost of capital.

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

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

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


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that IFRS require more comprehensive disclosures than do most countries domestic

standards.

The information asymmetry literature suggests that greater disclosure

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

cost of equity through lower transaction costs and/or stronger demand for a firms

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

that higher information quality lowers the information asymmetries between

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

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

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

for diversification and investment return.

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

IFRS-based earnings announcements convey significantly higher information contents

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

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

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

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

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

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

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

strategy.

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

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

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

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


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

other differences in earnings management incentives and enforcement mechanisms,

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

significantly less in earnings management, as compared to German companies

reporting under domestic GAAP.

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

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

income and stockholders equity as reported under Germanys Commercial Code

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

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

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

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

studied suffered relevant accounting conversions in the process of compliance.

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

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

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

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

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

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

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

adopting countries make concurrent efforts to improve enforcement and governance

regimes.

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

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

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


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

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

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

any more value relevant than the accounting information derived using local

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

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

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

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

those mandatory IFRS adopters domiciled in countries with both strong enforcement

regimes and domestic accounting standards that differ significantly from IFRS.

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

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

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

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

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

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

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

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

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

increase in the quality of the financial statements.

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

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

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

that Portuguese companies that follow Portuguese Securities Market Commission

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


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

compliance with the recommendations is still low.

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

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

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

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

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

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

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

ratios of Finnish companies by considerably increasing the profitability ratios and

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

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

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

profits.

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

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

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

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

implementation on financial performance of the company. Financial statements

prepared under Czech accounting standards showed the company healthier than

financial statements drawn under IFRS.

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

indicators of 37 English companies suggested divergences between IFRS and

USGAAP indicating significant correlation between differences of these indicators.


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

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

disclosures as measured by disclosure indexes constructed from Balance Sheets and

Income Statements of 100 publicly listed companies in Philippines. Multiple

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

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

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

expressed in terms of Balance Sheet and Income Statement indices.

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

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

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

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

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

December 2005, and finds out the differences between Swedens voluntary adoptions

of IFRS during 1991-2004. With regard to the EUs international standards voluntary

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

are still disciplined mainly by regulators than by market mechanisms.

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

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

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

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

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

implementation by banking industry.

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

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

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

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

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

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

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

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

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

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


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3.

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

exposure draft for public comment; and

4.

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

International Financial Reporting Standard.

Uses of IFRS

IFRS are increasingly being recognized as Global Reporting Standards.

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

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

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

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

Exchanges without requiring the presentation of reconciliation statement.

Various currently applicable IFRS

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

of IFRS that are currently in force.

IFRS 1: First time adoption of International Financial Reporting Standards

IFRS 2: Share Based Payment

IFRS 3: Business Combinations

IFRS 4: Insurance Contracts

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

IFRS 6: Exploration for and Evaluation of Mineral Resources

IFRS 7: Financial Instruments: Disclosure

IFRS 8: Operating Segments


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

Sl. No. IFRS No. Corresponding IGAAP

1. First Time Adoption of IFRS Voluntary in India

2. Share based Payment ICAI-Under preparation

3. Business Combination AS-14

4. Insurance Contracts ICAI-Under preparation

5.Non-Current Assets Held for Sale and

Discontinued OperationsAS-24

6.Explanation for and Evaluation of

Mineral ResourcesCovered by guidance

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

8. Operative Segments AS-17

II.6 DESCRIPTION OF INTERNATIONAL ACCOUNTING STANDARDS

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

been superseded and large numbers of these have been revised.

The list of IAS that are currently in force

IAS 1: Presentation of Financial Statements

IAS 2: Inventories

IAS 7: Statement of Cash Flows

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

IAS 10: Events After the Reporting Period

IAS 11: Construction Contracts

IAS 12: Income Taxes

IAS 16: Property, Plant and Equipment

IAS 17: Leases

IAS 18: Revenue

IAS 19: Employee Benefits


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IAS 20: Accounting for Government Grants and Disclosure of Government

Assistance

IAS 21: The Effects of Changes in Foreign Exchange Rates

IAS 23: Borrowing Costs

IAS 24: Related Party Disclosures

IAS 26: Accounting and Reporting by Retirement Benefit Plans

IAS 27: Consolidated and Separate Financial Statements

IAS 28: Investments in Associates

IAS 29: Financial Reporting in Hyperinflationary Economies

IAS 31: Interests in Joint Ventures

IAS 32: Financial Instruments: Presentation

IAS 33: Earnings per Share

IAS 34: Interim Financial Reporting

IAS 36: Impairment of Assets

IAS 37: Provisions, Contingent Liabilities and Contingent Assets

IAS 38: Intangible Assets

IAS 39: Financial Instruments: Recognition and Measurement

IAS 40: Investment Property

IAS 41: Agriculture

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


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

The comparative position of IAS and IGAAP is presented below

IAS No. International Accounting Standards Corresponding IGAAP

1. Presentation of Financial Statements AS 1

2. Inventories AS 2 (Revised)

7. Statement of Cash Flows AS 3 (Revised)

8.Accounting Policies, Changes in

Accounting Estimates and ErrorsAS 5 (Revised)

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

11. Construction Contracts AS 7 (Revised)

12. Income Taxes AS 22

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

17. Leases AS 19

18. Revenue AS 9

19. Employee Benefits AS 15

20.Accounting for Government Grants and

Disclosure of Government AssistanceAS 12

21.The Effects of Ch

economics factor on ifrs

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