Editorial Board

A Refereed Monthly International Journal of Management

Implementation of International Financial Reporting Standards in Indian Companies

Author

ABSTRACT

Globalization is making a dramatic impact on the world economy, borders are getting less and less relevant and corporation and trade between companies situated on different continents is now very common. More and more companies have become global in their commercial activities and international trade with shares and credits is constantly increasing. For increased business accounting also needs to improve and for this purpose a common set of accounting standards are required. Each country has their own standards which are different from each other and to improve accounting and making similar standard International accounting standard committee (IASC) is working on common standards called International financial reporting standards (IFRS). India intends to use since 2011 but it was delayed up to 2016. This paper analyses the differences in the annual report of a company when IFRS were implemented and measure the result of IFRS in annual accounts. Further, the views of managers, auditors and accountants for the use of IFRS were also analysed in this paper. The paper conclude that the respondents (N=200) have positive perception towards adoption of IFRS and its use.

Keywords: IFRS, Indian AS, Wipro, Implementation of IFRS, Gaps in opening and closing balance.

INTRODUCTION

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 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?

Beginning from 1st April 2011,(later from 1^st April, 2016) 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 to carry 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 of convergence 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.

The IFRS adopted in India was in the format of Ind.AS-101 (First-time Adoption of Indian Accounting Standards) was used for the purpose of first time adoption of IFRS with the objective to provide a suitable starting point for accounting in accordance with Ind.AS, set out the procedures that an entity would follow when it adopts Ind.AS for the first time as the basis for preparing its financial statements, transition at a cost that does not exceed the benefits, and ensure that the entity’s first Ind.AS financial statements contain high quality information that is transparent for users and comparable over all periods presented. Ind.AS 101 has certain differences as compared to the corresponding International Financial Reporting Standard (IFRS) 1, First-time Adoption of International Financial Reporting Standards including certain inclusion/modification of existing exemptions under IFRS 1 provide practical expedient to the Indian companies adopting Ind.AS.

Objectives of the Study

This research is undertaken to contribute towards the following broad objectives.

1. To measure the implementation of IFRS in Indian company and measuring gap in the opening balance sheet of corporate entity when it is used first time.
2. To find out perception of respondents in relation to adoption of IFRS for reporting at national level

Review of Literature

Nobes and Parker (1995) described that the most fundamental factor, which limits the harmonization, is a number of initial differences between accounting practices in different countries. The accounting standard-setting process has proceeded somewhat differently in the major nations of the developed world. The professional accountancy body and good training system both form the limitation and disadvantage for the harmonization process. Street and Shaughnessy (1998) reported that at the beginning of the 1990s, numerous differences existed between international standards and the accounting standards of the major Anglo-American countries. The paper also highlighted the significance of the enforcement issue for the IASC as it was seeking an International Organization of Securities Commissions (IOSCO) endorsement. Choi, Frost and Meek (1999) emphasized that the international standardization of accounting may create so called “standards overload”. The companies must respond the costly international requirements. McLeay, Neal, and Tollington (1999) distinguish harmonization from standardization and present a method for measuring harmonization that allows for choice between alternative accounting treatments. Fearnley and Hines (2002) examined the attitudes of key players in Implementing IFRS in the U.K. The research indicates that the regulators, auditors and company directors who were interviewed accept the concept of common global standards but do not believe that the standard of financial reporting in the U.K. will improve as a result of the IAS regulation. Woods (2002) defines globalization as combination of internationalization, political and economic liberalization. Guohua Zhang (2005) stated that high-quality international accounting standards are needed to provide comparable and consistent financial information to assist in capital allocation, and to maximize the efficiency of capital markets throughout the world, which results in a growing importance of financial globalization. In order to achieve this objective, accounting professions have increasingly become aware of the need to establish a single set of accounting standards that would be valid in the international arena. Nobes and Parker (2006) stated that ‘harmonization’ is a process of increasing the Compatibility of accounting practices by setting bounds to their degree of variation. ‘Standardization’ appears to imply the imposition of a more rigid and narrow set of rules. However, within accounting, these two words have almost become technical terms, and one cannot rely upon the normal difference in their meanings. ‘Harmonization’ is a word that tends to be associated with the transnational legislation emanating from the European Union; ‘standardization’ is a word often associated with the International Accounting Standards Board. So, accounting standards setting can be seen one of the main activities within the global harmonizing process. Ball (2006)Therefore, mandatory IFRS adoption has the potential to facilitate cross-border comparability, increase reporting transparency, decrease information costs, reduce information asymmetry, and thereby increase the liquidity, competitiveness, and efficiency of markets

Quigley (2007) According to proponents of International Financial Reporting Standards (IFRS), publicly traded companies must apply a single set of high-quality accounting standards in order to contribute to better functioning capital markets. Soderstrom& Sun, (2007) As a result of the interdependence between accounting standards and the country’s institutional setting and firm’s incentives, the economic consequences of changing accounting system may vary across countries. Daske, Hail, Leuz, and Verdi (2008)after mandatory IFRS adoption, forecast accuracy and other measures of the quality of the information environment increase significantly more for mandatory adopters relative to non-adopters and voluntary adopters. Unlike prior studies, we do not find that voluntary adopters benefit significantly more from mandating IFRS compared to mandatory adopters. Armstrong et al (2010) found out a positive reaction to IFRS adoption events for firms with high quality pre adoption information, consistent with investors expecting net convergence benefits from IFRS adoption. In his study of 1084 European Union firms during the period of (1995-2006), Cai& Wong (2010) in their study of global capital markets summarized that the capital markets of the countries that have adopted IFRS have higher degree of integration among them after their IFRS adoption as compared to the period before the adoption. Lantto&Sahlstrom (2009) in their study of key financial ratios of companies of Finland found that the adoption of IFRS changes the magnitude of the key accounting ratios. The study also showed that the 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. Chand & White (2007) in their paper on convergence of Domestic Accounting Standards and IFRS, demonstrated that the influence of Multinational Enterprises and large international accounting firms can lead to transfer of economic resources in their favour, wherein the public interests are usually ignored. Elena et al (2009) in their article dealing with the issues of convergence between US Generally Accepted Accounting Principles (GAAP) and IFRS were of the opinion that the adoption of IFRS in the USA undoubtedly would mark a significant change for many US companies. It would require a shift to a more principles-based approach, place for greater reliance on management (and auditor) judgment, and spur major changes in company processes and systems. Ali &Ustundag (2009) in their paper on development process of Financial Reporting Standards around the World and its practical results in a developing country, Turkey. They observe that Turkey has encountered several complications in adaption of IFRS such as complex structure of the International standards, potential knowledge shortfalls and other difficulties in application and enforcement issues. Epstein (2009) in his article on Economic Effects of IFRS adoption emphasized on the fact that universal financial reporting standards will increase market liquidity, decrease transaction costs for investors, lower cost of capital and facilitate international capital formation and flows. Devalle (2010) concluded that with adoption of IFRS by 3721 firms listed on 5 European Stock Exchanges, influence of earning on share price increased. Bhagat (2012) in his articlereveled that there are so many aspects relating to IFRS convergence which still need to be clarified, such as IFRS first time adoption standard, compliance of comparative previous period figures with IFRS, changes required to the Companies Act to comply with IFRS, changes to the Income-Tax Act, the Reserve Bank of India’s requirements for banks, etc.

Research Methodology

The research methodology adopted for the current research study is explained as under:

Method of data Collection:

The data collected from both the primary and secondary sources. The respondents were given Likert scale to fill the data in one page questionnaire.

Data Source:

Primary Source: Primary data were collected directly by using questionnaire.The responses were arrested through personal interview with 200 respondents including managers, auditors and accountants from companies operated in India.

Secondary Sources: the secondary data were collected from annual report of Wipro Companyas a sample and published report of companies.

Data and SPSS Code:

The description of the variables and their SPSS codes were presented in table-1 as under:

Table-1: Variables and their SPSS codes

Data analysis:

As per the nature of data, i.e., ordinal data, one sample t test was used as statistical tools & techniques.

As per the first objectives and research gap the differences in the gap at IFRS and old AS in India was compared and the details were shown for 2008 and 2009 in the table-2 and Table-3 for Wipro Company as under:

Table-2: Gap in the opening balance sheet of Wipro for 2008

Table-3: Gap in the opening balance sheet of Wipro for 2009

The study investigates the financial statement implications of adopting IFRS by Wipro. It is observed 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 mainly because 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 following the 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.

To analysis the second objective the data from the respondents working in the companies in India who were using IFRS or Ind.AS were collected. 15 companies were selected for the purpose of the data collection. The profile of the sample is presented in table-4 as under:

Table-4: Demographic profile of respondents

As per the objective of finding out the responses of auditors, accountants and managers were taken for adoption of IFRS in India. Their perceptions were taken on 17 variables which were selected as per reviews of literature. The following hypothesis was made:

H₁= There is a requirement of IFRS for reporting at national level.

To analyse the hypothesis various sub hypothesis were developed and one sample t test were conducted with SPSS-19 software. The results were shown in table-5 as under:

Table-5: One sample T test

1. One-Sample Statistics

1. Chi Square Test

1. One-Sample Test

The descriptive of the data was shown in part ‘a’ of the Table-5, while part ‘b’ of the table 5, provides the actual result of the chi-square goodness-of-fit test. Chi square Test for respondents perception have shown that in in case of Understand, Harmonise, Converged, current_era, listed_comp, Impor_use, Training, Session, Howmany, Goodwill and liability_Mgt differences were found significant as p<0.05. Thus we can reject the hypothesis and state that there is a requirement of IFRS for reporting at national level which revealed the above ponts. Further, the output of the ‘one sample t test’ in the table-5 (c part)reveals that significant gap exists between the hypothesized test values with the calculated sample statistics for the requirement of IFRS for reporting at national level. Significant difference exists for variable openion_IFRS and Timeline_satisfaction(p<0.05) at 5% level of significance. The respondents have exhibited a fair amount of agreement on need IFRS at national level.

Conclusion

The study investigates both financial statements and views of respondents including managers, auditors and accountants. The financial statement were analysed with current reporting principles and implications of adopting IFRS in a sample company Wipro. It was observed 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 mainly because dividend provision is not recognized in IFRS. The primary data revealed that respondents understand the concept of accounting standards, Harmonization of National GAAP with IFRS, it is necessary for countries of the world to converge to IFRS, IFRS is required for Companies in current era, listed companies should adopt IFRS, which Is it important to use. Training is also required before the implementation of IFRS, they have attended any sessions of IFRS training, IFRS implementation will increase the goodwill of the company, increase the Liability of management, IFRS implementation will increases the level of Disclosure and respondent’s opinion about IFRS is satisfied. All these observations make us conclude that IFRS is fair value & Balance Sheet oriented accounting standards. Indian GAAP used more conservative approach where IFRSleads to more transparent disclosures.

References

• Alp, Ali, Ustundag, Salim, 2009, Financial Reporting Transformation: The Experience Of Turkey, Critical Perspective On Accounting, 20, (5) Pp 680.
• Armstrong, S, Christopher, Barth, E, Mary, Jagolinzer, D, Alan, Riedl, J, Edward, 2010 Market Reaction to the adoption ofIFRSin Europe, The Accounting Review, 85(1) Pp 31-61.
• Bhattacharjee, Sumon, Islam, Zahirul, Muhammad, 2009, Problems Of Adoption Of International Financial Reporting Standards (Ifrs) In Bangladesh, International Journal Of Business And Management, 4 (12). Pp 165-175
• Paananen, Mari, Lin, Henghsiu, 2009, The Development Of Accounting Quality Of IAS And IFRS Over Time: The Case Of Germany, Journal Of InternationalAccounting Research, 8 (1) Pp 31-55.
• Poria, Saxena, Vandana, 2009, IFRS Implementation And Challenges In India, Medc Monthly Economic Digest.
• Jyoti H. Pohane, 2012, International Indexed & Referred Research Journal, ISSN- 2250-2556; Vol. I, Issue-1, 213-234.
• Ravi Sharma, IFRS The Wayahead, International Referred Research Journal ISSN- 0975-3486 Vol-I, Issue-9 Rni: Rajbil /2009/30097
• Kasliwal, V. S. 2012,Indian Scenario In Context With IFRS, International Indexed & Referred Research Journal, ISSN- 2250-2556; I(1), April, 2012.
• SunitaAjaykumarRai, IFRS- Problems And Challenges In First Time Adoption, International Indexed & Referred Research, I(1), April, 2012.
• Steffee, S, 2009, IFRS Discrepancies Vary By Country, Company, The Internal Auditor, 66 (4), Pp 13.
• ShamnaniGopichand B, International Indexed & Referred Research Journal, I(1), April, 2012.
• Zhou, Haiyan, Xiong, Yan, Ganguli, Gouranga, 2009, Does The Adoption of International Financial Reporting Standards Restrain EarningsManagement? Evidence from An Emerging Market, Academy of Accounting And Financial Studies Journal, 13 (Special Issue) Pp 43-56.
• About the IFRS Foundation and the IASB." IFRS. IFRS Foundation. Web. 11 Nov. 2010.<http://www.ifrs.org >.
• Bebbington, Joseph, and Esther Song. 2003, "The Adoption of IFRS in the EU and New Zealand." National Centre for Research on Europe. University of Canterbury, Nov.-Dec. 2003. Web. 14 Nov. 2011. <http://www.europe.canterbury.ac.nz/research/finance1.shtml>.
• Bogoslaw, David. 2008. "Global Accounting Standards? Not So Fast." Bloomberg BusinessWeek. 13 Nov. 2008. Web. 14 Nov. 2010. <http://www.businessweek.com>.
• Callao, Susana, Jose I. Jarne, and Jose A. Lainez.2007, "Adoption of IFRS in Spain: Effect on theComparability and Relevance of Financial Reporting." Journal of InternationalAccounting, Auditing and Taxation,16(2), 148-78.
• "Closing the GAAP." The Economist. 28 Aug. 2008. Web. 18 Nov. 2010.<http://www.economist.com>.
• "Facts about FASB." FASB: Financial Accounting Standards Board. Web. 10 Nov. 2010.<http://www.fasb.org>.
• Hail, Luzi, Christian Leuz, and Peter D. Wysocki. "Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and PolicyFactors." Social Science Research Network. Social Science Electronic Publishing, 11Mar. 2009. Web. 17 Nov. 2011.<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1357331>.
• Heidhues, Eva, and Chris Patel. "Convergence of Accounting Standards in Germany: Biases and Challenges." Macquarie University ResearchOnline. East China University of Science & Technology. Web. 15 Nov. 2011. <http://hdl.handle.net/1959.14/102181>.28
• Henry, David. 2008, "Global Accounting Rules: Simpler, Yes. But Better?." BusinessWeek. 04 Sept. Web. 20 November 2010. <http://www.businessweek.com >.
• "Mind the GAAP: Analyzing the Proposed Switch to International Accounting Standards."Knowledge@Wharton. 1 Apr. 2009. Web. 22 Nov. 2010. <http://knowledge.wharton.upenn.edu/>.
• "SEC Leadership in International Effort." AICPA: IFRS Resources. Web. 15 Nov. 2010.<http://www.ifrs.com>.
• Soderstrom, Naomi S., and Kevin Jialin Sun, 2009. “IFRS Adoption and Accounting Quality: AReview.” Social Science Research Network. Social Science Electronic Publishing, 11 Mar.. Web. 20 Nov. 2011.<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1008416>.
• Williams, J. Richard. "Funding FASB: Public Money, Public Domain." ORG. Web. 27 Nov. 2010. <http://www.nysscpa.org/>.
• Wu, Joanna S., and Ivy Zhang, 2010, Voluntary IAS and U.S. GAAP Adoption by ContinentalEuropean Firms: The Role of Labour Relations. Social Science Research Network. Nov.2006. Web. 20 Nov..<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=954599.