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 International Academic Institute International
for Science and Technology Academic Journal of
Accounting
International Academic Journal of Accounting and Financial and
Management Financial Management
Vol. 5, No. 4, 2018, pp. 137-147.

ISSN 2454-2350 www.iaiest.com

Effects of Adopting International Financial Reporting Standards:

An Empirical Evidence from selected Indian companies.
Amrutha Pavithrana, Murugesan Selvamb, R Gopinathc , Chinnadurai Kathiravana
a
Ph.D Research Scholar, Department of Commerce and Financial Studies, Bharathidasan University, Tiruchirappalli, Tamil Nadu,
India
b
Professor & Head Dean, Faculty of Management, Department of Commerce and Financial Studies, Bharathidasan University,
Tiruchirappalli, Tamil Nadu, India
c
Junior Engineer, BSNL, Trichy SSA, Tamil Nadu Telecom Circle, India

Abstract
This study examines the effects of adopting International Financial Reporting Standards (IFRS), on the
financial performance of sample companies of India during pre and post IFRS period of convergence. It
was observed that the financial statements of the sample companies were prepared in accordance with the
local GAAP initially and later it converged with IFRS. The financial performance of the sample
companies was analysed in respect of liquidity, profitability and stability, using eleven financial ratios.
The study used Wilcoxon signed rank test, to test the statistical difference in financial ratios, prepared as
per both the standards. It is found that among the three sample companies, Wipro Ltd and Infosys Ltd
exhibited statistically significant difference in the sample ratios on convergence, whereas, with regard to
Dr Reddy’s Laboratories there was no statistically significant difference noticed on convergence with
IFRS during pre and post IFRS period.

Keywords: International Financial Reporting Standards (IFRS), Generally Accepted Reporting

Standards, Financial Ratios.

1. INTRODUCTION

Globalization of capital markets is an irreversible process and there are many potential benefits to be
gained from mutually recognized and respected international accounting standards Adekoya, O. (2011).
The adoption of uniform standards cuts the costs of doing business across borders, by reducing the need
for supplementary information. The uniform standards make the financial accounting information more
comparable, thereby enhancing evaluation and analysis by the users of financial statements, including the
stakeholders of the companies. To bridge the gap between accounting standards among multinational

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firms of different countries, the International Accounting Standards Committee (IASC) was founded in
1973 by a group of professional accounting practitioners Abdulkadir Madawaki (2012).
The IASC formulated the Uniform and Global Accounting Standards, with the aim of reducing the
discrepancies in international accounting principles and reporting practices. Besides, the IASC has
actively been championing the uniformity and standardization of accounting principles for over two
decades Carlson (1997). In April 2001, the International Accounting Standards Board (IASB) took over
the setting of International Accounting Standards from the International Accounting Standards Committee
(IASC) Adekoya, O. (2011). The IASB updated the already existing international accounting standards
and referred to them as International Financial Reporting Standards – IFRS.
The basic underlying principle of financial reporting is to supply the transparent financial information and
outlook about firms to the investors and general public. The firms across the world do not stand on the
same base of accounting and reporting framework. Hence a healthy comparability by the global investors
or other interested parties was nearly impossible. It is reported that in recent years, the international
financial transactions have greatly increased with growing competitiveness among companies over the
world Angus, O. Unegbu. (2014).
The globalization provides the local investors investment opportunities outside of their national
boundaries. But the interpretation and understanding of the international financial transactions have
become matters of serious concerns for these investors due to dissimilar accounting standards on
reporting at international level. Therefore, since 1970, the International Accounting Standards Board
(IASB) has been working with the cooperation of European Union (EU), on synchronization between
different countries’ accounting models. It has been creating a unique international framework to mitigate
these dissimilarities. Many countries like Africa, Asia, Australia and America have already integrated
their local GAAP with IFRS. More than 100 countries have authorized the implementation of IFRS in a
phased manner. Today, India is one such country, having realised the benefits of converging with IFRS
Guggiola (2010).

2. REVIEW OF LITERATURE

An attempt has been made in this study, to review the selected research work already undertaken in the
research area of this study, to understand the concepts, methodology employed and the gaps in the
research area.
Bhatia, S. and Tripathy, A. (2018) examined the performance efficiencies of IT firms and their impact
on transition from generally accepted accounting principles to International Financial Reporting standards
(IFRS), using data envelopment analysis. Dina Aburous (2018) used the concept of institutional work
and found that the technical dependency of corporate accounting on audit blurs the boundaries between
the two fields. DeFond, M., et al. (2018) examined the effectiveness of China’s IFRS adoption from the
perspective of an important set of financial report users and foreign institutional investors. Zayyad et al.
(2014) used One-Sample Kolmogorov-Smirnov Test and Mann-Whitney U test, to examine the effect of
IFRS adoption on the performance evaluation of a firm, using a set of selected financial ratios. Ibiamke
and Briggs (2014) found that IFRS adoption caused negative impact on financial ratios on the Nigerian
listed companies. Anwer S. Ahmed (2013) studied the eff ects of mandatory adoption of IFRS on three
groups of accounting quality metrics, namely, income smoothing, reporting aggressiveness, and earnings
management, to meet or beat a target. Zeghal et al. (2011) studied the effects of IFRS adoption on
earnings management of French companies and found that mandatory IFRS adoption caused a reduction
in the at the earnings management level. Lantto and Sahlström (2009) analysed the transition effects of
IFRS on financial reporting in Finland, with the use of financial ratios. The study found that the selected
financial ratios were significantly affected as a result of the IFRS adoption. Agca and Aktas (2007)
studied the results of the financial ratios, gathered from the financial statements, prepared in accordance
with IFRS and the financial statements prepared according to the local regulations. It was found that some

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selected variables were statistically significant. Jermakowicz et al. (2007) examined the value relevance
of IFRS transition effects on DAX-30 listed German companies. It was found that IFRS transition
improved the comparability of the financial statements. Callao et al. (2007) examined the effect of IFRS
on the comparability and relevance of financial reporting in Spain, using IBEX-35 companies. It is
pointed out that the advantage of comparability of accounts was lost when IFRS and local GAAP were
used together in a country. Jermakowicz (2004) studied the effects of IFRS adoption on BEL-20
companies in Belgium, using primary data. It is concluded that IFRS transition had significant impact on
the selected companies. Arce and Mora (2002) investigated the value relevance of alternative accounting
measures under different accounting systems in Europe.
A number of studies have been carried out to understand the impact of adopting IFRS around the world.
But very limited studies were done on analysing the effects of adopting IFRS on Indian companies. This
study would examine three sample companies from India, which had adopted IFRS voluntarily and to
study the pre and post effects of IFRS on the financial variables of the sample companies.

3. STATEMENT OF THE PROBLEM

Different countries adopt different accounting treatments and disclosure patterns, with respect to the same
economic event happening across the globe. This may create confusion among the stakeholders while
interpreting the financial statements. Financial statements that are based on a single and universally
accepted GAAP would enable the world and the stakeholders to exchange financial information about the
firms in a meaningful and trustworthy manner. This would accelerate the globalization of finance. The
business community, including corporate world, would follow new systems only when there is positive
advantage from adopting IFRS. Therefore, there is need for the study that shows the advantages of IFRS
convergence with Indian firms and its effectiveness on the performance of Indian corporate sector. The
present study was mainly focused on the effects of convergence with IFRS, with respect to the financial
performance by the sample firms, namely, Wipro Ltd, Infosys Ltd and Dr Reddy’s Laboratory, Angus O.
Unegbu (2014).

4. OBJECTIVES OF THE STUDY

The main objective of this study was to find the effects of adopting International Financial Reporting
Standards (IFRS) on the financial performance of Indian companies.

5. HYPOTHESES OF THE STUDY

The following null hypotheses were tested in the study.
NH01: There is no normality in selected financial variables computed, by using local GAAP and IFRS.
NH02: There is no statistically significant difference between the selected financial variables computed
by using local GAAP and IFRS.

6. METHODOLOGY OF THE STUDY

a. Sampling Design
The present study was mainly focused on selected Indian companies, which had voluntarily adopted IFRS
standards. There are only three sample companies, namely, (Wipro Ltd, Infosys Ltd and Dr Reddy’s
Laboratory) which had adopted IFRS and GAAP voluntarily during the early years of 2000. Hence it was
decided to select all the three companies. These three companies were listed in both Indian and foreign
stock exchanges like the New York Stock Exchange (NYSE).

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b. Period of the Study

The study covered a period of 14 years (i.e. nine years prior to adopting IFRS and five years after
adopting IFRS). The details of study period are given in Table - 1. The required information was
collected from the financial reports, for fourteen years, to calculate the financial variables used in this
study.

Table - 1 : List of Sample Companies and Period of the Study

Name of the Sample Pre Convergence Period Post Convergence Period
Companies (5 years) (9 years)
1st April 2004 to 1st April 2009 to
Wipro Ltd
31st March 2009 31st March 2018
1st April 2004 to 1st April 2004 to
Infosys Ltd
31st March 2009 31st March 2018
1st April 2004 to 1st April 2009 to
Dr Reddy’s Laboratory
31st March 2009 31st March 2018

c. Source of Data
The financial data, relating to three sample companies, were taken from the Website of BSE India and
respective Company Websites. The other relevant data, for this study, were collected from journals,
newspapers, e-IFRS and Websites.

d. Variables & Tools used in the Study

As pointed out earlier, the main aim of this study was to examine the financial performance of sample
firms. The financial performance was studied in terms of liquidity, profitability and stability of the three
sample companies. The financial ratios were obtained from previous research studies (Serkan et al.,
(2013) & Callao et al., (2007). The list of the selected variables is given in Table-2.

Table – 2 : List of Variables (Financial Ratios) Used in the Study

Sl. No Type of Ratios Ratios

1 Current Ratio (CR)
2 Quick Ratio (QR)
Liquidity Ratio
3 Current Liability/Total Liability (CL/TL)
4 Current Liability/Total Assets (CL/TA)
5 Gross Profit Ratio (GPR)
6 Net Profit Ratio (NPR)
7 Profitability Ratio Return on Assets (ROA)
8 Return on Equity (ROE)
9 Debt Equity Ratio (DER)
10 Stability Ratio Debt Ratio (DR)
11 Equity Ratio (ER)

For the purpose of testing the hypotheses of this study, Descriptive Statistics (which describes the nature
of the variables), Shapiro–Wilks test (to test whether the variables are normally distributed or not) and
Wilcoxon signed-ranks test (to test the statistically significant difference between the IFRS and GAAP
variables), were used Kathiravan et al., (2018).

e. Limitations of the Study

The present study suffers from the following major limitations.

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i. Firstly, the companies sample, that had voluntarily adopted IFRS reporting along with Indian
GAAP reporting, during the initial period of 2009, were very limited in number. The grouping of the
companies, representing each industry, was not possible because the sample size was limited to three
companies only.

ii. The study was based on secondary data and it was confined only to three selected sample
companies, namely, Wipro Ltd, Infosys Ltd and Dr Reddy’s Laboratories.

iii. The limitations associated with statistical tools, would apply to this study also.

7. EFFECTS OF ADOPTING IFRS

a) Nature of Financial Variables of Sample Firms.

Table - 3 summarizes the results of descriptive statistics, revealing the nature of data relating to financial
variables, calculated separately during the pre and post period of converging with IFRS, for the sample
companies. The descriptive statistics included mean, standard deviation, minimum and maximum values
for the selected financial variables. The mean values of liquidity ratios, during pre IFRS period, were
2.106 (CR), 1.912 (QR), 1.035 (CL/TL), 0.302 (CL/TA) while the values, after adopting IFRS, were
2.077 (CR), 1.928 (QR), 1.346 (CL/TL) and 0.376 (CL/TA). It is to be noted that the average values of all
the liquidity ratios of three sample firms together had significantly increased in the post IFRS period i.e.
after converging with IFRS reporting standards. Further, while comparing the standard deviation values,
during pre and post convergence period of liquidity ratios, an upward trend in the standard deviation was
observed during the post IFRS, from CL/TL (0.552), CL/TA (0.028) to CL/TL (0.934), CL/TA (0.061)
and a decline in CR (0.679), QR (0.822) to CR (0.534), QR (0.748). Further, the mean values of CR
(2.077) and QR (1.928) had improved while the values of standard deviation had decreased for CR
(0.534) and QR (0.748) when the financial statements were prepared by using IFRS. In other words, there
was an inverse effect on mean and standard deviation. Hence it is inferred that only the liquidity ratios
(Current Ratio, Quick Ratio, CL/TL and CL/TA) recorded an improvement while preparing the financial
statements under IFRS.
Values of profitability ratios, during the pre IFRS period, were 1.77 (NPR), 0.176 (ROA) and 0.259
(ROE), which gradually declined to 0.165 (NPR), 0.142 (ROA) and 0.215 (ROE), after converging with
IFRS, except in the case of GPR, which moved up from 0.200 to 0.221. The same declining effect was
noticed in their standard deviation values, which were higher in pre adoption period, like 0.105 (GPR),
0.088 (NPR), 0.102 (ROA) and 0.108 (ROE) and decreased after converging with IFRS. In other words,
the profitability ratios did not show much improvement, except in the case of GPR while preparing the
financial statements under IFRS.
While looking at the Stability Ratios during pre IFRS period, there had been higher mean values, i.e.
0.652 (DER) and 0.355 (DR) than that of post IFRS period i.e. 0.602 (DER), 0.350 (DR) and (ER) had a
lower mean value in pre IFRS period which improved post IFRS period from 0.644 to 0.650. The analysis
of standard deviation shows there was a similar trend in the case of DER where the mean values declined
in the case of DER from 0.398 to 0.366 and an upward trend followed when mean values of ER and
improved the standard deviation also improved from ER (0.140) to (0.150).The value of standard
deviation also declined in the case of DER from 0.398 to 0.366 and an upward trend followed when mean
values of ER and improved the standard deviation also improved from ER (0.140) to (0.150). An inverse
effect in the case of stability ratios was noticed only in the case of (DR) when the mean value declined
and value of standard deviation improved from 0.140 to 0.150.
The comparison of profitability ratios and stability ratios indicated that a similar trend was found in their
mean values when both had a fall after adopting IFRS standards whereas the value of standard deviation

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recorded a rise on converging with IFRS in the case of stability ratios. But in case of profitability ratios,
there was a decline in the mean values and the value of standard deviation also had come down
simultaneously, which was visible during the IFRS period. It is clearly visible that the liquidity ratios had
out performed on converging with IFRS and the stability ratios and profitability ratios had declined after
converging with IFRS, in respect of three firms.

b) Result of Normality Analysis for Variables under IGAAP and IFRS.

The normality analysis, using Shapiro-Wilk Test for the sample variables, under Indian GAAP and IFRS,
during the study period, is presented in Table-4. Under S-W statistic, the observed cumulative frequency
distribution, for a variable, to a theoretical distribution, was compared. From the results of normality
analysis, it is evident that the significance values for Liquidity Ratios, Profitability Ratios and Stability
Ratios, during the pre IFRS period, were greater than the p-value of 0.05 during the study period. The
values of the various ratios were 0.521 (CR), 0.051 (QR), 0.497 (CL/TL), 0.301 (CL/TA), 0.925 (GPR),
0.992 (NPR), 0.822 (ROA), 0.424 (ROE), 0.932 (DER), 0.786 (DR) and 0.788 (ER), in respect of sample

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firms. Similarly, in the post IFRS period too, the values of all three liquidity ratios, profitability ratios,
and stability ratios were CR (0.879), QR (0.671), CL/TL (0.067), CL/TA (0.977), GPR (0.555), NPR
(0.849), ROA (0.747), ROE (0.997), DER (0.974), DR (0.707) and ER (0.707) and they were greater than
the p-value of 0.05. In other words, during the pre and post IFRS periods, the values of all the variables
were not statistically significant (as the sig. value was greater than 0.05). Hence NH01: There is no
normality in selected financial variables computed by using local GAAP and IFRS, is accepted for
the sample companies during the study period. Therefore, it is inferred that the sample variables were not
normally distributed. Since the values of sample ratios were not normally distributed, non parametric test,
namely, Wilcoxon Signed-Rank Test was further used to evaluate the relationship between the selected
financial variables, during the pre and post periods of convergence with IFRS.

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c) Results of Wilcoxon Signed Rank Test for sample variables

The results of Wilcoxon Signed Rank Test, for the sample companies, during the study period of fourteen
years, are given in Table-5. An attempt has been made to examine the effects of the liquidity, profitability
and stability ratios of the sample firms, during pre and post convergence to IFRS. The analysis of Wipro
Ltd shows that there was a drastic improvement in the values of liquidity ratios [Current Ratio - 2.116,
Quick Ratio – 2.077, and Current Liability to Total Asset - 0.313] during the pre/post study period. It is to
be noted that liquidity ratios generally assesses the capability of the company to pay its short term
obligations. The analysis of liquidity ratios of Wipro Ltd shows that the ability of Wipro Ltd, to meet all
its short term obligations, improved during the post IFRS period.
It is a known fact that profitability ratios give an idea about the ability of firms to manage expenses of the
company efficiently. The analysis of profitability ratios of Wipro Ltd (like Gross Profit Ratio - 0.210 and
Net Profit Ratio - 0.183) shows that it increased during the post IFRS period. A high profitability ratio is
always good as the expenses are being controlled. Considering the stability ratios of Wipro ltd, the debt
ratio also improved to 0.376, on converging with IFRS. It is to be noted that Infosys Ltd also reported
significant increase in the value of Current Liability to Total Liability (2.422) and Current Liability to
Total Asset (0.438), which were similar to the results of Wipro Ltd. There was a notable improvement in
the stability ratio i.e. Equity Ratio (0.812) after convergence with IFRS. This indicates an ideal capital
structure of Infosys Ltd, after convergence with IFRS. Finally, Dr Reddy’s Lab has recorded high positive
effect on all the three categories of ratios. Regarding the Liquidity Ratios, Current Liability to Total
Liability was 0.772 and Current Liability to Total Asset was 0.376. Under Profitability Ratios, GPR was
0.160, NPR 0.113, Return on Asset 0.092 and Return on Equity 0.185 and in Stability ratios, Debt Ratio
at 0.964 improved during the post IFRS period. Wipro Ltd and Dr Reddy’s Lab Ltd showed an
improvement in all the three categories of ratios whereas Infosys ltd showed improvement only in two
categories of ratios during the study period.
It could be observed from Table-5 that the values of five ratios, namely, Current ratio (CR), Quick ratio
(QR), Net Profit Ratio (NPR), Return on Asset (ROA) and Return on Equity (ROE) were found to be
statistically significant (Asymp.Sig < 0.05) in the case of Wipro Ltd on converging with IFRS. In the case
of Infosys Ltd, the values of profitability ratios such as Net Profit Ratio (NPR) and Return on Equity
(ROE) and Return on Assets (ROA) were found to be statistically significant (Asymp.Sig < 0.05). The
analysis of Dr Reddy’s Laboratory Ltd shows that none of the ratios was statistically significant
(Asymp.Sig < 0.05) on converging with IFRS reporting standards. Hence it is concluded that the NH02:
‘There lies no significant difference between the selected financial variables computed using local
GAAP and IFRS’, is rejected in the case of Wipro Ltd and Infosys Ltd. On the other hand, the NH02:
‘There lies no significant difference between the selected financial variables computed using local
GAAP and IFRS’ is accepted in the case of Dr Reddy’s Laboratory. It is observed that among the three
sample companies, Wipro Ltd had achieved greater statistically significant difference in the ratios on
convergence with IFRS.

8. CONCLUSION
This study analysed the effects of adopting IFRS in respect of financial variables and the difference in the
impact between local GAAP and IFRS based financial statements, prepared by three key players, namely,
Wipro Ltd, Infosys Ltd and Dr Reddy’s Laboratory, during the study period of 14 years which comprised
pre nine years and post five years of convergence to IFRS. It was found that Current Ratio (CR), Quick
Ratio (QR), Net Profit Ratio (NPR), Return on Assets (ROA), Return on Equity (ROE) and Debt Equity
Ratio (DER) were found to be statistically significant (Asymp.Sig < 0.05), under IFRS financial reports.
This means that the convergence with IFRS had influenced operating efficiency, profitability and
liquidity of the company. The previous studies, by Agca and Aktas (2007) and Callao et al. (2007),

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indicated that current ratios were influenced by the IFRS adoption on financial statements. The results
comparing the pre and post IFRS periods of this study showed that, adoption of IFRS had a statistically
significant effect on the equity accounts. Hence it is suggested that transition to IFRS will provide better
opportunity for capital maintenance and the protection against failure risk.

9. SCOPE FOR FURTHER RESEARCH

From the literature review part, it is understood that majority of the earlier studies were carried out in the
European countries and during the periods 2005 to 2016. There is not much research work carried out
with respect to Indian companies. Hence there was a need for understanding the effects of converging
with IFRS in Indian context. Though researchers have classified India as one of the countries with high
levels of earnings management in the world, there were very few studies on earnings management in

India, especially on the influence of accounting standards on earnings management. Hence there is more
scope to study whether adoption of international standards is associated with reduced earnings
management in the firms in India. Further, a comparative study of Indian firms with foreign firms who
have adopted IFRS and their impact on the financial performance and operational efficiency can be
measured.

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