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Consequences and determinants of IFRS convergence in India

Article  in  International Journal of Accounting and Information Management · March 2020

DOI: 10.1108/IJAIM-06-2019-0062

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IFRS
Consequences and determinants convergence in
of IFRS convergence in India India
Vincent Tawiah
DCU Business School, Dublin City University,
Dublin, Ireland, and
Pran Boolaky Received 17 June 2019
Revised 5 August 2019
Nexia International, Mauritius, UK Accepted 15 August 2019

Abstract
Purpose – The purpose of this paper is to provide evidence of how convergence to International Financial
Reporting Standards (IFRS) impacts accounting values and the determinants of variation in equity
adjustments among Indian companies.
Design/methodology/approach – Using a sample of 323 listed companies, the authors empirically test
whether there is a significant difference between converged IFRS (Ind.AS) and Indian Generally Accepted
Accounting Principles (GAAP) (AS) reported figures and ratios and why companies adjust differently.
Findings – This paper reveals that fair valuation under Ind.AS causes a significant decrease in goodwill. A
substantial decrease in both current and long-term liabilities because of non-recognition of proposed dividend,
discounting of long-term provision per Ind.AS was also found. The variations in equity adjustment were
significantly influenced by capital structure, level of family control and auditor type.
Practical implications – This paper provides insights to users who are interested in historical data, that
Ind.AS brings significant changes in the accounting values and ratios and the impact differs among
companies based on capital structure, ownership and auditor type.
Originality/value – This paper contributes to the literature of IFRS convergence in India by providing
rational analysis of the differences between IFRS, Indian converged GAAP and Indian local GAAP among
companies and its impact on accounting values.
Keywords India, Convergence, IFRS, IGAAP, Ind.AS
Paper type Research paper

1. Introduction
Although there are some notable prior studies on the impact of International Financial
Reporting Standards (IFRS) on financial statements (ACCA, 2013; Fito et al., 2012; Gastòn
et al., 2010; Lantto and Sahlström, 2009; Lueg et al., 2014; Wu et al., 2014; Marzuki and
Wahab, 2016; Serkan et al., 2013; Tsalavoutas and Evans, 2010), the literature is yet to be
further informed on IFRS in India. India has been developing its local standards since 1979
(Krishman, 2018; ICAI, 2007). However, the call for global harmonisation of accounting
standards has pressurised it [India] to converge with IFRS. Given India’s move towards
IFRS adoption and the key role it plays as “the mother of all outsourcing opportunities”
(Hoogervorst, 2015), it is important to inform the literature on the impact of IFRS on
financial statements of Indian companies. We argue that this gap exists for three reasons.
First, although India opened its economy in 1991 to the world through the Liberation,
Privatisation and Globalisation (LPG) programme, its businesses are still dominated by International Journal of
government and family ownership (Krishman, 2018; Perumpral et al., 2009; Tawiah et al., Accounting & Information
Management
2015). Additionally, there is a high level of promoter ownership, making them (Indian © Emerald Publishing Limited
1834-7649
companies) closely held companies. Contrary to European studies where business DOI 10.1108/IJAIM-06-2019-0062
IJAIM ownership is dispersed, the business structures in India are different and mostly family-
owned business where compliance with IFRS against Indian Generally Accepted
Accounting Principle (GAAP) remains an area worthy of study.
Second, India is a founding member of the International Federation of Accountants
(IFAC) and a member of International Accounting Standard Board (IASB) which has been
promoting IFRS for 40 years now. Additionally, the Institute of Chartered Accountants,
India (ICAI) claims that they have been providing inputs to IASB in the development of
IFRS. Despite these involvements in the globalisation of accounting practices, it took India
seven years after the first IFRS (2003) to initiate action on its roadmap to convergence and
not even adoption. Also, it took the country another five years to announce the
implementation of the converged IFRS standards, which was developed in 2010 (Jain, 2011).
These long timelines clearly indicate that India has carefully carved out and carved in Ind.
AS (for simplicity and convenience we refer Indian converged IFRS as Ind.AS hereafter) to
reflect the unique business practices in the country (Kantayya, 2016) as well as the trend of
global accounting harmonisation (Rekhy, 2015; Sharma, Joshi and Kansal, 2017). According
to Krishman (2018), some of the issues that necessitated convergence rather than full
adoption are:

to maintain consistency with existing legal and regulatory requirements; and

the lack of an efficient market to determine the fair value of various assets (ICAI,
2007).

Third, the stagewise implementation of the standard indicates that India has two sets of
legally enforceable accounting standards (existing local IGAAP and the new converged
IFRS for listed companies). Further, Indian companies that traded in the USA and Europe
prepare accounts according to IFRS as issued by IASB and which makes it three different
sets of accounting standards operating in India. Therefore, an understanding of the possible
difference in accounting values can enlighten the accounting users in the interpretation of
financial statements of listed companies in India. More importantly, as convergence is
different from full adoption, it is interesting to inform literature about how converged IFRS
financial statements differ from fully adopted financial statements, especially for an
emerging economy like India as it positions itself as the mother of all outsourcing
opportunities.
To shed light on the value impact of IFRS convergence in India, we have examined the
changes in accounting values and ratios. With a sample of 323 listed companies during the
2015-2017 accounting period, we are able to document the impact of Ind.AS on existing
IGAAP and IFRS as well as the behavioural pattern of companies towards the adjustment.
Consistent with Lantto and Sahlström (2009) and Lueg et al. (2014), we test the statistical
significance of the difference on key values, and the ratio between different accounting
standards using Wilcoxon sign ranked test. We use ordinary least square to examine why
IFRS impacts differently on companies.
Our results show that fair valuation requirements of Ind.AS causes a significant decrease
in goodwill. While IGAAP recognises goodwill on book values, INAS recognises goodwill
based on the fair value of assets of the acquiree. Similarly, the total liabilities decrease
because of the discounted value measurement of long-term provision and non-recognition of
proposed dividend under Ind.AS. This decrease in current liability resulted in a significant
increase in the current ratio. With regards to the effects on the income statement, we did not
find any significant impact on revenue and net profit. However, we attribute the significant
change in the earnings per share (EPS) to the reclassification of extraordinary items,
archival gains/loss on employee benefits and amortisation of goodwill. The findings from
2015 and 2016 analysis show that the convergence to IFRS in India causes significant IFRS
changes in reported figures, especially on balance sheet items. The 2015 results confirm the convergence in
robustness of our approach in testing the impact of IFRS convergence in India (Table III).
The direction of change between IGAAP and IFRS is consistent with that of the changes
India
between IGAAP and Ind.AS. This confirms how Ind.AS has bridged the gap between
IGAAP and IFRS. However, the difference between Ind.AS and IFRS provides empirical
evidence that convergence is not equivalent to full adoption.
Regarding the determinants of variations in equity adjustments, we found that leverage
has a positive and significant relationship with the extent of Ind.AS adjustments in the
balance sheet. Similarly, companies audited by the Big4 have larger adjustments than non-
Big4 clients. However, less dispersed, as well as family-controlled, companies show small
adjustments in the balance sheet.
Our study differs from prior studies and makes incremental contributions to literature in
fourfold. First, we established some behavioural patterns that explain changes in accounting
numbers after the application of converged IFRS. Second, India provides unique settings
regarding the time frame and business practices which have not been captured in prior
studies. Our results confirm this assertion, as it yields findings different from existing
literature. Whereas previous studies argue the increase in assets because of fair valuation,
our results indicate a decrease.
Similarly in other countries (Gastòn et al. (2010) – Australia; Lueg et al. (2014) – UK; Stent
et al. (2010) – New Zealand), it was found that IFRS increases current liability, but we found
a significant decrease in India. Third, unlike prior studies, our analyses have two years of
the same sample set, which provides an opportunity to assess the consistency of the impact.
Fourth, we provide a comprehensive impact of convergence on both existing GAAP and
IFRS statement, which yields findings for what if India adopted IFRS. This is novel in the
literature of financial statement effects of IFRS. More importantly, our findings demonstrate
how convergence can help a country to align its standards with IFRS and, at the same time,
incorporate the local environment.
The rest of this paper is organised as follows. Section 2 gives a brief of accounting
practices before IFRS in India and Section 3 provides a review of the literature. Section 4
covers the research design and methods. Section 5 presents the results and discussions, and
Section 6 concludes the paper.

2. Accounting systems and practices

India existed as a country and engaged in trade in the BC (Before Christ); hence, it is logical
to start the genealogy of Indian accounting practices from the BC. As depicted in Figure 1,
the historical development of Indian accounting system can be analysed over five periods.
In a quest to abolish the Nanada (dictatorship rule) during the pre-colonisation era,
Vishnugupta Chanakya Kautilya wrote a book called Arthashastra in the fourth century
that describes accurate measuring and reporting of economic activities as means of wealth
creations (Kautilya’s Sutra, Subramanian). In his book, Kaulitya stated that the objective of
accounting is the explanation and prediction of economic activities (Kautilya, 2020, fourth
century). Using arithmetic procedures including permutations and combination, he
developed bookkeeping rules, procedures for preparation of income statements and budgets
as well as performing independent audits (Sihag, 2004). Kaulitya focused on the accounting
of public sector because of the dominance of government business during his era. His
accounting system concentrated on the arithmetic side of adding and subtracting of figures.
This system was mostly a single entry.
IJAIM
4BC Kaulya
System Brish 1947 Diff 1977
before rule pracces 1956 general ASB
Coloniall independ
coloniaa
l era era ence company
law
requirements
1979 1st
Local GAAAP 2016
1949 ICAI AS

Book keeping rules

Procedures for income statement General requirements for the
State level pracces format and content of final
and budget preparaon
Family controlled accounts
Procedures for performing audit
business pracces
(Sihag,2004) Specific standards for
specific items

Figure 1. Imposion of Brish accounng

rules
Phases of accounting
Stringent and uniform accounng
history of India rules for revenue collecon

During colonialization, the British brought in strict uniform accounting practices, especially
on the East India companies (Marston, 1986). Britain imposed their (Britain) local rules on
the Indians to facilitate tax collection. There was also a need for a uniform accounting
system because Indians traded with people from both the East and West during the colonial
era (Perumpral et al., 2009).
Independence of India from the British also saw the private (family) takeover of some
government businesses and British companies, as well as the start-up of family-controlled
businesses such as TATAs (Marston, 1986). Most family-controlled companies were
unwilling to disclose financial information because of the fear of competition, payment of
high taxes and the presentation of false accounts (Perumpral et al., 2009). Businesses were
preparing accounts, as it suits them without any reference to any standards. Again, each
state and empire tried to develop laws that suit the people of the state. Although the ICAI
was formed in 1949, it was just a body of professionals without any legal power to set
standards. These professionals were people already practising across the country without
any standardised formal training (Perumpral et al., 2009).
Although the inception of Companies Act 1956 brought some uniformity in the
preparation of accounts, the requirements of the Act was general without referring to any
specific standards. Section 211 of the Companies Act 1956 prescribes the content of the
balance sheet, profit and loss accounting, referring to the schedule VI in Part 1. However,
Subsections 3A and 3C further state that the profit and loss and balance sheet shall comply
with standards recommended by the ICAI. Though mandated to set standards, until 1979,
the ICAI has not set any standards; hence, there were no specific standards for the
preparations of accounts.
In fulfilment of its (ICAI) mandate to recommend accounting standards, the ICAI
established the Accounting Standard Board in 1977 to develop accounting standards. In
1979, the board came out with its first set of standards starting with IGAAP (AS) 1
Disclosure of Accounting Policies. Since that date, the recommended standards and basis of
preparation of accounts in India has been the IGAAP (AS). Until India indicated its intention
to change to IFRS through the concept paper in 2007, the ASB of ICAI has been developing
and revising IGAAP (AS) to meet the continuous changing economic environment. Because
of its membership in the IASC (IASB), the IGAAP standards are based on the principles of
IASB making them closer to the IFRS (IAS) (Report of the Committee on IFRS compliance
Indian Insurance Industry by IRAD).
3. Literature review IFRS
Because of the widespread of IFRS across the world, both academicians and professionals convergence in
are continuously studying this global accounting standard waves across national
boundaries. While some have looked at the challenges and issues of implementing IFRS,
India
others (Blanchette et al., 2013; Fito et al., 2012; Kim, 2013; Lueg et al., 2014; Serkan et al., 2013;
Stent et al., 2010; Tsalavoutas and Evans, 2010) have empirically tested the impact of IFRS
on accounting information quality and accounting valuation. Since European countries
mandated IFRS adoption in 2005, there are studies that document its [IFRS] impact on
financial statements (Christensen et al., 2009; Lueg et al., 2014; Gastòn et al., 2010 – the UK;
Fito et al., 2012 – Spain; Serkan et al., 2013, Lantto and Sahlstron, 2009 – Finland;
Tsalavoutas and Evans, 2010 – Greece). On the other hand, in the Indian Ocean, in 2001,
Mauritius was the first country to mandate IFRS, even before Europe and the UK but with
few studies on this theme (Doorgakunt, 2019).
According to the findings from a survey of literature by Houqe (2018), IFRS has
enhanced transparency and comparability of financial statements through detailed
disclosures. In an empirical investigation into the value relevance of information reported by
Russian public firms, Kim (2013) found that leading Russian firms on London Stock
Exchange that reported in accordance with IFRS produce more value-relevant reports
compared to their local peers that reported under the Russian standards. On this basis, the
study predicted that the mandatory adoption of IFRS in Russia is likely to result in
improved information quality.
With the help of financial ratios and accounting figures, Serkan et al. (2013) analysed the
differences between local GAAP- and IFRS-based financial statements and the effect of IFRS
on financial reporting of 140 companies listed on the Istanbul Stock Exchange, Turkey.
They revealed that the financial statements prepared in accordance with local GAAP and
IFRS were statistically different. These significant differences were identified in inventories,
fixed asset, long-term liabilities and stockholders’ equity accounts. Their result is consistent
with Fito et al. (2012) findings on the consequences of IFRS in Spain. Lueg et al. (2014) also
found a substantial increase in profitability ratios in the UK because of the transition to
IFRS. Similarly, in a study on both Spain and the UK, Gastòn et al. (2010) found that IFRS
adoption had a significant quantitative impact and is much higher in the UK. Lantoo and
Sahlstrom (2009) argue that the changes in financial ratios after the adoption of IFRS in
continental Europe is because of fair valuation and stricter requirements on some
accounting issues.
Using 66 European companies, Fearnley and Gray (2015) found that cultural values are
significant institutional determinants for measurement choices on investment properties in
IAS 40, irrespective of years of IFRS experiences.
Tsalavoutas and Evans (2010) used Gray’s comparability index to analyse the impact of
IFRS on 238 companies in Greece. They found that IFRS had a significant impact on the
financial position and reported performance as well as on gearing and liquidity ratios. On
average, the impact on shareholders’ equity and net income was positive, while the impact
on gearing and liquidity was negative. However, the significant impact on liquidity and net
income was experienced by companies with auditors other than the Big4 auditing firms.
These companies also faced a significantly greater impact on gearing than companies with
Big4 auditors. They also identify a large number of companies with material negative
changes, suggesting that transition to IFRS and the fair value option do not necessarily
result in higher shareholders’ equity figures as found in the study by Jaruga et al. (2007).
A study by Blanchette et al. (2013) on the impact of IFRS in Canada reveals a striking
difference in the balance sheet. Total assets in IFRS were less than half of the total assets in
IJAIM Canadian GAAP (CGAAP) for the company that has the largest negative difference in the
sample and more than double the total assets in CGAAP for the company with the most
significant positive difference. However, these differences are mostly offset in shareholders’
equity. Sales and operating revenues were reduced under IFRS compared to same items
under CGAAP. Profit was high, and other comprehensive income (OCI) adjustments were
predominately negative (losses). The study noted that the central values of IFRS financial
statement figures and ratios are not significantly different from those derived under
CGAAP.
A recent study by Jermakowicz, Chen and Donker (2018) indicates that the impact of
IFRS adoption on the accounting values of Canadian companies is significantly influenced
by practices within an industry. This implies that firms within the same industry experience
similar effects of IFRS in the financial statements.
Hilliard and Neidermeyer (2018) found that there were market reactions on first-time
adoption reconciliation adjustments. However, a standard by standard adjustment provides
enhanced explanatory power to market reactions when compared with aggregate measures.
Stent et al. (2010) found that the use of IFRS in New Zealand has led to a significant
increase in liabilities and a decrease in equity for private-sector entities. The authors
attributed this to the adjustments to income taxes, employee benefits and financial
instruments as the main reasons for increases in liabilities and decreases in equity.
Using Tobin’s Q, Wang and Campbell (2012) analysed the effect of IFRS adoption on
Chinese companies. Their study did not find significant differences in the mean and median
of Tobin’s Q after the implementation of IFRS. However, there was a significant difference in
the standard deviation. They concluded that a year-by-year analysis of the variance failed to
support the expectation that IFRS caused the increase in the standard deviation.
Liu et al. (2011) examined the accounting quality from 2006 to 2010 following the
mandatory IFRS in China. Their results indicated that accounting quality improved with
decreased earnings management and increased value relevance of accounting measures in
China since 2007. The improvement is less likely to be associated with changes in economic
conditions but from the changes in the standards.
Similarly, ACCA (2013) found that although earnings and book values of Chinese
companies were valued relevant under the old CAS, earnings are significantly more-value-
relevant under IFRS in A-share issuers. The relationship, however, depends on the level of
incentives for a company to give accurate accounts. In China, Chen and Rezaee (2012) found
that companies with effective internal governance structures are more incentivised to
provide quality information that complies with the requirements of IFRS. Similarly, Sharma
et al. (2017) found that accounting professionals and bankers in India acknowledge the
efforts of ICA in training people; however, the professionals admitted that convergence to
IFRS might not lead to harmonisation because of difficulty in interpreting the standards and
weak enforcement. Evidence from Korea shows that there was a significant reduction in the
cost of equity because of the mandatory adoption of IFRS (Kim and Ryu, 2018).
Sarbapriya (2012) found that the total assets value and total equity per IFRS were all
more than AS by 1.37 and 7.28 per cent, respectively, while the total liabilities were less by 6
per cent in 2008. However, in 2009, the total asset per IFRS was high by 1.94 per cent, and
total equity was also higher by 8.13 per cent. However, the differences in the total liabilities
reduce to 4.28 per cent from 6 per cent in 2008. There was not much deviations and
fluctuations in the net income position as disclosed by financial statements of Wipro Ltd in
IFRS reporting and Indian GAAP. Moreover, the difference between total liability and
equity is because of the reclassification of items. These results are consistent with
Swamynathan and Sindhu (2012), who argue that IFRS is balance sheet oriented than the IFRS
conservative Indian GAAP (AS). convergence in
The above discussions highlight the potential changes that IFRS brings to the financial
statement. India, a family-oriented business country, is expected to experience many
India
changes in its reporting landscape after the implementation of Stage 1 of IFRS because of
the detailed disclosure and market-oriented nature of IFRS. Hence, we anticipate that the
accounting values and ratios of converged IFRS will be different from the local Indian
GAAP.

4. Research design
4.1 Data set
Our population was Economic Times of India top 500[1] listed companies by sales in 2015/
2016 financial year. From the 500 companies, financial institutions were eliminated because
they are exempted from the mass implementation of Ind.AS. Of the remaining 376
companies, 53 are excluded because of incomplete information. The final sample size is 323,
representing 65 per cent of the population.
Similar, to IFRS 1 (first-time adoption), INAS 1 requires first-time adopters to present
comparative figures for the prior year. However, most companies provided two years of
comparative figures as compared to a single year as done in other countries. That is,
companies that adopted Ind.AS in 2016/2017 have comparative figures for 2015/2016 and
2014/2015. This unique setting among the sample companies enriches the study by
providing comprehensive two years of data on the transition of accounting standards in
India. Prior studies have demonstrated that empirical result varies among databases
because of differences in data contained in them (Callao et al., 2007). In the light of this
argument and the lack of a specific database on relevant variables, all data were hand
collected from annual reports of the companies.
It is important to note that the selected items capture all relevant accounting figures
spanning from the income statement [revenue, net profit and EPS), balance sheet (assets,
liabilities and equity) and ratios (return on assets, return on equity, net profit margin and
current ratios).

4.2 Consequences of Ind.AS on accounting values

As India did not fully adopt IFRS, it creates three different sets of accounting standards in
comparison to other countries (IGAAP, INAS and IFRS). Therefore, we first analysed the
impact of converged IFRS on the existing IGAAP, followed by an investigation into the
differences between full IFRS and converged Ind.AS. As an extension of the study, we
estimated the differences if India should have opted for full adoption of IFRS. We do this by
comparing IGAAP with IFRS financial statements. These three sets of investigation enable
us to gauge the impact of convergence as well as anticipate if India goes for full adoption of
IFRS in the future. The empirical analysis was conducted using the test of equality. F-test
and t-test were used to test the hypothesis.
Findings from other countries such as Greece (Tsalavoutas and Evans, 2010), the UK
(Lueg et al., 2014) and Spain (Callao et al., 2007) indicate that the adoption of IFRS does have
a significant impact on accounting values and ratio. However, according to the ICAI and
MCA, INAS has been developed very closely to IFRS, saving certain exceptions that we
have already explained. Therefore, we do not expect these results to be different from other
countries. Hence, we test the following hypothesis:
IJAIM H1. There are no significant differences in the value taken by the variable Xi
considering IGAAP and Ind.AS.
where Xi is every accounting figure or ratio considered including all relevant accounting
figures spanning from the income statement (revenue, net profit and EPS), balance sheet
(assets, liabilities and equity) and ratios (return on assets, return on equity, net profit margin
and current ratios). IGAAP is a local accounting standard in India (AS), and Ind.AS is the
new IFRS-converged standard in India.
Following Fito et al. (2012), Lantto and Sahlström (2009) and Lueg et al. (2014), we used
the Wilcoxon signed-rank test because we compared variables for the same firms in the
same period but under different standards and the variables are not normally distributed. In
our analysis, we also investigated the key individual items which are likely to cause the
changes in the values and ratio. This approach enables us to provide in-depth analysis on a
standard-by-standard basis.

4.3 Analyses of the determinants

After establishing the quantitative impact of Ind.AS on financial statements, we evaluated
whether these results are related to company characteristics. We derived our assumption
from positive accounting theory (Watts and Zimmerman, 1990), which states that
companies behave differently because of their unique characteristics. To do this, we
regressed total equity adjustments on ownership type, shareholding, capital structure and
auditor type. Our hypothesis in this regard is:

H2. There is no significant association between the impact of Ind.AS on accounting

values and company characteristics.
We test this hypothesis with econometric estimations from this model. For convenience, the
year (t) and country (i) indexes are removed.

jEAj ¼ b þ LEV þ SH þ FB þ AT þ TA þ GW þ POV þ « t

where EA is the net effect of Ind.AS on financial statements measured as total equity
adjustment deflated by the total asset of the company. LEV is the capital structure of the
company measured as the ratio of total debt to total capital (debt plus equity) under IGAAP.
According to the agency theory (Jensen and Meckling, 1976), high leverage leads to high
disclosure as a means of building confidence in lenders. Although there are mixed results on
the impact of leverage on disclosure (Cuijpers and Buijink, 2005; Francis et al., 2008), we
expect high debt financing companies to show large equity adjustments because positive
adjustments strengthen the financial position of the company for better loan deals. Also, the
discounting of liabilities under Ind.AS enhances the positive net effect on the balance sheet.
SH is the shareholding structure of the company measured as the percentage of sharing
of the top shareholder. Following Jensen and Meckling (1976) agency theory, closely held
companies are less likely to affect many changes on the balance sheet because top
shareholders are previewed to insider information. Also, such holders might not need to be
convinced as compared to a large number of investors. Therefore, we expect an inverse
relationship between the shareholding structure and the net effect of Ind.AS.
FB takes 1 if the business is a family-controlled business and 0 if otherwise. Family-
controlled business is defined as the percentage of shareholding by a single family in a
company. A firm was classified as family-controlled firm if largest shareholdings are in the
hands of a single family. Following the findings of Abdullah et al. (2015) and Haniffa and
Cooke (2009) of an inverse relationship between family business and disclosures, we expect IFRS
a similar relationship. convergence in
AT is a dummy variable that takes on 1 if the firm was audited by the Big4 or 0
otherwise. TA is a proxy for company size measured as a log of total assets. GW-goodwill
India
was measured as the proportion of goodwill to total assets. Because Ind.AS has a significant
impact on goodwill because of fair valuation, we expect a positive relationship between
equity adjustments and goodwill. POV-provision is measured as the amount of both current
and long-term provisions in the balance sheet. It was calculated as the total provision
divided by the total asset.
We account for the impact of company size by deflating EA, GW and POV by the total
asset of the company. The deflating approach also helps to reduce the impact of non-
normality of the variables. All variables except for EA were calculated from financial
statements as per IGAAP.

5. Results and discussions

5.1 Descriptive statistics
Table I shows the descriptive statistics of financial statements for the year ending 2016 for
both Ind.AS and IGAAP. It also includes the test for normality results using a combination
of Skewness and Kurtosis (SKtest). All amount is expressed in nearest 10m(crores) of Indian
rupees except for Kurtosis, Skewness and SKtest.
Because of the difference in the financial performance of companies, sample data of
financial statements are usually skewed and not normally distributed (Lueg et al., 2014;
Lantto and Shahlstrom, 2009). Based on the significant level (p-value 0.001) of the Sktest, we
reject the null hypothesis that the data is normally distributed. Following the non-normality
of the data set, we used the Wilcoxon Signed Ranked Test to prove whether there is a
significant difference between reported figures of Ind.AS and IGAAP.
Before proceeding to the non-parametric test, we calculated the percentage change of
both the mean and median of the IGAAP and Ind.AS figures and the results are presented in
Table II. This analysis indicates the direction of impact of Ind.AS on financial statements.
According to Lueg et al. (2014), median values provide a more accurate reflection in the case
of non-normal distribution. Therefore, our discussion is focused on the median values.

5.2 The difference in balance sheet items

Fair valuation under Ind.AS in business combination causes a significant decrease in
goodwill. According to IGAAP (AS 14), the identified assets of the acquiree are measured at
book value, which results in high goodwill, whereas Ind.AS 103 requires fair valuation,
which is likely to reduce the goodwill. Under IGAAP, the acquirer amortises goodwill over
the period for which the acquirer expects to receive benefits from the synergies. However,
under Ind.AS, goodwill is not amortised but is tested for impairment periodically. Contrary
to prior studies that IFRS increases the value of assets because of fair valuation, in India,
there was no significant increase in assets value. Because most companies measured their
assets using Level 3 inputs of fair value hierarchy or cost model as there is inadequate data
for Levels 1 and 2 fair value measurement. These findings are contradictory to those of
Gastòn et al. (2010) and Lueg et al. (2014), who concluded that IFRS increases the value of
assets beacuse of the fair valuation. Based on these findings, we argue that the theoretical
difference between IGAAP and Ind.AS on assets measurement has not reflected on the
financial statement because of alternative measurement and partially to inadequate market
information for fair valuation.
 IJAIM

Table I.

Ind.AS) n = 323
(2016 IGAAP and
Descriptive statistics
Items Mean Median SD kur Skew First quartile Third quartile Minimum Maximum SK test

IGAAP (AS)
Revenue 513,877 108,596.9 960,335 4.717259 2.42016 16,655.44 377,916.4 16,655.44 3,559,266 0.000
Total expenses 1,189,822 109,681.6 5,273,947 40.261 6.290926 14,135.76 327,167.4 14,135.76 34,229,352 0.000
Profit 23,850.97 5,458.355 43,323.5 1.572131 0.782704 93,956.1 31,375.07 93,956.1 136,780 0.031
EPS 38.04595 21.1 48.7491 0.57268 1.130507 32.08 53.875 32.08 155.55 0.000
Goodwill 18,500.4 176.38 41,004.42 20.63177 4.258691 0 5,683.385 0 231,371 0.020
Other intangible 49,677.13 1,125.87 147,934 11.30431 3.475517 8.6 9,396.185 8.6 666,134 0.000
Total NCA 259,208.2 79,840.92 434,972.1 6.010864 2.519245 4,923.58 233,797.5 4,923.58 1,891,373 0.000
Current asset 171,111.1 46,471.09 290,059.2 5.923563 2.514406 4,625.91 143,735 4,625.91 1,173,815 0.000
Total assets 422,172.8 139,990.6 646,187.8 4.619486 2.249757 12,671.7 469,171.5 12,671.7 2,692,976 0.000
Share capital 6,485.717 1,256.24 13,390.2 17.06805 3.810803 39.94 6,045.168 39.94 75,000 0.000
Total equity 145,011.4 37,639.9 200,511.8 2.491406 1.78415 3,971.71 218,648 3,971.71 807,826.7 0.000
Total NCL 118,055.1 34,482.7 233,564.5 7.262994 2.81417 428.08 78,725.22 428.08 1,007,711 0.000
Current liab 166,927.3 40,073.65 292,284.3 6.562897 2.648118 2,953.09 162,220.4 2,953.09 1,245,509 0.000
Total liabilities 285,035.4 80,082 475,057 5.102261 2.43252 3,381.17 242,231.5 3,381.17 1,876,267 0.000
Provisions 22,295.63 6,451.44 40,794.5 11.19112 3.220661 218.84 25,890.31 218.84 205,194.2 0.000
Return on asset 0.056496 0.041114 0.099558 5.65172 1.947428 0.06478 0.113131 0.06478 0.479527 0.000
Return on equity 0.164477 0.145015 0.32282 10.44491 1.951518 0.75928 0.229207 0.75928 1.577593 0.000
Current ratio 1.025064 1.159642 0.648788 0.220704 0.76325 0.05861 1.547087 0.05861 3.010821 0.103
Net profit margin 0.045511 0.077017 0.101958 1.317317 0.870537 0.11178 0.127587 0.11178 0.396587 0.028

IND.AS
Revenue 535,642.2 106,157.6 1,011,289 5.345074 2.500227 15,220.23 373,843.8 15,220.23 4,148,211 0.000
Total expenses 1,120,450 98,491.09 824,802.8 7.247209 2.844863 12,840.85 334,812.8 12,840.85 3,424,821 0.031
Profit 22,724.64 5,592.17 45,548.14 3.10458 0.280707 127,360 30,164.75 127,360 144,890 0.000
EPS 32.7081 17.145 47.62054 2.409723 1.557471 40.46 45.8325 40.46 181.98 0.000
Goodwill 13,972.95 141.765 68,063.95 33.97578 5.639031 0 4,207.39 0 428,381 0.000
Other intangible 53,445.78 1,155.965 157,023.4 10.76554 3.413618 12 11,691.72 12 693,755 0.000
Total NCA 271,899.2 80,797 444,811.1 6.827388 2.602945 4,449 238,457.5 4,449 2,028,680 0.000
Current asset 169,807.3 45,054.5 279,107.8 5.541521 2.43704 4,732.91 147,892.4 4,732.91 1,124,313 0.000
Total assets 440,007.3 131,949 660,291.6 4.121616 2.178421 12,895.81 526,652.8 12,895.81 2,671,412 0.000
Share capital 6,443.894 1,256.24 13,401.21 17.0544 3.810228 39.94 6,045.168 39.94 75,000 0.000
Total equity 155,506.4 43,206.04 214,338 1.861501 1.709024 6,573 234,517.7 6,573 789,524.1 0.000
Total NCL 101,980.5 30,881.4 228,339.3 6.81525 2.743928 435.55 88,734.2 435.55 947,954 0.000
Current liab 159,547.5 35,092.53 299,376.8 8.179885 2.862958 2,781.06 132,152.4 2,781.06 1,389,194 0.000
Total liabilities 289,567.5 78,016.63 484,194.3 4.203004 2.266415 3,220.02 173,506.5 3,220.02 1,877,559 0.000
(continued)
Items Mean Median SD kur Skew First quartile Third quartile Minimum Maximum SK test

Provisions 10,824.82 3,867.09 25,135.52 22.44788 4.440908 49.69 9,129.973 49.69 148,122.2 0.000
Return on asset 0.051646 0.042381 0.106831 7.403054 2.219697 0.07384 0.119128 0.07384 0.536084 0.000
Return on equity 0.146133 0.12943 0.261425 11.80365 2.221143 0.52362 0.218139 0.52362 1.37957 0.000
Current ratio 1.064305 1.283877 1.019755 1.272162 1.320691 0.288472 2.096841 0.288472 4.477775 0.005
Net profit margin 0.046026 0.07678 0.097516 1.890803 1.042777 0.09507 0.133653 0.09507 0.399795 0.009
convergence in

Table I.
India
IFRS
IJAIM IGAAP (2016) INDAS (2016) Change p-value
Items Median Median in (%)

Revenue 108,596.9 106,157.6 2 0.244

Profit 5,458.355 5,592.17 2 0.464
EPSIN 21.1 17.145 19 0.034
Goodwill 176.38 141.765 20 0.013
Total NCA 79,840.92 80,797 1 0.369
Current asset 46,471.09 45,054.5 3 0.263
Total assets 139,990.6 131,949 6 0.085
Total equity 37,639.9 43,206.04 15 0.007
Total NCL 34,482.7 30,881.4 10 0.008
Current liab 40,073.65 35,092.53 12 0.004
Provisions 6,451.44 3,867.09 40 0.001
Return on asset 0.041114 0.042381 3 0.019
Return on equity 0.145015 0.12943 11 0.018
Current ratio 1.159642 1.283877 11 0.024
Table II.
Net profit margin 0.077017 0.07678 0 0.494
2016 analysis on
IGAAP and INDAS Notes: This table presents the comparison between Indian GAAP (IGAAP) and the IFRS converged
(n = 323) standards (INDAS) reported figures and calculated ratios using 2016 financial statements

The significant increase in total equity can be attributed to the difference in the
recognition of proposed dividend. Contrary to IGAAP (AS 4), INAS 10 does not allow
the deduction of proposed dividend until it is declared. However, the non-recognition of
the proposed dividend per Ind.AS 10 decreases current liability and, hence, total
liability. According to IGAAP (AS 4), the proposed dividend must be recognised as a
current liability, whereas Ind.AS disallows the recognition of proposed dividend after
the reporting period as a liability in the financial statements. Our result is opposite to
that of Goodwin et al. (2009) and Lueg et al. (2014), who found an increase in current
liability in Australia and the UK, respectively.
The median values of non-current liabilities show a significant decrease by 11 per cent (p-
value 0.023) because of the difference in deferred tax computation and discounting of long-
term provision. Unlike IGAAP (AS 27) where deferred tax is computed for all timing
difference with regards to accounting and tax profit, INAS 12 required deferred tax
computation on temporary differences arising from the carrying amount of assets and
liabilities in the balance sheet. Also, Ind.AS 37 requires discounting of long-term provisions;
however, IGAAP (AS 29) requires reporting of full nominal value without discounting. The
significant impact of Ind.AS is the recognition of both current and non-current provisions.
As presented in Table II, the median value of provision decreased by 40 per cent at a
significant level of 0.001. This decrease is driven by non-recognition of proposed dividend
and the discounting of long-term provision.

5.3 The differences in income statement items

There is no significant impact of Ind.AS on revenue and net profit, which is also reflected in
the net profit margin ratio. However, there is a significant change in the EPS because of the
reclassification of extraordinary items, actuarial gains/losses on employee benefits and
reversal of amortised goodwill. Whereas IGAAP allows the presentation of extraordinary
items, INAS prohibits extraordinary items. This means that all items, including
extraordinary items, are presented as ordinary items under Ind.AS, hence causing changes
in the total earnings. Under IGAAP, goodwill is amortised, while goodwill is tested for IFRS
impairment per Ind.AS. convergence in
India
5.4 Differences in ratios
As the difference in the current assets is not high and significant, we attribute the significant
positive increase in current Ratio to the significant decrease in current liabilities. Lueg et al.
(2014) also found that a significant change in current liability caused changes in the current
ratio. However, Lueg et al. (2014) and Goodwin et al. (2009) showed an increase in current
liability after the adoption of IFRS in the UK and Australia, respectively.
Because of the significant decrease in total assets and an increase in equity, without a
significant change in the net profit, there was a significant increase in the ROA. Contrary,
there is a decrease in ROE because of non-recognition of proposed dividend, which increases
equity under Ind.AS. Therefore, it can be concluded that the significant increase in ROA and
decrease in ROE is as a result of the decrease in total assets and increase in equity,
respectively. This is primarily because of accounting for goodwill and non-recognition of
proposed dividends, among others.

5.5 Robustness check (using 2015 financial statements)

India provides a unique opportunity for analysing a two-year effect of IFRS convergence
because most companies prepare three years of comparative balance sheets as part of Ind.
AS transition process. To check the validity and robustness of our results, we repeated the
analysis using 2014/2015 financial statements. Our objective here was to test the
retrospective effect of Ind.AS is similar to the transition year. That is re-stated figures of
2014/2015 Ind.AS is compared with IGAAP of the same year. Because we did not find any
significant changes in the income statement items (revenue and net profit) in the 2016
analysis, we focused on the balance sheet items in the 2015 analysis.
Consistent, with the 2016 analysis, the decrease in the median value of goodwill is very
high (20 per cent) and significant (p-value 0.013). Similarly, there is a significant decrease
in current liability but not the same magnitude as in 2016 reported figures. The current ratio
also reflects the 2016 pattern of the increase because of a decrease in the current liabilities.
Both 2016 and 2015 analyses show that IFRS convergence in India causes significant
changes in goodwill and provisions. The 2015 results confirm the robustness of our
approach in testing the impact of IFRS convergence in India (Table III).

5.6 What if India adopted IFRS or adopt IFRS in the future

Although India has not fully adopted IFRS, with time, the country will go for full adoption.
Therefore, using a sample of 20 companies which has financial statements for IGAAP, INAS
and IFRS, we conducted additional analysis on the impact of full adoption of IFRS on Indian
companies. It is obvious that IFRS will bring similar changes as Ind.AS has done. In
Table IV, the direction of change between IGAAP and IFRS is consistent with that of the
changes between IGAAP and Ind.AS in Table II. The results confirm how Ind.AS has
bridged the gap between IGAAP and IFRS. However, the difference between Ind.AS and
IFRS indicated that convergence is not equivalent to full adoption (Table V).
For all the variables under consideration, the median difference under Ind.AS, IGAAP
and IFRS is less than 4 per cent. The difference between IFRS reported net profit, EPS and
that of Ind.AS is because of the recognition of actuarial gains/loss in profit loss by IFRS and
in OCI by Ind.AS (IAS 19/Ind.AS 19). For total equity and ROE, the change is caused by the
measurement and recognition of investment property. Ind.AS accounts for investment
IJAIM IGAAP (2015) INDAS (2015) Change p-value
Items median Median in (%)

Goodwill 123.54 95.84 22 0.092

Total NCA 75,101.85 76,279 2 0.598
Current asset 48,146.58 48,107.11 0 0.352
Total assets 106,587.5 103,116.6 3 0.071
Total equity 37,510.29 40,085.98 7 0.016
Total NCL 31,193.74 27,825.17 11 0.021
Current liab 35,613.45 33,085.3 7 0.039
Provisions 5,358.475 3,263.47 39 0.001
Table III.
Current ratio 1.100348 1.163379 6 0.057
2015 analysis on
IGAAP and INDAS Note: This table presents the comparison between Indian GAAP (IGAAP) and the IFRS converged
(n = 301) standards (INDAS) reported figures and calculated ratios using 2015 financial statements

Median (Crores) Percentage change p-values

IGAAP/ INDAS/ IGAAP/ INDAS/
Item IGAAP INDAS IFRS IFRS (%) IFRS (%) IFRS IFRS

EPS 48.315 53.435 54.9 14 3 0.035 0.046

Goodwill 46,562.6 22,619 22,378 52 1 0.009 0.471
Total NCA 281,194 226,668.5 232,646.5 17 3 0.527 0.715
Current asset 500,226 510,177.5 510,177.5 2 0 0.352 0.075
Total assets 729,420 700,046 691,198.5 5 1 0.057 0.465
Total equity 512,573 550,550 555,835 8 1 0.827 0.715
Total NCL 26,346.5 20,279.5 20,551.5 22 1 0.042 0.452
Table IV.
Current liab 202,189 173,450.5 173,327.5 14 0 0.094 0.998
Comparison of
IGAAP/IFRS, Notes: This table presents the comparison among Indian GAAP (IGAAP); IFRS converged standards
INDAS/IFRS (n = 20) (INDAS); IFRS as issued by ISAB reported figures and calculated ratios using 2016 financial statements

ITEM IGAAP (AS) Ind.AS

Proposed dividend AS (10) recognised proposed dividend as Ind.AS (4) disallows the recognition of
liability per proposed dividend as a liability
Deferred tax AS (27) computes deferred tax for all time Ind.AS (12). Deferred tax is computed for
difference in respect of difference in temporary differences between carrying
profit and loss account and income tax the amount of asset and liabilities in the
reporting balance sheet under Ind.AS
Long-term AS (29) does not discount liabilities Ind.AS 37 requires the discounting of the
liabilities regardless of the time effect provision on liabilities if the effect of time
value of money is material
Goodwill AS (14) recognised acquired assets and Ind.AS 103 requires acquired assets and
Table V.
liabilities at existing book values liabilities to be recognised at fair value
Some difference
between IGAAP and Notes: This table presents some of the notable difference between Indian GAAP (IGAAP) and the IFRS
Ind.AS converged standards (INDAS)
property using only the cost model, but both cost and fair value options of accounting are IFRS
available under IFRS. convergence in
India
5.7 Results on the determinants of equity adjustments
This section reports the findings of the multivariate analysis on determinants of the extent
of equity adjustments because of the implementation of Ind.AS. Table VI presents the
results of the regression estimation using the total equity adjustments (EA) score as the
dependent variable. We use data from 2015 financial statements to test whether the main
findings were robust against a change in the reporting year. We replicated all relevant
empirical tests. As presented in column M1, the results are identical to M2. Also, the R2 is
similar across the models. Hence, our model and variable are robust in explaining why Ind.
AS impacts differently among companies (Glaum et al., 2013). The F-statistics of 23.41
(21.51) at p < 0.001 indicates that the models are well specified.
As seen in Table VI, all the variables of interest, namely debt, financing, shareholding,
ownership type and auditor type, are significant determinants of adjustments a company
disclosed. The coefficient of SH is negative and significant as expected, indicating that
companies with concentrated shareholding are less committed to giving more information.
The results chime with both agency and positive accounting theory that companies with
single large shareholding exercise control on the extent of adjustments.
Concerning family-controlled businesses and the extent of equity adjustments, the
results in Table VI show a significant negative relationship between FB and EA. Thus,
family-controlled companies are less likely to reflect most of Ind.AS adjustments on the face
of the balance sheet. Our results support Abdullah et al.’s (2015) and Chen et al.’s (2008)
argument that family business is more likely to tilt the firm’s disclosure towards their
preference.
The results on LEV suggest that companies with high leverage are more likely to
disclose large adjustment on its balance sheet. This is because the fair valuation of assets
shows an increase in assets, which increases the value to offset its high leverage. Moreover,
high debt financing companies experience more adjustments because they require
disclosure to build confidence in both existing and prospective lenders who are
predominantly external as compare to some equity holders who can be internal. Our results
are consistent with that of Al-Akra et al. (2010).

Variable Exp sign 2016 statement M1 2015 statement M2

LEV – debt to capital ratio þ 0.035** (2.053) 0.031** (2.041)

SH – percentage of highest shareholding –  0.011** (2.23) 0.017* (0.048)
FB – family business – 0.051* (1.720) 0.067** (1.991)
AT – type of auditor þ þ 0.028* (1.814) 0.019 (0.045)
TA – Total asset þ 0.072** (0.043) 0.067** (2.110)
GW – amount of good will þ 0.252*** (5.034) 0.191*** (6.029)
POV – total provision þ 0.133** (2.021) 0.118*** (5.017)
Constant 2.17*** (10.08) 2.87*** (9.661)
Adjust R2 49.52 47.23
F-value 23.41*** 23.51***
Observation 323 301

Notes: This table presents the regression results of firm behaviour pattern on equity adjustments on Table VI.
convergence. Significant levels – ***= 1%; **= 5%; and *= 10%. The t-statistics are in parentheses. We use Regression results on
the absolute figure of EA deflated by total asset as dependent variable determinants
IJAIM As expected, the Big4 auditors provide high-quality audit than non-audit firms. Also, they
have the resources to provide market-based measurement as required by Ind.AS. This result
chimes with that of Samaha et al. (2009) and Karim and Ahmed (2005), in respect to the
significant positive relationship between international auditors and IFRS compliance (Al-
Akra et al., 2010; Appiah et al., 2016).
The results on both goodwill (GW) and provision (POV) are consistent with our prior
analysis on the impact of Ind.AS on accounting values. Thus, companies with a high
amount of goodwill will experience a huge impact on equity adjustments. Similarly,
companies with provision before the adoption of Ind.AS experience increase in adjustments.

6. Conclusion
We have investigated the impact of IFRS convergence on accounting values in India. A
country which is uniquely different from prior research sites because of its business
practices and IFRS adoption timelines. Specifically, we have documented how convergence
to IFRS affected accounting values, including an investigation into the difference between
full IFRS and converged IFRS reported figures. We also performed an analysis between
IGAAP and IFRS financial statements to estimate the impact if India had gone for full
adoption. We carried out regression analyses to understand the behaviour pattern of
companies towards first-time adoption adjustments.
Although there was a high expectation that the convergence to IFRS will bring massive
changes to the financial statements (Rekhy, 2015) because of findings from other countries:
China –ACCA (2013), UK – Lueg et al. (2014); Malaysia – Marzuki and Wahab (2016) and
Turkey – Serkan et al. (2013), our results indicate less impact with only three items
significantly affected (goodwill, current liabilities and extraordinary items). First, contrary
to prior literature that IFRS increases total assets value because of fair valuation, in India, a
significant decrease in goodwill caused decrease in assets’ value. Also, there was an
insignificant impact on other assets because companies used Level 3 inputs or cost model.
Second, we found a significant decrease in both current and long-term liabilities because of
non-recognition of proposed dividend and discounting of the long-term provision under Ind.
AS. This decrease in current liability resulted in a significant positive increase in the current
ratio. Similarly, we found that the significant increase in ROA and decrease ROE were
because of a decrease in total assets and an increase in equity. Third, there was a significant
change in EPS because of the reclassification of extraordinary items, actuarial gains, long-
term employee benefits and reversal of amortised goodwill.
Like the 2016 analysis, there was significant decrease in current liabilities of 2015
financial statements, which reflected a decrease in the current ratio. However, the significant
decrease in goodwill in 2015 was lesser than that of 2016. Both 2016 and 2015 analyses show
that the convergence of IFRS in India caused significant changes in reported figures,
especially on balance sheet items.
Our study is relevant to users of Ind.AS financial statements, especially regulators,
standard setters and investors concerned with the impact of the convergence on accounting
values and the behaviour patterns of companies. Ind.AS increases goodwill valuation, but it
decreased in provision and current liabilities with a positive impact on total equity
adjustment. The amount of total equity adjustment is subject to the company’s
characteristics, such as leverage, level of family control, type of auditor and ownership
structure.
Although Ind.AS is closely aligned with IFRS, our analysis on Ind.AS and IFRS shows
that international analyst and investors should be aware that there are significant
differences between IASB IFRS and India-converged IFRS. For instance, the difference in
recognition of actuarial gains/loss on employee benefits and measurement of investment IFRS
properties can cause changes in EPS between Ind.AS and IFRS statements. convergence in
Our study complements the works of Fito et al. (2012), Lueg et al. (2014) and Lantto and
Shahlstrom (2009), by providing evidence on the impact of IFRS in family business-oriented
India
and emerging economy.
The generalisation of this study is limited because of the following. First, our data
exclude financial companies because they are yet to implement Ind.AS. Second, because
of the unavailability of data, not all Phase 1 companies were included in the sample.
Third, readers must know that Phase 1 companies are large listed companies with a net
worth of 500 crores or more; hence, this study excludes medium and small companies.
We, therefore, suggest that further studies should explore the impact of the
convergence on small and medium listed companies as and when they implement Ind.
AS.

Note
1. We limited our population to this set because there are more than 5,000 listed companies in
India.

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Further reading
Ding, Y., Hope, O., Jeanjean, T. and Stolowy, H. (2007), “Differences between domestic accounting
standards and IAS: measurement, determinants and implications”, Journal of Accounting and
Public Policy, Vol. 26 No. 1, pp. 1-38.
MCA notification (2015), “The companies (Indian accounting standards) rules 2015”, GSR dated 16th
February 2015, New Delhi, available at: www.mca.gov.in/MinistryV2/Stand.html

Corresponding author
Vincent Tawiah can be contacted at: vincent.tawiah@griffithuni.edu.au

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