Consequences and determinants of IFRS convergence in India

• Pages: 303-322
• DOI: https://doi.org/10.1108/IJAIM-06-2019-0062
• Date: 09 March 2020
• Published date: 09 March 2020
• Author: Vincent Tawiah,Pran Boolaky
• Subject Matter: Accounting/accountancy,Accounting & Finance

Consequences and determinants

of IFRS convergence in India

Vincent Tawiah

DCU Business School, Dublin City University,

Dublin, Ireland, and

Pran Boolaky

Nexia International, Mauritius, UK

Abstract

Purpose –The purpose of this paper is to provide evidenceof how convergence to International Financial

Reporting Standards (IFRS) impacts accounting values and the determinants of variation in equity

adjustmentsamong Indian companies.

Design/methodology/approach –Using a sample of 323listed companies, the authors empirically test

whether there is a signif‌icant difference between converged IFRS (Ind.AS) and Indian Generally Accepted

AccountingPrinciples (GAAP) (AS) reported f‌iguresand ratios and why companies adjust differently.

Findings –This paper revealsthat fair valuation under Ind.AS causes a signif‌icant decrease in goodwill.A

substantialdecrease in both current and long-term liabilities because of non-recognitionof proposed dividend,

discounting of long-term provision per Ind.AS was also found. The variations in equity adjustment were

signif‌icantlyinf‌luenced by capital structure, levelof family control and auditor type.

Practical implications –This paper providesinsights 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

companiesbased 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

companiesand 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;Fit

oet 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 statementsof Indian companies. We argue that this gap existsfor 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

government and family ownership (Krishman, 2018;Perumpral et al., 2009;Tawiah et al.,

2015). Additionally, there is a high level of promoter ownership, making them (Indian

companies) closely held companies. Contrary to European studies where business

IFRS

convergence in

India

303

Received17 June 2019

Revised5 August 2019

Accepted15 August 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 2, 2020

pp. 303-322

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-06-2019-0062

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

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 operatingin 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 companiesduring 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 differentlyon companies.

Our results show that fair valuation requirementsof 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 discountedvalue measurement of long-term provision and non-recognition of

proposed dividend under Ind.AS. This decrease in current liability resultedin a signif‌icant

increase in the current ratio. With regards to the effectson 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

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