Based on the thesis "Cash Flow Ratios to Predict Soundness of Business Investment" we've tried to see how the performance of a company might seem different financially just because of difference in accounting standards. This is also an attempt to unmask the true picture of a company's financial health from its operations alone.

1. CORPORATE FINANCE
INTERNAL ASSESSMENT SEM - III
Comparing Indian GAAP and IFRS using
Traditional and Cash Flow Ratios
Aakriti Agarwal (13004)
Aarushi Verma (13006)
Aditya Tanwar (13020)
Aman Budhiraja (13029)
Angad Singh(13037)
Shaheed Sukhdev College of Business Studies

2. Acknowledgement
We would like to express our heartfelt gratitude and regard for our Corporate Finance instructor, Prof.
Hamendra Kumar Porwal for letting us choose this topic and providing his valuable guidance without which this
project could not have possibly been completed. It was our professor’s thesis on Cash Flow Ratios for Predicting
Investment’s Soundness itself that inspired us to take up this topic.
His able guidance and suggestions have been the cornerstone of our project. Doing this project with Professor
Porwal was a great learning experience for us.
Thank You
Names of group members:-
Aakriti Agarwal
Aarushi Verma
Aditya Tanwar
Aman Budhiraja
Angad Singh

3. Contents
1.Acknowledgement
2.Contents
3.Objective
4.Research Methodology
5.Introduction
6.Comparison
7.Analysis
8.The Canadian Case
9.Conclusion
10.Bibliography

4. Objectives
● Compare financial statements made in compliance with IFRS vs Indian GAAP on basis of
certain ratios to highlight the difference in the supposed image of a company arising
merely due to difference in accounting principles.
● Calculate those ratios again using figures from cash from operating activities as well &
compare with those obtained from balance sheet, to see how much of the revenues are
actually because of operations.
● To understand whether there is variability in ratios when different standards are used.
● To observe the degree of variance for the traditional ratios and cash flow ratios to see
which is more stable.

5. Research Methodology
Various companies were found that made their financial statements according to both standards for the
same time period IFRS and IGAAP and their financial information was obtained using their annual
reports.
Ratio analysis was done for financial statements made according to both standards. For this traditional
ratios as well as cash flow ratios(Porwal, Jain) were used. Correlation between the ratios helped find out
the deviations in the figures.
The case of convergence to IFRS in Canada has also been considered for comparison. Apart from the
analysis, other data is secondary.
Limitations
Due to constraints of time and resources, the study is likely to suffer from certain limitations. Some of
these are mentioned here under so that the findings of the study may be understood in a proper
perspective. The limitations of the study are:
● The primary and most pertinent limitation was that there were very few companies
making their balance sheets as per IFRS and IGAAP both and therefore limited data ends up
being a representative of the entire dataset which may not be the case.
● Also, ideally the financial data should’ve been of the same accounting period for purposeful
comparison, but this wasn’t possible due to data insufficiency.
● The study is based on the secondary data and the limitation of using secondary data may
affect the results.
● The secondary data was taken from the annual reports of the six banks. It may be possible
that the data shown in the annual reports may be window dressed which does not show
the actual position of the banks.
Ideally, we would have preferred to compare all companies for the same time period.
However, financial data wasn’t available and availability of data was the biggest limitation
for the project.

6. Introduction
Indian companies publish financial statements in a language that is foreign to overseas investors. The risk
of being materially misinformed when investing in India is therefore high.
Only three major world economies have yet to shift to International Financial Reporting Standards
(IFRS). They are the US, Japan and India. Japan effectively follows US Generally Accepted Accounting
Practice (US GAAP).
The question arises how can you invest in a company if you don’t understand their accounts? Indian
GAAP (henceforth referred to as IGAAP) allows for too much discretion and makes international peer
comparisons virtually impossible. Therefore convergence to IFRS is very crucial.
International Financial Reporting Standards (IFRS) are designed as a common global language for
business affairs so that company accounts are understandable and comparable across international
boundaries. They are a consequence of growing international shareholding and trade and are particularly
important for companies that have dealings in several countries.
IFRS began as an attempt to harmonize accounting across the European Union but the value of
harmonizaticon quickly made the concept attractive around the world. They are sometimes still called by
the original name of International Accounting Standards(IAS). IAS were issued between 1973 and 2001
by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new
International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting
International Accounting Standards.
During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee
standards (SICs). The IASB has continued to develop standards calling the new standards International
Financial Reporting Standards. The aim of IFRSs is to provide "a single set of high-quality, global
accounting standards that require transparent and comparable information in general purpose financial
statements" (IFRS Handbook, Introduction).
Under Indian GAAP, profits may not be as real as they appear to be. The date for IFRS adoption by India,
originally 1 April 2011, has been repeatedly postponed over the last four years, with some experts
predicting some kind of convergence towards IFRS by 1 April 2015.

7. Comparison of IFRS and I-GAAP
The consolidated financial statements of the Group for the year ended 31 December 2012 with
comparatives as at 31 December 2011 are prepared in accordance with International Financial Reporting
Standards (IFRS) and IFRS Interpretations Committee (IFRIC) interpretations as adopted by the
European Union.
IFRS differs in certain significant respects from Indian Generally Accepted Accounting Principles (GAAP).
Such differences involve methods for measuring the amounts shown in the financial statements of the
Group, as well as additional disclosures required by Indian GAAP.
Set out below are descriptions of certain accounting differences between IFRS and Indian GAAP:
Changes in accounting policy
IFRS
Changes in accounting policy are applied retrospectively. Comparatives are restated and the effect of
period(s) not presented is adjusted against opening retained earnings of the earliest year presented.
Policy changes made on the adoption of a new standard are made in accordance with that standard’s
transitional provisions.
Indian GAAP
The cumulative amount of the change is included in the income statement for the period in which the
change is made except as specified in certain standards (transitional provision) where the change during
the transition period resulting from adoption of the standard has to be adjusted against opening retained
earnings and the impact disclosed. Where a change in accounting policy has a material effect in the
current period, the amount by which any item in the financial statements is affected by such change
should also be disclosed to the extent ascertainable. Where such an amount is not ascertainable this fact
should be indicated.
Consolidation
IFRS
Entities are consolidated when the Group has the power to govern the financial and operating policies so
as to obtain benefits. Control is presumed to exist when the Group owns more than one half of an entity’s
voting power. Currently exercisable voting rights should also be taken into consideration when
determining whether control exists.

8. Indian GAAP
Similar to IFRS, except that currently exercisable voting rights are not considered in determining control.
Acquired and internally generated intangible assets
IFRS
Intangible assets are recognised if the specific criteria are met. Assets with a finite useful life are
amortised on a systematic basis over their useful life. An asset with an indefinite useful life and which is
not yet available for use should be tested for impairment annually.
Indian GAAP
Intangible assets are capitalised if specific criteria are met and are amortised over their useful life,
generally not exceeding 10 years. The recoverable amount of an intangible asset that is not available for
use or is being amortised over a period exceeding 10 years should be reviewed at least at each financial
year-end even if there is no indication that the asset is impaired.
Liabilities and equity
IFRS
A financial instrument is classified as a liability where there is a contractual obligation to deliver either
cash or another financial asset to the holder of that instrument, regardless of the manner in which the
contractual obligation will be settled. Preference shares, which carry a mandatory coupon or are
redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities and
are presented in other borrowed funds. The dividends on these preference shares are recognised in the
income statement as interest expense on an amortised cost basis using the effective interest method.
Indian GAAP
Classification is based on the legal form rather than substance.
Interest income and expense
IFRS
Interest income and expense is recognised in the income statement using the effective interest method.
The effective interest rate is the rate that discounts estimated future cash payments or receipts through
the expected life of the financial instrument. When calculating the effective interest rate, the Group
estimates cash flows considering all contractual terms of the financial instrument but does not consider
future credit losses. The calculation includes all fees and points paid or received between parties to the
contract that are an integral part of the effective interest rate, transaction costs and all other premiums or
discounts.

9. Indian GAAP
In the absence of a specific effective interest rate requirement, premiums and discounts are usually
amortised on a straight line basis over the term of the instrument.
Dividends
IFRS
Dividends to holders of equity instruments, when proposed or declared after the balance sheet date,
should not be recognised as a liability on the balance sheet date. A company however is required to
disclose the amount of dividends that were proposed or declared after the balance sheet date but before
the financial statements were authorised for issue.
Indian GAAP
Dividends are reflected in the financial statements of the year to which they relate even if proposed or
approved after the year end.

10. Key Differences in Approaches:
Substance over Form
Emphasis on Substance over Form is a common thread which runs through IFRS. While it may also be a
criteria in IGAAP and is reffered to in AS1, the emphasis is much stronger in case of IFRS i.e. while in the
Indian context, very often the legal form may influence in the accounting treatment, in IFRS, it will always
be the reality or commercial nature which will have precedence over the legal form.
Fair Value
fair value is another area where emphasis is laid in IFRS. In the Indian context, new standards such as
impairment of assets are also aligned towards fair value. This is also the case in revaluation of assets or
mark to market for investments. However, in the Indian context, this is largely applicable in case the fair
value is below the cost and is normally not applied where fair value is higher than cost as in the books
Fair value gives the readers of financial statements information which is more 'real' or more 'relevant'
than that of historical costs. However, from the point of view of the preparers of the financial statements,
historical costs provide a more stable and reliable method (reliablity stems from knowing the impact and
smoothening out of impact).
However, in most cases, IFRS gives the option of using historical costs like in case of assets, but FV is
mandatory for investments, specifically derivative based. Equally investments of the held to maturity
category can be continued to be accounted for on historical cost basis.
Time value of money is also an area where IFRS lays stress. As an example, a receivable without interest
with a time gap of,say, 15 years be subject to discounting in the accounts of the current period. In terms
of approach, IFRS is more balance sheet oriented as much as the Indian context is more P&L oriented.
Under IFRS, the approach is to get the balance sheet into correct perspective and these impacts will
reflect in the P&L as a residual effect.

11. Analysis and Major Findings
Correlation and variance has been found out for Traditional Ratios between the two standards and
likewise for Cash Flow Ratios.

12. Individual Ratio Calculations for each company have been attached in the Annexure.
As per the above findings it appears that there are substantial differences between the two accounting
standards specially when taking the cash flow ratios into consideration. The major differences between
the standards have been shown by highlighting them.
However, these variances have been largely affected by extremes, for example, the operating and
investing activity ratio for Wipro for the financial year 2010. Therefore under the Cash Flow Ratios the
Cash Operating Coverage Ratio, Operating and Financing Activity Ratio, Operating and Investing Activity
Ratio and Inventory Cash Flow Ratio have been eliminated. For the Traditional Ratios, Efficiency
Indicators (which are expressed in “times” ) and Total Assets to Debt Ratio were also excluded.
As a result, the variances obtained were much more stable and comparable; thereby being of analytical
usage.

13. For the larger part, the variance between the values has gone down significantly for the cash flow ratios,
specially for Great Eastern Energy and Wipro.
The highlighted figures show major differences in ratios for both the methods and we can see the major
differences go down when considering the Cash Flow ratios, thereby making us draw our first major
assumption that after eliminating the extreme figures, the cash flow ratios are less susceptible to
changes in accounting standards and more stable as compared to the traditional ratios.
The second major finding was that although there are various differences in IFRS and IGAAP as
mentioned above, the ratios, whether traditional or cash flow aren’t reflecting major differences.
Although there are exceptions too in certain cases like

14. ● Debtors Turnover Ratio for nearly all except Wipro
● Working Capital Turnover for Sify 2012
● Total Asset to Debt Ratio for Wipro
● Operating Ratio for all except Wipro
● Cash flow ratios that compare cash generated or used in operating activities to that for
financing and investing activities are quite volatile as well.
Lastly, we observe that the EPS for all companies analysed rose when the financial statements
were made as per IFRS.

15. The Canadian Case
January 1, 2011, IFRS replaced Canadian generally accepted accounting principles (GAAP) as the financial
reporting framework for publicly accountable enterprises and government business enterprises.
Because Canada comprises less than four per cent of world capital markets, IFRSs now provide more
opportunities for Canadian businesses and investors by reducing the cost of capital, increasing access to
international capital markets and reducing costs by eliminating the need for reconciliations.
Most of the ratios under IFRS are more volatile than those under pre-changeover Canadian GAAP
● Maximum values of several ratios are higher and minimum values are lower under IFRS, although
the effects of IFRS on means and medians of ratios related to the financial condition of companies are not
statistically significant.
● There is a significant difference in the distribution of values around medians for such ratios as
current and quick ratios, debt, alternative-debt and equity ratios, interest coverage, fixed-charge and
cash-flow coverage, return on assets (ROA), comprehensive-ROA and price-earnings related ratios.
● The exact source of the increased volatility of ratios under IFRS remains unclear. The causes may
include the incremental adjustments that are specific to IFRS, and those associated with the principle-
based approach that allows for more discretion and judgment by management.
Differences between IFRS and pre-changeover Canadian GAAP do not affect cash flows
● The cash-flow statement is less influenced by accounting methods and estimates, and serves as a
sound basis of comparison.
IFRS’ impact on financial ratios is driven by differences in application of fair value accounting and
consolidation, and several other differences
● Fair value accounting leads to adjustments in balance sheet figures, direct allocation of some
unrealized gains and losses to the income statement, as well as allocation of other unrealized gains and
losses to other comprehensive income.
● Liquidity and leverage ratios are affected by fair value accounting practices due to balance sheet
variations while profitability and coverage ratios are affected due to balance sheet variations and
recognition of unrealized gains/losses.
● The impact of consolidation on ratios is difficult to isolate as the differences are incorporated or
combined in the consolidated figures. Incorporation of minority interest in equity also has a significant
impact on financial statements, directly affecting profitability and leverage ratios.
● A number of other differences between IFRS and pre-changeover Canadian GAAP impact financial
ratios. Leverage and profitability ratios are sensitive to the differences in impairment test procedures

16. applied to long-lived assets, as well as to the impact on liabilities, expenses and equity caused by the
differences in application of standards on leases, pensions and contingencies, and share-based payments.
Specific characteristics differentiate IFRS from other accounting regimes
● IFRS is principle-based; it gives more importance to substance (over form) and allows
management to use greater discretion and flexibility in choosing accounting methods and estimates when
preparing financial statements.
● Fair value accounting responds to investors’ needs for information that reflects market-based
values, but involves varying degrees of subjectivity. Since investors need market-based values to make
decisions regarding buying or selling stocks, many items in financial statements are required or eligible
for fair value accounting under IFRS.
● Comprehensive income reflects revenues, expenses, gains and losses recognized during a specified
time period. It is summarized in a separate financial statement made up of two parts; one corresponding
to the bottom line (profit or loss) of the income statement and the other – called other comprehensive
income (OCI) – relating to fair value adjustments.
● The entity theory underlies consolidation requiring assets and liabilities of acquired subsidiaries
and minority interests to be measured at fair value. Under IFRS, the share of profit allocated to minority
interest is recognized directly in equity rather than income.
● IFRS improves transparency and completeness of financial statements, yet can lead to information
overload as accompanying notes are abundant and complex.
Recommendations
● Analysts should continue to be cautious when examining financial ratios during the transition to
IFRS in Canada.
● Financial statement users need to be aware of the main features of IFRS that differ from pre-
changeover Canadian GAAP and distinguish between reported performance changes caused by the
transition to IFRS from those caused by changes in the business.
● Relying on cash-flow analysis is recommended, particularly in cases when accounting practices
are subject to uncertainty or discretion of management. Another possible solution may lie in recalculating
ratios using IFRS retroactive information presented in the year of transition.

17. Conclusion
Firstly, India truly should take up convergence to IFRS seriously because ours is the only economy that
follows such a different accounting standard till date. Especially given its aim to promote FDI, a uniform
accounting standard hailed for Fair Value and Transparent Disclosure would give a major boost to India
as a place to invest.
The convergence to IFRS, in addition to making the financial statements better understood, would also, if
nothing, then cause a minor surge in the EPS, if the findings are to be believed. This would positively
affect the image of the company as well.
Seeing as Cash Flow Ratios are more stable, for two-three financial years after convergence to IFRS, the
cash flow ratios should be used and cash flow statement emphasised on for better picture of the
company’s finances. Pretty similar to the conclusions of the Canadian example, caution must be taken
while using traditional ratios.
Even for the traditional ratios there isn’t that much volatility in the ratios (as opposed to the case in
Canada) and although there would be significant costs associated with changeover to IFRS but the gains
to be made from the convergence are much higher.
On a more holistic note, in the long term, if all internationally traded companies and companies with
international operations report under IFRSs, the need for reconciliations between national GAAPs is
eliminated. The financial information they report will be consistent and comparable, creating new
opportunities in international financial markets, with increased access to capital.

18. Bibliography
Cash Flow Ratios
Porwal, Jain (2013) ‘Cash Flow Ratios to Predict Investment’s Soundness’, Asia-Pacific Finance and
Accounting Review, Page 55-76
http://administrator.asiapacific.edu/userfiles/Porwal%20and%20Jain.pdf
Literary Review
http://www.cica.ca/applying-the-standards/financial-reporting/international-financial-reporting-
standards/item73266.aspx#WhendidthechangeovertoIFRSstakeplace
http://www.cga-canada.org/en-
ca/MediaCentre/ResourceLibrary/AreasOfExpertise/Pages/ca_backgrounder_IFRS.aspx
http://www.iasplus.com/en/publications/india/indian-gaap-ifrs-and-ind-as-a-
comparison/at_download/file/1202indiacompare.pdf
https://www.accountancylive.com/indian-gaap-v-international-gaap-question-interpretation
http://igaaptoifrs.blogspot.in/
http://www.cenresinpub.org/pub/DECEMBER2013/JBOD/Page%2013-33_2340_.pdf
Sources for Financial Data
http://www.airtel.in/about-bharti/investor-relations/results
http://corporate.sify.com/financials.html
http://www.geecl.com/financials.php
http://www.wipro.com/investors/last-3-years-data.aspx