This presentation contains author's research on significance of IND AS implementation. The author found that traditional profit measure based on PAT and IND AS based Total Comprehensive Income are not significantly different. Also impact of first time adoption of Ind AS is not significant.

1. Significance of IFRS convergence in
India
Evidence from first set of Ind AS compliant financial
statements
Dr. T.P.Ghosh
Professor of Accounting & Finance
Institute of Management Technology, Dubai

2. Background
• The first phase of Ind ASs implementation is over as per the IFRS
convergence time line issued by the MCA , and the first set of IFRS
converged financial statements for the accounting period 2016-17
have already been released by many Phase I companies
• As per the Roadmap notified by the Ministry of Corporate Affairs,
Government of India, in the Phase 1 i.e. for the accounting period
commencing on or after 1 April 2016 the Ind ASs become applicable
to the following companies for the preparation and presentation of
financial statements:
 Companies whose equity or debt securities are listed or are in the
process of listing on any stock exchange in India or outside India
(listed companies) and having net worth of Rs.500 crores or more;
 Unlisted companies having a net worth of Rs.500 crores or more
 Holding, subsidiary, joint venture or associate companies of the
listed and unlisted companies covered above.

3. IND
IND AS
Searching Difference between IFRS / Ind AS
and previous Indian GAAP

4. Theme
• The theme of this lecture is impact of Ind AS
application on accounting numbers.
• This has been achieved by –
- evaluating impact of other comprehensive
income
- evaluating impact of first -time adoption
impact

5. Measurement Bases of Ind AS/ IFRS

6. Limited application of Fair value
• FVTOCI equity and debt ( Ind AS 109/ IFRS 9),
• Cash flow hedge ( Ind AS 109/IFRS9)
• Translation difference in foreign operations ( Ind AS 21 / IAS
21) – partly covered under previous GAAP
• Remeasurement of defined benefit plan ( Ind AS 19/ IAS 19)
• Tangible fixed assets , intangible assets could be measured at
cost and Ind AS 101 Exemption ‘carrying amount as deemed
cost’
• Carving out fair value option of investment property
• Application of ‘IFRS amortised cost’ to financial assets and
financial liabilities having scheduled cash flow is more of kind
of historical cost than fair value.

7. Data , Sample and Limitation
• Ind AS based accounting information along with
previous GAAP reconciliation
• Sample Size : 100 listed companies covering NIFTY 50,
SENSEX 30 and NIFTY NEXT 50
• Limitations : Balance Sheet Data is available only for 3
years and P&L data for 2 years. Essentially long run
trend could not be established.
Analysis reflects only result of first-time adoption.
Sample companies belong to non-financial sector.
Although 64 out of 100 companies reported foreign
operations, Ind AS 109 has limited application

8. Data sourcing
• Relevant data is sourced manually from
published financial statements of the sample
companies, and market capitalization data is
taken from CMIE Prowess. These companies
belong to non-financial sectors as Ind AS
implementation to financial sector is planned
at a later phase.

9. • IFRS adoption triggered three streams of empirical
research covering financial reporting effects, capital
market effects and macroeconomic effects.
• The current paper fall in the first category i.e. financial
reporting effects.
• In this category research studies primarily cover
(a) compliance with the IFRS and the accounting choices ,
(b) analysis of properties of accounting numbers, and
(c) value relevance.
Literature review

10. • Few papers (Schadewitz and Vieru, 2007; Costel ,
2013; Kabir et al , 2016) find increased value
relevance of financial reporting after IFRS
adoption
• While others (Callao et al., 2007; Filip and
Raffournier, 2010; Dobija and Klimczak, 2010,
Terzi 2013; Aledo and Abellan, 2014; Piotr , 2014)
observed a decline in relevance of financial
reporting.
• Arshad et al (2016) found size matters IFRS
implication.
Literature review

11. • Callao et al (2007) found that there has been no
improvement in the relevance of financial reporting to
local stock market operators because the gap between
book and market values is wider when IFRS are
applied.
• In a different study of IFRS impact on various EU
countries, Callao (2009) found that that the first
application of IFRS has had different effects on the
financial reporting among countries and grouped
various EU countries on the basis of impact but
concluded that IFRS is a different accounting system
when compared to previous GAAP accounting
numbers.
Literature review

12. • Maria (2015) studied impact of the IFRS adoption on
financial assets and liabilities of Romanian listed
companies measured through a set of twenty three
ratios and found that fourteen of the twenty three
ratios (more than 60%) record changes that range from
-5% to +5%, which was interpreted (applying mean
index of comparability scale) as a neutral impact of
IFRS implementation.
• Romana (2014) found (based on a sample of sixty
seven Romanian companies) that the application of
IFRS had a small effect on net income and
shareholders’ equity.
Literature review

13. • Dobija (2010) found positive evidence of value relevance ( based
on sample from Warsaw Stock Exchange in Poland) but no
improvement in the strength of the relationship over time. Terzi et
al (2013) did not observe statistically significant differences in book
value/market value ratio analysis depending on the market value
under local GAAP and IFRS. However, in subsector analysis, they
identified that some subsector groups have been affected from the
transition to IFRS.
• Based on data of banks listed on the Warsaw Stock Exchange during
1998-2012, Piotr (2014) observed that increase in the value
relevance of both book values of equity and residual incomes of
banks after introduction of IFRS is statistically insignificant.
• Aledo and Abellan (2014) found no evidence of increased value
relevance after IFRS adoption in Spain.
Literature review

14. • In the context of IFRS implementation in Nigerian banks,
Yahaya et al (2015) found that assets and liabilities tend to
be higher in IFRS than in Nigerian GAAP; however, these
differences are mostly offset in shareholders’ equity.
• Abedana et al (2016) found that in respect of Ghanian
companies IFRS impact on deferred tax is significant.
• Based on voluntarily released IFRS financial statements of a
small sample of six Indian companies, Kalra and Vardia
(2016) observed that adoption of IFRS has led to no
significant impact on assets turnover ratio, fixed assets
turnover ratio, return on assets, net profit margin,
receivable turnover and return on equity.
Literature review

15. To study value relevance the following research ideas
are framed:
• whether other comprehensive income (OCI) makes
significant difference in profit and equity ;
• first time adoption difference in equity is significant
to consider that cumulative impact of difference in
accounting treatment under previous GAAP and fair
value measurement was material enough to reckon
that Ind AS provides a severe correction;
Research Ideas & Hypotheses

16. To evaluate fair value impact of OCI on profit, paired samples t-
test is performed on the following two set of paired samples –
• Null Hypothesis (H0): Traditional PAT based profitability ratio
(PAT/ Revenue) are same as IFRS total comprehensive income
based profitability ratio (TCI/ Revenue)
• Alternative Hypothesis (H1): PAT/ Revenue is different from TCI
/ Revenue
For this purpose, PAT / Total Revenue of 2016-17 and TCI /
Revenue of 2016-17, and PAT / Total Revenue of 2015-16 and TCI /
Revenue of 2015-16 are analyzed applying paired samples t-test.
Paired samples t-test is found appropriate since data are from
same sample reflecting profit before and after adjustment of OCI.
Research Ideas & Hypotheses

17. Importance of OCI
• Income measurement based on comprehensive income comprising
of both realised and unrealised fair value gain/loss is the new way
of looking into performance of an entity.
• Comprehensive income (CI) comprises of profit after tax (PAT)
reflecting managerial performance and OCI reflecting primarily
changes in market factors .
• Realized gains and losses are included in the profit measurement,
but evaluating the unrealized portion of the income can
demonstrate how an entity manages its investments and whether
big losses are expected.
• Theoretically, OCI can help users to get a better measure of the fair
value of a company's investments internally and externally.

18. Other Comprehensive Income

19. 92
42
16
35
2
59
2
33
0
1
84
92
39
13
29
1
59
1
32
0
0
81
RDBP F VT OC IE F VT OC A C F H R DGIH T DF O F C MIT S OC I BP G OC IDO I T
OCI ELEMENTS IN SAMPLE COMPANIES
Series1 Series2

20. BPG Bargain purchase gain
CFHR Cash flow hedge reserve
DGIH Deferred gain/loss on investment hedge
TDLFCMI Translation difference on long term Foreign currency monetary items
FVTOCA Fair value gain/loss on Fair value through other comprehensive income
other financial assets
FVTOCIE Fair value gain/loss on Fair value through other comprehensive income
equity investments
ITE Income tax effect
OCIDO OCI of discontinued operations
OCIDO Other comprehensive income
PAT Profit after tax
PATR16 PAT/Revenue 2015-16
PATR17 PAT/Revenue 2016-17
RDBP Remeasurement of defined benefit plans
SOCI Share of OCI in associates / Joint Ventures
TCI Total comprehensive income
TCIR16 Total Comprehensive Income/ Revenue 2015-16
TCIR17 Total Comprehensive Income/ Revenue 2016-17
TDFO Translation difference on foreign operations

21. OCI Elements of Sample Companies
2016-17 2015-16
OCI Elements Applicable
standard
No. of companies Average Std. dev No. of companies Average Std. dev
RDBP Ind AS 19 92 -25.04% 435.50% 92 50.10% 196.22%
FVTOCIE Ind AS 109 42 -37.22% 827.94% 39 -8.50% 152.44%
FVTOCA Ind AS 109 16 5.11% 74.14% 13 1.23% 7.25%
CFHR Ind AS 109 35 95.64% 539.54% 29 27.99% 150.69%
DGIH Ind AS 109 2 -1.94% 17.07% 1 0.62% 5.97%
TDFO Ind AS 21 59 87.64% 745.26% 59 55.48% 195.52%
TDLFCMI Ind AS 21 2 1.37% 9.59% 1 0.02% 0.20%
SOCI Ind AS 21 33 2.39% 14.69% 32 -2.56% 20.53%
BPG Ind AS 103 0 0.00% 0.00% 0 0.00% 0.00%
OCIDO Ind AS 1 1 -0.01% 0.07% 0 0.00% 0.00%
ITE Ind AS 1 84 -27.94% 106.00% 81 -24.38% 71.55%
Sample 100 100
Outliers excluded 8 7
Average OCI/ PAT% 1.82% .80%
Std. Dev of OCI/PAT% 10.7% 8.23%

22. PAT and Comprehensive Income
• To evaluate fair value impact of OCI on profit,
paired samples t-test is performed on the following
two set of paired samples –
• Profit after tax / Total Revenue of 2016-17 and Total
Comprehensive Income / Revenue of 2016-17
• Profit after tax / Total Revenue of 2015-16 and Total
Comprehensive Income / Revenue of 2016-17 with
null hypothesis that mean of Profit after tax / Total
Revenue is not different from mean of Total
Comprehensive Income / Revenue and alternative
hypothesis that they are indeed different.

23. 10.18%
9.73%
10.15%
9.76%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
2016-17 2015-16
Figure 1 Profitability Ratios
PAT/Revenue TCI/ Revenue

24. -20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91
Cross-sectional Ratio Movement 2016-17
TCI/Revenue PAT/Revnue

25. 4.44%
1.20%
0.13%
14.31%
-1.12%
2.75%
6.63%
0.16%
-5.32%
1.00%
-1.01%
9.56%
0.58%
-9.99%
-4.05%
-0.32%
Bharti Airtel Century Textile KBL ONGC Taj Hotels Tata Motors TGBL Welspun
PAT/ Revenue TCI/Revenue

26. 1284.97 1040.18 1378.87
5104.37
13616.171
2198
-13538.89
38.09%
24.50%
73.25%
25.04%
63.39%
7.37%
-179.17%
-200.00%
-150.00%
-100.00%
-50.00%
0.00%
50.00%
100.00%
-15000
-10000
-5000
0
5000
10000
15000
GAIL India Grasim Hindalco IOCL ONGC RIL Tata Motors
Fair Value through Other Comprehensive Income
FVTOCI % PAT

27. Methodology
• PAT/ Revenue series for 2016-17 & 2015-16 and
TCI/ Revenue series for 2016-17 are normally
distributed as per Kolmogorov- Smirnov test but
TCI/ Revenue for 2015-16 is not normal.
• To eliminate size difference across the sample
data set, ratio scale has been used instead of
comparing means of PAT and TCI.
• Since the result of normality test is mixed, non-
parametric test (Wilcoxon signed rank test) is also
applied to get confirmation about the findings of
paired samples t-test.

28. Paired Samples Test
Paired Differences
t df
Sig. (2-
tailed)Mean
Std.
Deviation
Std. Error
Mean
95% Confidence
Interval of the
Difference
Lower Upper
Pair 1 PATR16 -
TCIR16
-.02523% .83766% .08686% -.19775% .14728% -.291 92 .772
Pair 2 PATR17 -
TCIR17
.02967% .87771% .09151% -.15210% .21144% .324 91 .746

29. Result
• Based on 2 tailed significance level of paired samples t-
test, the null hypotheses that means of PAT / Total
Revenue and TCI / Total revenue are same [
Significance 2-tailed for 2016-17 (p): 0.746 and for
2015-16: 0.772]. Null Hypothesis is retained since p >
(α =.05).
• Therefore, the sample data do not support significance
of OCI in Indian context. Median of differences
between PAT/ Revenue and TCI/ revenue is zero as per
Wilcoxon signed rank test (Significance for 2015-16
:0.796 and for 2016-17 :0.849) and thus null hypothesis
is retained applying non-parametric test as well.

30. Discussion
Insignificance of OCI may be the result of the following factors:
• OCI impact on non-financial sector companies is of lesser degree. These
companies may not have significant proportion of financial assets. Also
application of hedging is limited. An important of source of OCI is
application of Ind AS 109 (equivalent to IFRS 9).
• Most of the sample companies do not have equity investments and cash
flow hedge.
• Remeasurement of defined benefit plan is by nature does not have
significant impact.
• Offsetting effect within OCI elements is has reduced overall impact. For
example, positive TDFO significantly neutralized negative impact of
FVTOCIE in 2016-17.
• There is no revaluation of tangible and intangible assets.
• However, this finding does not undermine the importance of recognizing
OCI in financial statements. In particular study of OCI in outliers show
unusual high level of TDFO and/or CFHR.

31. First-time adoption of Indian
Accounting Standards

32. Two Critical Exemptions
Likewise IFRS 1, First time adoption of Ind ASs ( Ind AS 101)
provides mandatory and optional exemptions from retrospective
application of revised standards to facilitate less costly change
over.
However, Ind AS 101 grants two critical exemptions –
• The carrying amount of property , plant and equipment
,intangible assets and investment property under the previous
GAAP can be treated as deemed cost under Ind ASs; and
• Carrying amount of the long term foreign currency
denominated monetary items can carried forward in Ind AS and
the accounting policy of deferral of exchange fluctuation
difference if opted under the previous GAAP can be continued.

33. Major issues in equity reconciliation in Ind AS
application

34. Major issues in equity reconciliation in Ind AS
application

35. Major issues in equity reconciliation in Ind AS
application

36. Major issues in equity reconciliation in Ind AS
application

37. -40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
0 20 40 60 80 100 120
Fig 4 Ind AS Adjustments%
Ind AS Adjustments%
Wide-ranging adjustments items affected the previous GAAP equity of the sample
companies differently.
Ind AS adjustments as % of previous GAAP fall in the range -24.8% to 88.5%.
However, distribution of Ind AS adjustments (See Figures 4 &5) show presence of
significant impact only in few cases.
On the positive side only 6% of sample companies reported Ind AS adjustments in the
range of 50-88.5% and on the negative side only 10% of the sample companies reported
Ind AS adjustments in the range of (10%)- (24.8%).
Concentration of Ind AS adjustment impact is found in the range of (10%)-10%.

38. 10
15
52
11
6 6
0
10
20
30
40
50
60
Less than -10% −24.8% Less than 0% − -10% 0%-10% 10% -20% 20%-50% 50%-88.85%
Fig 5 Distribution Ind AS adjustments to Equity

39. Research Hypothesis
Based on this preliminary analysis the following research
hypothesis has framed:
• Null Hypothesis: Means of previous GAAP and Ind AS
Equity are the same
• Alternative Hypothesis: Means of previous GAAP and
Ind AS equity are different
To test this research hypothesis, previous GAAP and Ind
AS equity data are neutralised for size effect by
converting into ratio of market Capitalisation on the date
of transition. Paired samples t-test is deployed on
Previous GAAP Equity / Market Capitalisation and Ind AS
Equity / Market Capitalisation.

41. Result
• The significance 2-tailed 0.844 implies that the null
hypothesis means of previous GAAP equity and Ind AS
equity are the same cannot be rejected.
• This finding indicates towards smooth transition to Ind AS
without having major impact on corporate numbers. This
might have been caused by two factors:
- major carve out specified at the beginning of this paragraph
- non-significant financial assets and hedging activities by
Indian companies
- dominance of amortised cost which is effect close to
redemption value than fair value and
- previous GAAP was not very different from Ind AS.

42. CARRYING AMOUNT AS DEEM COST

43. Concluding Remarks
• This research paper establishes that OCI
component, which is considered as important
indicator of future performance of entity, did
not significantly impacted non-financial sector
companies in first time adoption.
• This outcome indicates that Ind AS based
financial reporting did not generate a different
profit data to improve predictive ability of using
comprehensive income as an alternative to
traditional profit.

44. I didn’t find any.
THANK YOU
Are PAT and Total
Comprehensive Income
different?
Did first –time adoption
of Ind AS significantly
impact equity ?