You need at least 4 sources to compose this essay, and which one I have provided is mandatory. Also, you need to follow the format below! Thanks!!!!

A successful Joining the Conversation essay will:

· Have 750+ words

· Present and argue for an original thesis

· Position your ideas into an academic conversation with your sources

· Support your claim with evidence from credible sources

· Utilize at least 4 sources, 1 of which should be peer-reviewed

· Responsibly cite, integrate, and summarize the main sources used

· Be an original Work

See “Joining the Conversation – Assignment Sheet” on Canvas

· You may work with one of the four topics we discussed in class and select most of your sources from the provided list, or you can choose your own research topic to learn more about and be responsible for finding your own sources.

Essay format:

· Introduction

· Hook

· Thesis

· Forecasting

· Summary

· Summary of the main points of each article

· Explain how these articles and their data relate/agree/disagree with your thesis

· (This section can occur before or after the regular introduction but must be before the body paragraphs)

· Body paragraphs (organized around points supporting your thesis)

· Should support/prove your thesis

· Must match up with the forecasting in you introduction

· Should rely on your sources for data and quotes

· Conclusion

· Transition

· Thesis

· Clincher

Journal of Financial Management and Analysis, 29(2):2016 :

10

-19
© Om Sai Ram Centre for Financial Management Research

IMPACT OF IFRS ADOPTION ON FINANCIAL DECISIONS
CASE STUDY OF INDIAN INFORMATION TECHNOLOGY

INDUSTRY : WIPRO LTD.

VIDYA CHANDRASEKAR, M.Com., Ph D. Professor D.N.S. KUMAR, Ph. D.
Adjunct Faculty Professor of Finance & Associate Director

Department of Commerce Centre for Research – Projects
em ail: Vidyal5592@gmail.com em ail: dns.kumar@christuniversity.in

Christ University, Hosur Road
Bengaluru – 560029, INDIA

Abstract
Expansion of business environment in the 1990s changed the financial set up of India from the conventional
bank based borrowings to marked based one. This necessitated companies to address global stakeholders.
The regulatory requirement of different countries also necessitated companies to do multiple reporting i.e.,
one as per home country standard and the other as per the host country standard. To overcome multiple
reporting and to address global stakeholders, a uniform system of reporting was felt necessary to facilitate
comparisons, which resulted in the establishment of International Accounting Standard Board (IASB)
which issues International Financial Reporting Standards (IFRS).

Certain Indian companies having listed in foreign stock exchanges are reporting IFRS voluntarily in their
financial statements. The present study tries to understand the impact of this voluntary adoption of IFRS
on the financial decision makers through a case analysis of Wipro Ltd. The analysis compared the major
financial parameters under IFRS and Indian GAAP as reported by Wipro Ltd for a period of four years from
2009 -10 to 2012-13. The results postulate an increase in liquidity ratios; interest coverage ratio; marginal
increase in debt equity ratio; and no significant increase in profitability ratios except net profit ratio which
rose slightly in the year 2013. Overall the results indicate that the adoption of fair value accounting and
strict requirement in adhering to accounting standards have strengthened the financial indicators and
provided the decision makers a transparent, true and fair accounting highlighters.

Keywords : Financial markets, Globalization, Financial reporting, Accounting Standards

JEL Classification : E61, F42, G39, M41, 053

Introduction
Developments in socio – economic fabric in India
have changed financial environment of businesses
in India from traditional bank based system to
market oriented, which paved way for globalization
and consequently expansion of financial markets
worldwide necessitating companies to raise funds

abroad and address investors outside the home
country. As a result, companies were required to
comply with regulatory requirem ent of filing
financial reports as per home country and global
standards, which led to multiple reporting. To
overcom e m u ltip le rep o rtin g and to have a
transparent system of reporting which facilitates;

The authors are grateful to the Research Group on Project Management of the University for financial support and to
Wipro (IT/Services/Company) for extending rewarding cooperation, and to the referees of the Journal JFMA for
useful comments.
The authors own full responsibility for the contents of the paper.

10

mailto:Vidyal5592@gmail.com

mailto:dns.kumar@christuniversity.in

I mpact O f IF R S A doption O n F inancial D ecisions
C ase Study O f I ndian I nformation T echnology I ndustry : W ipro L td.

11

comparisons, reduces cost of raising capital, and
also fulfills regulatory requirements of different
countries, a uniform system of accounting was felt
necessary. The e s ta b lis h m e n t o f In ternational
Financial Reporting Standards (IFRS), a common
a c c o u n tin g syste m and fra m e w o rk , w h i c h is
p e rc e iv e d as tra n s p a re n t, and fair to local and
global in v es to rs , and which lead to in creased
compatibility and comparability among different
f in a n c ia l s ta t e m e n ts a c ro s s the g l o b e 1. This
p e r c e p t i o n is s u p p o r t e d by the f i n d i n g s of
Hope, et al.2, that countries adopt IFRS to improve
investor protection, to make capital market more
accessible to foreign investors, and to improve
comparativeness and comprehensiveness of their
financial information.

In the past, companies submitted their annual
financials to regulators and banks as a mandatory
disclosure, as users of these financial statements
were few, with creditors being major stakeholder.
Others are investors, employees, customers and
management. Employees were happy as long as
they were r e w a rd e d with good s a la r y /w a g e s /
p a c k a g e ; e m p l o y e e s w ith t h e i r s a la r i e s and
b e n e f i t s ; c u s to m e r s w ith q u a li ty p r o d u c t at
competitive prices. The necessity to read financial
statements was never felt by these stakeholders.
Even, focus of financial statement was on providing
financial information to stockholders and creditors
to measure management’s performance, and for
taxation purpose. However, globalization has given
new twist to financial market with a change in focus
f ro m t r a d i t i o n a l s t e w a r d s h i p to a b r o a d e r
stakeholder focussed fair valuation. The framework
of IFRS also emphasizes that, financial information
p r o v i d e d s h o u ld h e lp s t a k e h o l d e r s to m ake
economic and other decisions.

Today, doing business is not only attractive but
challenging with higher level of expectations by
various sta k e h o ld ers with d iffe re n t phases of
e c o n o m y and s t a g e s o f p r o d u c t s / s e r v i c e s .
Business solutions, although look simple have
t a k e n a m a n i f o l d d e l i v e r a b l e s w ith s h a re d
g o v e r n a n c e s w ith v a r i o u s a s p e c t s , p a r t i e s ,

compliances, standards etc. in a multi-country focus
of businesses. Investors are always on the lookout
for newer investment opportunities in any part of
the w o rld , w hich w o u ld add v a lu e to them .
Expansion of markets internationally has deprived
local companies of the home market advantage.
Even small and medium industries are exposed to
c o m p e t i t i o n , in and a ro u n d the w o r ld . The
reputation associated with good financial reporting
is more when brands become associated with a
company’s name3. As financial statements are the
means through which businesses communicate to
these various s ta k e h o ld e r s , re q u i r e m e n t o f a
uniform system of fin ancial rep ortin g becam e
necessity. Proponents of International Financial
Reporting Standards (IFRS) believe that financial
statements prepared is to meet common needs of
most potential users

4.

Prelude
T h e p u r p o s e o f any f i n a n c i a l r e p o r t i n g is
e s s e n t ia l ly to red u c e i n fo r m a tio n a sym m e try
b e t w e e n c o r p o r a t e m a n a g e r s a n d p a r t i e s
contracting with their firm (Watts, 2001). It is for
corporate managers to reduce this information
asymm etry by providing transparent financial
reports. The IFRS framework (ibid 1989) provides
f o u r p r i n c i p a l q u a l i t y f e a t u r e s : r e le v a n c e ,
reliability, understandability and comparability.
Information is said to have relevance only when
it helps users in d e c ision making process by
e v a l u a t i n g v a r i o u s o p t i o n s . A c c o u n t i n g
information needs to be relevant, as accounting
report must give user what s/he wants and be
useful for decision-m aking purposes. As users
of financial sta tem ents do not have access to
books and re c o rd s b a s ed on w hich f in a n c ia l
s t a t e m e n t s a re p r e p a r e d , t h e y d e p e n d on
companies audited financial statements, which
are presumed to be both reliable and relevant

5.

To e n s u r e the r e l i a b i l i t y and r e l e v a n c e o f
financial statements, companies in US frequently
employ Certified Public Accountant (CPA) firms
to v a l i d a t e t h a t th e c o m p a n i e s ’ f i n a n c i a l
i n f o r m a t io n a d h e re d to G en er a lly A c c e p ted

1 2 JOURNAL O F FINANCIAL MANAGEMENT AND ANALYSIS

Accounting Principles (GAAP) 6 and so is the case
in I n d i a w ith the a p p o i n t m e n t o f c e r t i f i e d
c h a rtere d a c c o u n ta n t to a udit and c e rtify the
financial statements. Any information provided
must also have reliability. Information is said to
have reliability when it is free from error and bias.
Without reliable financial information, decision
makers cannot rely on financial statements for
making sound economic decisions and indicated
reporting improvements in quality of reporting after
IFRS implementation to reduce absolute analyst’s
forecast errors7. Financial statements must be
presented in such a way that there should not be
any ambiguity in reporting and give a scope for
interpreting it in multiple ways. Comparability of
financial statement is another important aspect
of IFRS, the main purpose for which uniform
accounting standard was initiated. Stakeholders
should be able to read f inancial statement of two
d i f f e r e n t c o m p a n i e s a nd a n a l y z e f i n a n c i a l
performance and position of the company. The
International Accounting Standard Board (IASB) 2
works closely with all the stake holders which
i n c l u d e i n v e s t o r s , a n a l y s t s , a c c o u n t i n g
p r o f e s s i o n a l s e tc o f a b u s i n e s s to b r i n g in
changes to the policies which results in more
disclosures.

Users of these financial reports are many, such as
i n v e s t o r s , c r e d i t o r s , e m p l o y e e s , c u s t o m e r s ,
competitors, government, public & so on. Purpose
of usage of these reports also differs from person
to person. A le xa nder, et a l . 8 d iv id e users o f
fin a n c ia l rep o rts into E quity in v e s to rs , Loan
C r e d i t o r s , E m p l o y e e s , A n a l y s t s , S u p p l i e r s ,
Customer, Competitors, Government and Public.
Shareholders use it to determine the company’s
financial position to decide whether to invest in
the company or not; Creditors to view liquidity
position of the company so that they get their
payments on time; Employees to know health of
t h e c o m p a n y ; G o v e r n m e n t to m o n i t o r the
compliances followed and taxation. Companies will
be able to initiate new relationships with investors,
c u s to m e r s , s u p p li e r s and o t h e r s t a k e h o l d e r s
i n t e r n a t i o n a l l y as IFRS p r o v id e s a g lo b a l ly

accepted reporting platform which will ultimately
raise reputation and relationship of the corporate
and give them a competitive advantage in building
their brand.

T h e i n t r o d u c t i o n o f I F R S h a s f u e l l e d the
expectations of users of financial statements on
p o t e n t ia l b e n e f i ts o f a d o p tio n . S tu d ie s have
confirmed the benefits of IFRS adoption such as
h ig h e r c o m p a r a b i l it y o f f in a n c ia l s ta te m e n ts
a m o n g c o m p a n i e s o p e r a t i n g in d i f f e r e n t
jurisdictions, lower transaction costs, and access
to i n te r n a t io n a l c a p ita l th ro u g h cross b o rd e r
listin gs and greater in te rn atio n a l in v es tm e n t9.
Many studies done in Europe and Canada who
were early adopters of IFRS have confirmed that
the a d o p tio n has r e s u l te d in c h a n g es in key
accounting parameters and financial ratios of the
companies. Though literature finds difference in
a c c o u n t i n g s t a n d a r d s a f f e c t i n g a c c o u n t i n g
param eters and financial ratios, no study has
focused on to find the impact, these differences
have on financial decisions. This pertinent case
analysis is an attempt to highlight the impact
IFRS may have on financial decisions of Wipro
Ltd.

I F R S is c o m p r e h e n s i v e p r i n c i p l e s b a s e d
a c c o u n t in g with e m p h a s is on real e c o n o m ic
t ra n s a c t io n s 10. Advocates of IFRS argue that if
all companies follow one accounting standards,
financial reports of companies would be uniform
w h i c h f a c i l i t a t e s e a s y c o m p a r i s o n . 11 IFR S
produces higher quality of fin ancial rep ortin g,
e n h a n c e s the c r e d i b i l i t y o f f i r m f i n a n c i a l
sta tem ents, and in turn provid es lenders with
more certainty and information about the ability
o f f i r m s to t i m e l y m e e t t h e i r f i n a n c i a l
obligations, thus, leading to better borrowing
t e r m s 12. A further argument in favor of IFRS is
th a t the p r o v i s i o n o f m ore f o r w a r d – l o o k i n g
in form atio n may improve the ability of users to
m o n i t o r m a n a g e m e n t p e r f o r m a n c e , as the
i n t r o d u c t i o n o f f a i r v a lu e a ll o w s f o r b e t t e r
a ssessm ent of m anager ability. Eventually, due
to smoother com m unicatio n between managers,

Impact O f IFR S Adoption O n F inancial Decisions
C ase Study O f I ndian I nformation T echnology I ndustry : W ipro L td.

13

s h a r e h o l d e r s a n d o t h e r i n t e r e s t e d p a r t i e s ,
agency costs woul d become lower, which will
lead to l ower cost of debt f i n a n c i n g 13. Barth,
et.al., provide evidence that IFRS convey new
i n f o r m a t i o n to t h e m a r k e t w h i c h a s s i s t s
i n v e s t o r s in m a k i n g i n f o r m e d d e c i s i o n s ,
p r e d i c t i o n s o f a f i r m ’s f u t u r e f i n a n c i a l
p e r f o r m a n c e a n d s i g n a l h i g h e r a c c o u n t i n g
q ua l i t y t h r o u g h t ra n s p a r e n c y . The i mp r o v e d
financial communi cat i on helps users in taking
deci s i ons as this e xt e nde d i nf or ma t i on helps
them to underst and the dynami cs of financial
r e p o r t i n g b e t t e r . D u n n e , i n hi s s t u d y on
i mplementation of IFRS in UK, Italy and Ireland
on w h e t h e r IFRS e na bl e s s t a k e h o l de r s make
bett er i nfor med decisi ons, reports Italians were
very support i ve, UK respondent s agreed but the
Irish were more negative. This was attributed to
the negati ve views of UK and Irish auditors and
preparers.

Since pr ofi tabi li ty is one of the key indicators,
showcasing the health of a company, proponents
of IFRS claim that adopti on of IFRS results in
i ncrease in these ratios. Studies by Lantto and
Sahl st om14 examined the impact of IFRS adoption
on key financial ratios of Fi nnish compani es.
The r e s u l t s s h o w e d t hat , I FRS c h a n g e s the
m a g n i t u d e o f a c c o u n t i n g r a t i o s due to the
adopti on of fair value account i ng and stricter
r equi r eme nt on certain account ing issues. The
r esul ts i ndi cat ed i ncrease in pr ofi tabi li ty and
geari ng ratios and decrease in PE, equity and
q u i c k r a t i o s . The s t udy by P u n d a 15, on UK
c ompa ni es found that, though UK GAAP and
IFRS are very much similar in many aspects, still
there was sizeable di fference in financial ratios
a f t e r c o n v e r s i o n to I F R S , wi t h r e s p e c t to
pr ofi tabi li ty and l iqui dit y ratios.

Hung and Subr amanyam16 investigated the effects
of IFRS on F i na n c i a l s t a t e me n t s of Ge r ma n
Companies during the period 1998- 2002. The
study found i ncrease in total assets and book
value of equity under IFRS and also variability
o f b o o k v a l ue and i nc ome . Henr y, et. a / . ,

17

exami ned the r econcil i at i on bet ween US GAAP
and IFRS of EU cross-li sted firms from 2004 to
2006. Thei r f indi ngs indicate diff erences in net
i n c o m e a n d s h a r e h o l d e r s e q u i t y b e t w e e n
industries. Firms reported hi gher net income and
l ower sharehol der equit y under IFRS than US
GAAP. Dunne, et.al., state that the mai n reason
for Eur opean countri es to adopt IFRS is due to
its potential benefits: i mpr ovement s of i nvest or
p r o t e c t i o n , c a p i t a l m a r k e t a c c e s s i b i l i t y to
foreign i nvest ors, compar abi l i t y and quali ty of
financial statements.

R a h m o n o v a 18 f o u n d s u b s t a n t i a l d i f f e r e n c e
between financial ratios for companies reporting
under IFRS versus US GAAP. These differences
i n c r e a s e d t he n e e d o f i n v e s t o r s and o t h e r
f i n a n c i a l s t a t e m e n t us e r s to u n d e r s t a n d the
c h a n g e s t h a t r e s u l t s f r o m t he n e w s e t o f
s t a n d a r d s to make well i n f o r me d and sound
f i n a n c i a l d e c i s i o n s . A c c o r d i n g to
P r i c e w a t e r h o u s e C o o p e r s 19, “E x e c u t i v e s can
e x p e c t t h a t I F R S c o n v e r s i o n c o u l d a f f e c t
business f undamentals, such as, communications
w i t h ke y s t a k e h o l d e r s , o p e r a t i o n s a n d
infrastructure, tax and human capital strategies” .
Even it is expected that, some rules and guidelines
concerning assets and liabilities, revenues and
expenses, equities are going to change according
to IFRS.

Methodology Used

As few of the Indian companies listed in European
Union and New York stock exchanges have adopted
IFRS voluntarily as early as 2007 (without waiting
for Government announcement). The present case
study analysis is an attempt to explores the impact
of t hi s v o l u n t a r y a d o p t i o n o f I n t e r n a t i o n a l
F i n a n c i a l R e p o r t i n g S t a n d a r d s on f i n a n c i a l
decisions. The study compares major financial
p a r a me t e r s unde r IFRS and I ndi an GAAP as
reported by Wipro for a period of four years from
2009-10 to 2012-13, and its possible impact in terms
of benefits / drawbacks to all the external/internal
stakeholders.

14 JOURNAL OF FINANCIAL MANAGEMENT AND ANALYSIS

T h e s tu d y a n a ly s e s f i n a n c i a l s t a t e m e n t s of
Wipro, both balance sheet and income statement
from 2009-10 to 2012-13 (four years). Financial
ratios, both under IFRS and Indian GAAP are the
focal areas of analysis. Further, the study draws
the d ifferences in f in a n c ia l ratios under both
standards and builds on the inherent information
to fin a nc ia l decision m akers. Financial ratios
provide a benchmark for comparability of firms
to review their growth in relation to previous
years or with competing companies or against
industry standard. Thus, nine fin a nc ia l ratios
have been identified and are grouped into four
c a t e g o r i e s i.e ., L i q u id i ty , D e bt, E q u i ty and
Profitability*, (see Exhibit)

Research Findings

Wipro started reporting under IFRS from 2009-2010,
with transition date of 01.04.2008. The company
reports its financials both under Indian GAAP and
IFRS. Data has been extracted from both Indian
GAAP and IFRS as reported by Wipro to calculate,
compare, and for analysis.

W ip ro Ltd (W ipro) is one o f the l a r g e s t IT
services companies of India. Established in 1945
as an edible oil company, it later forayed into IT

busin ess. Wipro is also into other busin esses
s u c h as c o n s u m e r c a r e , l i g h t i n g and
i n f r a s t r u c t u r e e n g i n e e r i n g . The c o m p a n y is
p red o m in an tly e quity f ina nc ed, with its total
loans and borrow ings am ounting only to 18 per
cent o f capital mix as on March 31, 2013. The
m a r k e t c a p i t a l i z a t i o n o f the c o m p a n y as on
March 31, 2013 is $1075 bn. Over the last six
y e a rs the g r o w th o f r e v e n u e and p r o f i t are
noticed at a CAGR of 20 per cent and 14 per cent
r e s p e c t i v e l y . The c o m p a n y ’s o p e r a t i o n s are
f o u n d in 54 c o u n t r i e s w i t h an i n t e l l e c t u a l
strength of 142,000+ across serv ices/countries.
Prim arily, the com pa nies stocks are listed at
N a tio n a l Stock E xc ha nge and Bom bay Stock
Exchange. The c o m p a n y ’s American Depositary
Receipts (ADR) representing equity shares are
listed in New York Stock Exchange.

First time adopters of I n te rnationa l Financial
Reporting Standards are required to explain the
reasons for diffe re nc e in figures from Indian
GAAP to IFRS with a reconciliation of Equity and
P r o f i t and L o s s A c c o u n t as on the d a te of
transition. This explanation along with the notes
to the consolidated financial statements has been
used to interpret the reasons for the difference
in ratios calculated.

EXHIBIT

FINANCIAL RATIOS

A. Liquidity Ratios
• Current Ratio : Current Assets / Current Liabilities
• Quick Ratio : Current Assets- (Inventory + Prepaid

Expenses) / Current Liabilities

Debt Ratios
• Debt Equity Ratio : Total Liabilities / Stockholders

Equity
• Interest Coverage Ratio : *EBIT / Interest Expense

Equity Ratio
• Proprietary Ratio : Stockholders Equity / (Total

Assets Intangibles)

B. Profitability Ratios

• Current Ratio : Current Assets / Current Liabilities
• Net Profit Ratio : Net Profit after tax / Net Sales
• Return on Equity : Net Income / Stockholders Equity
• Fixed Assets Turnover Ratio : Net Sales / Average

Total Assets
• Return on Capital Employed : *EBIT/(Total Assets

– Current Liabilities)

♦Earnings before interest and tax
The percentage difference between the ratios under IFRS
and Indian GAAP is calculated by:
Percentage Difference =
IRatio under IFRS – Ratio under Indian GAAPt * 100
Ratio under Indian GAAP)

I mpact O f IFR S A doption O n F inancial Decisions
C ase Study O f I ndian I nformation T echnology I ndustry : W ipro L td.

15

TABLE 1
LIQUIDITY RATIOS

Ratios IGAAP IFRS Difference in %

2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Current Ratio 2.26 2.27 1.99 1.82 1.90 2.31 2.32 2.12 -15.61 1.86 16.52 16.%
Quick Ratio 2.16 2.16 1.92 1.80 1.83 2.21 2.23 2.10 -15.24 2.49 16.60 16.98

Ratio Analysis
L iq u id ity ratios are a measure of c o m p a n y ’s
ability to meet short term financial obligations
and it r e f l e c t s on t h e m a r g i n o f s a f e t y
management maintains to overcome any adverse
s it u a ti o n s . Table 1 p o s tu l a te s that, both the
c u r r e n t a n d q u i c k r a t i o s h a v e i n c r e a s e d
s i g n i f i c a n t l y f r o m a n e g a t i v e 15 p e r c e n t
difference in 2010 to a positive 17 per cent in
2013. This gives a positive signal to lenders /
b a n k e rs as they look into the s o lv e n c y o f a
c o m p a n y b e fo r e f in a n c in g . A good l iq u i d it y
p o s it i o n h e lps m a n a g e rs not only to addre ss
fixed obligations of company but also helps them
in taking decisions with regard to declaration of
dividend, expansion, diversification etc. From
shareholder perspective if liabilities are less, it
is good news to them as the company is adding
value to them in form of financial assets.

A reduced current liabilities and strength ened
current asset is the reason for this sig nific ant
improvement in liquidity ratios. Where Indian
GAAP requires provision for dividend to be made
be fo re it is a p p ro v e d by s h a r e h o l d e r s , IFRS
requires approval before payment of dividend. This
reduces provision for liability to a considerable
extent. IFRS recognizes lease advance and rentals
as current assets and available for sale financial
assets are measured at fair value at reporting date.
Indian GAAP treats lease advance and rentals in
PPE and available for sale financial assets are
measured at cost or market value whichever is
lower. Under IFRS Available for sale financial
assets and liabilities are measured at fair value
whereas in IGAAP short term investments are
m easured at lower of cost or fair value. This
reporting difference has boosted current asset in
IFRS and resulted in a better liquidity position.

TABLE 2
DEBT RATIOS

Ratios IGAAP IFRS Difference in %
2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Debt Equity
Ratio 0.78 0.63 0.60 0.64 0.68 0.55 0.52 0.54 -13.34 -13.76 -12.16 -14.74
Interest coverage
Ratio 45.72 81.35 21.30 28.19 42.85 33.61 20.98 30.19 -6.28 -58.68 -1.51 -6.28

Debt Equity ratio is a long term solvency ratio which
i n d i c a t e r e l a t i o n b e tw e e n p o r t i o n o f a s se ts
provided by stockholders and portion of assets
financed by creditors. A high debt equity ratio
means company is at risk, as it has to earn not only

to reward the stockholders but also to fulfill the
commitment to lenders.

Table 2 shows that difference in ratio has decreased
marginally from a negative 13.34 per cent in 2010 to

1 6 JOURNAL OF FINANCIAL MANAGEMENT AND ANALYSIS

-14.74 per cent in 2013. Low debt symbolizes low
risk and gives confidence to the lenders that their
debt would be repaid in time. Low debt also means
that earnings of the company are not spent on
repaying interest but to reward shareholders for
the risk undertaken. An average debt equity ratio
for four years hovering around 0.57 under IFRS as
against 0.66 under Indian GAAP reflects financial
health and managerial efficiency of the company to
external stakeholders.

Reduction in debt equity ratios is on account of
increase in equity due to recording of Minority
Interest within Equity; accelerated amortization of
stock compensation expense in the initial years
under IFRS; recognizing changes in the fair value
of available for sale financial investm ents at
reporting date directly in equity which increased
the denom inator and decrease in liability and
increase in equity due to recognition of dividend
after shareholder approval.

Interest Coverage is a financial ratio which
indicates the company’s ability to pay interest
charges on its debt. The coverage aspect of ratio
indicates the number of times interest could be paid
from available earnings, thereby providing a sense
of safety margin a company has, for paying its
interest for any period. Table 2 shows difference in
interest coverage ratio between Indian GAAP and
IFRS as very volatile ranging from a negative 6.28

per cent in 2010 to a positive 7.08 per cent in 20

13.

Low interest coverage in IFRS and a greater
difference in ratio reflected in the years 2010 (-6.28)
and 2011(-58.68) are due to exchange fluctuation of
foreign currency borrowings which is shown as
deduction to other income in the profit and loss
account in Indian GAAP, whereas in IFRS it is
shown as an interest expense. Because of this,
interest coverage under IFRS in the years 2010 and
2011 were very low (especially in 2011) compared
to Indian GAAP. But following the companies bill
of 2011 which was initiated to align Indian GAAP
with IFRS, the exchange fluctuation on foreign
currency borrowings was also shown as an interest
expense in Indian GAAP from 2012 onwards, instead
of adjusting with other income. As a result of which
the difference between ratios has narrowed from
2012 onwards and has strengthened under IFRS in
2013.

By in clu d in g the risk on fo reig n cu rren cy
borrowings along with fixed obligations, IFRS
strengthens the internal control systems of the
company which also reflect on the Management’s
perspective. As the ability to pay interest on
borrowings is a tool for testing the solvency of the
company, a higher ratio portrays a positive signal
to the len d ers and m argin of safety to the
shareholders.

TABLE 3
EQUITY RATIOS

Ratios IGAAP IFRS Difference in 95

2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Proprietary Ratio 0.67 0.72 0.74 0.70 0.72 0.77 0.79 0.74 7.21 6.58 5.63 6.97

Proprietary ratio indicates relationship between
owners’ funds and total assets. It reflects extent to
which owners funds are invested in different types
of assets and financial strength of the company.
Higher ratio indicates long term solvency position
of the company and lower ratio indicates greater

risk to the creditors.

As per Table 3, the percentage difference has been
around 6 per cent in almost all the years. A high
p ro p rie ta ry ratio u nder IFRS in d ic a te s the
soundness of the capital structure, healthier long

I mpact O f IF R S Adoption O n F inancial D ecisions
C ase Study O f I ndian Information T echnology I ndustry : W ipro L td.

17

term solvency of the company, a good return to the
shareholders and a greater security for creditors.

The increase in equity is on account of presentation
of minority interest within equity; changes in the
fair valuation of available for sale investments under

e q u it y on r e p o r t i n g d a te and a c c e l e r a t e d
amortization of stock compensation in the initial
years. Increased intangibles under IFRS reduce the
denominator thereby increasing the equity ratio.
I n c l u d i n g m i n o r i t y i n t e r e s t i n c r e a s e s the
shareholders equity and the ratio.

TABLE 4
PROFITABILITY RATIOS

Ratios IGAAP IFRS Difference In %
2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Net Profit Ratio 0.17 0.17 0.15 0.16 0.17 0.17 0.15 0.18 -0.36 0.70 -0.13 8.46
Return on Equity 0.25 0.23 0.21 0.23 0.23 0.22 0.20 0.22 -6.80 -5.26 -5.56 -6.69
Fixed Asset T/O 5.09 5.62 6.51 6.% 5.1 5.72 6.52 6.83 0.10 1.80 0.12 -1.81
ROCE 0.23 0.23 0.25 0.30 0.25 0.24 0.23 0.28 10.19 5.79 -6.49 -8.40

N et p ro fit ratio m easures the efficiency of a
company. It reflects on companies pricing policy,
cost structure and production efficiency. A low
p r o f i t i n d i c a t e s low m a r g i n o f s a fe t y for
stakeholders as decline in sales in subsequent
years would erode profits.

Net p rofit (Table 4) rem ains more or less the
same under both Indian GAAP and IFRS except
in the year 2013 where the percentage difference
between Indian GAAP and IFRS is 8.46 per cent.
This is due to dem erger and discontinuation of
operatio ns by of certain subsid iary companies,
by which assets & liabilities of these companies
are a djuste d a g a in s t res e rv es o f Wipro as on
March 31, 2012. However, IFRS continues to
show the profits of the discontin ued (demerged)
operatio ns separately in its income statement in
2013, which has resulted in the difference of 8.46
per cent in the ratios. With profits o f continued
a n d d i s c o n t i n u e d ( d e m e r g e d ) o p e r a t i o n s
separately in the income statement, a transparent
c om m unication is sent to all the stakeholders
reading the report to take appropriate decisions.
High and consistent profitability of the company
is looked into by investors to assess the risk of
in v es tin g , c re d ito rs for d e te rm in in g repaying

capacity of debts and Governm ents to compute
taxes.

Return on E quity is the measure o f fin ancial
efficiency of a company. Higher values indicate
efficiency of the company in generating income
from in v estm e n t to its s to c k h o ld e rs . Table 4
shows minor difference in ratios under IFRS and
Indian GAAP which is on account of m inority
interest o f company recognized within equity in
IFRS and is presented separate ly from equity in
I n d ia n GAAP. I n c r e a s e in e q u it y is a lso on
account of fair value m easurem ent of available
for sale i n v e s t m e n t s at e a ch r e p o r t i n g date,
whereby the changes in the fair value of these
i n v e s t m e n t s a re r e c o g n i z e d u n d e r e q u i t y .
Liability for dividend declared after the reporting
period is recognized in retain ed earnings under
IGAAP is de recognized under IFRS, as under
IFRS d i v id e n d is to be r e c o r d e d on ly a ft e r
a p p r o v a l . This p r e s e n t a t i o n d i f f e r e n c e a lso
increases equity under IFRS. This presentatio n
difference betw een IFRS and Indian GAAP has
r e s u l t e d in i n c r e a s e in e q u i t y u n d e r I F R S ,
resulting in low return to stockholders. But by
reportin g m inority inte rest within equity, IFRS
fac ilita te s sta keholders, investors and lenders

18 JOURNAL OF FINANCIAL MANAGEMENT AND ANALYSIS

to i dentify their share on returns of the company,
a f t e r t a k i ng i nt o a c c o u n t s t ake of m i n o r i t y
interest.

F ix e d a s s e t t u r n o v e r r at i o m e a s u r e s s a l e s
g e ne r a t e d by the c o mpa ny out o f i nv e s t me n t
made in fixed assets. Hi ghe r r at i o is a good
indicator as it signifies greater level of usage of
fixed assets. Negative and low difference found
is on a c c o u n t o f l e a s e s o f l a n d w h i c h are
classified as operating leases in IFRS and lease
advance and rentals are r ecognized as income in
profit and loss account, whereas in Indian GAAP,
these are treated as finance lease and are taken
to Pr ope r t y, Pl a nt & E q u i p m e n t ( PPE) . The
treatment of lease accounting not only affects
fixed asset t urnover ratio but also ratios such as
r e t u r n on e qui t y and E B I T D A etc. and also
changes the u s e r ’s decision making about their
i nvest ment . There is a negat i ve diff erence as
regards fixed assets turnover ratio as under IFRS
advances paid for acquisition of property, plant
and equipment out standing at reporting date are
disclosed under Capital work in progress. Under
IGAAP, these advances are shown under Long
t er m l o a n s a n d a d v a n c e s . T h i s r e p o r t i n g
di fference and the fair val uat i on i ncr ease the
denominator and reduce the ratio under IFRS.

Return on capital employed measures the efficiency
with which investments made by stakeholders and
creditors are used. By comparing net income to sum
of a company’s debt and equity capital, investors
get a picture of how leverage impacts company’s
p r o f i t a b i l i t y . A n a l y s t s c o n s i d e r RO C E as a
m e a s u r e m e n t of c o m p r e h e n s i v e p r o f i t a b i l i t y
indicator because it gauges management’s ability
to generate earnings from a company’s total pool
of capital.

T h e d i f f e r e n c e in R O C E s h o w s a g r a d u a l
d e c l i n e unde r IFRS f r om a po s i t i v e 10.19 in
2 010 to a – 8.40 in 2013. As r egards return on
c a p i t a l e m p l o y e d a low c u r r e n t l i a b i l i t y on
account of not pr ovidi ng for di vidend i ncreases
t he d e n o m i n a t o r and e v e n t u a l l y r e d u c e s the

ratio. Denomi nat or of the ratio is also i ncreased
du e to f a i r v a l u e a c c o u n t i n g ; r e c o g n i z i n g
cus t omer related intangibl es and balance sheet
a p p r o a c h to r e c o g n i z e d e f e r r e d t a x . T h i s
report ing di fference resul ted in reduced return
on capital empl oyed under IFRS.

Conclusions

This study supports the literature on the impact of
adoption of IFRS on accounting figures and key
financial ratios of Wipro Ltd used by investors,
c r e d i t o r s , a n a l y s t s etc. R e s u l t s i n d i c a t e
considerable increase in liquidity ratios, equity ratio
and interest coverage ratio, marginal increase in
debt equity ratio and no significant increase in any
of the profitability ratios. The major reasons for
difference in ratios could be attributed to principle
based IFRS standard which requires fair value
accounting, difference in accounting for leases,
balance sheet approach to deferred taxes, and
t i mi n g of p r o v i d i n g p r o v i s i o n f or p r o p o s e d
dividend.

As users of f inancial st at ement s are not e xpert s
in r e a d i n g a n d t a k i n g d e c i s i o n s b a s e d on
r eport s, e xpl a na t i on pr ovi de d by way of not es
to accounts under IFRS makes it easier for even
a novi ce to u n de r s t a nd the r epor t s . As IFRS
a d o p t i o n r e q u i r e s p r o v i d i n g mor e e x t e n s i v e
i nf or ma t i on; t r ans par ency, quali ty and contr ol
s yst ems of c ompa ni e s get s t r e ngt he ne d. Thus
IFRS not only i mpact the a c count i ng f igur es
b u t a l s o b r i n g s in c h a n g e s w i t h i n t h e
o r g a n i z a t i o n by s t r e n g t h e n i n g t he i r i nt e r n a l
s y s t e m s and p r o c e s s e s . O v e r a l l t he r e s u l t s
i ndicate that adopt i on of f ai r value a ccount i ng
a n d s t r i c t r e q u i r e m e n t i n a d h e r i n g to
a c c o u n t i n g s t a n d a r d s h a v e s t r e n g t h e n e d the
fi nanci al figures and pr ovi ded decisi on makers
a t r a ns pa r e nt , true and fair a c count i ng pi ct ure.
Though the i nitial cost i nvol ved in t r a ns i t i on
is h i g h , c o m p a n i e s n e e d to a d o p t I FRS to
pa r t i ci pa t e in a gl obal i s e d f i na nc i a l mar ket , to
ena bl e i nves t ors and ot her users of fi nanci al
s t a t e me nt s .

Impact O f IFRS Adoption O n F inancial Decisions
C ase Study O f I ndian I nformation T echnology I ndustry : W ipro L td.

19

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10.

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14.

15.

16.

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