case study

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: [email protected] em ail: [email protected]

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.

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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 users4.

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 relevant5.

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

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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,

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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.

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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)

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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

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-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 2013.

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.

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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.

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