A Study of Impact of IFRS Convergence in India on Debt–Equity Components of Financial Statements

Abstract

The present article analyses the impact of International Financial Reporting Standards (IFRS) convergence on financial statements in India. Our focus is on the most significant and challenging standard, that is, IND-AS (financial instruments). Our focus is on the most significant and challenging standard i.e IND-AS(Financial Instruments) and their impact on debt-equity classification brought about by the new standard(s). We analyse the annual reports of 30 listed entities having outstanding preference share capital for the years 2015–2016 and 2016–2017. We redefine the formulae of ratios most commonly used in loan agreements (popularly referred to as ‘debt covenants’) from lenders’ perspective and empirically examine the impact of IFRS convergence on the value of these ratios for the same financial year, that is, 2015–2016. Our results show that there is a significant difference in the value of ratios calculated using newly developed formulae and by applying the old formulae on new data. The study is the first of its kind to empirically examine the impact of IND-AS specifically standard relating to financial instruments on debt ratios in India. Our contribution to the literature is that we not only examine the impact on ratios on transition to IND-AS but also offer a solution as to how the users can mitigate this impact by making adjustments to the debt ratios taking into account the recognition, measurement and presentation changes brought about by IND-AS, so that they can apply our newly developed formulae directly on IND-AS statements and derive the same meaning and interpretation from the ratios as before retaining their practical usage. Thus, our study is of immediate practical relevance to lenders, credit managers and investors aiding their decision making.

Asymmetric financial reporting quality and firm size: conditional evidence from an emerging market

“…Mandatory preparation of financial reports as per IFRS is a very recent phenomenon in India. Hence, some base level studies, such as Kaaya (2015), Jain and Gupta (2020) and Tawiah and Boolaky (2020), found the differences between accounting figures as per IFRS and earlier accounting standards and their impact on accounting values. To repeat, from April 1 2016, India has implemented the new framework of accounting standards (Ind AS) that seeks to converge with IFRS and not fully adopt them.…”

Does the Ind AS moderate the relationship between capital structure and firm performance?

“…The adoption of new accounting standards, that is, Ind AS has significantly impacted the debt and equity components, valuation of assets, and other aspects of the firm's financial statements (Jain & Gupta, 2020). These changes are likely to affect the leverage and profitability contents of the firms.…”

“…For instance, under Ind AS, the treatment of leases, derivatives, preference shares, and convertible shares, differs from previous accounting standards. These changes can impact a firm's reported leverage ratios or interest coverage ratios (Jain & Gupta, 2020). Consequently, the relationship between leverage and firm performance may be influenced.…”