You are on page 1of 225

A COMPARATIVE STUDY OF SELECT

ACCOUNTING STANDARDS FOR FINANCIAL


DERIVATIVE INSTRUMENTS
A
THESIS
SUBMITTED TO
THE UNIVESITY OF BURDWAN

FOR THE DEGREE OF


DOCTOR OF PHILOSOPHY IN ARTS
(BUSINESS ADMINISTRATION)

By
Arjun Gope

The University of Burdwan


Burdwan-713104
West Bengal, India
Dedicated

To

My Reverend
Parents
PREFACE

The world is moving from state governed economy to open market economy during the

last three decades. Market is constantly challenging state dominance in almost every sphere of

human civilization where nothing remains deterministic in nature and change becomes the only

constant perception almost in every walk of human life.

Not a single segment of the financial market can avoid risk but participants like investors,

speculators, hedgers or arbitrageurs may try to manage risk or may derive benefit out of market

swings. Financial derivative techniques e.g. forward, futures, options and swaps (plain vanilla

type) or various combinations of these techniques (exotic) on innumerous underlying across

various segments of the markets like commodity, stock, interest rate, credit or foreign exchange

have become extremely popular all over the developed economy as well recognized,

mathematically perfected legal tool to manage risk. After coping- up with the teething problems

of introduction of derivatives, volume in the derivative segment overrides its cash counterparts to

a great extent. In India aggregate volume in the derivative market has reached already about nine

times larger than that of its cash counterparts.

As India is at the juncture of introducing IFRS (Ind AS) replacing its Indian AS, we justify our

research initiatives from two distinct perspectives;

 Does introduction of IFRS replacing Indian AS enhance value to shareholders?

 Does introduction of IFRS replacing Indian AS bring more reliability and accountability

in corporate financial reporting?

In addition to two main research questions, that follow from the comparison of Accounting

Standards of Derivative Financial Instruments (DFIs) we further investigate

 How far companies differ from IFRS in terms of reporting and practices of DFIs;

i
 To find whether there is uniformity of reporting and disclosure practices of DFIs among

the group of IFRS user companies with an objective ;

 To identify the type of differences in terms of reporting and practices of DFIs between

the two groups of companies, viz. IFRS users and Indian AS users, with an objective.

Although IFRS comes with a mandate that either it is to be accepted in full or rejected in full,

it is imperative to clarify, that there exists differences among IFRS users firms around the

world as some countries go for wholesale adoption of IFRS replacing their national standards

(e.g. UK, France, Germany) while some countries seek to converge their national standards

to IFRS (Australia, India).

Although USA has neither adopted nor converged their national accounting standards in line

with IFRS, Securities & Exchange Commission (SEC) of America offers most significant

alternative to US firms and firms listed in the US stock exchanges to prepare their Annual

accounts as per IFRS avoiding Financial Accounting Standards (FAS) issued by their

national accounting setters, Financial Accounting Standard Board (FASB), there is little

room for apprehension that IFRS is going to be single accounting language for the world in

the near future.

Our study found that adoption of IFRS for DFIs in India would be in favor of the business

firms and investors. However, country needs to emphasize on major changes in different

existing legislations and enhances number of IFRS trained professional accountants.

Arjun Gope

Burdwan, 2015

ii
ACKNOWLEDGEMENT

I am very fortunate to have an exceptional guide for this research work. I wish to avail this
amiable opportunity to express my deepest reverence to my teacher, mentor, supervisor Prof.
Gautam Mitra of the Department of Business Administration, Burdwan University for his
intellectual, valuable guidance, affectionate support and untiring help which has enabled me to
learn and develop a sound base to carry out this research work. There is no befitting language to
express my gratitude for the inspiration that I have received from him.

I am indebted to all the faculty members of this department, who have always been helpful to me.
I wish to place on record my gratitude to all the non-teaching staffs of this Department for their
support during the entire course of research.

I thank to all my respondents belonging to various corporate sectors and academic fields of
various countries of the globe. They gave their kind support and valuable time for filling the
questionnaire. I would also thank those who contributed directly or indirectly in any form for the
completion of this study.

I must acknowledge the inspiration received from Dr. Amiya Kumar Pan, Principal and my
colleagues of Iswar Chandra Vidyasagar College, Tripura. At the same time I express my
indebtedness to fellow research scholars and seniors who have been very supportive and
encouraging in each step of my research work.

My deepest gratitude and respect goes to my father Sri Narayan Chandra Gope and mother Smt.
Tapasi Gope and father-in-law Sri Biswanath Paul and mother- in- law Smt. Radha Rani Paul
and my relatives for their blessings and encouragement.

Words will do little justice to express my love and respect to my beloved wife Ms. Adwitiya Gope
for constant unconditional support and encouragement to complete the work. I owe my loving
thanks to her.

I would never have got through had my loveable children, Anushka (mani) and Anshuman
(Deep) failed to provide their patience and sacrifice their most valuable time from childhood life.

Above all, I humbly thank God whose grace and blessing has enabled me to see this day. I give
all the glory to Him.

Arjun Gope

iii
CONTENTS

No. Details Page No.

1. Title of the thesis


2. Dedication
3. Certificate from Guide
4. Preface i
5. Acknowledgement iii
6. Contents iv
7. List of exhibits vii
8. Abbreviations x

Point No. Chapter details Page No.

Chapter 1: Introduction 1-12


1.1 Introduction 1
1.2 Accounting standards 3
1.3 Derivative financial instruments 7
1.4 Need of the study 9
1.5 Structure of the study 10
1.6 Limitation of the study 11

Chapter 2: Review of literature 13-44

2.1 Introduction 13
2.2 Uncertainty & Risk 13
2.3 Risk & Derivatives 14
2.4 Derivative & Transparency 17
2.5 Accounting standards 18
2.6 DFIs and its disclosures 23
2.7 DFIs and fair value measurements 26
2.8 Hedge Accounting and DFIs 29
2.9 Content analysis & disclosure index 32
2.10 Conclusion 34
2.10.1 Findings from the review of literatures 34
2.10.2 Research gaps 35
2.10.3 Research objectives 35

iv
Chapter 3: Data, Methods and Tools 45-62

3.1 Introduction 45
3.2 Research questions and hypothesis 46
3.3 Population and Sample 47
3.4 Data collection 50
3.5 Statistical methods and tools 51
3.6 Conclusion 60

Chapter 4: An Overview of Derivative Financial Instruments 63-82


4.1 Introduction 63
4.2 Derivative instruments 63
4.3 Types of Derivative financial instruments 65
4.4 Derivative market 68
4.5 Participants of Derivative market 71
4.6 Growth of world derivative market 72
4.7 Growth of DFIs in India 75
4.8 Regulators of derivative financial market 79
4.9 Conclusion 80

Chapter 5: An Overview of Accounting Standards for Derivative Financial


Instruments 83-106
5.1 Introduction 83
5.2 IAS 32 Financial Instruments: Presentation 84
5.3 IAS 39 Financial Instruments: Recognition and measurement 86
5.4 IFRS 7 Financial Instruments: Disclosure 94
5.5 IFRS 9 Financial Instruments 98
5.6 IFRS 13 Fair Value measurement 99
5.7 Differences between IFRS and Ind AS for DFIs 103
5.8 Conclusion 105

Chapter 6: Accounting Standards for DFI: A comparative study 107-117


6.1 Introduction 107
6.2 Sample selection and data collection 107
6.3 Hypothesis formation 107
6.4 Data analysis & findings 111
6.5 Conclusion 116

Chapter 7: Impact of implementation of IFRS for DFIs in India 118-130


7.1 Introduction 118
7.2 Research question 118
7.3 Data analysis & findings 120
7.4 Conclusion 128

v
Chapter 8: Reliability, Accountability and Shareholder’ value Creation: A
comparative analysis of IFRS for DFIs 131-146
8.1 Introduction 131
8.2 Hypothesis formation 131
8.3 Data analysis & findings 132
8.4 Conclusion 145

Chapter 9: Conclusion and Policy Implications 147-156

9.1 Introduction 147


9.2 Summary of the research work 148
9.3 Contributions 150
9.4 Policy implications 151
9.5 Concluding remarks 154
9.6 Scope of further research 156

No. Glossary, Bibliography & Appendix Page No

1. Bibliography 157-179
2. Glossary 180-183
3. Appendix 184-183

vi
LIST OF EXHIBITS

No Title Page
1.1 Types of IFRS 4
1.2 The international Accounting Standards (IAS) for DFI 6
1.3 Select accounting standards for DFI: International and Indian standards 7
2.1 Research involving Content analysis & Disclosure index in the field of
Accounting 33
3.1 Profession of Respondents 48
3.2 How familiar are you with IFRS for Derivative Financial Instruments? 49
3.3 Five Point Rating Scale 50
3.4 Logistic Regression model 59
4.1 Use of DFIs for risk management 64
4.2 Aspects of Derivative instrument 65
4.3 Classification of Derivative 66
4.4 Difference between Exchange traded derivative and OTC traded derivative
market 69
4.5 Global Futures and Options Volume by Region 70
4.6 Purpose of issuing or holding of DFIs 72
4.7 Top 20 Derivatives Exchanges in the world: Ranked by number of contracts
traded and/or cleared 73
4.8 Derivatives market vs. world GDP 75
4.9 Financial Derivatives in India: A Chronology of important events 76
4.10 Cash & derivative market turnover for last five years 77
4.11 Cash and Derivative Markets of National Stock Exchange, India. 78
5.1 Decision tree for classification of a financial instrument 85
5.2 Classification of financial Instrument as asset 87
5.3 Classification of financial Instrument as liability 88
5.4 Categorization of DFIs 88
5.5 Initial measurement of DFIs at fair value 89

vii
No Title Page
5.6 Subsequent measurement of DFIs 90
5.7 Steps for hedge accounting 92
5.8 IFRS 13 Fair value hierarchy 101
5.9 Fair value hierarch used by IFRS user companies 102
5.10 Differences between IFRS and Ind AS in respect of DFIs 103
6.1 Score on reporting and disclosure level: IFRS user companies 108
6.2 No. of companies and class interval of Score on reporting and disclosure 108
6.3 Hypothesis Test Summary of One-Sample Binomial Test 111
6.4 Hypothesis Test Summary of One-Sample Wilcoxon Signed Rank Test 112
6.5 Hypothesis Test Summary of Kruskal-Wallis Test 113
6.6 Uniformity in the selected economy for reporting and disclosing DFIs under
IFRS 113
6.7 Hypothesis Test Summary of Mann-Whitney U Test 114
6.8 Independent-Samples Mann-Whitney U Test 115
7.1 Variables for statistical tests 119
7.2 KMO and Bartlett's Test 120
7.3 Total Variance Explained 121
7.4 Scree plot of Variables 122
7.5 Rotated Factor Loadings and Communalities 123
7.6 Varimax-rotated Component Matrix factor wise 124
7.7 Naming of Factors consisting items 125
7.8 Internal Consistency 127
7.9 Ranks and affects of factors 128
8.1 Reliability of accounting information of DFIs 132
8.2 Independent variables where dependent variable is reliability of accounting
information on DFIs 133
8.3 KMO and Bartlett's Test (Case-I) 133
8.4 Rotated Factor Loadings and Communalities(Case-I) 134
8.5 Case Processing Summary(Case-I) 134
8.6 Omnibus Tests of Model Coefficients(Case-I) 135

viii
No Title Page
8.7 Model Summary (Case-I) 135
8.8 Hosmer and Lemeshow Test (Case-I) 135
8.9 Contingency Table for Hosmer and Lemeshow Test (Case-I) 136
8.10 Variables in the Equation (Case-I) 136
8.11 Accountability of management for accounting and reporting of derivatives 137
8.12 Variables where dependent variable is accountability of management for
accounting and reporting of derivatives 138
8.13 KMO and Bartlett's Test (Case-II) 138
8.14 Rotated Factor Loadings and Communalities (Case-II) 139
8.15 Omnibus Tests of Model Coefficients (Case-II) 139
8.16 Model Summary (Case-II) 139
8.17 Hosmer and Lemeshow Test (Case-II) 140
8.18 Contingency Table for Hosmer and Lemeshow Test (Case-II) 140
8.19 Variables in the Equation (Case-II) 140
8.20 Shareholders’ value creation 141
8.21 Independent variables where dependent variable is shareholders’ value
(Case-III) 142
8.22 KMO and Bartlett's Test (Case-III) 142
8.23 Rotated Factor Loadings and Communalities (Case-III) 143
8.24 Omnibus Tests of Model Coefficients (Case-III) 143
8.25 Model Summary (Case-III) 143
8.26 Hosmer and Lemeshow Test (Case-III) 144
8.27 Contingency Table for Hosmer and Lemeshow Test (Case-III) 144
8.28 Variables in the Equation (Case-III) 144

ix
ABBREVIATIONS

Abbreviation Full Form


ACCA Association of Chartered Certified Accountants
AS Accounting Standard
ASC Accounting Standards Codification
BSE Bombay Stock Exchange
CA Content Analysis
CA Chartered Accountant
CBOT Chicago Board of Trade
CCIL Clearing Corporation of India Limited
CEO Chief Executive Officer
CFA Chartered Financial Analyst
CFO Chief Financial Officer
CME Chicago Mercantile Exchange
CPA Certified Public Accountant
DCF Discounted Cash Flow
DFI Derivative Financial Instrument
DI Disclosure Index
ED Exposure Draft
EFA Exploratory factor analysis
EITF Emerging Issues Task Force
EU European Union
FAS Financial Accounting Standard
FASB Financial Accounting Standards Board
FCD Foreign Currency Derivative
FI Financal Instrument
FTI Forensic Technologies International Ltd
FV Fair Value
FVA Fair Value Accounting

x
Abbreviation Full Form
FVO Fair Value Option
FVTPL Fair Value Through Profit or Loss
GAAP Generally Accepted Accounting Principles
IAS International Accounting Standard
IASB International Accounting Standard Board
IC Internal Consistency
ICAI Institute of Chartered Accountants of India
IFRIC IFRS Interpretations Committee
IFRS International Financial Reporting Standards
IMF International Monetary Fund
Ind AS Indian Accounting Standards
IRDA Insurance Regulatory and Development Authority
ISDA International Swaps and Derivatives Association
JWG Joint Working Group
KMO Kaiser-Meyer-Olkin
MCA Ministry of Corporate Affairs
MD Managing Director
NSE National Stock Exchange
OTC Over-The-Counter
PCA Principal Component Analysis
RBI Reserve Bank of India
SCRA Securities Contract Regulation Act
SEBI Securities Exchange Board of India
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SRS Simple random sampling
UK United Kingdom
USA United States of America

xi
CHAPTER-I

INTRODUCTION

1.1 Introduction

This research is about derivative financial instruments and its accounting standards. Although

derivative was extremely popular in the economically advanced countries, in India it has been

introduced only in year 2000. On 9th June, 15 minutes past 12 Himanshu Kazi a broker in

Bombay Stock Exchange first took an exposure on stock index future. Within a short span of

time three more products index option, stock future and stock option have been introduced in the

Indian stock market. Despite of low volume in the derivative segment at its initial phase in

comparison to its cash counterpart, volume surged at the later stage in tune with the global trend.

As Indian stock market was habituated with ‗badla‘ trading on individual stock, stock based

derivative product like stock future and stock option became more popular unlike index based

products in the advanced countries, whose price movement was easier to predict.

Not just in stock market, in other segments of the financial markets like foreign exchange,

interest rate, credit market & commodity market different types of derivative products have

become extremely popular and their volume is almost nine times than their cash counterpart. In

this connection it seems to be pertinent to explain what derivative financial instrument (DFIs) is?

DFIs are the results of combining different derivative techniques applied on various underlying

assets (sometimes we call it just underlying!).It is basically a risk management tool for the

hedgers. However, arbitrageurs and speculators may derive benefit out of it.

1
Value of DFIs keeps on changing with the change in value of the underlying or other derivative

products. Derivative instruments may be innovated almost on any underlying whose value keeps

on changing. Numbers of derivative techniques are also limitless. Techniques are categorized

under plain vanilla and exotic. In plain vanilla type derivative we combine one technique with

one underlying. Techniques are forward, future, options and swaps.

Which product to be applied in which situation? It all depends on derivative players‘ perception

about the future movement of the price of the underlying, his risk bearing capacity and his own

strategy and finally how much loss (if resulted) he is prepared to bear. Derivative market is for

innovative person, who goes on innovating in tune with changing market conditions. With the

passage of time, new products, new market segments (say, whether derivative) will be made

ready for new entrants in the market. It is worth mentioning that weather derivative is already

quite popular in America.

While derivative financial instrument constitute the first part of the thesis, accounting standard is

the second significant component. The subject of accountancy or accounting practice is a very

challenging area in the domain of social science. Change in accounting practices is not

independent of changes in society or sectorial interference. It is really an exciting yet scholarly

study how history and development of accounting practices or accounting standard setting

process revolves round the continuing socio political changes.

Accounting for derivative financial instruments (DFI) has remained a vital issue to International

Accounting Standard Board (IASB1) and other national accounting standard boards because of its

complex nature. Specific international or national accounting standards are not yet available that

1
The International Accounting Standards Board is the independent standard-setting body of the IFRS Foundation.

2
might guide derivative transactions. Nevertheless, various national and international accounting

standards on financial instruments are available that guide accounting for DFIs.

Since its inception in 2001, International Accounting Standard Board (IASB) has been framing

International Financial Reporting Standards (IFRS) to maintain uniformity and consistency in

accounting across the globe. The board has issued different accounting standards on financial

instruments and matters in relation to their recognition, measurement and disclosure from time to

time. These international accounting standards are International Accounting Standards IAS 32,

IAS 39, IFRS 7, IFRS 13 and IFRS 9.

Institute of Chartered Accountants of India (ICAI) is actively promoting the IASB's

pronouncements in the country with a view to facilitating global harmonization of Accounting

Standards. Henceforth, existing Indian Accounting Standards would change into IFRS-

converged Indian Accounting Standards (Ind AS) from April 1, 2016. It would become

mandatory for business entities having net worth of INR 500 crore or more as on 31st March,

2016 to follow the new Ind AS w.e.f. 1st April 2016. However, business entities having net worth

of less than INR 500 crore can follow Ind AS voluntarily which would be irreversible.

The chapter would narrate brief perspective of accounting standards, derivative financial

instruments, need of the study and the structure of the thesis. The chapter also outlines the

limitations of our study.

1.2 Accounting standards

Financial Accounting Standards (FASs) are rule based accounting standards while IFRS is

principle based standard and often there were grounds of conflicts and contradiction between

FAS and IAS. In fact, accounting world became bi polar amidst IAS vs. FAS controversy. In this

3
situation, a debate started mounting up across the Atlantic, may we have a single, high quality

and globally comparable accounting standard that (i) not only favors various stakeholders of

Accounting across the world but also (ii) in complete favour of capital market that has also

started overtaking deterministic & traditional ways of fund mobilisation and throwing challenges

to the investor communities.

International Accounting Standard Body (IASB) was found in 2005 and they adopted all

accounting standards released by International Accounting Standard Committee but realized

importance of issuing a new set of standards deleting some of the existing IASs. They named it

International Financial Accounting Standards (appendix-G). Like IASs another interpretation

committee started interpreting those IFRSs. Apart from main IFRS, another set of IFRS has also

been released for small companies with less complex types of transactions. It seems to be

rational to provide an exhibit of complete profile of IFRS.

Exhibit 1.1

Types of IFRS

International Financial Reporting Standards (IFRS)

IASs adopted by IASB, not yet deleted

Interpretation of those IASs by ICIASs

Type A: IFRS (0) IFRS

Interpretations of IFRS by IFRIC

Type B: IFRS for Small & Medium Companies (IFRS for SMEs)

Now we narrate what we seek to do and what we do not. We do not venture to introspect entire

IFRS rather we focus on IFRS for DFIs. So we are critically examining only IAS 32, IAS 39,

4
IFRS 7 and IFRS 13. And we are not interested with rest of neither all IFRSs nor IFRS for

SMEs. As FAS of FASB is rule based standards and huge, we avoid making comparison

between FAS and IFRS rather restrict our study within Indian AS and IFRS while both are

principle based standards.

In order to make our study comprehensive we have ventured to introspect three other related

research questions. The introduction of IFRS for listed companies in many countries around the

world is one of the most significant regulatory changes in accounting history. Over 130 countries

have recently moved to IFRS reporting or decided to require the use of these standards in the

near future and even the US, SEC is considering allowing US firms to prepare their financial

statements in accordance with IFRS. Regulators expect that use of IFRS enhances the

comparability of financial statements, improve corporate transparency, increases the quality of

financial reporting and hence benefits investors.

In order to understand Accounting standard we first need to understand Generally Accepted

Accounting Principles or GAAP. Generally Accepted Accounting Principles might be of national

level or international level. If GAAP is considered a set (in mathematical terminology),

accounting standards is nothing but a sub set. GAAP is a combination of (i) accounting practices

or procedures at the national or regional level (in India we have Marwari accounting practice;

special accounting practices by Muslims, accounting for banks, insurance companies are also

different in the context of recognition, measurement and disclosure practices), (ii) regulations or

set of different legislations that effects accounting e.g. Company Law, SEBI Rules &

Regulations, Foreign Exchange Management Act etc in Indian context and (iii) accounting

standards at the national level.

At the outset of globalization, the adoption of accounting standards requires uniformity,

transparency and comparable information which are, in turn, accepted by investors, creditors,

5
financial analysts and all other users of financial statements. It is difficult to compare financial

information without a common set of accounting and financial reporting standards worldwide. In

this respect, India is not lagging behind and admits to converge with IFRS to provide a common

set of accounting standards.

In 2007, ICAI decided to converge2 Indian Accounting standards with IFRS for strengthening the

financial reporting system of the country. Ministry of corporate Affairs (MCA), Govt. of India,

also supported the initiative of ICAI to converge with IFRS and finally the country is going to

adopt IFRS compulsorily from 1st April 2016.

The International Accounting Standards (IAS) that guides reporting of DFI is as follows:

Exhibit 1.2

The International Accounting Standards (IAS) for DFIs

• Financial Instruments: Presentation


IAS 32 [Debt vs Equity, convertibles, Preferred shares, Treasury shares]

• Financial Instruments: Recognition and measurement


[Recognition & Derecognition, Measurement, Derivatives & Hedge
IAS 39 Accounting]

• Financial Instruments: Disclosure


IFRS 7 [Fair value measurement, Risk management]

• Financial Instruments
IFRS 9 [Hedge effectiveness testing, Risk component, Disclosures]

• Fair Value measurement


IFRS 13

2
Convergence with IFRS means that the Indian Accounting Standards (AS) and the International
Financial Reporting Standards (IFRS) would, over time, develop high quality, compatible accounting
standards.

6
From Exhibit 1.2 we come to know that although we have five IFRSs for Derivative financial

Instruments, however, IFRS 13 is the standard that deals with fair value.

India has moved swiftly to fulfill the commitment made by the Hon’ble finance minister in the

implementation of IFRS in India. The Ministry of Corporate Affairs (MCA) has come out with

the Indian Accounting Standards which mandates certain classes of companies to prepare

financial statements as per IFRS converged Indian Accounting Standards (Ind AS). In India the

IFRS-converged Ind AS for DFIs would be as follows;

Exhibit 1.3

Select accounting standards for DFI: International and Indian standards

Sl No IAS (IFRS) Ind AS (IFRS-converged )


1. IAS 32 : Financial Instruments: Presentation Ind AS 32: Financial Instruments:
Presentation
2. IAS 39: Financial Instruments: Recognition Ind AS 39: Financial Instruments:
and measurement Recognition and measurement
3. IFRS 7: Financial Instruments: Disclosure Ind AS 107: Financial Instruments:
Disclosure
4. IFRS 9: Financial Instruments 3 Ind AS: 109: Financial Instruments
(Exposure draft)
5. IFRS 13: Fair Value measurement Ind AS 113: Fair Value measurement
(exposure draft)

1.3 Derivative financial instruments

All markets are prone to different kinds of risks. Derivative is considered as one of the categories

of risk management tools. As this consciousness about risk management capacity of derivative

grew, the market for derivatives has developed.

3
IFRS 9 is effective for annual periods beginning on or after 1 January 2018.

7
A derivative is an instrument whose value keeps on changing with the change in value of the

underlying. However, following are the notable features of derivative financial instrument.

 whose value changes in response to a specified variable or underlying rate (

for example, interest rate);

 that requires no or little investment;

 that is settled at a future date.

The derivative market performs a number of economic functions. Epstein & Jermakowicz (2010)

opine that derivative financial instruments are used most typically as a tool to assist in the

management of some category of risk, such as possible unfavorable movements in share prices,

interest rate variations, currency fluctuations, commodity price volatility etc. Other functions of

DFI are Market efficiency, Price discovery, Hedging, price Stabilization, Catalyze

entrepreneurial activity.

According to International Swaps and Derivatives Association (ISDA) Survey (2009), foreign

exchange derivatives are the most widely used instruments (88 percent of the sample), followed

by interest rate derivatives (83 percent). Usage of foreign exchange and interest rate derivatives

was fairly uniform across all industries and 70 to 94 percent of all surveyed companies use

interest rate derivatives. Above all, the survey reported that over 94% of the world's largest

companies use derivatives to manage their risks.

However, increased use of derivatives opens up new horizons of accounting studies altogether.

Butler (2009) in his famous book ―Accounting for Financial Instruments‖ provided affirmative

answer to such question as should the accounting professionals are worried about the increased

use of complexity in the financial instruments market?

8
Misunderstanding or unjust use of derivative financial instruments may be catastrophic indeed.

Warren Buffet opined, ‗derivative is a weapon of mass destruction‘. Accounting professionals

need to be in vigil to stop manhandling of derivatives so as to comply with the increasing need of

national and international accounting standards. Hence justified use of DFIs would be possible

only if there are acceptable accounting standards for DFIs.

1.4 Need for the study

Accounting treatment of DFIs is not same in all countries mainly due to lack of uniformity in

accounting standards. To make uniformity in the field of accounting, IASB introduced IFRS

which has been accepted and practiced in many countries of the world.

Indian companies are about to replace the existing Indian AS with the converged IFRS. New Ind

AS, i.e., IFRS for DFI would be accepted in India if it would be able to provide more

comparative benefit than that of the existing one, which demands a comparative study between

the AS and IFRS for DFIs.

There are a good number of studies on accounting standards for DFIs at national and

international level. However to the best of our knowledge, no single study has highlighted a

comparison between IFRS and Indian accounting standards with respect to DFIs. Present

endeavor is a very humble attempt to fill up the void.

In view of the above facts, we have undertaken the study entitled ―A comparative study of select

accounting standards for financial derivative instruments‖.

9
1.5 Structure of the study

The study has been organized in nine chapters which shape the present empirical study.

Chapter 1 is the introductory chapter. It attempts to introduce DFI and Accounting standard. The

chapter describes the objective of the study. The chapter also explains the motivation behind the

study.

Chapter 2 is on ‗Review of literature‘. By undertaking a literature review we are able to critically

summarise the existing research works in the area under investigation and research gap is

identified thereof.

Chapter 3 is on ‗Data, methods and tools‘. This chapter provides details of population and

sample collection, statistical techniques and software used for data analysis.

Chapter 4 deals with ‗An overview of Derivative Financial instruments‘. This chapter explains

the evolution and growth of DFIs.

Chapter 5 is on ‗Accounting Standards for DFIs‘. Here the principles of selected accounting

standards namely IAS 32, IAS 39, IFRS 7 and IFRS 13 for DFIs are extracted and comparison is

made with the respective Ind AS.

Chapter 6 titles ‗Accounting standards for DFIs: A comparative study‘. Here level of disclosure,

uniformity among the IFRS user companies and the difference between IFRS users and AS

(Indian) user companies in respect of DFIs are studied.

10
Chapter 7 deals with ‗Impact of implementation of IFRSs for DFIs in India‘. This chapter finds

the important factors which would be influenced by the implementation of IFRSs for DFIs in

India.

Chapter 8 talks on ‗Reliability, accountability and share holders‘ value creation: a comparative

analysis of IFRS for DFIs‘. The chapter tests whether reliability, accountability and share

holders‘ value creation would be influenced by the implementation of IFRSs for DFIs.

Chapter 9 the last chapter summarizes the whole study, offers policy implications and narrates

scope for further research.

1.6 Limitation of the study

Despite our attempts to make a comprehensive study, following limitations remained.

 The study is concerned with select accounting standards and we have considered

throughout the research work IFRS, AS (existing Indian AS) and Ind AS only. But other

foreign accounting standards like US FAS could have been considered. Financial

Accounting Standards Board (FASB), USA is a prominent accounting standard setting

body. We have avoided FASB standards as these are rule based standards and standards

under our comparison (IFRS and Indian AS) are principle based.

 Content analysis technique has been used for gathering information from the selected

annual reports for our research. This content analysis tool sometimes disregards the

context that produced the text, as well as the state of things after the text is produced.

 In case of secondary data single year annual report is used to draw the inference, where

average score of more than one year could have been considered.

11
References

Butler, C. (2009). Accounting for Financial Instruments. England: A John Wiley and Sons Ltd,

Publication.

Epstein, J. Barry & Jermakowicz, K. Eva. (2010). Interpretation and Application of International

Financial Reporting Standards. New Jersey: Wiley

Survey of International Swaps and Derivatives Association (ISDA) in 2009

http://www.isda.org/press/press042309der.pdf Accessed on: 21.09.2015

Shapiro, A.C. (2000). Multinational Financial Management, Prentice hall of India, New Delhi.

http://www.ifrs.org; Accessed on: 12 04.2013

12
CHAPTER-II

REVIEW OF LITERATURE
2.1 Introduction

Derivative is an innovative instrument of finance and accounting standard is a vibrant issue of

accounting field. Now a days, derivatives and accounting standards have become fertile field of

research works. There is no dearth of specific studies on derivatives and accounting standards

respectively, but the area of studies on reflection of accounting standards for derivatives has not

yet been exhausted.

The present research focuses on select accounting standards and Derivative financial

instruments (DFIs) and it expects to be helpful to forecast the comparative benefits of select

Accounting Standards. An exhaustive literature review has been done to identify the research

gap. For the sake of clarity and simplicity all the studies reviewed have been categorised

logically and the research gap is identified thereof.

2.2 Uncertainty & risk

Uncertainty is the underlying force that invites risk. Shapiro (2000), Tchankova (2002) examined

the theoretical aspects of risks like its definition, categories and reporting significance and risk

management. Arshad & Ismail (2011) pointed out that as the business environment is uncertain,

an organization requires managing its risks in order to reduce the unwanted impact of risks on

existing and future firm‘s performance. Rawat (2012), the users of financial statements need

information about an entity‘s exposures to risks and how those risks are managed. Selvam & Rita

(2011) opined that derivatives allow the efficient transfer of financial risks and can help to

ensure that value-enhancing opportunities will not be ignored. Hunziker (2013) stated that risk

13
management has become considerably more important especially due to the use of more complex

and innovative financial instruments. Woods & Marginson (2004) reported that financial

reporting practices are of limited help to users wishing to assess the scale of an institution‘s

financial risk exposure. According to Arshad & Ismail (2011), managers‘ ability to disclose

relevant risk information that reflects more accurately the companies‘ current and future

financial performance, will facilitate these users in making effective investment decisions.

DybviLiang & Marshall (2013) stated that when hedging is executed properly, risk management

is expected and even essential for competition. However, they did not skip to highlight the evils

of this risk management strategy which may waste resources when it increases risk instead of

reducing it. Lien and Zhang (2008) also stressed that the underlying reasons for the negative

effects are associated with the leverage nature of derivatives transactions, nontransparent

reporting of transaction risks and unsophisticated or insufficient risk management controls in

financial institutions, as well as weak prudential supervision. Shapiro (2000) stated that the

derivative is one of the categories of risk management tools. As this consciousness about risk

management capacity for derivative grew, market for derivatives developed. Findings of Arshad

& Ismail (2011) revealed that enhanced understanding and perception on the overall risk

concepts are important drivers that can facilitate managers in disclosing more comprehensive and

relevant risk-related information. Evans, Fisher, Gourio & Krane (2015) stated that risk

management is a longstanding practice, and econometric evidence shows that the Federal

Reserve historically has responded to uncertainty, as measured by a variety of indicators.

2.3 Risk & derivatives

Vashishtha & Kumar (2010) pointed out that derivatives provide an effective solution to the

problem of risk caused by uncertainty and volatility in underlying asset. Derivatives are risk

14
management tools that help an organisation to effectively transfer risk. According to Stulz (2004)

and Verma (2008), derivatives allow firms and individuals to hedge risks and to handle risks

efficiently. Marlowe (2000) argued that the emergence of the derivative market products most

notably forwards, futures and options can be traced back to the willingness of risk-averse

economic agents to guard themselves against uncertainties arising out of fluctuations in asset

prices. Buvaneswari et. al. (2007), Vashishtha & Kumar (2010), Prabhakara (2013) also

considered derivative as a very important tool of risk management. According to Verma (2008),

the dependence of the derivative‘s value on other prices or variables makes it an excellent

vehicle for transferring risk provided (Selvam and Rita, 2011) the derivatives players fully

understand the complexity of financial derivatives contracts and the accompanying risks.

The initial decade of unprecedented volatility in the international financial environment

occurred in the 1970s – starting with the breakdown of the Brettonwoods system on 15th August

1971 and ending with the well known Saturday night massacre of Federal Reserve on 6th

October, 1979. During the Brettonwoods era there was relative currency and interest rate

stability. The breakdown of the Brettonwoods system in August 1971, with US President

Nixon‘s announcement that dollar would no longer be convertible to gold (at fixed exchange

rate), resulted in inflation, volatile interest rates and currency turmoil. This state of affairs

heralded the origin of Derivatives (Bhaskar & Mahapatra, 2003). Verma (2008) also stated that

the first financial derivatives were created only in the 1970s. According to Avadhani (2000) also,

financial derivatives came into spotlight when during the post 1970 period, US announced its

decision to give up gold- dollar parity, the basic king pin of the Bretton-Wood System of fixed

exchange rates. With the dismantling of this system in 1971, exchange rates couldn‘t be kept

fixed. Interest rates became more volatile due to high employment and inflation rates.

15
Prabhakara (2013) indicated that financial derivatives have earned a well deserved and extremely

significant place among all the financial instruments (products), due to innovation and hence it

could revolutionize the accounting landscape. Lin, Pantzalis & Park (2009) found that

comprehensive and sophisticated practice of derivatives has a positive impact on acquiring firm

performance. More comprehensive and sophisticated users outperform their less comprehensive

and sophisticated counterparts, while nonusers perform the worst. Koonce, Lipe, and McAnally

(2008) highlighted that investors are more satisfied with firm managers and assign a higher value

to firms when managers use derivatives (that address company‘s risks) than when they do not.

Their study also stresses the idea that investors believe that managers who use derivatives in

these situations exhibit a higher level of decision-making care than those who do not use

derivatives. According to Hwang (2002), changes in the global economy and innovations in

financial markets have led to increasing use of derivatives. Although Buvaneswari (2007)

viewed that the use of derivative as a risk management tool is not known to many of the players

in the market till today. The findings of Gope (2014) & Prabhakara (2013) reported that the

usages of financial derivatives as risk management tools are increasing gradually in India both in

terms of volume and number of contract traded. Greenspan (1997) observed ―By far the most

significant event in finance during the past decades has been the extraordinary development and

expansion of financial derivatives…‖

Finding of Dinh & Gong (2013) showed that the use of derivative instruments for hedging

activities brings high effectiveness to the firms. Prabhakara (2013) highlighted that India is one

of the most successful developing countries that have earned a well deserved and extremely

significant place in terms of financial derivatives among all the financial instruments. The

16
growth of derivatives in the recent years, in India, has surpassed the growth of its counterpart

across the globe.

The results of Sakhivel & Kamalah (2011) revealed that spot market volatility has declined after

introduction of future trading i.e. derivative. According to Dodd (2000), derivatives facilitated

the growth in private capital flows by unbinding the risks associated with investment vehicles

such as bank loans, stocks, bonds and direct physical investment and then reallocating the risks

more efficiently in the long run.

2.4 Derivative & transparency

According to Kawaller (2004), the job of interpreting financial statement becomes a challenging

one when the firm uses derivatives, because most derivative contracts had been off-balance-sheet

items, lacking in transparency and inconsistent accounting treatment. Bushman, Piotroski &

Smith (2004) pointed out that for listed corporations, transparency means equal availability of

information to all stakeholders. Ernst & Young (2006) has shown that a majority of investors has

identified transparency as the most important aspect at the initial stage when considering an

investment. Woods & Marginson (2004) reported that financial reporting practices are of limited

help to users wishing to assess the scale of an institution‘s financial risk exposure. According to

Strouhal et al. (2010), the low level of information provided for derivatives operations can turn

derivative financial instruments into a potential source of private information and furthermore to

abnormal returns since all the market participants do not have access to the information that they

need. According to Leuz & Verrecchia (2000), incomplete supply of information causes

information asymmetry. Mitra & Gope (2013) in their study observed that management requires

to disclose how efficiently the management uses the Derivative financial instruments to tackle

17
the risk arises in the business. Sarkar (2006) stated that financial statements currently provide

misleading information on institutions‘ use of derivatives. Further, there is no consistent method

of accounting for gains and losses from derivatives trading. He thinks a proper framework to

account for derivatives to be developed. The study of Arshad & Ismail (2011) highlighted that

enhanced perception and understanding of risk-related information among managers can lead to

an increase in the managers‘ motivation to report more transparent disclosure of risk information

in annual reports. Consequently, this is expected to improve decision-making of investors and

other users of financial statements. Findings of Ahmed, Kilic & Lobo (2006) suggested that

Statement of Financial Accounting Standards (SFAS) No. 1334 has been successful in increasing

the transparency and visibility of derivative financial instruments.

2.5 Accounting standards

Stakeholders do not have exposure to the same level of information as company managers have,

so they need independent instruments to evaluate the actual position of the business. Companies

present their financial position through various financial statements. In this regard, accounting

standards provide guidance on how accounting information should be recorded, reported and

interpreted. According to Porwal (2006), Standardization helps to reduce wide judgmental

intuition and discretion, which has reduced the work of the external auditor considerably.

According to Ikpefan & Akande (2012), IFRS employs a uniform, single and consistent

accounting framework that will gravitate towards General Accepted Accounting Practice

(GAPP) 5 in the future. Kingsley, Gina & Vivian (2014) opined, accounting Standards are

concerned either with how information might be presented, what information ought to be

4
SFAS 133: Accounting for Derivative Instruments and Hedging Activities, issued by FASB.
5
Generally accepted accounting principles (GAAP) are the standard framework of guidelines for financial
accounting used in any given jurisdiction ;( Wikipedia, https://en.wikipedia.org/wiki).

18
presented or how assets might be valued. According to Bhattacharyya (2009), the objective of

financial reporting is to provide information useful in (a) Evaluating management in their

stewardship function, and (b) Making business and economic decisions by investors and

potential investors. Brown & Tarca (2012) mentioned that IFRS reporting is only part of the

investor's or analyst's information set. Tendeloo & vanstraelen (2005) stated that accounting

theory, through the issuance of standards, provides direction and guidance on how business

enterprise could achieve the goal of proper record keeping, transparency, uniformity,

comparability and enhancing public confidence in financial reporting. Glautier & underdown

(2001) cited that the need for the imposition of standards arose because of lack of uniformity

existing as to the manner in which periodic profit is measured and the financial position of an

enterprise presented. According to Hague (2004), in any activity involving multiple participants

some conventions are necessary if there is to be consistency in the manner in which participants

act. For example, a convention that vehicles driving in the same direction should be on a

particular side of the road which is necessary to avoid chaos on the streets; Accounting is no

different. Without guiding principles, each accounting project would start with a blank sheet of

paper and the results would not necessarily be compatible with those of other projects that had,

perhaps, been developed by reference to different principles. Sunder (2002) stated that

accounting standards are important regulatory devices of accounting. They serve as a template

contract among parties who participate in a firm, such as management, creditors, and

shareholders. Adedeji (2004) stated that accounting standards are rules comprising of best

practices issued from time to time by a duly empowered body. The standards setting

organizations, function by reviewing existing accounting principles and practices and

recommend the best through standards. According to Pricewaterhouse Coopers (2004),

19
IAS/IFRS information has affected the perception of firm‘s business performance and firms have

been enabled to produce IAS/IFRS financial statements that allow them to adopt a global

financial reporting language as well as to be evaluated in a global marketplace.

Kingsley, Gina & Vivian (2014), opined that IFRS refers to a series of accounting

pronouncements published by the International Accounting Standards Board to help preparers of

financial statements, throughout the world, produce and present high quality, transparent and

comparable financial information. According to Sunder (2009), a single set of high-quality

written standards of financial reporting applied to all companies in the world, would improve

financial reporting by making financial reports more comparable and thus assist investors and

other users of financial statements in making better decisions. Madawaki (2012) stated that the

IFRS is already making its way around the world as a single set of high quality global accounting

standards. Ramanna & Sletten (2009) were consistent with the presence of network effects in

IFRS adoption; they found that a country is more likely to adopt IFRS if its trade partners or

countries within its geographical region are IFRS adopters.

Convergence of IFRS (Ikpefan & Akande, 2012) will place better quality of financial reporting

due to consistent application of accounting principles and reliability of financial statements.

Trust and reliance can be placed by investors, analysts and other stakeholders in a company‘s

financial statements. Iatridis (2010), Ikpefan & Akande (2012) stated that the benefits of

implementing IFRS include higher comparability of financial information, lower transaction

costs and greater international investment. The paper (Cai & Wong, 2010) was a first attempt to

empirically measure the effects of IFRS adoption on a stock market‘s integration into the global

capital market. The results are consistent with the widely suggested benefit of IFRS adoption.

Adopting IFRS seems to reduce the diversity of accounting practices, thus enables the efficient

20
movement of capital across borders. Djatej, et al. (2010) believed that IFRS is more beneficial

for countries having market supportive institutional infrastructure in place as compared to those

who do not have such market. Chen, et al. (2010) found that the majority of accounting quality

indicators have improved after IFRS adoption in the European Union. According to Iatridis

(2010), IFRS implementation has favorably affected the overall financial performance and

position of firms. Under IFRS, key financial figures e.g. profitability and growth appear to be

higher. In addition, firms exhibit higher leverage measures following the high IFRS financial

reporting quality.

According to Jyothi & Ravinarayana (2014), a high quality corporate financial reporting

environment depends on effective control and enforcement mechanism. The IFRS compliances

will need a lot of co-ordination among various regulatory authorities and framework like ICAI,

Securities Exchange Board of India (SEBI), Companies Act, Insurance Regulatory and

Development Authority (IRDA), Reserve Bank of India (RBI) etc. in case of India. Tarca (2004)

finds significant voluntary use of ‗‗international‘‘ standards in all five Countries, viz, United

Kingdom, France, Germany, Japan and Australia. Companies using ‗‗international‘‘ standards

are likely to be larger, have more foreign revenue and to be listed in one or more foreign stock

exchanges. Jeanjean & Stolowy (2008) found that the pervasiveness of earnings management in

three countries, e.g. Australia, France and the UK did not decline after the introduction of IFRS

and in fact increased in France. Barth, Landsman and Lang (2008) reported that IAS improved

accounting quality in terms of timely recognition of losses and higher association of losses and

reduce the cost of capital. Evans and Taylor (1982) studied the impact of IAS on the financial

reporting of member nations by analysing companies‘ financial reports to ascertain the degree of

compliance with International Accounting Standard (IAS).The study presented the results in

21
terms of compliance rates (percentage of companies which met IAS requirements) and found low

compliance rates, meaning the IASB had little influence over each country‘s accounting

practices.

According to Sunder (2009), single set of standards should be practiced in the United States,

European Union and elsewhere and at the same time the U.S. educational system should prepare

itself to integrate IFRS into its curricula so that U.S. graduates become able to prepare, use and

audit financial reports based on IFRS. Purvis, Gerson & Diamond (1991) stated that harmonized

international standards claim that if all firms follow the same set of accounting standards,

external financial reports of firms would provide more uniform disclosures and more useful

accounting information to investors. According to Devalle, Onali & Magarini (2010) the main

aim of IFRS is to improve cross‐border comparability of financial statements by means of

harmonisation of accounting standards.

Accounting standards have not kept pace with market derivatives activities. Until the late 1990s,

derivatives were reported on the balance sheet on a variety of bases (including fair value,

forward value, spot rates, intrinsic value, historical cost) or not recorded at all (Pricewaterhouse

Coopers,1999). The study of Bischof (2009) investigated the effects on presentation choices.

Before adoption of IFRS 76, a presentation of financial instruments by measurement categories

was the prevalent choice among European banks. The new standard even requires that

presentation should be at least in the footnotes. Bonetti et al. (2012) analysed the effect both on

stock returns and trading volume. Their results showed that after the adoption of IFRS 7, the

market reaction to foreign exchange rate changes would be aligned with the quantitative

information provided by firms. On the other hand, before IFRS 7 investors did not assess firms'

6
IFRS 7 Financial Instruments: Disclosure, issued by IASB in the year 2005.

22
exposures to currency risk properly. They also documented that IFRS 7 quantitative disclosure

reduces the trading volume sensitivity to foreign exchange rate changes, which proxies for

investor uncertainty and diversity of opinion. Taken together, these findings suggest that a

backward-looking disclosure is as useful for investors as the forward-looking quantitative

disclosures on market risk required by Financial Reporting. Haina (2008) pointed out that IFRS

adoption has a positive informational consequence and improves investors‘ information

environment and IFRS adoption generates more public information than private information.

Khorambakht & Naderian (2014) observed that IFRS having high quality accounting standards

helps in different areas like investment and other economic decisions across borders, increase

market efficiency, reduction on cost of capital etc.

2.6 DFIs and its disclosure

A growing number of published risk disclosure studies are being observed in the recent decade

(e.g., Hunziker, 2013; Lipunga, 2014; Malaquias & Lemes, 2013; Bischof, 2009; Welker, 1995

& Leuz and Verrecchia, 2000) opined that improved and better disclosures reduce information

asymmetry and lead to a greater liquidity of the stock and raises demand from large investors

which decreases an entity‘s cost of capital. Levine, Loayza & Beck (2000) stated that the

disclosure of accounting information, for instance, helps to reduce information asymmetry, sheds

light on the volatility of stock returns and can also be an indicator for both domestic and foreign

investors in making their choices. Verechia (2001) extensively reviewed and categorized

accounting literature on disclosure in order to develop a firms‘ disclosure theory. He concludes

that information asymmetry between stakeholders and management reduction is the starting

point of a comprehensive theory of disclosure. Ernst & Young (2008) opined that the qualitative

disclosures should include a narrative description of the risks the fund is exposed to and how

23
they arise. Woods & Marginson (2004) stated that existing accounting disclosure practices on

derivative financial instruments are limited in terms of their expertise decision.

After adoption of SFAS 1197, Edwards Jr. and Eller (1996) had analysed the top ten US dealer

banks‘ annual reports and concluded that the depth of both the qualitative and the quantitative

disclosures had improved. According to Malaquias & Lemes (2013), due to lack of economic

incentives in Brazil for firms to provide more disclosure in financial statements, the low level of

disclosure is found in accounting reports. According to Garbade and Silber (1983), future

markets on equities provide the dual benefits of risk transfer through hedging and price discovery

by disclosing information about future spot prices that cannot be offered in the spot market alone

and hence justifies increased amount of trading in futures than in equities.

The study of Bischof (2009) examined the effects of IFRS 7 adoption on disclosure practice from

a sample of 171 banks from 28 different countries of Europe. He pointed out that the level of

disclosure has significantly increased during the year of the standard‘s first-time adoption. This

is due to both a more extensive description of accounting policies and a more elaborate

disclosure of information about exposures to significant risks. Chalmers and Godfrey (2000)

concluded that companies are not disclosing details about derivative accounting policies making

information not useful and not comparable. They also found diversity in terms of clarity, detail

and consistency of companies‘ disclosures about the classification of accounting policies.

Strouhal, Bonaci & Matis (2010) stated that the low level of information provided for derivatives

operations can turn derivative financial instruments into a potential source of private information

and furthermore to abnormal returns and not to forget inefficiency of the market since all the

7
SFAS 119: Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, issued by
FASB.

24
market participants do not have access to the information they need for their decision making

processes. Chalmers and Godfrey (2000) concluded that companies are not disclosing details

about derivative accounting policies making the information not useful and not comparable.

They also found diversity in terms of the clarity, detail and consistency of companies. According

to Strouhal, Bonaci & Matis (2010), the very low level of information reported on derivatives

operations might be the signal of an alarming situation concerning the characteristics of

accounting information that already had its way through the current crisis. According to Lopes &

Rodrigues (2007), some economic sectors can have greater institutional pressures for disclosure

of information than others. Lopes & Rodrigues (2007) concluded that the disclosure degree is

significantly related to size, type of auditor, listing status and economic sector.

This study of Bischof (2009) examines the effects of IFRS 7 adoption on disclosure practice by

European banks. A sample of 171 banks from 28 different countries shows that the level of

disclosure has significantly increased during the year of the standard‘s first-time adoption.

Hunziker (2013) revealed that in Switzerland, Significant associations are found between the

number/amount of market risk disclosures and company size. Likewise a significant association

is found between the number/amount of risk disclosures and the company‘s risk proxies by the

gearing ratio. No association is found between the number/amount of risk disclosures and the

company‘s performance, however. Study of Lipunga (2014) revealed a high risk disclosure level

among the sampled banks. The individual bank score range was between 0.76 and 0.88 with an

overall score of 0.82, indicating that an average 82% of the disclosure items were actually

disclosed in the annual reports of the sampled banks. According to Amran et al. (2009) the

annual report of a company is actually the way of conveying useful information for potential

stakeholders to decide about investments, credits and other issues. The study conducted by

25
Ragini (2012) revealed that the countries under study, i.e., India, US, and Japan, have significant

improvement in their overall disclosure scores where Japanese companies have shown the

maximum improvement of 59 percent in the overall disclosure scores followed by US (42 %)

and Indian companies (31%). Sujan & Abeysekera (2007) and Steenkamp (2007) viewed that

most of the researchers have found disclosures to be low and that too in qualitative form except

since 2007 after which shift towards quantitative and high disclosures has been noticed.

Forensic Technologies International Ltd (FTI) Consulting (2015) showed that overall as a group,

BSE 100 index constituents, discloses a reflection of low Mandatory and Voluntary Disclosure

scores.

2.7 DFIs and fair value measurements

According to Epstein & Jermakowicz (2010), beginning in the late 1980s, FASB and IASB have

both been pursuing stated goals that would require all financial instruments and many other

assets and liabilities to be stated at fair values. The pursuit of this goal has resulted in a

succession of standards that have increased the number of fair value measurements required by

IFRS and to provide more transparency to users, increased the scope and complexity of the

related required disclosures. According to McCarroll (2012), the standard IFRS 13 could have

significant implications for any entity that carries a financial or non-financial asset at fair value

but the financial service sectors would be most impacted.

Fair value accounting has become a crucial measurement principle in international accounting,

and major standard setters, including the International Accounting Standards Board (IASB) and

the Financial Accounting Standards Board (FASB), promote fair value accounting as the future

basis for measurement. Luax & Leuz (2009) stated that in a world with information asymmetry,

26
we expect optimal fair value accounting standards and enforcement to constrain some deviations

from market prices that would be permitted if the gatekeepers (e.g., auditors or the Securities and

Exchange Commission) had the same information as the managers. According to Fiechter

(2011), the application of the fair valuation option is a more effective tool to reduce earnings

volatility than hedge accounting in accordance with IAS 398.

Aliabadi et al. (2011) stated even though FASB and IASB have shown a greater interest in fair

value reporting in recent years and it is generally believed that fair values of assets and liabilities

are more relevant to decision making, neither FASB nor IASB, or any other accounting and

auditing organizations, provides detailed guidance for fair value determination in cases in which

the market value of assets and liabilities are not objectively observable.

Iatridis (2010) demonstrates that following the fair value orientation of IFRS, the transition to

IFRS appears to introduce volatility in income statement figures. Over-all findings of Fiechter

(2010) confirmed the IASB‘s initial intention on introducing the FVO for financial instruments.

Epstein & Jermakowicz (2010) stated that the pursuit of this goal has resulted in a succession of

standards that have increased the number of fair value measurements required by IFRS to

provide more transparency to users, and increased the scope and complexity of the related

required disclosures. Melumad et al. (1999) stated that the fair value recognition of derivatives

makes the use of derivatives more transparent and encourages prudent risk management.

The fair value measurement is based on subjective assumptions and may therefore be subjected

to manipulation (Dechow et al. 2010). Aliabadi et al. (2011) showed that policy makers and

standard setters have not provided a comprehensive guidance for fair value determination and

8
IAS 39 Financial Instruments: Recognition and measurement issued by IASB in the year 1998.

27
literate in fair value calculations is poor. According to Ryan (2008), discussions surrounding fair

value accounting remain controversial, primarily due to the trade-off between the relevance and

the reliability of reported fair values. Fiechter (2011) reported that prudential supervisors such as

the European Central Bank or the Basel Committee on Banking Supervision were concerned that

the FVO might be used inappropriately. Aliabadi et al. (2011) stated that universities are not

offering any stand alone and comprehensive courses of fair value accounting and are not

educating accountants who are specialized in fair value determination.

According to Lins et al. (2011), firms that take active positions are more likely to be affected by

fair value reporting. Taken together, their evidence indicates that requirements to report

derivatives at fair values have had a material impact on derivative use while speculative activities

have been reduced, sound hedging strategies have been compromised as well. Cairns et al.

(2011) observed the expected increase in the use of fair value measurement for financial

instruments and share-based payment in case of mandatory requirements and limited and

selective use of the fair value option to measure at fair value where unit is optional. Laux and

Leuz (2010) reported that they have little reason to believe that the fair-value accounting

contributed to United States (US) banks' problems in the financial crisis in a major way. Fair

values play only a limited role for banks' income statements and regulatory capital ratios except

for a few banks with large trading positions.

Christensen & Nikolae (2009) examined the accounting policies for intangible assets, investment

property, plant and equipment of 1,539 companies domiciled in the United Kingdom (UK) and

Germany. With very few exceptions they found that fair value is used exclusively for property.

They found that 3% of companies use fair value for owner-occupied property, compared with

47% for investment property. The lack of companies that use fair value for all other non-

28
financial assets is inconsistent with net benefits of fair value accounting. Their evidence is

broadly consistent with the observation that companies do not perceive the net benefits of fair

value accounting to exceed those of historical cost accounting. They found, however, that where

fair value is used, the evidence points to contracting, rather than valuation, needs as the main

determinant of a company's decision to use fair value over historical cost.

Lopes & Rodrigues (2007) concluded that about half of the companies, where sample size is 56,

are using fair value for held-for trading financial assets but less than half adopt these criteria for

available-for-sale financial assets as required by IAS 39. The majority of companies disclose the

fair value method but the information is far from being clear and objective, preventing the fair

value information from being relevant and useful. Gebhardt et al. (2004) opined that the

mandatory full fair value model offers no choices in the preparation of accounts and results in

financial statements that are easier to compare. They also reported that the optional fair value

model proposed by the IASB in the recent IAS 32 and 39 Improvement Exposure Draft may be a

useful interim solution providing the option to gain experience with an extended use of fair

values in bank accounting. Fiechter (2011) commented that regulatory quality is more likely to

apply the FVO to reduce accounting mismatches.

2.8 Hedge accounting for DFIs

The quality of financial reporting for derivatives and hedging activities is very important as it

can influence investors‘ understanding of risk exposure and risk management activities

undertaken by corporations. In India, most derivatives users describe themselves as hedgers and

Indian laws generally require that derivatives should be used only for hedging purposes (Sarkar,

2006). According to Dinh & Gong (2013), use of the accounting methods plays an important role

29
in the recognizing process of accounting data and making financial statements. According to

Dybvig et al. (2013), hedging is an option of risk management. Its purpose is to remove a

transaction risk and capture its pure economic profit. Fundamentally, this strategy is the same as

insurance. For the insured, the insurance policy makes money in bad times (when an insurable

event occurs) and loses money in good times (when no insurable event occurs but the premium is

paid), which reduces risk by softening the impact of bad outcomes. The same is true for a

hedging strategy; losing money on the hedge in good times and making money in bad times

offsets the original cash flows, making the total cash flow less volatile. According to Li,

Visaltanachoti & Luo (2014), there are two schools of theories that demonstrate why firms

involve with corporate hedging. One is based on owner‘s diversification motives or corporate

managers‘ personal utility maximization. It suggests that the main purpose of corporate hedging

is to reduce the likelihood that managers will suffer from adverse outcomes from uncertainties.

The other is based on shareholder value maximization. Stulz (1984) and Smith and Stulz (1985)

stated that risk averse managers will be actively engaged in hedging for the following reasons:

Firstly, their wealth and human capital are concentrated in the corporations they work for.

Secondly, they find the cost of hedging on their own account is higher than the cost of hedging at

the corporation. Dinh & Gong (2013) stated that outcome analysis also indicates that hedge

accounting brings great profit to the firms and investors and at the same time it also minimizes

the risks.

Analysis of Dinh & Gong (2013) indicates that hedge accounting brings great profit to the firms

and investors. Simultaneously, it also minimizes the risks. Bartram et al. (2009) pointed out that

firms with less liquid derivatives markets, typically in middle-income countries, are less likely to

hedge. According to Kawaller (2004), for an analyst to evaluate any company — whether it uses

30
derivatives or not — the analyst needs to know what price exposure exists, how much of this

exposure is covered, and how hedges are managed.

According to Dybvig et al (2013), the widespread use of future contracts and swaps to hedge

foreign exchange, interest rate, and commodity risk, since without this ability to hedge, many

profitable businesses would be prone to risk.

According to PWC (2013), for many entities the breadth and complexity of accounting for

derivatives and hedging activities have created significant challenges. Lopes & Rodrigues (2007)

pointed out that companies have quite a long way to go in terms of accounting and disclosure of

financial instruments, namely derivatives. Gebhardt et al. (2004) opined that the key problem of

modern universal banks following dynamic macro hedging techniques is the narrow micro-

hedging concept implied in IAS 39 and SFAS 133. Banks often are not able or willing to fulfill

these burdensome documentation requirements and therefore opt not to choose hedge accounting

for all hedging activities. Thus, a fully hedged bank might present more volatile net income than

a partially hedged bank as demonstrated by our model results. As a consequence, financial

statements of banks are hardly comparable for users under Current IAS or US GAAP. Li,

Visaltanachoti & Luo (2014) stated that there is no evidence to support the value added benefits

of hedging with Foreign Currency Derivatives (FCDs) in this study. This shows that, statistically,

there is no evidence that the use of FCDs can cause higher firm market value for New Zealand

firms.

On the other, Li, et al. (2014) pointed out that there are reasons why firms do not hedge.

Transaction costs of hedging, such as commissions paid to dealers, bid-ask spread and

transaction fees charged by over-the-counter (OTC) or stock exchange are the first concern.

31
Secondly, in order to accomplish the purpose of hedging, firms have to evaluate the trade-off

between costs and benefits of any particular hedging strategy.

2.9 Content analysis & disclosure index

Content analysis (CA) - is a widely used method in accounting research. According to United

States General Accounting Office (1989), content analysis is a set of procedures for collecting

and organizing information in a standardized format that allows analysts to make inferences

about the characteristics and meaning of written and other recorded material. Jones & Shoemaker

(1994) stated that Content analysis has been widely used in accounting research, applied to

annual reports in order to analyze several issues, such as social, environmental, research and

development disclosures. Cavanagh (1997) opines that content analysis allows the researcher to

test theoretical issues to enhance understanding of the data. Hassan & Marston (2010) opines that

a disclosure index could include mandatory items of information and/or voluntary item of

information.

Disclosure score index- Htay et al. (2011) opined that disclosure of information in the annual

reports is highlighted as one of the important aspects of the good corporate governance. Hassan

& Marston (2010) opined that a disclosure index could include mandatory items of information

and/or voluntary item of information. It can cover information reported in one or more disclosure

vehicles such as corporate annual reports, interim reports, investor relation etc.

Content analysis and disclosure index are widely used in accounting research; a review of

Content analysis and disclosure index is extracted as follows (Exhibit 2.1);

32
Exhibit 2.1
Research involving Content analysis & Disclosure index in the field of Accounting
Author and Sample size/ Methodology Basis of Related
Year Country used Valuation Accounting Findings of the study
and Standards
Reporting of
DFI
Atanasovsk 104 companies CA and Regression IFRS 7 Macedonian companies
(2015) (Macedonia) Disclosure Analysis provides 62.75% of
Index mandatory information
for financial instruments
as required by relevant
IFRS 7 requirements.
Adznan & 319 companies Disclosure Descriptive & MFRS 7 Disclosure level of FI of
Nelson Index Correlation Malaysian companies as
(2014) Analysis per MFRS 7 is 80.76%.
Lipunga 7 (Malawi) CA Basel II IFRS 7 High risk disclosure level
(2014) framework & profitability is an
insignificant determinant
of the level of risk
Disclosure.
Malaquias 24 (Brazil ) CA Lopes & IFRS 7 Brazilian market has an
& Lemes Rodrigues‘s average and inferior
(2013) disclosure disclosure level.
index (2007)
Hunziker 116 CA Sensitivity IFRS 7 Overall the (potential)
(2013) (Switzerland) analysis, stakeholder may rely on
Monte Carlo disclosures under IFRS to
simulation assess about the market
risks that origin from
financial instruments.
Ragini 260 (India, US, Disclosure Descriptiv, Ind As 26 Countries under study
(2012) and Japan) Index (DI) Univariate & SFAS-142 have significant
Multivariate improvement in their
Statiscis overall disclosure scores.
Strouhal et 51 (Czech and CA Modigliani IFRS The lack of experience in
al. (2010) Romanian) and Miller trading and
(1958) handling of derivatives
and accounting
aspects are concerned.

33
Author and Sample size/ Methodology Basis of Related
Year Country used Valuation Accounting Findings of the study
and Standards
Reporting of
DFI
Lopes & 56 CA Positive IAS 32 & IAS Disclosure level is
Rodrigues (Portuguese) accounting 39 significantly related to
(2007) theory (1981) size, listing status and
leverage degree.
Woods & 09 (UK) CA ASB‘s IFRS 13 Information on trading
arginson Statement of and derivatives activities
2004) Principles is disclosed as
( 1999) (i) Narrative Disclosures
and (ii) as Numerical
Disclosures in the Annual
Reports.

2.10 Conclusion

Our study of literature review is summarized in three sub groups. The first one attempt to

identify the findings of the review of literatures till date, the second part highlights the identified

problems i.e., the research gaps and the last one ends with the objective of the research work.

2.10.1 Findings from the review of literatures

1. Risk management has become one of the most important activities of recent business

concern.

2. Use of DFIs as risk management tool is rapidly increasing worldwide.

3. Low level of disclosures of derivatives operations turns to lack of transparency.

4. Accounting standards are important regulatory devices for derivative financial instrument

accounting.

5. IFRS for derivative financial instrument is becoming a global reporting language.

34
2.10.2 Research gaps

1. No study has yet been done on comparison of international and national accounting

standards for DFIs.

2. No research has so far summarized the main factors relating to IFRS for DFI in case of

countries like India.

3. Further, no empirical study has examined whether the Indian companies and stakeholders

would be benefitted after implementation and practices of IFRS for DFIs.

2.10.3 Research objectives

i. The research would concentrate on the select major International Financial Reporting

Standards (IFRS) for DFIs. The study also explores the differences between IFRS for

DFIs and Ind AS for DFIs.

ii. Furthermore, the research would

(a) Evaluate the accounting practices by IFRS user companies with an objective to

find how far the companies differ from IFRS in terms of reporting and practices of

DFIs;

(b) Compare among the group of IFRS user companies with an objective to find

whether there is uniformity for reporting and disclosure of DFIs;

(c) Compare between the two groups of companies, viz, IFRS users and Indian AS

users, with an objective to see whether there are differences in terms of reporting and

practices of DFIs.

35
iii. The research would summarise the main factors relating to IFRS for DFI in case of

countries like India.

iv. The study would examine whether there are any positive impact of IFRS for

derivative financial instruments (DFI) on:

(a) Reliability of accounting information of derivative financial instruments (DFIs);

(b) Accountability of management for accounting and reporting of derivatives; and

(c) Shareholders‘ value creation.

References
Adedeji B.A. (2004): Accounting Theory and Regulatory Framework; Lagos Nigeria.

Adznan, S., & Nelson, S. P. (2014). Financial instruments disclosure practices: Evidence from Malaysian

listed firms. Procedia - Social and Behavioral Sciences , 164, 62-67.

Ahmed, A., Kilic, E., & Lobo, G. (2006). Does Recognition versus Disclosure Matter? Evidence from Value-

Relevance of Banks' Recognized and Disclosed Derivative Financial Instruments. The Accounting

Review , 81 (3), 567-588.

Alexandera, D., Bonacib, C., & Mustatab, R. (2012). Fair value measurement in financial reporting.

Procedia Economics and Finance , 3, 84-80.

Aliabadi, S., Chent, H., & Dorestani, A. (2011). Fair Value Determination: A Conceptual Framework.

Journal of Accounting-Business & Management , 18 (1), 93-107.

Amran, A., Bin, A. M., & Hassan, B. C. (2009). Risk reporting: An exploratory study on risk management

disclosure in Malaysian annual reports. Managerial Auditing Journal , 24 (1), 39-57.

Arshad, R., & Ismail, R. (2011). Discretionary Risks Disclosure:. Asian Journal of Accounting and

Governance: A Management Perspective , 2, 67-77.

36
Atanasovsk, A. (2015). Empirical Investigation into the Determinants of Compliance with IFRS 7

Disclosure Requirements. ACTA Universitatis Danubius , 11 (2), 5-17.

Avadhani, S. (2000). Investment Management and Mutual Funds (2 ed.).

Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International Accounting Standards and Accounting

Quality. Journal of Accounting Research , 46 (3), 467-498.

Bartram, S., Brown, G., & Fehle, F. (2009). International evidence on financial derivatives usage.

Financial Management , 38 (1), 185-206.

Bhaskar, P. V. & Mahapatra, B. (2003). Derivative Simplified- An Introduction to Risk Management.

Response Books.

Bhattacharyya, A. (2009). Indian Accounting Standards: Practices, Comparisons, and Interpretations.

New Delhi: Tata McGraw-Hill Education.

Bischof, J. (2009). The effects of IFRS 7 adoption on bank disclosure in Europe. Accounting in Europe , 6

(2), 167-194.

Bonetti, P., Mattei, M., & Palmucci, F. (2012). Market reactions to the disclosures on currency risk under

IFRS 7. Academy of Accounting & Financial Studies Journal , 16, 13-24.

Brown, P., & Tarca, A. (2012). Ten years of IFRS: Practitioners’ comments and suggestions for research.

Australian Accounting Review , 22 (4), 319-330.

Bushman, R. M., Piotroski, J., & Smith, A. J. (2004). What determines corporate transparency? . Journal

of Accounting Research , 42 (2), 207-252.

Buvaneswari, R.P. ; Ragupathi, M. ;Mani, A. & Kirubakaran, M. (2007). Indian Stock Market - Hedging of

Index Future is a boon or bane. Indian Journal of Finance , I (3), 25-23.

Cai, F., & Wong, H. (2010). The Effect Of IFRS Adoption On Global Market Integration. International

Business & Economics Research Journal , 9 (10), 25-34.

Cairns, D., Massoudi, D., Taplin, R., & Tarca, A. (2011). IFRS fair value measurement and accounting

policy choice in the United. The British Accounting Review , 43, 1-21.

37
Cavanagh S. (1997) Content analysis: concepts, methods and applications. Nurse Researcher 4, 5–16.

Chalmers, K., & Godfrey, J. (2000). Practice versus Prescription in the Disclosure and Recognition of

Derivatives. Australian Accounting Review , 11 (2), 40-50.

Christensen,H. B. & Nikolae V. 2009, Who uses fair value accounting for non-financial assets after IFRS

adoption? Electronic copy available at: http://ssrn.com/abstract=1269515, Accessed:

09.09.2014

Chen, H., Tang, Q., Jiang, Y., & Lin, Z. (2010). The role of International Financial Reporting Standards in

accounting quality: evidence from the European Union . Journal of International Financial

Management and Accounting , 21 (3), 220-278.

Dechow, P., Myers, L., & Shakespeare, C. (2010). Fair Value Accounting and Gains from Asset Securiti-

sations: A Convenient Earnings Management Tool with Compensation Side-Benefits. Journal of

Accounting and Economics , 49 (1), 2-25.

Devalle, A., Onali, E., & Magarini, R. (2010). Assessing the value relevance of accounting data after the

introduction of IFRS in Europe. Journal of International Financial Management & Accounting , 21

(2), 85-119.

Dinh, D., & Gong, G. (2013). Hedge accounting and impact on financial market. Journal of Finance and

Accounting , 1-18.

Djatej, A., Gao, G., Sarikas, R., & Senteney, D. (2010). An Investigation Of The Comparative Impact Of

Degree Of Implementation Of IFRS Upon The Public And Private Information Quality Of Asia

Pacific Country Firms. International Business & Economics Research Journal , 9 (3), 27-46.

Dodd, R. 2000. “The Role of Derivatives in the East Asian Financial Crisis.” Working Paper Series III,

Center for Economic Policy Analysis, New York.

Dybvig, P. H., Liang, P. J., & Marshall, W. J. (2013). The New Risk Management: The Good, the Bad, and

the Ugly. Federal Reserve Bank of St. Louis Review , 95 (4), 273-291.

38
Edwards Jr. and Eller, G. (1996): "Derivatives Disclosures by Major U.S. Banks, 1995", Federal Reserve

Bulletin, September, 792-801.

Epstein, J. Barry & Jermakowicz, K. Eva. (2010). Interpretation and Application of International Financial

Reporting Standards. New Jersey: Wiley.

Ernst & Young (2006); Risk Investor Survey Report

http://www.ey.com/global/ssets.nsf/international/Global_Risk_investor_Survey_Report/$file;

Accessed on: 29.03.2008

Ernst & Young, 2008,Observation on the implementation of IFRS 7 in corporate entities.

Evans, C., Fisher, J., Gourio, F., & Krane, G. (2015). Risk Management for Monetary Policy Near the Zero

Lower Bound. BPEA Conference Draft,1-76. Chicago: Brookings Papers.

Evans, T., & Taylor, M. (1982). ""Bottom Line Compliance" with Iasc: A Comparative Analysis".

International journal of Accounting , 18 (1), 115-128.

Ficechter, P. (2011). The Effects of the FairValue Option under IAS 39 on the volatility of Bank earnings.

Journal of International Accounting Research ,10(1), 85-108

FTI Consulting (2015);India Disclosure Index 2015, How India’s Leading Listed Companies Fare on

Mandatory & Voluntary Disclosure; http://www.fticonsulting.com/insights/reports/india-

disclosure-index-2015, Accessed on: 04.10.2015

Garbade K and Silber W (1983), “Price Movements and Price Discovery in Futures and Cash Markets”,

Review of Economics and Statistics, Vol. 65, No. 2, pp. 289-297.

Gebhardt, G., Reichardt, R., & Wittenbrink, C. (2004). Accounting for Financial Instruments in the

Banking Industry: Conclusions from a Simulation Model. European Accounting Review , 13 (2),

341-371.

Glaulier, M., & Underdown, B. (2001). Accounting Theory and Practice (7th ed.). London: FT-Prentice

Hall.

39
Gope, A. (2014). Indian Equity Derivative Market. international Journal of business and Management , 2

(6), 115-124.

Greenspan, J. (1997). Financial Futures and Options in Indian Perspective. Jaico Publishing House.

Hague, I. (2004). IAS 39: Underlying Principles. Accounting in Europe , 1 (1), 20-26.

Haina, S (2008), Economic and Informational consequences of voluntary adoption of IFRS; ProQuest

Dissertations & Theses: The Humanities and Social Sciences Collection.

Hassan , O; Marston , C (2010); Disclosure measurement in the empirical accounting literature - a review

article; Electronic copy available at: http://ssrn.com/abstract=1640598; Accessed on:

05/06/2015

Hunziker, S. (2013). The disclosure of market risk information under IFRS 7 Evidence from Swiss listed

non-financial companies. IFZ Working Paper No. 0020/2013, Lucerne University of Applied

Sciences and Arts,Switzerland .

Hwang, A. (2002). Comparative analysis of accounting treatments for derivatives. Journal of Accounting

Education , 20 (3), 205-233.

Iatridis, G. (2010). IFRS Adoption and Financial Statement Effects: The UK Case. (38), 165-172.

Ikpefan, O. A., & Akande, A. O. (2012). International Financial Reporting Standard (IFRS): Benefits,

Obstacles and Intrigues for Implementation in Nigeria. Business Intelligence Journal , 5 (2), 299-

307.

Jyothi, D. J., & Ravinarayana, K. (2014). Convergence with IFRS: Benefits and Challenges. Asian Journal of

Management , 5 (3), 293-296.

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings

management before and after IFRS adoption. J. Account. Public Policy (27), 480-494.

Jones, M. J., & Shoemaker, P. A. (1994). Accounting narratives: A review of empirical studies of content

and readability. Journal of Accounting Literature , 13, 142-161.

40
Kawaller, G. I. (2004). What analysis Need to know about Accounting for Derivatives. New york: AIMR.

Available at: http://faculty.babson.edu/halsey/acc7500/derivative%20accounting%202004.pdf;

Accessed on 12.09.2013

Khorambakht, Z., & Naderian, A. (2014). A study of differences in financial performance under Indian

GAAP and IFRS: Case of Wipro company. Asian Journal of Development Matters , 8 (1), 24-30.

Kingsley, O. O., Gina, O., & Vivian, O. (2014). A Comparative Study of Accounting Standards in Nigeria,

United Kingdom and United States of America. IOSR Journal of Economics and Finance , 3 (2), 1-

7.

Koonce, L., Lipe, M., & McAnaIly, M. (2008). Investor Reactions to Derivative Use and Outcomes. Review

of Accounting Studies , 13 (4), 571-597.

Laux, Christian & Leuz, Christian , 2009, The Crisis of Fair value accounting; Making sense of the

recentdebate, CFS ( Centre for Financial Studies) working papers No-2009/09 Available at :

www.econstor.eu, Accessed on: 28/09/2014

Leuz, C., & Verrecchia, R. (2000). The Economic Consequences of Increased Disclosure. Journal of

Accounting Research , 38, 91–124.

Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: causality and causes.

Journal of Monetary Economics , 46 (1), 31-77.

Li1, H., Nuttawat Visaltanachoti, N., & Luo, R. H. (2014). Foreign Currency Derivatives and Firm Value:

Evidence from New Zealand. Journal of Financial Risk Management (3), 96-112.

Lien, D., & Zhang, M. (2008). A Survey of Emerging Derivatives Markets. Emerging Markets Finance and

Trade , 44 (2), 39-69.

Lin, J. B., Pantzalis, C., & Park, J. C. (2009). Derivatives use, Information Asymmetry, and MNC post-

acquisition performance. Financial Management ,38(3), 631-661.

Lins, K. V., Servaes, H., & Tamayo, A. (2011). Does Fair Value Reporting Affect Risk Management?

International Survey Evidence. Financial Management , 40 (3), 525-551.

41
Lipunga, A. M. (2014). Risk disclosure practices of Malawian commercial banks. Journal of Contemporary

Issues in Business Research , 3 (3), 154-167.

Lopes, P. T., & Rodrigues, L. L. (2007). Accounting for financial instruments: An analysis of the

determinants of disclosure in the Portuguese stock exchange. The International Journal of

accounting , 42, 25-56.

Madawaki, A. (2012). Adopttion of International Financial Reporting Standards in Developing countries;

The case of Nigeria. International Journal of Business and management , 7 (3), 152-161.

Malaquias, R., & Lemes, S. (2013). Disclosure of financial instruments according to International

Accounting Standards: empirical evidence from Brazilian companies. Brazilian Business Review ,

10 (3), 82-107.

Marlowe, J. (2000). Hedging Currency Risk and Options and Futures.

McCarroll, J. (2012). Fiar value measurement under IFRS 13. Accountancy Ireland , 44 (4), 22-23.

Melumad, N., Weyns, G., & Ziv, A. (1999). Comparing Alternative Hedge Accounting Standards:sahre

holders perspective. Review of Accounting studies , 5, 265-292.

Mitra, G. &. (2013). IFRS on Derivative Financial Instruments. DBM Social Science Reporter , 1 (1), 12-19.

Powal, S. (2006). Accounting Theory: An Introduction (8th ed.). New Delhi, India: Tata McGraw Hill

Publishing Co. Ltd.

Prabhakara, T. (2013). Derivatives, Hedge Accounting Disclosure And Impact On Indian Financial Market.

Golden Research Thoughts , 3 (3).

PricewaterhouseCoopers. (1999). Overview and expected impacts on FAS 133. LLP. New York:

PricewaterhouseCoopers Available at : http://www.pwccomperio.com.

PricewaterhouseCoopers (2004). Ready for take-off? Available at : www.pwc.com/ifrs; Accessed on:

15/12/2014

PricewaterhouseCoopers (2013), A Global Guide to Fair Value Measurements, Available at:

www.pwc.com, Accessed on: 02/09/2014

42
Purvis, S., Gerson, H., & Diamond, M. (1991). The IASC and its comparability project: Prerequisites for

success. Accounting Horizons , 5, 25-44.

Ragini. (2012). Corporate Disclosure of Intangibles:A Comparative Study of Practices among Indian, US,

and Japanese Companies. Vikalpa , 37 (3), 51-72.

Ramanna, K & Sletten, E (2009): Why do countries adopt International Financial Reporting Standards?

Working Paper, 09-102, http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf, Accessed

on: 04/12/2014

Rawat, D. (2012). Students' Guide to Accounting Standards. New Delhi: Taxmann.

Ryan, S. G. 2008. Accounting in and for the subprime crisis. The Accounting Review 83(6): 1605–1638.

Sakhivel, P., & Kamalah, B. (2011). The effect of derivative trading on volatility of underlying stocks:

evidence from the NSE. Indian journal of Economics and Business , 511-531.

Sarkar,A. 2006 Indian Derivatives Markests Accesed on 22.11.12 :

http://www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdf

Selvam, V., & Rita, S. (2011). Financial Derivatives - Real Challenges in India. Advances In Management ,

4 (1), 20-23.

Shapiro, A.C. (2000). Multinational Financial Management, Prentice hall of India, New Delhi.

Smith, C., & Stulz, R. (1985). The Determinants of firms' hedging policies. Journal of Financial and

Quantitative Analysis , 20 (4), 391-405.

Strouhal, J., Bonaci, C., & Matis, D. (2010). Accounting for Derivatives: Hedging or Trading? Wseas

transaction on business and economics , 7 (3), 242-251.

Stulz, R. (1984). Optimal hedging policies . Journal of Financial and Quantitative Analysis , 19, 127-140.

Stulz, R. (2004). Should We Fear Derivatives? Journal of Economic perspectives , 18 (3), 173-192.

Sujan, A., & Abeysekera, I. (2007). Intellectual capital reporting practices of the top Australian firms.

Australian Accounting Review , 17 (42), 71-83.

Sunder, S. (2009). IFRS and the Accounting Consensus. Accounting Horizons , 23 (1), 101-111.

43
Sunder, S. (2002). Regulatory competition among accounting standards within and across international

boundaries. Journal of Accounting and Public Policy , 21, 219-234.

Tarca, A. (2004). International Convergence of Accounting Practices: Choosing between IAS and US

GAAP. Journal of International Financial Management and Accounting , 15 (1), 60-90.

Tchankova, L. (2002). Risk identification – basic stage in risk management. Environmental Management

and Health , 13 (3), 290-297.

Tendelooa, B. V., & Vanstraelena, A. (2005). Earnings management under German GAAP versus IFRS.

European Accounting Review , 14 (1), 155-180.

United States General Accounting Office (1989), Available at

http://archive.gao.gov/d48t13/138426.pdfAccessed on: 12/09/2014

Vantendeloo, B & A. Vanstraelen(2005): Earnings Management under German GAAP versus European

Accounting Review.

Vashishtha, A., & Kumar, S. (2010). Development of Financial Derivatives Market in India- A Case.

International Research Journal of Finance and Economics (37), 15-29.

Varma, J. R. (2008). Derivatives and Risk Management, McGraw Hill Companies, New Delhi.

Verma, Sanjeev & Chauhan, Rohit. (2008). Opportinities in Indian Derivatives and commodioties market.

Indian Journal of Finance , 2 (1).

Verrecchia, R. E.,(2001), Essays on Disclosure, Available at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=276699; Accessed: 28.08.2014

Welker, M. (1995). Disclosure Policy, Information Asymmetry, and Liquidity in Equity Markets.

Contemporary Accounting Research , 11 (2), 801-827.

Woods, M. & Marginson, D. (2004). Accounting for Derivatives: Anevaluation of reporting practice by UK

Banks. European Accounting Review , 13 (2), 373-391.

44
CHAPTER III

DATA, METHODS AND TOOLS

3.1 Introduction

Review of literature has highlighted that IFRS has emerged as a single set of high-quality written

standard of financial reporting. The adoption of IFRS around the world is taking place rapidly to

bring about accounting quality improvement through a uniform set of standards for financial

reporting and thus enhancing the comparability of financial statements.

On the other, financial derivatives have earned a well deserved and extremely significant place

among all the financial instruments. Many factors have contributed in the explosive growth of

derivatives since 1970s. Derivatives being a tool of financial innovation in particular, have

revolutionized the global financial landscape in general. However, interpretation of financial

statements is quite challenging as most derivative financial instrument contracts are off-balance-

sheet items9. The very low level of derivative information reported might be the signal of an

alarming situation concerning the characteristics of accounting information that already had its

way through may derivative disasters and global financial crisis in particular.

At the outset, our study is confined to comparison between IFRS and Indian AS (before

convergence with IFRS) for DFI. The aim of the study is to find out whether it would be

beneficial to replace the Indian AS with the IFRS one. Thus, the main research question of this

thesis is:

Why should a country adopt IFRS for DFIs instead of its national accounting standards for DFIs?

9
Item (financial instrument) does not appear on a company's balance sheet.

45
This chapter explains the research methodology followed to explore the required practical details

to find out the answer of the above question. This chapter presents the nature of the study,

research question and research hypotheses. It also describes the ways and means of collecting

data, sampling techniques used and the statistical tools selected in the analysis of data.

The research is designed to conduct a formal study starting with research question and

hypothesis followed by collection of relevant data and testing hypothesis in order to answer the

research question.

3.2 Research questions and hypothesis

Our main theme of the research ―why should a country adopt IFRS for DFIs instead of its

national accounting standards for DFIs?‖ leads to the following research questions and

hypotheses.

3.2.1 Research questions:

Q1: Why do accounting standards for DFIs become so important for India?

Q1: Are there any differences between IFRS and Converged Ind AS in respect of DFIs?

Q3: What are the key factors affected by IFRS for DFIs in case of countries like India?

3.2.2 Research Hypotheses:

H01: Companies maintain only up to 75% disclosures on DFI under IFRS.

HA1: Companies maintain disclosures on DFI under IFRS more than75% of the standard level.

Ho2: No differences exist among the selected economy for reporting and disclosure of DFIs

under IFRS in their annual reports.

HA2: The selected economy are reporting and disclosing DFIs differently in their annual reports

46
H03: No differences exist between the two groups of companies namely IFRS users and Non-

converged Ind AS users for reporting and disclosing the DFIs.

HA3: Reporting and disclosure level of IFRS adopted companies is higher than the Ind AS user

companies for DFIs.

H04: Reliability of accounting information of DFIs would not be influenced by IFRS in India.

HA4: Reliability of accounting information of DFIs would be influenced by IFRS in India.

H05: Accountability of management for accounting and reporting of derivatives would not be

influenced by IFRS in India.

HA5: Accountability of management for accounting and reporting of derivatives would be

influenced by IFRS in India.

H06: Shareholders‘ value would not be influenced by the adoption of IFRS for DFI in India.

HA6: Shareholders‘ value would be influenced by the adoption of IFRS for DFI in India.

3.3 Population and Sample

We have used primary as well as secondary data for our research purpose. These are explained as

follows:

3.3.1 Primary data

The study involves an international survey 10 on accounting standards for derivative financial

instruments involving as many as 50 countries. On-line research survey is conducted for

collecting primary data where population size is comprised of the experts of 53 countries 11

10
Survey held during the period from March 2015 to July 2015.
11
Number of respondents, country wise is shown in the Appendix-C.

47
including India. We have used the LinkedIn business-oriented social networking service to reach

our respondents.

To conduct the survey, a questionnaire is developed to gather information about the perception

and opinion towards IFRS for DFIs especially on the field of reliability, accountability and value

creation benefits gained from the application of IFRS for DFIs.

We have approached 1200 IFRS experts of different countries across the globe for filling up of

the questionnaire on simple random sampling basis. Because of voluntary responses from the

experts, 166 responses could be received. Out of 166 we have selected 160 responses from more

than 50 foreign countries for our research purpose. Responses of 6 respondents have been

rejected as these are incomplete responses.

Our respondents represented a wide range of profession, e.g., auditor, accountants, top level

manager, finance Professional, IFRS trainer, professors and other professional experts in IFRS.

Exhibit 3.1
Profession of respondents

Sl Type of Designation Number of


No Respondents
1. Auditor 24
2. CEO/MD/Director 06
3. Chartered Accountant/ACCA/CFA/CPA/Accountant etc. 56
4. CFO / Financial analyst/Finance Professional 25
5. IFRS consultant/IFRS Trainer/IFRS reporting manager 16
6. Professor/Lecturer/Teacher/Author 18
7. Other professionals expert in IFRS 15
Total 160

The questionnaire includes one question regarding the respondents‘ knowledge level on IFRS for

derivative financial instruments. Respondents were requested not to fill in the questionnaire if he

or she is not familiar with IFRS for derivative financial instruments. We have got the following

result:

48
Exhibit 3.2
How familiar with IFRS for Derivative Financial Instruments

Sl. IFRS knowledge level for DFI Number of % of


No. respondents respondents
1 Extremely familiar 46 29%
2 Moderately familiar 70 44%
3 Somewhat familiar 26 16%
4 Slightly familiar 18 11%
5 Not at all familiar 00 00%
Total 160 100%

3.3.2 Secondary data

Data12 has been obtained from two set of groups. First group comprises of United Kingdom,

European Union, Canada, Germany and Switzerland and the second one is India 13 . Each

company in the first group requires filing annual reports using IFRS is involved with derivative

transactions. And the second group consists of Indian companies where IFRS is yet to be

implemented but involved with derivative transactions.

The population of the study has been taken from respective stock exchange websites. A list of

2,182 eligible companies is obtained based on the select country for the first group. And another

list of 284 eligible companies is obtained for the second group.

Companies are excluded from the first group that did not upload annual reports for the year 2014

or not reported in English language or because of the partial uploading of the annual reports or

the companies did not use DFIs during the period.

Similarly companies are excluded from the second group that did not upload latest annual reports

or because of the partial uploading of the annual reports or the companies did not use Derivative

12
On line survey feedback (primary data) and select annual reports of the companies (secondary data) are
submitted as soft copy through compact disk (CD).
13
Economy selected from the top 13 stock exchanges of the world as on 31 January 2015, appendix-B.

49
financial instruments during the period or the companies which have already adopted IFRS for

reporting purpose. Then we have used simple random sampling to select the annual reports of the

companies.

Total sample size for the study is 160. Two sets of samples are selected: one set of 80 companies

had been selected from the first group, United Kingdom, European Union, Canada, Germany &

Switzerland and another set of 80 companies were from the second group i.e. India.

3.4 Data collection

3.4.1 Primary data

For accumulating data from the responses we have put five point rating scale questions in the

questionnaire. Scores for the answers are allotted as follows;

Exhibit 3.3
Five Point Rating Scale

Options Scores
A) Strongly agree 1
B) Agree 2
C) Neither agree nor disagree 3
D) Disagree 4

Our questionnaire14 consists of 21 questions designed on IFRS for derivative financial

instruments.

3.4.2. Secondary data

Data for our study are sourced from the annual reports of selected companies. With the objective

of identifying disclosure practices concerning Derivative financial instruments we applied the

14
Questionnaire is included in appendix-D.

50
content analysis technique to listed companies' annual reports, which were comprehensively

analyzed. This analysis is based on the list of categories, covering all the items that allow us to

identify the existence of disclosures required by IAS 32, IAS 39, IFRS 7 and IFRS 13.

With the aim of identifying accounting practices for DFIs, we have applied content analysis

technique (please see review of literature) and disclosure index (please see appendix-A) to the

annual reports of selected companies.

3.5 Statistical methods and tools

A number of statistical techniques have been used for analysis of data. We have used Statistical

Package for the Social Sciences (SPSS) version-21 for the data analysis. The techniques used for

data analysis are presented here as per research hypothesis.

H01: Companies maintain only up to 75% disclosures on DFI under IFRS.

To test the hypothesis One-Sample Binomial Test and One-Sample Wilcoxon signed rank test are

used;

 One-Sample Binomial Test

We use one sample binomial test to justify the null hypothesis that IFRS adopting companies

maintained disclosures on DFI under IFRS up to the level of 75% and the alternative hypothesis

is that companies maintained disclosures on DFIs under IFRS more than 75% level.

One sample binomial test allows us to find out whether the proportion of success on a two-level

categorical dependent variable significantly differs from a hypothesized value or not. The

Binomial Test procedure compares the observed frequencies of the two categories of a

51
dichotomous variable to the frequencies that are expected under a binomial distribution with a

specified probability parameter.

Objective

Our objective is to investigate the significance of the difference between an assumed proportion

( ) and an observed proportion (p).

Limitation

The test is approximate and assumes that the number of observations in the sample is sufficiently

large (i.e. n ≥ 30) to justify the normal approximation of the binomial.

Method

A random sample of n elements is taken from a population in which it is assumed that a

proportion belongs to a specified class. The proportion p of elements in the sample belonging

to this class is calculated. The test statistics is

Z=

 One-Sample Wilcoxon Signed Rank Test

One-Sample Wilcoxon signed rank test is a nonparametric test which is alternative to a one-

sample t-test. The test determines whether the median of the sample is equal to some specified

value. The Wilcoxon signed rank test requires that the differences are approximately symmetric

and data are measured on an ordinal, interval, or ratio scale. According to Oyeka & Ebuh (2012),

Wilcoxon Signed-Rank Test statistics enables the estimation of the probabilities of positive, zero

52
or tied and negative differences within the data. García et al. (2009) also suggested that

Wilcoxon Signed-Rank Test for the measurement of median difference.

This one-sample Wilcoxon signed rank test works as follows

 State the null hypothesis - the median value is equal to some value, say = m.

 Calculate the difference between each observation and the hypothesized median,

= - m.

 Rank the dis, i.e. assign rank 1 to the smallest rank 2 to the next smallest etc.

 Label each rank with its sign, according to the sign of di.

 Calculate W+, the sum of the ranks of the positive dis and W-, the sum of the ranks of the

negative dis.

Ho2: No differences exist in the selected economy/countries for reporting and disclosing DFI

under IFRS in their annual reports.

 Kruskal-Wallis Test

According to Kothari (2004), Kruskal-Wallis Test is used to test the null hypothesis that ‗K‘

independent random samplers come from identical universe against the alternative hypothesis

that the means of these universes are not equal. This test is analogous to the one-way analysis of

53
variance (ANOVA)15 but unlike the later, it does not require the assumption that the samples

come from approximately normal population or the universe having the same standard deviation.

Kruskal and Wallis's (1952) rank-based test of location equality for three or more groups may be

among the most useful of available hypothesis testing procedures for behavioural and social

science research.

The test is measured by-

12 k
Ri2
H   3(n  1)
n(n  1) i ni
Where

ni= number of observations in the ith sample

n=n1+n2+……….+ nk = total number of observations in the k samples

Ri= sum of the ranks for the ith sample

H03: No differences exist between the two groups of companies namely IFRS users and Non-

converged Ind AS users for reporting and disclosing DFIs.

 Mann-Whitney Test

The Wilcoxon-Mann-Whitney test is a non-parametric analog to the independent samples t-test

and can be used when we do not assume that the dependent variable is normally distributed.

According to Nachar (2008), null hypothesis (H0), as per Mann-Whitney U test, stipulates that

the two groups come from the same population. Akgun (2012) used the Mann-–Whitney U test

15
Analysis of variance (ANOVA) is a parametric test used to analyze the differences among group means and their
associated procedures (appendix-E/1).

54
to analyze the variables to measure the influence of mandatory application of IFRS on the

vocational activities. Abdul-Uthman & Sanni (2014) applied the Mann-Whitney test statistics to

test whether a significant difference exists among the ratios calculated from the pair of financial

statements.

To calculate the value of Mann-Whitney U test, we use the following formulae:

U=n1n2 + R1 …………………………….. (1)

U= n1n2 + R2 ………………………………. (2)

Where:

U=Mann-Whitney U test

n1 = sample size one

= Sample size two

Ri = Rank of the sample size

Q3: What are the key factors affected by IFRS for DFIs in case of countries like India?

We applied factor analysis on 21 variables related to IFRS for DFIs to find out the key factors

affected by IFRS for DFIs in case of countries like India.

 Factor analysis

To prove the above hypothesis we have used the factor analysis on the select variables. Factor

analysis is a multivariate statistic method that starts from the research related to the dependence

of the internal variables and concludes the numerous complex variables into a few

55
comprehensive factors. Exploratory factor analysis is used as we do not have a pre-defined idea

of the structure or how many dimensions may be there in a set of variables.

Factor analysis is primarily used for data reduction and structure detection. The basic idea of

factor analysis is that through the study of the internal structure of variable correlation matrix or

covariance matrix, a few random variables which are used to describe the relationship between

multiple variables must be found out. Then group the variables according to the level of the

relevance among them, and make sure that the correlation between the variables in a same group

is high and the correlation among variables between groups is low. So each type of variable

actually represents a basic structure, namely common factor. These common factors are the basic

structures which influence the correlation among the original variables.

Model of factor analysis

The factor analysis model expresses the variation and co-variation in a set of observed

continuous variables. The factor model is represented as:

Xi = Ai 1F1 + Ai 2F2 + Ai 3F3 + . . . + AimFm + PiUi

Where-

Xi = i th standardized variable

Aij = standardized multiple regression coefficient of variable i on common factor j

Fj = common factor j

Pi = standardized regression coefficient of variable i on unique factor i

Ui = the unique factor for variable i

m = number of common factors

56
The common factors themselves can be expressed as linear combinations of the observed

variables.

Fi = Wi1X1 + Wi2X2 + Wi3X3 + . . . + WikXk

Where:

Fi = estimate of i th factor

Wi= weight or factor score coefficient

k = number of variables

H04: Reliability of accounting information of derivative financial instruments (DFI) would not

be influenced by IFRS in India.

H05: Accountability of management for accounting and reporting of derivatives would not be

influenced by IFRS in India;

H06: Shareholders‘ value would not be influenced by the adoption of IFRS for DFI in India.

The following statistical tools are used to prove the above Hypotheses (H04, Ho5 and H06).

 Factor analysis:

Same procedure as stated above.

 Binary logistic regression

According to Agresti (2007) Logistic Regression is the most important tool in the social science

research for the categorical data (binary outcome) analysis and it is also becoming very popular

in the business applications.

57
Binary (or binomial) logistic regression is a form of regression which is used when the

dependent variable is a dichotomy and the independents are of any type. Logistic regression can

be used to predict a categorical dependent variable on the basis of continuous and/or categorical

independents; to determine the effect size of the independent variables on the dependent; to rank

the relative importance of independents; to assess interaction effects; and to understand the

impact of covariate control variables.

Thus we design binary logistic regression to test the null hypothesis set above.

Assumptions

1. Logistic regression does not assume a linear relationship between the dependent and

independent variables ;

2. The data Y1, Y2, ..., Yk are independently distributed, i.e., cases are independent;

3. The dependent variable does not need to be normally distributed;

4. Normally distributed description of errors are not assumed;

5. Reliability of estimation declines when sample size is small;

Logistic Regression Model

The logistic regression model or the logit model as it is often referred to, is a special case of a

generalized linear model and analyzes models where the outcome is a nominal variable.

Analysis for the logistic regression model assumes that the outcome variable is a categorical

variable.

58
It is common practice to assume that the outcome variable, denoted as Y, is a dichotomous

variable having either a success or failure as the outcome.

Exhibit 3.4

Logistic Regression model

For logistic regression analysis, the model parameter estimates (α, , , ) should be obtained

and it should be determined how well the model fits the data (Agresti, 2007)

The regression model is used as follows:

Logit (y) = α + + +...…………..+

Where-

The regression coefficients are the coefficients α, , , of the equation:

59
Variables:

 Let Y be a binary response variable

Yi = 1 if the trait is present in observation i

Yi = 0 if the trait is not present in observation i

X = (X1, X2, ..., Xk) be a set of explanatory variables which can be discrete, continuous, or

a combination. xi is the observed value of the explanatory variables for observation i.

3.6 Conclusion

This chapter presents the research methodology used in the research work. The chapter starts

with shaping the research design and describing its approach, followed by the sample selected in

the study and the applicable tools and techniques. An international survey is conducted

considering the respondents of more than fifty countries of the globe. Secondary data is also

collected from the selected annual reports of the year 2014-15 following the random sampling

method. Content analysis and disclosure index score is used to collect the data from the annual

reports of the company. And finally One-Sample Binomial Test, One-Sample Wilcoxon Signed

Rank Test, Kruskal-Wallis Test, Mann-Whitney Test, Factor analysis and Binary logistic

regression are applied as statistical tools to analyse the collected data.

References

Abduli, Z., Uthman, A. B., & Sanni, M. (2014). Financial ratios as performance measure: A comparison of

IFRS and Nigerian GAAP. Accounting and Management Information Systems , 13 (1), 82-97.

Agresti, A. (2007). Categorical Data Analysis (2 ed.). Hoboken: Wiley-Interscience.

60
Akgun, A. H. (2012). Mandatory application of International Financial Reporting Standards: Influence

process of aimed at members of the accounting profession. The Journal of Accounting and

Finance , 173-194.

Cavanagh S. (1997) Content analysis: concepts, methods and applications. Nurse Researcher 4, 5–16.

García, S., Molina, D., Lozano, M., & Herrera, F. (2009). A study on the use of non-parametric tests for

analyzing the evolutionary algorithms’ behaviour: a case study on the CEC’2005 Special Session

on Real ParameterOptimization. J Heuristics , 15, 617-644.

George, D., & Mallery, P. (2003). SPSS for Windows step by step: A simple guide and reference (4 ed.).

Boston: Allyn & Bacon.

Hassan , O; Marston , C (2010); Disclosure measurement in the empirical accounting literature - a review

article; Electronic copy available at: http://ssrn.com/abstract=1640598; Accessed on:

05/06/2015

Hon, T. (2012). The Behaviour of Small Investors in the Hong Kong Derivatives Markets: A factor analysis.

Journal of Risk and Financial Management (5), 59-77.

Htay, S. N., Rashid, H. M., Adnan, M. A., & Meera, A. K. (2011). Corporate Governance and Risk

Management Information Disclosure in Malaysian Listed Banks: Panel Data analysis.

International Review of Business Research Papers , 7 (4), 159-176.

Jones, M. J., & Shoemaker, P. A. (1994). Accounting narratives: A review of empirical studies of content

and readability. Journal of Accounting Literature , 13, 142-161.

Kothari, C. (2004). Research Methodology Methods and Techniques (2 ed.). New Delhi: New Age

International Publishers.

61
Kruskal, W. H., & Wallis, A. (1952). Use of ranks in one-criterion variance analysis. Journal of the

American Statistical association , 47, 583-621.

Lopes, P. T., & Rodrigues, L. L. (2007). Accounting for financial instruments: An analysis of the

determinants of disclosure in the Portuguese stock exchange. The International Journal of

accounting , 42, 25-56.

Nachar, N. (2008). The Mann‐Whitney U: A Test for Assessing Whether Two Independent Samples Come

from the Same Distribution. Tutorials in Quantitative Methods for Psychology , 4 (1), 13-20.

Nunnally, J. C. (1978). Psychometric Theory. (2, Ed.) New York: McGraw-Hill.

Oyeka, I. C., & Ebuh, G. U. (2012). Modified Wilcoxon Signed-Rank Test. Open Journal of Statistics , 2,

172-176.

Prasad, D. (2008). Content Analysis: A method in Social Science Research. In Research methods for Social

Work, edited by: Lal, D., D.K. and Bhaskaran, V. New Delhi,

Robinson, J. P., Shaver, P. R., & Wrightsman, L. S. (Eds.). (1991). Measures of personality an

social psychological attitudes. San Diego: Academic Press.

United States General Accounting Office (1989), Available at

http://archive.gao.gov/d48t13/138426.pdfAccessed on: 12/09/2014

Swain, A. (2008). Text Book of Research Methodology (2nd ed.). New Delhi: Kalyani Publishers.

62
CHAPTER-IV

AN OVERVIEW OF DERIVATIVE FINANCIAL INSTRUMENTS

4.1 Introduction

Capital market is one of the driving forces of an economy and now a days derivative market has

become the most active part of capital market. Trading volume of derivative financial instrument

is gradually increasing all over the world. In India, National Stock Exchange (NSE) has

undertaken enormous efforts in upgrading the derivative market and within a short span of time

it has succeeded in achieving it. In one hand, derivatives may play important role in near

collapses or bankruptcies, as in the case of Barings Bank 16 in 1995, Lehman Brothers and

American International Group (AIG) in 2008; on the other, derivatives can bring substantial

economic benefits when handled properly17. Derivatives help economic agents to improve their

management of market and credit risks. This chapter provides an overview of derivative financial

instruments, encompassing main aspects of this instrument.

4.2 Derivative instruments

Derivatives are recognised as machineries of risk sharing benefits to hedgers and they provide

information about tentative further prices for all market participants. The most important purpose

of the derivative market is to manage risk. Derivatives can be used to manage risk through

16
Barings Bank was the second oldest merchant bank based in London. The bank collapsed in 1995 after suffering
losses of £827 million ($1.3 billion) resulting from poor speculative investments, primarily in future contracts,
conducted by an employee named Nick Leeson working at its office in Singapore.
17
James Morgan (Journalist) nicely captured the ambiguous role of derivatives in an article of Financial Times, ―a
derivative is like a razor. You can use it to shave yourself…or you can use it to commit suicide‖.

63
various strategies like hedging, arbitraging 18 etc. Epstein & Jermakowicz (2010) opine that

derivative financial instruments are used most typically as tools to assist in the management of

some category of risk, such as possible unfavorable movements in share prices, interest rate

variations, currency fluctuations and commodity price volatility. Exhibit 4.1 shows how the

companies use derivatives for risk management.

Exhibit 4.1

Use of DFIs for risk management

Use of DFIs by IFRS user companies


60 57
53
u
50
s 39
40 32
e
30
18
i 20
n 10 Series1

0
%
Interest Interest Exchange Exchange Others DFIs
rate rate Swaps rate rate Swaps
Forwards Forwards
Derivative financial instruments

Exhibit shows that most of the companies use exchange rate forward derivative as risk

management tool followed by interest rate swap, interest rate forwards etc.

The derivative instruments cannot play all alone. They function with three other parts namely

market, participants and regulators. The Union Finance Minister Arun Jaitley (September,

2015) said that markets thrive where there is confidence and integrity and this requires
18
Activity through which it becomes possible profits by exploiting price differences of identical or similar financial
instruments, on different markets.

64
transparency and good regulations. ―Market participants and regulators have to brace

themselves to face the challenges thrown by global developments and integration of

markets,‖ said Jaitley.

Exhibit: 4.2
Aspects of Derivative instrument

Derivative
Participants
instruments

Market Regulators

4.3 Types of Derivative financial instruments

A derivative19 is simply a contract to buy or sell an underlying asset at future date, with the

quantity, quality, price and other specifications defined today. On the other, a derivative may be

defined as an instrument whose value keeps on changing with the change in value of the

underlying. Derivative contracts are ―derived from‖ some other ―underlying‖. The change of

price of underlying changes the value of derivatives. That underlying can be an agricultural

19
The initial decade of unprecedented volatility in the international financial environment occurred in the 1970 s,
starting with the breakdown of the Brettonwoods system on 15 th August 1971 and ending with the well-known
saturday night massacre of Federal Reserve on 6th October, 1979. During the Brettonwoods era relative currency and
interest rate were stable. The breakdown of the Brettonwoods system in August in 1971 with US president Nixon‘s
announcement that the dollar would no longer be convertible to gold (at the rate of $35 to an ounce), resulted in
inflation, volatile interest rates and currency turmoil. This state of affairs heralded the origin of Derivatives (Bhaskar
& Mahapatra,2003).

65
product like potato, coffee, tea, stock or share of a company like ONGC, Infosys, ACC cement ;

Stock indexes like Standard & Poor, Sensex, Nifty etc; Currency like Dollar, Pound, Euro; rate

of interest etc. Type of derivative is not finite, but we have attempted to clarify derivative in

exhibit 4.3;

Exhibit4.3
Classification of Derivative
Basis of Type of Derivative Details Example
classification
On the basis of Commodity derivative underlying of any type of commodity as Corn future
underlying metal, potato, milk, egg etc.
Equity derivative underlying is at least partly derived from one Index future,
or more equity security index option etc.
Currency or foreign underlying is an exchange rate of two Currency futures
exchange derivative countries‘ currency
Interest Rate underlying is different form of interest Interest rate swap
Derivatives payments
On the basis of Financial derivatives having financial involvement Currency futures,
financial and interest rate swap
non-financial
nature Non-financial having no financial involvement Commodity
derivatives future
On the basis of Linear derivatives derivatives whose values depend linearly or Forwards,
linear and non- almost linearly on the underlying value are Futures are the
linear called linear derivatives examples of
linear type of
derivatives
Non-linear derivatives derivatives, whose value has a non-linear Option derivative
function with the underlying and payoff
changes with time and space, are called non-
linear derivatives
Over-the-counter trades under private negotiation directly Commodity
(OTC) traded between the buyer and seller derivatives,
derivative Forward rate
agreements,

66
Basis of Type of Derivative Details Example
classification
On the basis of Credit derivative
market where etc.
they trade Exchange traded trades via specialized derivative exchanges Futures, Options,
derivative or other exchanges Interest rate,
Index product,
Convertible,
Warrants etc
Plain vanilla derivative a plain vanilla derivative refers to a simple Examples of such
On the basis of and common derivative financial instrument kind of
features of the having standard features derivatives are
derivative Future, option,
Swap
Exotic derivative derivative instrument which refers to a more Swapoption
specialized and complicated one is treated as
exotic derivative. A plain vanilla derivative
may also convert into an exotic derivative
due to change of its features and vice versa.

The commonly used derivative techniques are as follows:

Forwards - A contract between two parties giving right and obligating each other, to exchange a

particular good or instrument at today's pre- agreed price where payment takes place at a specific

time in the future. Now a day‘s forward contracts are mostly used in the foreign exchange

market. The forward contract is an over the counter agreement.

Futures - In case of future contract two parties decide to purchase or sell an asset at a given time

in the future at a given price. It is similar to a forward contract. A future contract differs from a

forward contract where, a future contract is a standardized contract written by a clearing house

that operates an exchange whereas the forward contract is a non-standardized contract written by

the parties themselves.

67
The major types of futures are stock index futures, interest rate futures, and currency futures.

Options - A contract that gives the holder the right but not the obligation, to buy (in case of a call

option) or sell (in the case of a put option) an asset. In such type of contract the buyer has the

right and the seller has the obligation. It is of two different kinds such as calls and puts. A call

option gives a buyer/holder right but not the obligation to buy the underlying on or before

specified time at a specified price and quantity. Similarly, the buyer of a Put option has the right

to sell a certain quantity of the underlying variable at a specified price on or prior to a given date.

Swaps- These are private contracts between two entities to exchange cash flows on or before a

specified future date following a pre-decided formula. They are somewhat like forward contracts'

portfolios. Swaps are also of two types such as interest rate swaps and currency swaps. It is of

two types, such as Interest rate swaps and Currency swaps.

Interest rate swaps-in this case, only interest related cash flows can be exchanged between the

entities in one currency. Currency swaps-in this kind of swapping, principal and interest can be

exchanged from one currency to any other form of currency.

4.4 Derivatives market

The Derivatives Market is meant as the market where exchange of derivatives like futures

contracts, option contracts etc. takes place. Derivative market generates important risk-sharing

benefits for hedgers and information about expectations of further prices for all market

participants. The market volume for derivative securities (shown in exhibit 4.7) has become very

large in recent years.

The market can be divided into exchange traded derivative market and Over-the-counter (OTC)

traded derivative market. The basic difference between them is depicted in exhibit 4.4.

68
Exhibit 4.4
Difference between Exchange traded derivative and OTC traded derivative market
Basis of Exchange traded derivative Over-the-counter traded derivative
difference market market
Location Exchange Traded Derivatives are OTC contracts on the other hand are
derivatives that are traded on an decentralized. Market intermediaries
exchange which is the centralized compete to match buyers with sellers
platform for carrying out all the
transactions
Regulation regulated by the market regulators OTC contracts are loosely regulated. ISDA
and exchanges are not permitted to (International Swaps and Derivative
allow trades unless proper Association) master agreement is the most
processes for margin payments, commonly used master service agreement.
clearing and settlement are laid out
Contracts The contracts traded on an OTC contracts are private contracts that
exchange are standardized i.e. they can be customized as per one‘s needs
cannot be customized according to
one‘s need
Counterparty Clearing house acts as a guarantorOTC contracts, however, requires the
Risk participants to be aware of each other‘s
to all trades taking place over the
exchange. credit quality since there is no clearing
house guarantee.
Derivative Futures and Options are the most Swaps, forward rate agreements, exotic
product commonly traded derivative options etc. are some of the most widely
products in exchange traded traded OTC derivative instruments.
derivative market.
Price There is a very visible and Price transparency is not available.
transparency transparent market price for the
derivatives.
Derivative markets take different forms, viz, some of which are traded in the usual manner i.e. in

the same manner as their underlying market, and some of which are traded quite differently i.e.

not in the same manner as their underlying market. The most often traded types of derivatives

markets are futures markets and options markets. Global futures and options market volume is

depicted in exhibit 4.5

69
Exhibit 4.5

Global Futures and Options Volume by Region

(Based on the number of contracts traded and /or cleared at 75 exchanges worldwide)

Category Jan-Dec 2013 Jan-Dec 2014 % Change

North America 7,830,496,564 8,212,951,665 4.9%

Asia 7,301,581,335 7,252,376,703 -0.7%

Europe 4,359,086,394 4,450,348,259 2.1%

Latin America 1,683,182,520 1,514,203,690 -10.0%

Other 377,405,023 437,558,230 15.9%

Total 21,551,751,836 21,867,438,547 1.5%

Source: Futures Industry Annual Volume Survey, March 2015.

The first modern organized future exchange began in 1710 at the Dojima Rice Exchange in

Osaka, Japan. In the year 1877, the London Metal Market and Exchange Company (London

Metal Exchange) was founded. The world's oldest organized futures and option derivative

exchange, Chicago Board of Trade (CBOT)20 was established in 1848. In the year 1918, first

rival futures exchange Chicago Mercantile Exchange was established. Then almost 65 years

later, in 1973, first Chicago Boards Option Exchange was established. Now a days, there are

many derivative exchanges all over the world trading various types of derivative instruments.

However types of derivative contracts cannot be exhaustive because hedger, speculator and

arbitrageur may innovate many techniques or combination of techniques which produce exotic

products like swaption.

20
The Chicago Board of Trade, established in 1848, is the world's oldest futures and options exchange. More than
50 different options and futures contracts are traded by over 3,600 CBOT members.

70
4.5 Participants in derivative and the derivative markets

Different categories of investors participate with different objectives in derivative market. In

India a part of the investors uses the derivative market for risk management, some uses as

investment strategy where as other for speculation purposes. Although speculation in derivative

market in many countries like India is strictly prohibited. Patwari and Bhargava (2006) stated

that there are three broad categories of participants in the derivative market. They are: Hedgers,

Speculators and Arbitrageurs. Hedgers participate in the derivative market with an opposite

position to lock the price in the derivative market. The objective of a hedger is to offset the risk

of prices of financial instrument moving unfavorably for their ongoing business activities.

Speculators use derivative to gain profit. They accept large calculated risk and gains when the

price of the underlying moves as per their expectation and suffer loss for the movement in

opposite direction. Arbitrageurs exploit the market imperfections and inefficiencies for their

interest. The arbitrageurs take short and long positions in the same or different contracts at the

same time to generate a riskless profit.

Exhibit 4.6 shows percentage wise purpose of issuing or holding of DFIs in the companies. The

chart shows that exclusively 3% of the usage is used for trading purpose. 46% companies use

derivative only for hedging purpose where as 33% companies use derivative for hedging

purpose but not mentioned whether the companies are using derivative for trading purpose or

not.

71
Exhibit 4.6

Purpose of issuing or holding of DFIs

Purpose of issuing or holding DFIs by


IFRS user companies
13%
5%
Hedging only

Hedging and not


46% mentioned about trading
3%
Trading only

Hedging and trading


33%
Non-disclosing

Source: self developed from secondary data

4.6 Growth of world derivative market

Derivative market grows along with the growth of derivative transactions. The rapid growth of

derivative market across the globe is depicted in exhibit 4.7 and exhibit 4.8. It is seen from the

first exhibit that NSE positioned only after CME Group, Intercontinental Exchange and Eurex in

the calendar year 2013 and 2014 in terms of volume of Derivative contracts traded and/ or

cleared. And out of these top 20 Derivatives exchanges in the world, BSE ranked 11th position in

2014 but held the seventeenth position in the year 2013 in terms of volume of Derivative

contracts.

72
Exhibit 4.7
Top 20 Derivatives Exchanges in the world
(Ranked by number of contracts traded and/or cleared)
Rank Exchange Jan-Dec 2012 Jan-Dec 2013 Jan-Dec 2014 Annual %
Volume Volume Volume of Change
(2013-
2014)

1. CME Group 2,890,036,506 3,161,476,638 3,442,766,942 8.9%

2. Intercontinental 473,895,526 2,558,489,589 2,276,171,019 -11.0%


Exchange

3. Eurex 2,291,465,606 2,190,727,275 2,097,974,756 -4.2%

4. National Stock Exchange 2,010,493,487 2,127,151,585 1,880,362,513 -11.6%


(NSE) of India

5. BM&F Bovespa 1,635,957,604 1,603,706,918 1,417,925,815 -11.6%

6. Moscow Exchange 1,061,835,904 1,134,477,258 1,413,222,196 24.6%

7. CBOE Holdings 1,134,316,703 1,187,642,669 1,325,391,523 11.6%

8. Nasdaq OMX 1,115,529,138 1,142,955,206 1,127,130,071 -1.4%

9. Shanghai Futures 365,329,379 642,473,980 842,294,223 31.1%


Exchange

10. Dalian Commodity 633,042,976 700,500,777 769,637,041 9.9%


Exchange

11. Bombay Stock Exchange 243,757,257 254,845,929 725,841,680 184.8%


(BSE) of India

12. Korea Exchange 1,835,617,727 820,664,621 677,789,082 -17.4%

13. Zhengzhou Commodity 347,091,533 525,299,023 676,343,283 28.8%


Exchange

14. Hong Kong Exchanges & 119,802,638 301,128,507 319,577,388 6.1%


Clearing

73
Rank Exchange Jan-Dec 2012 Jan-Dec 2013 Jan-Dec 2014 Annual %
Volume Volume Volume of Change
(2013-
2014)

15. Japan Exchange Group 234,258,426 366,234,062 309,732,384 -15.4%

16. JSE Securities Exchange 158,996,880 254,514,072 304,003,143 19.4%

17. ASX Group 259,966,030 261,790,908 244,070,858 -6.8%

18. China Financial Futures 105,061,825 193,549,311 217,581,145 12.4%


Exchange

19. Taiwan Futures -------------- 153,225,238 202,227,653 32.0%


Exchange

20. BATS Exchange -------------- 151,814,889 201,985,667 33.0%

Source: Futures Industry Annual Volume Survey, March 2013; March 2014 & March 2015.

The growth of Derivative market in India can be easily understood if we look at the increased

rate of derivative transactions in BSE (184.8%). This is the highest rate among the top 20

derivative stock exchanges in the world during the year 2014. The rank of both the derivative

exchanges indicates the high speed growth of derivative market of our country.

From exhibit 4.8, it appears that if derivative market collapses, the economy, especially countries

involved with derivative financial instruments around the world, would collapse. Therefore, a

sound regulatory system is mandatory for using the weapon of derivative appropriately to

strengthen the economy of a nation.

74
Exhibit 4.8

Source: Economic Collapse news, January, 2015

4.7 Growth of Derivative financial instruments in India

Within a few years of its inception, India has witnessed the very positive prospect of financial

derivative market in the country. National Stock Exchange (NSE) stands out as one of the most

leading exchanges among all emerging markets and the Bombay Stock Exchange (BSE) also has

positioned eleven in the list of top 20 stock exchanges of the world which is reflected in exhibit

4.7.

Vashishtha & Kumar (2010) commented that India is one of the most successful developing

countries in terms of a vibrant market for exchange-traded derivatives. This reiterates the

strength of India‘s security market that functions through nationwide market access, anonymous,

safe and secured electronic trading. No doubt derivative market has started its journey in India

75
with the commodity product through Bombay Cotton Exchange Ltd. which was first established

in 1893. But as the global financial markets are now highly integrated, India could not be an

exception but necessarily integrated itself with the world of financial derivatives. The necessity

and requirements, financial de-regulation and the technological developments accelerate the

process of emerging new financial derivative instruments (exhibit 4.9) in our country.

Exhibit 4.9
Financial Derivatives in India: A Chronology of important events

Sl. No. Date Events


1. 1956 Securities Contracts (Regulation) Act
2. 1992 Securities and Exchange Board of India Act
3. 14th Dec. 1995 NSE asked SEBI for permission to
trade index futures
4. 1 June 1999 Interest rate swaps / Forward Rate Agreements allowed at BSE
5. 25 May2000 SEBI permitted NSE and BSE for index future trading
6. 9 Jun 2000 Trading of BSE Sensex future commenced at BSE
7. 12 Jun 2000 Trading of Nifty future commenced at NSE
8. 25 Sep 2000 Nifty Futures trading commenced at Singapore Exchange
9. 1June 2001 Index Options launched at BSE

10. 04 Jun 2001 Index options introduced at NSE


11. 02 July 2001 Stock options (on 135 securities) introduced at NSE
12. 09July 2001 Stock options launched at BSE
13. 01November 2001 Stock futures launched at BSE
14. 09 Nov 2001 Stock futures (on 135 securities) introduced at NSE
15. 24 Jun 2003 Interest rate futures introduced at NSE
16. 29 Aug 2008 Currency Future trading commences on the NSE
17. 1 October 2008 Currency Derivatives Introduced at BSE
18. 31 Aug 2009 Interest rate Derivatives trading commences on the NSE
19. Feb 1010 Launch of Currency Futures on additional currency pairs at NSE
20. 4 October 2010 EUREX - SENSEX Futures launch at NSE

76
Sl. No. Date Events
21. 28 Oct 2010 Introduction of European style stock options at NSE
22. 29 Oct 2010 Introduction of Currency Options at NSE
24. July 2011 Commencement of 91 day GOI trading Bill futures by NSE
25. Aug. 2011 Launch of derivative on Global Indices at NSE
26. Sep. 2011 Launch of derivative on CNX PSE & CNX infrastructure Indices
at NSE
27. 30th March 2012 BSE launched trading in BRICSMART indices derivatives
28. 28 November 2013 Launch of Currency Derivatives (BSE CDX)
29. 28 January 2014 Launch of Interest Rate Futures (BSE –IRF)
Source: Compiled from BSE & NSE websites.

Exhibit 4.10 and Exhibit 4.11 focus on NSE as an indicator of the health of Indian equity and

derivative market. The graph shows the equity and derivative turnover of NSE for last five years.

Exhibit 4.10

Cash & derivative market turnover for last five years

Cash and Derivative Market Turnover (NSE)


70,000,000

60,000,000

50,000,000

40,000,000
Cash Market- Rs. In Crore
30,000,000
Derivative Market- Rs. In Crore
20,000,000

10,000,000

0
2010-11 2011-12 2012-13 2013-14 2014-15

From the exhibit 4.10, it appears that volume of derivative transactions in NSE quite larger than

that of cash market volume. To find out the trend of these two markets we have drawn the

following graphs (exhibit 4.11);

77
Exhibit 4.11

Cash and Derivative Markets of National Stock Exchange, India.

Source: Gope, 2014

To be precise, equity derivatives hold less than 1% of the total trading volume of NSE up to May

2001. Derivatives‘ share remained below 10% up to August 2001. In other words, the cash

market kept its monopoly in the first year of the introduction of derivatives but the monopoly

shattered first in September 2001 when the share of cash market came down to 87% and that of

derivative market worked out in double digit. The derivative market got further strength and its

share overrun the cash market in February, 2003. The derivative market has been sharing

between 69% and 78% of the total turnover of market since November 2003. The market share

of the cash market came down to as low as 20.27% in December 2006. The percentage of trading

volume of derivative market as a % of its cash counterparts went phenomenally up to 206.89 in

November 2003, 359 in October 2005 and 415 in April 2006. The share of derivative market has

78
remained above 325% throughout the year 2006. Today the contribution of these two markets

has just reversed. In the year of inception of Derivatives, i.e., 2000-01, 99.81% was held by Cash

market and only 0.19% was in the hands of derivative market. After fourteen years of inception

of Derivatives in India, the share of cash market is found to be only 6.85% and the lion‘s share

93.15% is held by derivative market (Gope, 2014).

From the above findings, it is inferred that the derivative market has been dominating the cash

market in terms of trading volume since the year 2003-04 and the cash market has taken the back

seat.

4.8 Regulators of derivative financial market

Financial derivative markets as a whole seem to have grown much the way ahead of any other

financial instruments. But the trend and speed of the growth of derivatives needs to be governed

by appropriate financial regulators.

With the amendment in the definition of ''securities'' under SC(R)A (to include derivative

contracts in the definition of securities), derivatives trading takes place under the provisions of

the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India

Act, 1992.

In India, OTC derivatives trading are regulated by the central bank. Such trading has been

legalized by RBI wherein at least one of the parties of a transaction needs to be a regulated

entity. Financial institutions are allowed by RBI for using derivatives for their balance sheet

management, on the other, non-financial firms are allowed to use derivatives for hedging

79
purposes. Clearing Corporation of India Limited (CCIL)21 works as a reporting platform and a

clearing agency for post- trading settlements in the OTC derivative markets. OTC derivative

trading may also be exposed to automatic surveillance by exploring CCP approach.

SEBI constituted Dr. L. C. Gupta Committee that had laid down the regulatory framework for

derivative trading in India. Suggestive bye-laws & regulations are also framed by SEBI for

derivative exchanges/segment and it‘s clearing corporation/house that lay down provisions for

trading and settlement of derivative contracts. SEBI has also laid eligibility conditions for

derivative exchanges/segment and its clearing corporation/house. These eligibility conditions are

framed to provide a transparent trading environment, safety and integrity and provide facilities

for redressal of investor grievances. The nation follows a conservatism approach regarding

derivative instruments so that it becomes possible to extract the good side of the instruments

only.

4.9 Conclusion

Derivative attracts the users to participate in the derivative market instead of underlying cash

market for superior investment instrument, managing risk or for speculative trading due to

inherent leverage and lower transaction cost. Jain (2008) revealed that derivative securities have

definitely penetrated into the Indian stock market and investors are using these securities for

different purposes, namely risk management, profit enhancement, speculation and arbitrage.

Dodd (2000) reported that derivatives facilitated the growth in private capital flows by unbinding

the risks associated with investment vehicles such as bank loans, stocks, bonds and direct

21
The Clearing Corporation of India (CCIL) was set up with the prime objective to improve efficiency in the
transaction settlement process, insulate the financial system from shocks emanating from operations related issues,
and to undertake other related activities that would help to broaden and deepen the Money, Gilts and forex markets
in India.

80
physical investment and then re allocated the risks more efficiently in the long run Derivatives

are invented in response to fundamental changes in the global financial system. They, if properly

handled, would help in providing the resilience22 of the system and bring economic benefits to

the users. An important challenge is to design new rules and regulations to mitigate the risks and

to promote transparency by improving the quality and quantity of statistics on derivatives

markets. As most derivative contracts are recorded as off-balance-sheet items lacking in

transparency and the accounting treatment of derivatives had been applied inconsistently by

different companies it requires to follow homogeneous accounting standards across the globe.

References
Arora, D., & Rathinam, F.X; (2010),Working Paper No. 248 OTC Derivatives Market in India:

Recent Regulatory Initiatives and Open Issues for Market Stability and Development' Francis Xavier,

Indian council for research on international economic relations.

Bhaskar, P. V., & Mahapatra, B. (2003). Derivative Simplified- An Introduction to Risk Management.

Response Books.

Dodd, R. 2000. “The Role of Derivatives in the East Asian Financial Crisis.” Working Paper Series III,

Center for Economic Policy Analysis, New York

Economic Collapse news, January,2015; http://economiccollapsenews.com/2015/01/19/collapse-of-1-2-

quadrillion-global-derivatives-market-will-lead-to-dollar-collap

Epstein, J. Barry & Jermakowicz, K. Eva. (2010). Interpretation and Application of International Financial

Reporting Standards.

22
Resilience refers the capacity to recover quickly from difficulties.

81
Jaitley , A . (September, 2015) The Hindu, 29.09.2015; On line access available :

http://www.thehindu.com/business/Industry/a-move-to-boost-derivatives-

regulation/article7699416.ece; Accessed on 26.11.2015.

Patwari, D., & Bhargava, A. (2006). Options and Futures An Indian Perspective. Mumbai: Jaico Publishing.

Pricewaterhousecoopers. (2010). A practical guide to IFRS 7 For investment managers and investment,

private equity and real estate funds.

Securities Contracts (Regulation) Act, 1956 [42 of 1956] Available at

http://www.sebi.gov.in/acts/contractact.pdf; Accessed: 12. 05.2014

Shapiro, A.C. (2000). Multinational Financial Management, Prentice hall of India, New Delhi.

Srivastava, S., Yadav, S. S., & Jain, P. K. (2008). Derivative Trading in Indian Stock Market: Brrokers

Perception. IIMB Management Review , 20 (3).

Varma, J. R. (2008). Derivatives and Risk Management, McGraw Hill Companies, New Delhi.

Vashishtha, A., & Kumar, S. (2010). Development of Financial Derivatives Market in India- A Case.

International Research Journal of Finance and Economics (37), 15-29.

http://www.bseindia.com/ Accessed on 15/07/2014

http://www.nseindia.com/ Accessed on 27/06/2014

82
CHAPTER-V

AN OVERVIEW OF ACCOUNTING STANDARDS FOR

DERIVATIVE FINANCIAL INSTRUMENTS

5.1 Introduction

Financial reporting plays a major role in the economic growth of a nation. Although the main

objective of reporting is to present the financial status of the business in a prudent and

transparent manner, management often tries to exploit the discretion in accounting standards to

influence investors‘ interpretation. Reporting for DFIs is not an exception. Most derivative

contracts are recorded as off-balance-sheet items, lacking in transparency and the accounting

treatment of derivatives had been applied inconsistently by different companies.

Of late, accounting standards on financial instruments have been framed and approved to deal

with the issues of presenting, recognising, measuring and disclosing financial instruments,

including derivatives by IASB23.

Out of these accounting standards, according to Jermakowicz (2004), IAS 32 and IAS 39 are

seen as the most complex IASB standards in terms of understandability and the ones that are

more difficult to implement by companies on financial instruments including derivatives. This

chapter would analyse current accounting practices required under the select accounting

standards IAS 32, IAS 39, IFRS 7 and IFRS 13 for derivative financial instruments. It would also

make a comparison of IFRS with Ind AS (AS converged with IFRS).

23
The standard-setting body of International Financial Reporting Standards (IFRSs), an independent
private sector, nonprofit organigation develops and approves IFRSs.

83
5.2 IAS 32 Financial Instruments: Presentation

IASB issued ‗IAS 32 Financial Instruments: Presentation‘ in 1995. The standard has been

solving many issues relating to financial instruments since its inception. According to the

standard a financial instrument should be classified as either a financial liability or an equity

instrument as per the substance24 of the contract but not as per its legal form.

According to the standard, when the instrument gives rise to an obligation on the part of the

issuer to deliver cash or another financial asset or to exchange financial instruments on

potentially unfavorable terms, it is to be classified as a liability not as equity. On the other an

equity instrument is any contract that evidences a residual interest in the assets of an entity after

deducting all of its liabilities25.

Whatever may be the case, liability and equity must be presented separately in the Balance sheet.

In some cases, one or more of the component parts of the compound instrument may be financial

derivatives. The classification of a financial instrument where the contract may be settled in the

entity‘s own equity instruments may be presented through the following exhibit 5.1

24
In accounting for business transactions and other events, the measurement and reporting is for the
economic impact of an event, instead of its legal form and this substance depends on the instrument's
contractual rights and obligations.
25
The revised IAS 32 clarifies that an issuer may classify a financial instrument as equity only if both
conditions are met:
a. Instrument includes no contractual obligations (i) to deliver cash or another financial asset or (ii) to
exchange financial assets or financial liabilities with another entity under potentially unfavorable
conditions to the issuer.
b. If the instrument will or may be settled in the issuer‘s own shares, it is a non-derivative that includes no
contractual obligation for the issuer to deliver a variable number of its own shares, or a derivative that
will be settled by the issuer exchanging a fixed amount of cash or another financial asset for a fixed
number of its own shares.

84
Exhibit 5.1
Decision tree for classification of a financial instrument
(Where a contract may be settled in the entity‘s own equity instruments)

Is contract Derivative or Non-Derivative?

Derivative Non-derivative
contract Contract

Derivative will be settled by the entity in


exchange of a fixed amount of cash or Entity is or may be obligated
another financial asset for a fixed to deliver a variable number of
number of its own shares. its own equity instruments.

No Yes Yes No

Liability Equity Liability Equity


Liability Liability

Source: Self designed

The second principle of IAS 32 26 is to offset financial assets and liabilities and to report net

amount in the Balance sheet. The entity may have a right to settle net; it may still realize the

asset and settle the liability separately.

According to Schmidt (2013), the approach of distinguishing between two classes of claims, i.e.,

liabilities and equity has been put under stress over the recent years. First, there is an ever-

growing variety of hybrid financial instruments, some of which are designed to exploit this

26
This principle was updated with the amendment published by the IASB in December 2011.

85
classification approach. Second, the adoption of IFRS in Europe and elsewhere has brought

scenarios to light in which the classification approach does not result in decision-useful

information. Later on IASB issued IAS 39 which extends the classification of financial

instruments for reporting and disclosure purpose.

5.3 IAS 39 Financial instruments: recognition and measurement

‗IAS 39 Financial Instruments: Recognition and measurement‘ is issued in 1998. The objective

of this standard is to establish principles for recognising and measuring financial assets and

financial liabilities in the financial statements of business enterprises. IAS 39 revolutionized the

treatment of accounting in the area of financial instruments especially for derivative and other

contracts. Prior to IAS 39 and Financial Accounting Standard (FAS) 133 27 most derivative

contracts had been off-balance-sheet items and were traditionally accounted for using historical

cost accounting. Accounting treatment in the area of derivative was totally inconsistent, devoid

of principle and inadequate. The standard specifies the important principles as follows

5.3.1 Classification of financial instrument

First of all, the standard i.e., IAS 39 Financial Instruments: Recognition and measurement

classifies all financial assets into four categories

27
This Statement establishes accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.

86
Exhibit 5.2

Classification of FIs as asset

Financial assets at fair value through profit or loss Loans and Receivables

The asset comes under the purview of financial asset These are not derivative financial asset with
designated at fair value if an entity decides to designate fixed receipts. These includes loan assets,
the category on initial recognition. No restriction is trade receivables & deposits held with
imposed but the asset cannot be converted to another banks, other debt instruments etc.
category during its life.
Held-to-maturity Available-for-sale
Assets held to maturity are non derivative financial This is the residual category of assets which
assets with fixed or determinable payments and fixed includes all the financial assets that are not
maturity. Assets having maturity but payments are not classified in the above category.
determinable, does not qualify as held-to-maturity.
Held-to-maturity financial assets include debt
securities, redeemable preference shares.

Source: Designed from IAS 39

Financial assets at fair value through profit or loss is subdivided into two parts, namely (i)

Financial assets held-for-trading and (ii) Financial assets measured at fair value through profit or

loss upon initial recognition. According to IAS 39, financial asset has to be considered as

financial assets held for trading if the asset is acquired principally for the purpose of selling in

the near term; part of portfolio for which there is an evidence of a recent pattern of short-term

profit-taking; a derivative unless it is designated as an effective hedging instrument.

Financial liabilities are divided into two categories as per the standard

87
Exhibit 5.3
Classification of FIs as liability
Financial liability at fair value through profit or loss Other financial liability
Liability having a liquid market which is issued for re- It constitutes the residual liabilities that
acquisition in the short-term is classified as financial are not classified in the above category.
liability held for trading. All liabilities and derivatives other than
trading liabilities and derivatives that
are hedging instruments automatically
fall into this type of category.
Source: Designed from IAS 39

Financial liability at fair value through profit or loss is again sub-divided as (i) Financial liability

held-for-trading and (ii) those designated fair value at inception. Derivative under the category

of held-for-trading indicates that derivative is used with objective of generating profit from short

term fluctuations in price or dealer‘s margin.

Thus it shows that DFIs are to be classified as financial assets/liability at fair value through profit

or loss. Exhibit 5.4 shows how the IFRS user companies categories DFIs in their reporting. 58%

companies clearly specify that the companies classifying DFIs as ‗fair value through profit or

loss‘

Exhibit 5.4
Categorization of DFIs

DFIs Categorised by IFRS user


companies
22, 28%
Financial assets at fair
value through income
statement
Other Category
1, 1%

57, 71% Not disclosed

88
5.3.2 Recognition and measurement of DFIs

According to the standard norms of IAS 39, derivatives must be reported at fair values28 in the

financial statements with any changes in value recorded in either the income statement or in any

equity account. At initial measurement a DFI is to be recognized at its fair value. We have found

that almost all the companies recognize DFIs as its fair value, which is shown through a pie-chart

below.

Exhibit 5.5

Initial measurement of DFIs at fair value

Initial measurement of DFIs by IFRS


usrs companies

16%

4% Fair value
Historical cost/Cost price
Not Disclosed
80%

Subsequently, the DFIs are to be measured at fair value periodically. The changes in fair value of

DFIs are to be included in the income statement or in net profit and loss for the period. The

28
Fair value is the most relevant measure for financial instruments and the only relevant measure for
derivatives. Fair value reflects the current cash equivalent of financial instruments rather than the price of
a past transaction; it remains the same no matter which entity holds the financial instrument and it does
not depend on the future use of the financial instrument.

89
exhibit 5.6 shows that subsequent measurement of DFIs by the IFRS users companies at its fair

value is almost 100%.

Exhibit 5.6

Subsequent measurement of DFIs

Subsequent measurement of DFI by


IFRS user companies

6%

Fair value
Not Disclosed

94%

5.3.3 Derecognition of DFIs

When derecognition29 occurs then the difference between financial returns and recorded ledger

values are listed under gains or losses for that financial period. Also, surplus or deficits resulting

from the revaluation of previous periods are to be recognized directly in their equity and are also

to be listed under gains or losses for that period.

29
De-recognition may be of two types: complete de-recognition of a derivative instrument-a
transferor sells financial instrument in exchange of consideration with no continuing
involvement with the asset sold. Partial de-recognition of a derivative instrument-the transferor
has the right to pledge the asset as collateral and in some cases may retain some servicing benefit
from the transferred asset.

90
5.3.4 Hedge accounting of DFIs

Walton (2004) stated that the issue of accounting for derivatives had been thrown into relief by a

number of financial scandals where entities had engaged in derivatives contracts that remained

undisclosed and off balance sheet until large losses were realized. This led market regulators to

call for accounting to address the problem. One of the special areas of the IAS 39 is hedge

accounting. IAS 39 addressed, for the first time, special hedge accounting procedures to be

applied under defined sets of circumstances. Hedging is a strategy designed to minimise

exposure to an unexpected particular business risk. Generally an enterprise participates in

derivative markets to hedge fair value and cash flow risks. A perfect hedge completely

eliminates the risk which is practically not possible in all cases. The basic principle of IAS 39 is

that all the derivatives are to be considered as held for trading and are to be carried at fair value

with gains and losses in the income statement. On the other hand, derivatives are generally used

as hedging instruments and where they are required to be valued as either at cost (amortised cost)

or at fair value with gains and losses recognised in equity or items such as forecasted transitions

or firm‘s commitments that are not recognised in the balance sheet. As a result, an accounting

mismatch may be appearing due to different options for the treatment of DFIs. Here arises the

need of hedge accounting which corrects the mismatch by changing the timing of gains and

losses on either the hedged item or the hedging instruments.

As per IAS 39, hedge accounting is optional. According to Glaum and Klocker (2011), since

hedge accounting application itself is not mandated, the firm who enter hedge transaction doesn‘t

necessarily need to account for such transaction under a hedge accounting standard, and given

the complexity of the current standard some firms choose to forgo the application of hedge

accounting despite the fact that they are actually conducting a hedge transaction.

91
Hedge accounting is permitted under IAS 39 in certain circumstances, provided that the hedging

relationship is (i) clearly defined: what risk is being hedged and what is the expected relationship

between that risk and the hedging instrument, (ii) Measurable: what technique will be used to

assess hedge effectiveness; and (iii) actually effective: if despite strategies and expectations, the

hedge was not effective, or was only partially effective, the ineffective portion is not eligible for

hedge accounting. Steps for hedge accounting may be followed as follows:

Exhibit 5.7
Steps for hedge accounting
Steps At the inception of a hedge
Step 1 Determine the need for hedging
Step 2 Choose a hedging model
Step 3 Determine whether hedge Criteria are met
Step 4 Prepare hedge documentation
Ongoing (at least at each reporting date)

Step 5 Measure actual hedge effectiveness


Step 6 Reassess prospective hedge effectiveness
Step 7 Reassess hedge relationships and need for re-designation

Step-8 Prepare hedge accounting journal entries


Source: Gupta, P. (2008)..

IAS 39 recognises three types of hedges. It‘s important to understand the type of hedge involved

as the type of hedge determines the accounting entries. (i) A fair value hedge is a hedge of the

exposure to change in the fair value of a recognised DFI or a previously unrecognized firm

commitment that is attributable to a particular risk and could affect reported profit or loss, (ii) A

fair value hedge is a hedge of the exposure to changes in the fair value of a recognised asset or

liability or a previously unrecognized firm commitment that is attributable to a particular risk and

92
could affect reported profit or loss and (iii) Hedge of a net investment in a foreign entity: A

hedge, using a derivative or other financial instrument, of foreign currency is exposed in the net

assets of a foreign operation.

This principle, therefore, results in IAS 39 being very specific about the circumstances in which

hedge accounting may be applied. A hedging relationship qualifies for hedge accounting only

when hedge documentation and hedge effectiveness test are done.

Documentation of hedge relationship must be made at the inception of the hedge, which must

contain the information of entity‘s risk management, objective and strategy, type of hedging

relationship, the specific risk being hedged, the risk to be hedged needs to be identified

specifically, identification of hedged item and hedging instrument and explanation to test hedge

effectiveness. Hedge effectiveness tests: both the standards IAS 39 and FAS 133 require hedging

to be tested for hedge effectiveness while using hedge accounting. Hedge effectiveness reflects

the degree to which changes in the performance of an underlying risk exposure, i.e. underlying

hedged item, with respect to of a designated risk are offset by changes in the performance of a

designated hedging instrument. The objective of the effectiveness 30 test is to check whether the

market development of hedged item and hedging instruments are almost fully offsetting in

nature. According to Bontas (2012), the concept of hedge effectiveness is one that is crucial in

determining whether hedge accounting treatment may be applied or not. A hedge is to be highly

30
IAS 39 requires two types of effectiveness test: A Prospective effectiveness test which is
performed to find out whether the hedge is expected to be effective at the inception of the hedge
and in subsequent periods. This test must be conducted at least once in a year. Another one is
retrospective effectiveness test. This is a backward looking test which is used to test whether a
hedging relationship has actually been highly effective in a past period. This test must be
conducted at least at each balance-sheet date.

93
effective only when hedge becomes highly effective in achieving offsetting changes in fair value

or cash flows attributable to the hedged risk during the period and the actual result of the hedge

is within a range of 80%- 125%.

Outlines of IAS 39 establishes the requirements for the recognition, derecognition and

measurement of FIs including derivatives for companies which establish the financial statements

in accordance with IFRS. This standard also establishes uniform hedge accounting criteria for all

derivatives in order to reduce volatility in the income statement. Thus by applying a set of

principles and analysing issues by reference to the principles set under IAS 39 logical solutions

COULD be developed to serve the purpose of reporting DFIs.

However, the presentation, recognition and measurement of financial instruments are the

subjects of IAS 32 and IAS 39 but the importance of financial instruments‘ disclosure as a means

of helping investors to understand the risks associated with on and off-balance-sheet items has

been framed by IASB with an another accounting standard called IFRS 7 Financial instrument:

Disclosure.

5.4 IFRS 7 Financial Instruments: Disclosure

According to IFRS 7, an entity requires to provide disclosures in their financial statements that

enable users to evaluate the significance of financial instruments for the entity‘s financial

position and the nature and extent of risks arising from financial instruments to which the entity

is exposed during the period and at the end of the reporting period and how the entity manages

those risks including specified minimum disclosure about credit risk, liquidity risk and market

risk. An entity is allowed to present the required disclosures either on the face value of the

Balance sheet or in the notes to the financial statements.

94
5.4.1 Disclosures in the Balance sheet

The standard requires disclosures by class of financial instrument and it states that a class should

contain financial instruments of the same nature and characteristics and that the classes 31 should

be reconciled to the line items presented in the balance sheet. Enough detail is required so that

users are able to assess the significance of financial instruments. For example, forward derivative

contracts would be recorded as follows

Derivative financial assets

US-Dollar forward contract-cash flow hedge ***

Other forward exchange contract-held for trading ***

The standard requires that carrying amounts of each of the following categories, as defined in

IAS 39 is to be disclosed either on the face of the statement of financial position or in the notes.

Certainly DFIs have to be shown in the financial statement as classified as Financial asset or

liability at fair value through profit or loss.

5.4.2 Disclosure in Income statement

The reporting entity has to disclose the following items of revenue, expense, gains or losses

either on the face of the financial statements or in the notes:

(a) Net gains or net losses on DFIs at fair value through profit or loss showing separately those

on financial assets or financial liabilities designated as such upon initial recognition and those on

financial assets or financial liabilities that are classified as held for trading in accordance with

31
A ‗class‘ of financial instruments is not the same as a ‗category‘ of financial instruments.
Classes are determined at a lower level than the measurement categories in IAS 39 and are
reconciled back to the balance sheet as required by IFRS 7.
95
IAS 39;(b) Total interest income and total interest expense (calculated using the effective interest

method) for financial assets or financial liabilities that are not at fair value through profit or loss;

(c) Interest income on impaired financial assets accrued in accordance with IAS 39; and (d) the

amount of any impairment loss for each class of financial asset.

Since a derivative is classified as held for trading, unless it is accounted for hedging purpose, the

profit or loss on derivative has to be reported in the income statement or in the foot notes of the

statement.

5.4.3 Disclosure of accounting policies

The reporting entity has to disclose the measurement basis used in preparing the financial

statements and the other accounting policies used that are relevant to understand the financial

statements. IFRS 7 specifies that an entity engaged in hedging must disclose each type of hedge

described in IAS 39 separately i.e., fair value hedge, cash flow hedge and hedges of net

investments in foreign operations.

5.4.4 Disclosure about the fair value

IFRS 7 requires that the reporting entity should disclose information about fair value for each

class of financial asset and financial liability. The entity requires disclosing fair value amounts at

the end of each accounting period, how the fair values are determined and the effect on income

arising from each particular class of assets or liabilities. An exception is provided when the fair

value cannot be reliably determined for an investment in an equity instrument or in some cases

for a derivative instrument.

96
It requires disclosing the methods and if a valuation technique is used and the assumptions

applied in determining fair values of each class of financial assets or financial liabilities.

5.4.5 Disclosure of involvement with risks

Prokop (2008) pointed out that the identification, valuation and controlling of risks arising from

financial instruments is a major task of an internal risk management authority. IFRS 7

encompasses both qualitative and quantitative disclosures of risk.

 Qualitative disclosures

The qualitative disclosures should include a narrative description of the risks where the fund is

exposed to and how they arise. The policies and processes for managing the risks would typically

include: (i) Risk exposures for each type of financial instrument, (ii) Management's objectives,

policies, and processes for managing those risks and the methods used to measure the said risk,

(iii) Any changes from the prior reporting period.

 Quantitative disclosures

The quantitative disclosures provide information about the extent to which the entity is exposed

to risk based on information provided internally to the entity's key management personnel. The

entity requires summary of quantitative data about its exposure to that risk.

IFRS-7 requires two main categories of disclosures. Firstly, information about the significance of

financial instruments for an entity‘s financial position and performance. Secondly, the

information about the nature and extent of risks arising from financial instruments, including

specified minimum disclosure about credit risk, liquidity risk and market risk. Bischof (2009)

examined the effects of adoption of IFRS 7 on disclosure practice by European banks and

97
concluded that the level of disclosure significantly increased during the year of the standard‘s

first-time adoption. This is due to both a more extensive description of accounting policies and a

more elaborate disclosure of information about exposures to significant risks.

5.5 IFRS 9: Financial Instruments

In July 2014, IASB published the complete version of IFRS 9: Financial Instruments. IFRS 9

will be effective for annual periods beginning on or after January 1, 2018, subject to

endorsement in certain territories.

The final version of IFRS 9 brings together the classification and measurement, impairment and

hedge accounting phases and becomes fit for IASB‘s project intended to ultimately replace IAS

39 Financial Instruments: Recognition and Measurement. The standard consists of the following

headings

5.5.1 Classification and measurement

Classification determines how financial assets and financial liabilities are accounted for in

financial statements and in particular, how they are measured on an ongoing basis. IFRS 9

introduces a logical approach for the classification of financial assets driven by cash flow

characteristics and the business model in which an asset is held. This single, principle-based

approach replaces existing rule-based requirements that are complex and difficult to apply. The

new model also results in a single impairment model being applied to all financial instruments

removing a source of complexity associated with previous accounting requirements.

98
5.5.2 Impairment

During the financial crisis the delayed recognition of credit losses on loans (and other financial

instruments) was identified as a weakness in existing accounting standards. As part of IFRS 9 the

IASB has introduced a new expected loss impairment model that will require more timely

recognition of expected credit losses. Specifically the new Standard requires entities to account

for expected credit losses when financial instruments are first recognised and it lowers the

threshold for recognition of full lifetime expected losses.

The IASB has already announced its intention to create a transition resource group to support

stakeholders in the transition to the new impairment requirements.

5.5.3 Hedge accounting

IFRS 9 introduces a substantially-reformed model for hedge accounting with enhanced

disclosures about risk management activity. The new model represents a substantial overhauling

of hedge accounting that aligns the accounting treatment with risk management activities,

enabling entities to better reflect these activities in their financial statements. In addition, as a

result of these changes, users of the financial statements will be provided with better information

about risk management and the effect of hedge accounting on the financial statements.

5.6 IFRS 13: Fair Value Measurement

Accounting Standards Board (IASB) issued IFRS 13 Fair value measurement which establishes a

single source of guidance for fair value measurement where fair value is required or permitted

under IFRS.

99
The standard (i) defines fair value; (ii) sets out a framework for measuring fair value; and (iii)

requires disclosures about fair value measurements. IFRS 13 is a comprehensive standard that

focuses on measurement and disclosure.

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between market participants at the measurement date under

current market conditions irrespective of whether that price is directly observable or estimated

using another valuation technique. That definition of fair value emphasizes that fair value is a

market-based measurement not an entity-specific measurement.

5.6.1 Valuation techniques

As per standard it is necessary to use valuation techniques that are appropriate in the

circumstances and for which sufficient data are available to measure fair value, maximizing the

use of observable inputs and minimizing the use of unobservable inputs. The standard describes

three main approaches to measuring the fair value of assets and liabilities. These approaches are:

 Market approaches: Market approaches use information generated by actual market

transactions for identical or comparable assets or liabilities. Market approach techniques

often will use market multiples derived from a set of comparable transactions for the

asset or liability or similar items.

 Income approaches: Techniques classified as income approaches measure fair value

based on converting future cash flows into a single current amount in measurement date.

Discounted cash flow (DCF) method, Dividend discount model etc. are the examples of

income approach.

100
 Cost approaches: The cost approach reflects the amount that would be required currently

to replace the service capacity of an asset (often referred to as current replacement cost).

Our research finds that 59% of our select companies calculate fair value using discounted

cash flow32 (DCF) method.

5.6.2 Fair value hierarchy

To increase consistency and comparability in fair value measurements, the fair value standards

establish a fair value hierarchy to prioritize the inputs used in valuation techniques. There are

three broad levels to the fair value hierarchy of inputs to determine fair value, Level 1 being the

highest priority and Level 3 being the lowest priority. Exhibit 5.8 depicts the fair hierarchy;

Exhibit 5.8

IFRS 13 Fair value hierarchy

Exhibit 5.8 shows that Level 1 considers quoted prices (unadjusted) in active markets for

identical assets or liabilities; Level 2 considers inputs other than quoted prices included within

32
DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which
is used to evaluate the potential for investment.

Where, CF= cash flow, r =discounted rate and n=number of years

101
Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly

(i.e. derived from prices); and Level 3 considers inputs for the asset or liability that are not based

on observable market data (unobservable inputs).

Level 2 of the fair value hierarchy is followed by more than 62% of the companies followed by

level 3, 16% where level 1 is followed by only 5% of the companies to report the DFIs at its fair

value (exhibit 5.9).

Exhibit 5.9

Fair value hierarch used by IFRS user companies

Fair value hierarchy used by IFRS user


companies
5%
17%

Level 1
Level 2

16% Level 3
Not disclosed

62%

5.6.3 Disclosures about fair value measurements

The disclosure requirements included in the fair value standards are intended to provide

information about the extent to which a reporting entity measures assets and liabilities at fair

value, the valuation techniques and inputs used to measure fair value and the effect of fair value

measurements on earnings.

102
Alexandera, Bonacib & Mustatab (2012) concluded that the concept and informational content

and usefulness of fair value needs further clarification and refinement by the regulators,

preparers and users. Our study in this regard shows that 31% companies do not disclose about

the approach used to measure the fair value and 22% of the companies remained silent about the

valuation technique

5.7 Differences between IFRS and Ind AS for DFIs

India has converged Indian Accounting Standards with IFRS which would be implemented and

replaced by the existing AS soon. Similarities between the IFRS and Indian Accounting

standards do exist but we have tried to find out if any dissimilarity exists between the two sets of

standard in respect of DFIs. The following few points are appeared on the ground of difference

between IFRS and Ind AS;

Exhibit 5.10
Differences between IFRS and Ind AS in respect of DFIs
Basis of IFRS IND AS (converged)
difference
Accounting IAS 32 - Financial Instruments: Ind AS 32 Financial Instruments:
Standards for Presentation; Presentation
DFIs
IAS 39 Financial Instruments: Recognition Ind AS 39 Financial Instruments:
and Measurement; Recognition and measurement;

IFRS 7 Financial Instruments: Disclosures; Ind As 107 Financial Instruments:


Disclosures
IFRS 9 Financial Instruments;
Ind AS 113
IFRS 13 Fair Value Measurement. Fair Value Measurement (Exposure
Draft)
Terminology Terminologies ‗Statement of financial Ind AS 39 used the term ‗balance
position‘ and ‗Statement of comprehensive sheet‘ instead of ‗Statement of
income‘ are used in IAS 39. financial position‘ and ‗Statement of
profit and losses‘ instead of ‗Statement
of comprehensive income‘.

103
Basis of IFRS IND AS (converged)
difference
Derivative part Compound (hybrid) financial instruments The issuer of non-derivative financial
of Compound are required to be split into a debt and instrument shall evaluate the terms and
(hybrid) equity component and, if applicable, a such instrument shall be classified
financial derivative component. separately as financial liabilities,
instruments financial assets or equity instruments
accordingly (Ind AS 32).
Initial A DFI is recognized at its fair value. When a financial asset or financial
measurement Generally the fair value becomes its cost, liability is recognised initially, an
i.e., the consideration given or received. entity shall measure it at its fair value
The consideration given or received is plus, in the case of a financial asset or
normally the transaction price or the financial liability not at fair value
market price. This cost includes transaction through profit or loss, transaction costs
costs such as commissions, fees, and levies that are directly attributable to the
by regulatory agencies, taxes and duties. acquisition or issue of the financial
asset or financial liability.
Day one gains Day one gains and losses are recognized The standard remains silent in respect
and losses only when all inputs to the measurement of day one gains and losses on DFIs.
model are observable.
Hedge The shortcut method for interest rate swaps There is no relevant accounting
effectiveness hedging recognized debt is not permitted. guidance in Ind AS.
Under IFRS, assessment and measurement
of hedge effectiveness considers only the
change in fair value of the designated
hedged portion of the instrument‘s cash
flows, as long as the portion is separately
identifiable and reliably measurable.
Macro hedging Macro hedging designed to eliminate or Nothing is mentioned about Macro
reduce economic risk of an entire entity or hedging in Ind AS.
portfolio is permitted.
Changes in fair Determining the fair value of the financial In determining the fair value of the
value of liabilities designated at fair value through financial liabilities designated at fair
financial profit or loss upon initial recognition, any value through profit or loss upon initial
liabilities due to change in fair value due to changes in the recognition, any change in fair value
changes in credit entity‘s own credit risk are considered. due to changes in the entity‘s own
risk credit risk are ignored.

104
5.8 Conclusion

Blanchette & Desfleurs (2011) stated that IFRS accompanies a number of threats. First, IFRS

allows a lot of accounting choices and thus allows management to explore different ways to gain

maximum. Second, IFRS involves certain complexities which combine with the fact that there is

an incredibly large amount of information which are prerequisites in the disclosure notes. Our

study also supports that all the IFRS users companies are not in the same line in case of

reporting, measurement and disclosure. In spite of that, a single set of high quality global

accounting standards would provide different advantages.

Differences in IFRS implementation will no doubt persist as we do not live in a homogeneous

world. The study, as reflected in the above table, shows that there hardly remains any difference

between IFRS for DFIs and converged Ind AS for DFIs. So it is evident that India is going to

replace the existing AS by IFRS in respect of DFIs. Thus the converged Ind AS would be able to

maintain the desired outputs of IFRS in terms of uniformity, transparency, comparable

information and would provide all guidelines as stipulated by IFRSs.

References

Alexandera, D., Bonacib, C., & Mustatab, R. (2012). Fair value measurement in financial reporting.

Procedia Economics and Finance , 3, 84-80.

Ball, R. (2006). International Financial Reporting Standards (IFRS):pros and cons for Inverstors.

Accounting and business research, international accounting policy fouram , 5-27.

Blanchette, M., & Desfleurs, A. (2011). Critical Perspectives on the Implementation of IFRS in Canada.

Journal Of Global Business Administration (JGBA) , 3 (1), 19-40.

Bontas, B. (2012). The Assessment of Hedge Effectiveness. Economics and Applied Informatics , 1, 57-62.

105
Glaum, M., & Klocker, A. (2011). Hedge accounting and its influence on financial hedging: When the tail

wags the dog. Accounting and Business Research , 41 (5), 459-489.

Gupta, P. (2008). Financial Instruments standards:A guide on IAS 32, IAS 39 and IFRS 7. New Delhi: Tata

McGraw- Hill Publishing co. Ltd.

Jermakowicz, E. (2004); Effects of Adoption of International Financial Reporting

Standards in Belgium: The Evidence from BEL-20 Companies, Accounting in Europe, Vol.

1, September, 51-70.

Palea, V. (2013). IAS/IFRS and financial reporting quality: Lessons from the European experience. China

Journal of Accounting Research , 6, 247-263.

Schmidt, M. (2013). Equity and Liabilities – A Discussion of IAS 32 and a Critique of the Classification.

Accounting in Europe , 10 (2), 201-222.

The Institute of Chartered Accountants of India. (2011). Indian Accounting Standards. New Delhi: ICAI.

Tohmatsu, D. (2002). International Financial Reporting standards-A Practical Guide.

Walton, P. (2004). IAS 39: Where Different Accounting Models Collide. Accounting in Europe , 1, 4-16.

http://www.fasb.org; Accessed on: 24/12/14, 08/12/14 and 09/07/15

http://www.iasplus.com; Accessed on: 24/10/14, 08/12/14 and 09/08/15

http://www.icai.org; Accessed on: 24/10/14, 08/12/14 and 09/08/15

http://www.ifrs.org; Accessed on: 14/11/14, 08/12/14 and 14/10/15

106
CHAPTER VI

ACCOUNTING STANDARDS FOR DFI: A COMPARATIVE STUDY

6.1 Introduction

This chapter consists of three sections : (a) Evaluation of accounting practices by IFRS user

companies with an objective to find out how far the companies differ from the IFRS in terms of

reporting and disclosure of DFIs;33 (b) comparison among the group of IFRS users companies

with an objective to find out the level of uniformity for reporting and disclosure of DFI; (c)

Comparison between two group of companies, viz, IFRS users and Ind AS users with an

objective to see whether there are any differences in terms of reporting and practices of DFI.

6.2 Sample selection and data collection

We have considered secondary data for the analysis. The annual reports of 160 companies are

selected as sample size and data are retrieved from those annual reports of the companies34.

6.3 Hypothesis formation

A. IFRS and reporting and disclosure of DFI

According to Levine et al. (2000), the disclosure of accounting information helps reducing

information asymmetry, sheds light on the volatility of stock returns and can also be an indicator

for both domestic and foreign investors in making their choices. With an expectation of higher

level of disclosure of accounting information the nations are adopting IFRS for the benefits of

the companies and their stakeholders.

33
The statement may lead to a doubt that following the mandate by IASB the companies that have adopted IFRS
either they should follow the practice in full or reject in full. Therefore the obvious question that may arises how the
IFRS user companies may deviate from 100% of IFRS. Our experience teaches us a economy or country may only
converge their national accounting standards in line with IFRS; example in this context is Australia and India. This
is the specific reason why there exists a possibility of deviation from IFRS mandate regarding DFIs.
34
Please see details about the sample selection and data collection in chapter-III

107
Exhibit 6.1

Score on reporting and disclosure level: IFRS user companies

40

35 34

30
No of IFRS adopted companies

25

20

15 Frequency
15

10 9
8
5
5 4
3
1 1
0
7 8.5 10 11.5 13 14.5 16 17.5 More
Scores on reporting and disclosure level

From exhibit 6.1 it appears that all the IFRS user companies are not reporting and disclosing

according to the prescribed standards. Score obtained by the companies on reporting and

disclosure of DFIs are presented in exhibit 6.2 according to the class interval (appendix-E/2).

Exhibit 6.2

No. of companies and class interval of Score on reporting and disclosure

Class interval of scores No of companies % of companies


Up to 60% 14 18
61-70% 15 19
71-80% 30 37
81-90% 18 22
91-100% 3 4

108
Although 64% companies report and disclose on and above 76% (14.5 and above out of 19 point

score) of the selected items on DFI, 36% companies decline to report and disclose the

accounting information on and above 75% of their standard level. The average level of

disclosure for DFI is 73.37%. The frequency distribution shows that the companies do not report

and disclose the accounting information uniformly and level of disclosure is lower than specified

standard level.

The study of Hossain (2008) revealed that mandatory mean disclosure level of Indian banking

companies is 87% where the disclosure index follows the (i) Banking Companies Act, 1949 (ii)

Company Act, 1956 (iii) Listing Rules – of SEBI (iv) RBI guidelines. The research results of

Lipunga (2014) revealed a high risk disclosure level among the sampled banks. The individual

bank score range was between 0.76 and 0.88 with an overall score of 0.82 indicating that on an

average 82% of the disclosure items were actually disclosed in the annual reports of the sampled

banks.

Jankensgard, Hoffmann & Rahmat (2014) had shown that the foreign exchange risk disclosure in

the annual reports of the company is only 67%. In case of financial instruments, Lopes &

Rodrigues (2007) stated that the range of scores for the disclosure index on financial instruments

varied from 16% to 64% in the Portuguese Stock Exchange. Another study of Malaquias &

Lemes (2013) stated that no Brazilian companies, either for the Brazilian or American market,

had a disclosure index on financial instruments greater than 75% in their accounting reports.

109
From the existing literature it is found that the highest level of disclosure on Derivative

instrument is not greater than 75% and the descriptive statistics of our research work shows an

average disclosure level of 13.94 (73%). So the hypotheses we have set up are as follows:

H01: Companies maintain only up to 75% disclosures on DFIs under IFRSs.

HA1: Companies maintain disclosures on DFI under IFRS more than75% of the standard level.

B. IFRS for DFI is followed in all selected economy uniformly

All the selected companies belong to the economy United Kingdom, European Union, Canada,

Germany and Switzerland are considered for our analysis. Here our study aims to see whether

difference among five groups of company with respect to reporting and disclosure of RFIs are

statistically significant. Thus the null and alternative hypotheses are;

Ho2: No differences exist among the selected economy for reporting and disclosure of DFIs

under IFRS in their annual reports.

HA2: The selected economy are reporting and disclosing DFIs differently in their annual reports.

C. Comparison of effects of two sets of accounting standards: International Accounting

Standards and AS

Here we introspect whether statistically significant differences are found among the two groups

of economy viz, IFRS users and AS users, on the basis of reporting and disclosing the DFI in

their annual reports. And our hypotheses are;

H03: No differences exist between the two groups of companies namely IFRS users and Non-

converged AS users for reporting and disclosing the DFI.

110
HA3: Reporting and disclosure level of IFRS adopted companies is higher than the AS user

companies for DFI.

6.4 Data analysis & findings:

H01: Companies maintain only up to 75% disclosures on DFI under IFRS.

HA1: Companies maintain disclosures on DFI under IFRS more than75% of the standard level.

We use One-sample binomial test (explained in chapter-III) and One-sample Wilcoxon signed

rank test (explained in chapter-III) for the above hypotheses.

6.4.1. A One-Sample Binomial Test35:

Exhibit 6.3

Hypothesis Test Summary of one-sample Binomial test

Null Hypothesis Group Category N Observed Exact Sig. Decision


Prop. (2-tailed)

Group 1 <=14.25 38 .48 .737


Companies maintain
only up to 75% Group 2 > 14.25 42 .53
disclosures on DFIs
under IFRS. 80 1.00 Retain the null
Total hypothesis
# The significance level is .05.

6.4.1. B One-Sample Wilcoxon Signed Rank Test36:

H01: Companies maintain only up to 75% disclosures on DFI under IFRS

HA1: Companies maintain disclosures on DFI under IFRS more than75% of the standard level.

35
One-Sample Binomial Test is explained in chapter-III
36
One-Sample Wilcoxon Signed Rank Test is explained in chapter-III

111
Exhibit 6.4

Hypothesis test summary of One-sample wilcoxon signed rank test

Hypothesis Test Summary

Null Hypothesis Test Sig. Decision

Companies maintain only up to 75% One-Sample


Retain the null
disclosures on DFI under IFRS Wilcoxon Signed .686
hypothesis.
Rank Test

# The significance level is .05.

Since the null hypothesis in both the tests, (i) One-Sample Binomial Test and (ii) One-Sample

Wilcoxon Signed Rank Test are accepted it indicates that no companies, which have adopted

IFRS in the selected countries, had a disclosure level on DFIs are greater than 75% of their

standard level but up to the level of 75%.

6.4.2. Kruskal-Wallis Test37:

Ho2: No differences exist among the selected economy for reporting and disclosure of DFIs

under IFRS in their annual reports.

HA2: The selected economy are reporting and disclosing DFIs differently in their annual reports.

37
Kruskal-Wallis Test is detailed in chapter-III.

112
Exhibit 6.5

Hypothesis test summary of Kruskal-Wallis test

Hypothesis Test Summary


Null Hypothesis Test Sig. Decision
No differences exist in the selected
Independent-
economy/countries for reporting and Retain the null
Samples Kruskal- .182
disclosing DFI under IFRS in their annual hypothesis.
Wallis Test
reports.
# The significance level is .05.

From the Exhibit 6.5 it appears that null hypothesis is accepted at 5% level of significance. Thus

no differences exist among the five selected economy regarding reporting and disclosure of DFIs

in their annual reports. This level of uniformity is shown through in the following figure also.

Exhibit 6.6

Uniformity in the selected economy for reporting and disclosing DFIs under IFRS

113
6.4.3. Mann-Whitney Test38:

H03: No differences exist between the two groups of companies namely IFRS users and Non-

converged Ind AS users for reporting and disclosing the DFI.

HA3: Disclosure level of IFRS adopted companies is higher than the Ind AS user companies for

reporting and disclosing the DFI

Exhibit 6.7
Hypothesis test summary of Mann-Whitney U test
Hypothesis Test Summary
Null Hypothesis Test Sig. Decision

No differences exist between the two


Reject the null
groups of companies namely IFRS Independent-Samples
.000 hypothesis.
users and Non-converged Ind AS users Mann-Whitney U Test
for reporting and disclosing the DFI.

# The significance level is .01

The null hypothesis is rejected at 1% level of significance (Exhibit 6.7). Thus the alternative

hypothesis is accepted. From the exhibit, it is concluded that the IFRS user companies had the

higher accounting reporting and disclosure level than that of Indian Accounting Standard (AS)

user companies which is statistically significant at 1%.

38
Mann-Whitney Test is described in chapter-III.

114
Exhibit 6.8
Independent-Samples Mann-Whitney U Test

Sig. (2-sided test)

The exhibit 6.8 shows that mean rank (113.42) of the IFRS user companies is much greater than

the mean rank (47.58). The result strongly supports IFRS for derivative financial instruments for

a higher level of reporting and disclosure of DFIs comparative to Indian Accounting Standard

(AS).

115
6.5 Conclusion

The finding infers three research conclusions in this chapter: (i) IFRS user companies, in the

selected countries, had a disclosure level on Derivative financial instruments not greater than

75% of their standard level but they had disclosure up to 75% level of the standard. (ii) Although

IFRS adopted companies‘ reporting and disclosure level is not more than 75% of the standard

level, uniformity regarding reporting and disclosing DFIs in annual reports of the selected

economy/countries exists. (iii) Disclosure level of IFRS adopted companies is higher than the Ind

AS user companies for reporting and disclosing DFIs which strongly supports IFRSs for

derivative financial instruments for a higher level of reporting and disclosure of DFIs compared

to existing Indian AS.

References

Cavanagh S. (1997) Content analysis: concepts, methods and applications. Nurse Researcher 4, 5–16.

Hassan , O; Marston , C (2010); Disclosure measurement in the empirical accounting literature - a

review article; Electronic copy available at: http://ssrn.com/abstract=1640598; Accessed on:

05/06/2015

Hossain, M. (2008). The extent of Disclosure in Annual Reports of Banking. European Journal of

Scientific Research , 23 (4), 659-680.

Htay, S. N., Rashid, H. M., Adnan, M. A., & Meera, A. K. (2011). Corporate Governance and Risk

Management Information Disclosure in Malaysian Listed Banks: Panel Data analysis.

International Review of Business Research Papers , 7 (4), 159-176.

Jankensgård, H., Hoffmann, K., & Rahmat, D. (2014). Derivative Usage, Risk Disclosure, and Firm

Value. Journal of Accounting and Finance , 14 (5), 159-174.

116
Jones, M. J., & Shoemaker, P. A. (1994). Accounting narratives: A review of empirical studies of content

and readability. Journal of Accounting Literature , 13, 142-161.

Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: causality and causes.

Journal of Monetary Economics , 46 (1), 31-77.

Lipunga, A. (2014). Risk disclosure practices of Malawian commercial banks. Journal of Contemporary

Issues in Business Research , 3 (3), 154-167.

Lopes, P. T., & Rodrigues, L. L. (2007). Accounting for financial instruments: An analysis of the

determinants of disclosure in the Portuguese stock exchange. The International Journal of

accounting , 42, 25-56.

Malaquias, R., & Lemes, S. (2013). Disclosure of financial instruments according to International

Accounting Standards: empirical evidence from Brazilian companies. Brazilian Business Review ,

10 (3), 82-107.

Prasad, D. (2008). Content Analysis: A method in Social Science Research. In Research methods for

Social Work, edited by: Lal, D., D.K. and Bhaskaran, V. New Delhi,

Swain, A. (2008). Text Book of Research Methodology (2nd ed.). New Delhi: Kalyani Publishers.

United States General Accounting Office (1989), Available at

http://archive.gao.gov/d48t13/138426.pdfAccessed on: 12/09/2014

117
CHAPTER VII

IMPACT OF IMPLEMENTATION OF IFRS FOR DERIVATIVE

FINANCIAL INSTRUMENTS IN INDIA

7.1 Introduction

IFRS has already been adopted by more than 100 countries till now (Grupo Sura, 2015). More as

of countries are likely to implement IFRS in the upcoming years. India is also not lagging behind

in this respect. Existing Indian Accounting Standards would be replaced by IFRS (converged Ind

AS) from 1st April 2016. This transition would be done with the expectation of earning

comparative benefits from IFRS than that of Indian Accounting Standards. The research

objective in this chapter is to analyse the data obtained from the experts on IFRS for DFI and

thereby finding out the key factors which would be influenced by IFRS for derivative financial

instruments in India. In this respect, we have used factor analysis and cronbach's alpha statistical

techniques and finally found six factors namely, investment, human resource, uniformity, risk

and hedging, disclosure and control.

7.2 Research question

We have considered IAS 32, IAS 39, IFRS 7 and IFRS 13 and their impact on derivative

financial instruments in India on implementation of IFRS (converged Ind AS). We have traced

21 important variables related with the implementation of IFRS for DFIs in India as shown in

exhibit 7.1.

118
Exhibit 7.1
Variables for statistical tests
No. Variables Type Description

1. Variable-1 Input Variable Reliability of accounting information of DFI


2. Variable -2 Input Variable Reflection of actual derivative transactions
3 Variable -3 Input Variable Disclosure level for derivatives
4 Variable -4 Input Variable Derivative‘s fair value
5 Variable -5 Input Variable Uniformity in accounting process.
6 Variable -6 Input Variable Information on risk disclosure
7 Variable -7 Input Variable Hedge accounting disclosure
8 Variable -8 Input Variable Accountability of management
9 Variable -9 Input Variable Foreign capital inflow
10 Variable -10 Input Variable Impact of IFRS for DFIs on share price
11 Variable -11 Input Variable Decision making in respect of valuable investments
12 Variable -12 Input Variable Uniformed disclosures
13 Variable -13 Input Variable Comparability of derivative transactions
14 Variable -14 Input Variable Ability to interpret the derivative information
15 Variable -15 Input Variable Shareholders‘ value
16 Variable -16 Input Variable Scandals on off-Balance sheet derivative items
17 Variable -17 Input Variable Training on IFRS
18 Variable -18 Input Variable Lack of trained resource persons
19 Variable -19 Input Variable Simplify accounting and auditing activities on DFI
20 Variable -20 Input Variable Lack of training facilities and academic courses
21 Variable -21 Input Variable Easy to control foreign companies
No doubt, accounting for DFIs is a complex issue and study of derivative considering huge

number of variables makes the study of derivative more subtle. Thus, it becomes necessary to

identify and summarize key factors affected by IFRS for DFIs, on implementation of IFRS for

DFI in India. Here we get our research question;


119
What are the key factors affected by IFRS for DFI in case of countries like India?

Analysis of the research question gives rise to the following hypothesis:

H0: No relationship exists among the observed variables affected by IFRS for DFI and their

underlying latent constructs (factors) in case of countries like India.

HA: Relationship exists among observed variables affected by IFRS for DFI and their underlying

latent constructs (factors) in case of countries like India.

7.3 Data analysis and findings

To find the answer of the question we have done factor analysis (explained in chapter-3) on the

selected variables.

7.3.1 The Kaiser-Meyer-Olkin (KMO) & Bartlett's test of sphericity39:

From the exhibit 7.2, we see that KMO value is .0.706 which confirmed the appropriateness of

the data for exploratory factor analysis.

Exhibit 7. 2
KMO and Bartlett's Test

Measure of Sampling Adequacy. Kaiser-Meyer-Olkin


.706
Approx. Chi-Square 833.806
Bartlett's Test of Sphericity Df 210
Sig. .000

On the other hand Bartlett‘s test of sphericity (Exhibit 7.2) also conforms to continue with the

factor analysis.
39
The Kaiser-Meyer-Olkin (KMO) & Bartlett's test of sphericity are explained in appendix-E/13.

120
Number of factors is determined by the total variance explained & scree plot as follows.

7.3.2 Factor reduction and scree plot

Our aim is to identify the minimum number of factors that would account for the maximum

portion of variance of the original items, a cumulative percentage of variance explained being

greater than 50% is the criterion used in determining the number of factors with an eigenvalue

(appendix-E/6) greater than 1.

On the basis of this criterion, seven factors were extracted (Exhibit 7.3). Seven factors

collectively accounted for a satisfactory 63% level of the variance.

Exhibit 7.3
Total Variance Explained
Component Initial Eigenvalues Extraction Sums of Squared Rotation Sums of Squared
Loadings Loadings
Total % of Cumulative Total % of Cumulative Total % of Cumulative
Variance % Variance % Variance %
1 4.226 20.123 20.123 4.226 20.123 20.123 2.883 13.730 13.730
2 2.080 9.905 30.028 2.080 9.905 30.028 2.126 10.124 23.853
3 1.744 8.306 38.335 1.744 8.306 38.335 1.926 9.171 33.025
4 1.615 7.691 46.026 1.615 7.691 46.026 1.871 8.909 41.934
5 1.265 6.022 52.048 1.265 6.022 52.048 1.652 7.865 49.799
6 1.161 5.528 57.576 1.161 5.528 57.576 1.552 7.391 57.190
7 1.131 5.384 62.959 1.131 5.384 62.959 1.212 5.769 62.959
8 .915 4.355 67.315
9 .884 4.207 71.522
10 .785 3.738 75.260
11 .726 3.458 78.718
12 .648 3.084 81.802
13 .593 2.823 84.625
14 .578 2.753 87.377
15 .522 2.486 89.864
16 .479 2.279 92.142
17 .366 1.745 93.887
18 .351 1.669 95.556
19 .341 1.626 97.182
20 .309 1.470 98.652
21 .283 1.348 100.000
Source: Generated through SPSS software using primary data

121
The cumulative factors revealed that the first factor accounts for 13.730% of the variance. The

second cumulative factor accounts for 23.853% of the variance. The third cumulative factor

accounts for 33.025% of the variance. The fourth cumulative factor accounts for 41.934% of the

variance. The fifth cumulative factor accounts for 49.799% of the variance. The sixth

cumulative factor accounts for 57.190% of the variance. And the seventh cumulative factor

accounts for 62.959% of the variance.

Exhibit 7.4
Scree plot of Variables

.
Exhibit 7.4 demonstrates that a seven-factor solution is accepted. By graphing the eigenvalues

we found that the dominant factors will fall above the line. From the seventh factor onwards, we

see that the line is almost flat, meaning the each successive factor is accounting for smaller and

smaller amounts of the total variance.

122
Now from the exhibit 7.5, factor loadings greater than 0.500 have been identified and the score

of respective variable is bolded. We exclude the variable number-8 as factor loading (appendix-

E/8) and is less than 0.500.

Exhibit 7.5
Rotated Factor Loadings and Communalities
Variable Factor1 Factor2 Factor3 Factor4 Factor5 Factor6 Factor7 Communalities
1 -.091 -.085 .394 .500 -.001 .366 -.038 .557
2 .159 -.147 -.222 .353 .178 .565 -.093 .580
3 .044 -.118 .045 .752 -.059 .127 -.252 .666
4 .087 .299 .041 .693 .016 -.040 .109 .593
5 .160 .774 .199 -.022 .122 .101 .082 .696
6 -.083 .410 .605 .317 .028 -.098 .168 .680
7 .239 .080 .686 .157 .089 -.037 -.110 .580
8 .236 .160 .143 .492 -.018 .014 .268 .416
9 .818 -.002 .128 .126 .021 .005 -.104 .713
10 .698 .173 -.111 .110 .092 .211 .104 .605
11 .560 -.012 .215 -.044 .152 .122 -.402 .562
12 .109 .761 .068 .052 .011 .112 -.054 .614
13 .683 .016 .086 .059 -.162 .157 .180 .560
14 .068 .338 .095 .084 -.029 .725 .077 .668
15 .784 .125 .160 .008 -.063 -.041 .040 .664
16 .162 .126 .718 -.024 .004 .199 .005 .598
17 .072 -.140 -.004 -.013 .110 .021 .846 .753
18 -.048 -.067 .154 .039 .858 .078 .013 .774
19 -.017 .643 .054 .133 -.249 -.027 -.244 .556
20 .005 .029 -.065 -.061 .832 -.089 .070 .714
21 .305 .042 .391 -.126 -.163 .617 -.032 .672

Then using the Varimax rotation (appendix-E/22), we have obtained the following table

consisting of seven components (Exhibit 7.6).

123
Exhibit 7.6
Varimax-rotated Component Matrix factor wise

Variables Components
I II III IV V VI VII
1. Foreign Capital .818
2. Share price .698
3. Investment Decision .560
4. Derivatives and hedging .683
activities
5. Shareholders‘ value .784
1. Uniformity in accounting
process .774
2. Uniformed disclosures .761
3. Simplify accounting and
auditing activities .643

1. Risk disclosure .605


2. Hedge accounting .686
.718
3. Scandals on DFI
1. Reliability on accounting
information .500
2. Improvement of .752
disclosure level .693
3. Disclosure of fair value
1. Lack of trained resource
persons .858
2. Lack of training facilities
.832
and academic courses
1. Reflection of actual
Derivative transactions .565
2. Interpretation of
derivative information .725
3. Disclosure of complex
DFI transactions of foreign
.617
companies
1.Training of regulators, tax .846
authorities, auditors,
employees and stakeholders

124
Seven factors are formed (exhibit-7.6) consisting of 20 variables leaving only one (eighth one)

having weight less than 0.5. The rotated factors that formed with the items represent the

meaningful constructs with all positive loadings. We reject the seventh factor as it consists of

only one item. Finally, we have found six factors or components which are affected by the IFRS

for DFIs in developing countries like India. The factors are titled below:

Exhibit 7.7
Naming of Factors consisting items

Name of Factors/ Consists of items/variables


Components
A. Investment 1. Foreign Capital
2. Share price
3. Investment Decision
4. Derivatives and hedging activities
5. Shareholders‘ value

B. Uniformity in 1. Uniformity in accounting process


Accounting 2. Uniformed disclosures
3. Simplify accounting and auditing activities

C. Risk and Hedging 1. Risk disclosure


2. Information on Hedge accounting
3. Off-Balance sheet derivative items

D. Disclosure & 1. Reliability


reliability 2. Improvement of disclosure level
3.. Disclosure of fair value

E. Human Resource 1. Lack of trained resource persons


2. Lack of training facilities and academic courses

F. Control 1. Reflection of actual Derivative transactions


2. Interpretation of derivative information
3. Disclosure of complex DFI

125
7.3.3 Internal consistency (IC)

We have conducted an analysis of internal consistency (IC) to measure the reliability. Internal

consistency is assessed using (1) the item to total score correlation (appendix-E/12) and (2)

Cronbach's alpha coefficient (appendix-E/5) where majority of the researcher prefer to use

Cronbach's alpha coefficient.

According to George and Mallery (2003), Cronbach's alpha above 0.6 is generally ‗acceptable‘

and alpha .9 or higher is considered ‗excellent‘. Nunnally (1978), Robinson, Shaver, &

Wrightsman (1991) also recommended that minimum Cronbach‘s alpha for exploratory studies

is .600. Hon (2012) used Cronbach‘s coefficient alpha to test the reliability and the cut-off value

adopted by him was 0.500. Thus the test statistic ignores the relationship when the result

becomes lower than 0.50.

Now if we look at the exhibit 7.8, we see that for all the factors, Cronbach's alpha coefficient is

more than .500 and if we consider the cut off points .600 we find four factors having Cronbach's

alpha coefficient .786, .688, .661 and .612. The Corrected item-Total correlation for every individual

variable under these four factors is also more than .400. Thus the internal consistency table shows that the

four factors are acceptable.

126
Exhibit 7.8
Internal consistency
Name of the Items Corrected item- Scale Scale Std. Cronbach's
Factors Total correlation Mean if Deviation Alpha
item if item
deleted deleted
Foreign Capital .679
Share price .540
Investment Decision .405
Investment Derivatives and .547 11.33 2.467 .786
hedging activities
Shareholders‘ value .663
Uniformity Uniformity in .549
accounting process
Uniformed disclosures .501
Simplify accounting .375 8.10 1.393 .661
and auditing activities
Risk and Hedging Risk disclosure .443
.404 8.21 1.184 .612
Hedge accounting
Scandals on DFI .400
Disclosure & Reliability .319
Reliability .430
Improvement of
disclosure level
Disclosure of fair .391 11.36 1.084 .560
value
Human Resource Lack of trained .528
resource persons
Lack of training .528
facilities and 2.66 1.145 .688
academic courses
Control Reflection of actual .229
Derivative
transactions
Interpretation of .373 7.68 1.358 .507
derivative information
Disclosure of .382
complex DFI
We have finally ranked the factors in descending order as per the value of Cronbach's alpha

which is represented through the exhibit 7.9.

127
Exhibit 7.9
Ranks and affects of factors

Sl Name of factor Cronbach's Rank Affects of IFRS for DFI


No alpha (if
Item
deleted)
1 Investment .786 I Positive effect on investment area (Foreign
Capital, Share price, Investment Decision,
Derivatives and hedging activities,
Shareholders‘ value)
2 Human Resource .688 II Challenge with Human Resource
( Lack of trained resource persons, training
facilities and academic courses on IFRS)
3 Uniformity .661 III Positive affect on comparability
(Uniformity in accounting process,
Uniformed disclosures, Simplification of
accounting and auditing activities)
4 Risk and Hedging .612 IV Positive affect on risk and hedging
information
(Risk disclosure, Hedge accounting & Off-
Balance sheet derivative items)

5 Disclosure and .560 V Positive affect on Disclosure level


reliability (level of disclosure, fair value disclosure &
Management‘s Accountability towards
accounting and reporting)
6 Control .507 VI Controlling Derivative transactions
(Reflection of actual Derivative transactions,
easier interpretation of derivative
information and Disclosure of complex
DFI)

7.4 Conclusion

The results from the factor analysis and the internal consistency analysis suggest that (i)

Investment (ii) Human Resource (iii) Uniformity (iv) Risk and Hedging (v) Disclosure and

128
reliability and (vi) Control on derivative transactions would be affected by the adoption of IFRS

for DFIs in India.

Our result conclude that adoption of IFRS for DFIs would have following affects: (i) Adoption

of IFRS for DFI would be in favour of the business firm and investors; (ii) Lack of trained

resource persons having expert knowledge on IFRS is a big challenge to implement IFRS in the

countries like India; (iii) Comparison would be easier due to uniformity and simplicity in

accounting and (iv) There would be positive effect on risk and hedge activities information (v)

IFRS would have positive effect on derivative disclosures level and (vi) Control on derivative

transactions would also be improved.

References
Elliott, A. C., & Woodwar, W. A. (2014). IBM SPSS by Example: A Practical Guide to Statistical Data

Analysis. SAGE Publication.

Frank, H. B., & Siman, G. (2012). Exploring factors affecting the proper use of derivatives: An empirical

study with active users and controllers of derivatives. Managerial Finanace , 38 (4), 414-435.

George, D., & Mallery, P. (2003). SPSS for Windows step by step: A simple guide and reference (4 ed.).

Boston: Allyn & Bacon.

Gliem, J. A., & Gliem, R. R. (2003). Calculating, Interpreting, and Reporting Cronbach’s Alpha Reliability

Coefficient for Likert-Type Scales. Midwest Research to Practice Conference in Adult, Continuing,

and Community Education, (pp. 82-88). Midwest.

Grupo Sura (2015), IFRS -A universal financial reporting language;

http://www.gruposura.com/en/Investor%20Documents/IFRS%20English.pdf

129
Hon, T. (2012). The Behaviour of Small Investors in the Hong Kong Derivatives Markets: A factor analysis.

Journal of Risk and Financial Management (5), 59-77.

Nunnally, J. C. (1978). Psychometric Theory. (2, Ed.) New York: McGraw-Hill.

Robinson, J. P., Shaver, P. R., & Wrightsman, L. S. (Eds.). (1991). Measures of personality an

social psychological attitudes. San Diego: Academic Press.

Srivastava, A., & Gupta, P. (2014). Factors affecting IFRS adoption and implementation in India. South

Asian Academic Research Journals , 10, 23-36.

Yusoff, M. (2010). The Reliability And Validity Of The Postgraduate Stressor Questionnaire (psq) Among

Postgraduate Medical Trainees. WebmedCentral MEDICAL EDUCATION , 1 (9), 1-8.

130
CHAPTER VIII

RELIABILITY, ACCOUNTALIBILITY AND SHAREHOLDERS’

VALUE CREATION: A COMPARATIVE ANALYSIS OF IFRS

FOR DFIs

8.1 Introduction

In this chapter we would analyse advantages of implementing IFRS for derivative financial

instruments in lieu of present Ind. AS. We have identified three major advantageous aspects of

implementing IFRS (i) Reliability of accounting information40 of derivative financial instruments

(DFIs) (ii) Accountability of management for accounting and reporting of DFIs transactions and

the (iii) Share holders‘ value creation (see appendix-F). We have analysed data obtained from

160 expert respondents of more than 50 countries of the globe and found positive result in favour

of application of IFRS for derivative instruments in countries like India.

8.2 Hypothesis formation

H04: Reliability of accounting information of derivative financial instruments (DFI) would not be

influenced by IFRS in India.

HA4: Reliability of accounting information of derivative financial instruments (DFI) would be

influenced by IFRS in India.

H05: Accountability of management for accounting and reporting of derivatives would not be

influenced by IFRS in India.

40
Reliability on accounting information refers to whether financial information presented in the statement
and reports can be verified and used consistently by investors and creditors with the same results.
Basically, reliability refers to the trustworthiness of the financial statements.

131
HA5: Accountability of management for accounting and reporting of derivatives would be

influenced by IFRS in India.

H06: Shareholders‘ value would not be influenced by the adoption of IFRS for DFI in India.

HA6: Shareholders‘ value would be influenced by the adoption of IFRS for DFI in India.

8.3 Data analysis and findings

8.3.1 Reliability of accounting information DFIs (Case-I)

H04: Reliability of accounting information of derivative financial instruments (DFIs) would not

be influenced by IFRS in India.

Exhibit 8.1
Reliability of accounting information of DFIs

Reliability of accounting information


of DFI would improve after adoption
of IFRS
9%

Agreed
Not agreed

91%

In the present study, the relationship between reliability of accounting information of derivative

financial instruments and the following other seven select IFRS (IAS 32, IAS 39, IFRS 7 & IFRS

13) characteristics are examined by combination of factor analysis and binary logistic regression.

132
Exhibit 8.2
Independent variables where dependent variable is reliability of accounting information on
DFIs
No. Independent Type Description
Variable
1. Variable-1 Input Variable Disclosure level of derivatives
2. Variable -2 Input Variable Derivative‘s fair value
3 Variable -3 Input Variable Uniformity in derivative accounting process
4 Variable -4 Input Variable Comparability of derivative transactions
5 Variable -5 Input Variable Hedge accounting disclosure
6 Variable -6 Input Variable Management‘s accountability
7 Variable -7 Input Variable Uniformed disclosures

8.3.1.1 Factor analysis


Firstly, factor analysis is used to remove multicollinearity problems and to simplify the complex

relationships among the select IFRS (IAS 32, IAS 39, and IFRS 7 & IFRS 13) characteristics.

KMO (appendix-E/13) with a value of 0.668 confirmed the appropriateness of the data for

exploratory factor analysis. The Bartlett test of sphericity (ρ ≤0.000) also allows for factor

analysis.

Exhibit 8.3

KMO and Bartlett's Test (Case-I)

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .668


Approx. Chi-Square 183.987
Bartlett's Test of Sphericity Degree of freedom 21
Significance .000
From the exhibit 8.4, it appears that 2 factors having Eigen values greater than 1are selected as

independent variables.

133
Exhibit 8.4
Rotated Factor Loadings and Communalities (Case-I)

Rotated Factor Loadings and Communalities


Variables Factor1 Factor2 Communalities
Variable-1 -.192 .810 .694

Variable -2 .237 .706 .554

Variable -3 .816 -.004 .665

Variable -4 .592 .405 .514

Variable -5 .488 .302 .330

Variable -6 .262 .534 .354

Variable -7 .787 .016 .619

8.3.1.2 Binary logistic regression


Binary logistic regression (explained in chapter-III) is used to test the H05: Reliability of

accounting information of DFIs would not be influenced by IFRS in India.

Two factor scores coefficients (independent variables) are used for Binary logistic regression

analysis. The results are shown as follows

Exhibit 8.5
Case Processing Summary (Case-I)

Unweighted Cases N Percent


Included in Analysis 160 100
Selected Cases Missing Cases 000 .000
Total 160 100
Unselected Cases 000 .000
Total 160 100

134
The exhibit 8.5 simply shows that all the observations (N=160) are considered for binary logistic

regression.

Exhibit 8.6
Omnibus Tests of Model Coefficients(Case-I)

Tests Chi-square Degree of Level of significance


freedom
Step 14.064 2 .001
Step 1 Block 14.064 2 .001
Model 14.064 2 .001

A finding of significance (exhibit 8.6) of omnibus test (appendix-E/16) corresponds to the

conclusion that there is adequate fit of the data to the model, meaning that at least one of the

predictors is significantly related to the response variable.

Exhibit 8.7
Model Summary(Case-I)
Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square
1 80.885 .084 .188

From the exhibit 8.7 above, we can conclude that between 08.4% and 18.8% of the variation in

dependent variable is explained by the model.

Exhibit 8.8
Hosmer and Lemeshow Test( Case-I)

Step Chi-square Degree of freedom Level of Significance


1 15.556 6 .016

The Hosmer and Lemeshow Test (exhibit 8.8) shows that model fit is acceptable at χ² = 15.556,

p = .016(>.01), which indicates that our predicted values are not significantly different from what

we have observed.

135
Exhibit 8.9
Contingency Table for Hosmer and Lemeshow Test (Case-I)

Reliability of accounting Reliability of accounting


information of derivative financial information of derivative
Step
instruments (DFI) would improve financial instruments Total
after adoption of IFRS = Not Agree (DFI) would improve after
adoption of IFRS = Agree
Observed Expected Observed Expected
1 5 5.764 11 10.236 16
2 3 2.124 13 13.876 16
3 1 1.121 15 14.879 16
4 1 .947 15 15.053 16
Step 1
5 2 .238 3 4.762 5
6 2 2.872 64 63.128 66
7 0 .631 16 15.369 16
8 0 .303 9 8.697 9
The Contingency Table for Hosmer and Lemeshow test simply shows the observed and expected

values for each category of the outcome variable as used to calculate the Hosmer and Lemeshow

chi-square.

Finally, the ‗Variables in the Equation‘ summarizes the importance of the explanatory variables

individually whilst controlling the other explanatory variables. Some independent variables are

significantly related with the dependent variable and others are not associated so strongly.

Exhibit 8.10
Variables in the Equation (Case-I)
Factor Component B S.E. Wald df Sig. Exp(B) 95% C.I. for
EXP(B)
Lower Upper
FACTOR- .087 .244 .127 1 .722 1.091 .677 1.758
1
Step 1 FACTOR- .810 .216 14.045 1 .000 2.248 1.472 3.433
2
Constant 2.663 .344 60.076 1 .000 14.345 - -

136
From the exhibit 8.10 it is found that the relation between dependent variable and the Factor-1 is

insignificant. Hence, the relationship is not strong enough in this case. While in case of Factor-2,

the relationship is significant and indicates that if Factor-2 changes by one unit, the Reliability of

accounting information of derivative financial instruments would improve by 2.248 times.

8.3.2 Accountability of management (Case II)

H05: Accountability of management for accounting and reporting of

derivatives would not be influenced by IFRS in India.

Exhibit 8.11
Accountability of management for accounting and reporting of derivatives
IFRS for derivative financial instruments (DFI) would make management
more accountable for accounting and reporting of derivatives
23%

Agree
Not agree

77%

In the present study, the relationships between Accountability of management for accounting and

reporting of derivatives and the following eight select IFRS (IAS 32, IAS 39, and IFRS 7 &

IFRS 13) characteristics are examined by the combination of factor analysis and binary logistic

regression.

137
Exhibit 8.12
Variables where dependent variable is accountability of management for accounting and
reporting of derivatives
No. Independent Type Description
Variable
1. Variable-1 Input Variable Reliability of accounting information of DFI

2. Variable -2 Input Variable Reflection of actual derivative transactions

3. Variable -3 Input Variable Derivative‘s fair value

4. Variable -4 Input Variable Information on risk disclosure

5. Variable -5 Input Variable Hedge accounting disclosure

6. Variable -6 Input Variable Uniformed disclosures

7. Variable -7 Input Variable Ability to interpret the derivative information

8. Variable-8 Input Variable Scandals on off-Balance sheet derivative items

8.3.2.1 Factor analysis


Proceed to factor analysis we check the KMO and Bartlett's Test (appendix-E/13). KMO with a
value of 0.693 confirmed the appropriateness of the data for exploratory factor analysis. The
Bartlett test of sphericity (ρ ≤0.000) also allows for factor analysis.

Exhibit 8.13

KMO and Bartlett's Test (Case-II)

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .693


Approx. Chi-Square 156.374
Bartlett's Test of Sphericity Degree of freedom 28
Level of Sinificance. .000
Then, 3 factors having Eigen values greater than 1 are selected as independent or explanatory

variables.

138
Exhibit 8.14
Rotated Factor Loadings and Communalities (Case-II)

Rotated Factor Loadings and Communalities


Variables Factor1 Factor2 Factor3 Communalities
Variable-1 .546 -.065 .582 .641
Variable -2 -.158 .007 .813 .686
Variable -3 .036 .670 .265 .521
Variable -4 .568 .551 -.059 .631
Variable -5 .724 .158 -.029 .550
Variable -6 .104 .779 -.040 .619
Variable -7 .177 .327 .535 .525
Variable-8 .742 .049 .085 .561

8.3.2.2 Binary logistic regression


The related tests for binary logistic regression are as follows:

Exhibit 8.15
Omnibus Tests of Model Coefficients (Case-II)

Tests Chi-square df Sig.


Step 81.747 3 .000
Step 1 Block 81.747 3 .000
Model 81.747 3 .000

Exhibit 8.15 shows the finding of significance, (chi-square=81.747, df=03, p=.000) corresponds

to the conclusion that there is adequate fit of the data to the model, meaning that at least one of

the predictors is significantly related to the response variable.

Exhibit 8.16

Model Summary (Case-II)

Step -2 Log likelihood Cox & Snell R Nagelkerke R


Square Square
1 13.202 .400 .894
The model summary (exhibit 8.16) shows that 40% to 90% of variation in dependent variable

can be explained by the model.

139
Exhibit 8.17

Hosmer and Lemeshow Test (Case-II)

Step Chi-square df Sig.


1 .838 6 .991
Moving on, the Hosmer & Lemeshow test (exhibit 8.17) of the goodness of fit, has a significance

of .991, which means that our model is quite a good fit.

Exhibit 8.18
Contingency Table for Hosmer and Lemeshow Test (Case-II)
Reliability of accounting Reliability of accounting
information of derivative financial information of derivative
Step instruments (DFI) would improve financial instruments (DFI) Total
after adoption of IFRS = Not Agree would improve after
adoption of IFRS = Agree
Observed Expected Observed Expected
1 13 13.174 3 2.826 16
2 1 .727 15 15.273 16
3 0 .074 16 15.926 16
4 0 .015 15 14.985 15
Step 1
5 0 .005 17 16.995 17
6 0 .002 13 12.998 13
7 0 .001 47 46.999 47
8 0 .000 20 20.000 20
The Contingency Table for Hosmer and Lemeshow Test simply shows the observed and
expected values for each category of the outcome variable as used to calculate the Hosmer and
Lemeshow chi-square.
Exhibit 8.19
Variables in the Equation (Case-II)
Factors B S.E. Wald df Sig. Exp(B) 95% C.I. for EXP(B)
Lower Upper
FACTOR-1 3.021 1.060 8.124 1 .004 20.520 2.570 163.861
Step FACTOR-2 -.715 .731 .958 1 .328 .489 .117 2.049
1a FACTOR-3 3.711 1.211 9.392 1 .002 40.900 3.810 439.027
Constant 7.263 2.156 11.343 1 .001 1426.257

140
From the exhibit (Exhibit-8.19) it is found that the relation between dependent variable and the

factor-2 is insignificant. While in case of factor-1 & 3, the relationship is significant and

indicates that if factor-1 & 3 changes by one unit, the accountability of management for

accounting and reporting of derivatives would improve by 20 & 40 times respectively.

8.3.3 Shareholders’ value (Case III)

H06: Shareholders’ value would not be influenced by the adoption of IFRS for

DFI in India.
Exhibit 8.20
Shareholders’ value creation

Shareholders’ value would be


increased after adoption of IFRS for
DFI.

27%

Agreed
Not agreed

73%

In the present study, the relationships between Shareholders‘ value and the following six select

IFRS (IAS 32, IAS 39, and IFRS 7 & IFRS 13) characteristics are examined by the combination

of factor analysis and binary logistic regression.

141
Exhibit 8.21
Independent variables where dependent variable is shareholders’ value (Case-III)

No. Independent Type Description


Variable
1. Variable-1 Input Variable Foreign capital inflow
2. Variable -2 Input Variable Impact of IFRS for derivative financial instruments (DFI)
on share price
3. Variable -3 Input Variable Decision making regarding their valuable investments
4. Variable -4 Input Variable Uniformed disclosures
5. Variable -5 Input Variable Ability to interpret the derivative information
6. Variable -6 Input Variable Scandals on off-Balance sheet derivative items

Here we have considered six such independent variables for the regression which are influenced

by IFRS, to see whether the variables affect share holders‘ value creation. Factor analysis is used

to reduce large number of explanatory variables, to remove multi-collinearly problems and to

simplify the complex relationships among the select variables.

8.3.3.1 Factor analysis

Exhibit 8.22
KMO and Bartlett's Test (Case-III)
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .673
Approx. Chi-Square 114.299
Bartlett's Test of Sphericity df 15
Sig. .000

The exhibit 8.22 shows that KMO and Bartlett's test allows for exploratory factor analysis.

Two factors having Eigen values greater than 1 are selected as independent or explanatory

variables through the factor analysis:

142
Exhibit 8.23
Rotated Factor loadings and Communalities (Case-III)

Variables Rotated Factor Loadings and Communalities


Factor1 Factor2 Communalities
Variable-1 .827 .094 .693
Variable -2 .706 .205 .540
Variable -3 .733 .016 .538
Variable -4 .008 .769 .591
Variable -5 .100 .756 .581
Variable -6 .332 .423 .289

8.3.3.2 Binary logistic regression

Exhibit 8.24
Omnibus Tests of Model Coefficients (Case-III)
Step Chi-square df Sig.
Step 58.124 2 .000
Step 1 Block 58.124 2 .000
Model 58.124 2 .000
Finding of significance of omnibus test (exhibit 8.24) corresponds to the conclusion that there is

adequate fit of the data to the model, meaning that at least one of the predictors is significantly

related to the response variable.

Exhibit 8.25
Model Summary (Case-III)
Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square
a
1 130.090 .305 .440

The model summary shows that 30% to 44% of variation in dependent variable can be explained

by the model.

143
Exhibit 8.26
Hosmer and Lemeshow Test (Case-III)
Step Chi-square df Sig.
1 8.294 7 .307

Moving on, the Hosmer & Lemeshow test (exhibit-8.26) of goodness of fit suggests that the

model is quite a good fit.

Exhibit 8.27
Contingency Table for Hosmer and Lemeshow Test (Case-III)

Shareholders’ value would be Shareholders’ value would Total


Step increased after adoption of IFRS for be increased after adoption
DFI = Not agree of IFRS for DFI = Agree
Observed Expected Observed Expected
1 16 15.954 0 .046 16
2 16 15.708 0 .292 16
3 13 15.172 3 .828 16
4 15 15.094 2 1.906 17
Step 1 5 18 16.029 1 2.971 19
6 13 12.504 3 3.496 16
7 11 10.699 6 6.301 17
8 8 7.686 8 8.314 16
9 6 7.153 21 19.847 27

The Contingency Table for Hosmer and Lemeshow Test simply shows the observed and

expected values for each category of the outcome variable as used to calculate the Hosmer and

Lemeshow chi-square.

Exhibit 8.28
Variables in the Equation (Case-III)
FACTOR B S.E. Wald df Sig. Exp(B) 95% C.I. for EXP(B)
Lower Upper
FACTOR-1 2.259 .399 32.041 1 .000 9.575 4.379 20.934
a
Step 1 FACTOR-2 .261 .219 1.422 1 .233 1.299 .845 1.996
Constant -1.792 .312 33.045 1 .000 .167

144
From the exhibit it is found that (Exhibit No. -8.28) the relation between dependent variable and

the Factor-2 is insignificant. However, in case of Factor-1, the relationship is significant and

indicates that if factor-1changes by one unit, the Shareholders‘ value would be increased after

adoption of IFRS for DFI and it would improve by more than 9 times.

8.4 Conclusion

Ninety one percent of our respondents have supported that the reliability of accounting

information of derivative financial instruments would improve after adoption of IFRS in the

countries like India. The study shows that the seven select attributes characteristics are related

with the reliability of accounting information of DFIs where three out of seven independent

variables have individual influence on the reliability of accounting information of DFIs.

77% respondents have supported that the accountability of management for accounting and

reporting of derivatives would be improved after adoption of IFRS in the countries like India.

The study shows that the eight select attributes are related with the accountability of management

where six out of eight independent variables have individual influence on the accountability of

management for DFIs.

27% respondents have supported shareholders‘ value creation after adoption of IFRS in the

countries like India. The study shows that the six select variables are related to the shareholders‘

value creation where three out of six independent variables have individual influence on the

Shareholders‘ value creation in case of adoption of IFRS for DFIs.

Finally, we conclude that (i) reliability of accounting information of DFIs, (ii) accountability of

management for accounting and reporting of DFIs and (iii) shareholders‘ value creation, would

be influenced by the adoption of IFRS for DFIs in India.

145
References

Sakar, E., Keskin, S., & Unver, H. (2011). Using of factor analysis scores in multiple regression for

predction of kernel weight in ankara walnuts. The Journal of Animal & Plant Sciences , 21 (2),

182-185.

Suleiman, S., Suleman, I., Usman, U., & Salami, Y. O. (2014). Predicting an Applicant Status Using

Principal Component, Discriminant and Logistic Regression Analysis. International Journal Of

Mathematics And Statistics Invention (IJMSI) , 2 (10), 5-15.

146
CHAPTER IX

CONCLUSION AND POLICY IMPLICATIONS

9.1 Introduction

Our study now comes to an end. In this chapter we summarize studies and research output of all

previous chapters (except chapters 1, 2 and 3). This chapter concludes the thesis and takes up

significant policy issues. Beside policy relevance, the study provides rare evidence on the

economic consequences of forcing firms to change an entire set of accounting and disclosure

standards.

The lessons and merits of introduction of IFRS are still debated and there are major policy

issues. Effects of IFRS adoption involve three elements; (i) the information presented in financial

statements, (ii) the markets efficiency and (iii) the accounting harmonization. It has been argued

that IFRS adoption improves the functioning of global capital markets by providing comparable

and high quality information to investors. IFRS promises more accurate, comprehensive and

timely financial statement information than local principles, particularly if the standards they

replace have been influenced by legal, political and taxation agendas at the national level.

Even before IFRS became mandatory, many firms around the world had voluntary adopted or

switched to IFRS. Firms volunteering for an early adoption of IFRS are those seeking to access

foreign capital, improve customer recognition or reduce political cost. While we compare ‗early‘

and ‗late‘ adopters, we find benefits take some times to materialize.

Recent trend of moving towards IFRS by over 130 countries across the globe is one of the most

significant regulatory changes in the history of accounting. The lessons and merits of this change

147
are still debated and still remain a major policy issue. In this regard our study contributes to this

debate by providing early evidence of introducing mandatory IFRS reporting for DFIs in the

countries like India.

This concluding chapter is divided into five sections. In the first section, a summary is provided

of the contents of all the previous chapters including the findings of the study. The second

section talks on contribution of the research work. The third section offers the potential policy

guidelines for proper use of IFRSs for DFIs in India. The fourth section makes some concluding

remarks and section five, the last section deals with scope of further research.

9.2 Summary of the research work

The study reveals that:

 Use of derivatives is growing rapidly all over the world. India is also not lagging behind

in this regard. In case of NSE of India, it is observed that DFIs contribute more than 90%

of the total volume as compared to less than 1% at the time of inception of derivatives in

the Indian stock market in 2001.

 Adoption of Ind AS (IFRS) for DFIs would rejuvenate business firms and investors. As

the firms need to recognize measure and disclose DFIs as per IAS 32, IAS 39, IFRS 7

and IFRS 13, the whole accounting treatment of DFIs would have a positive impact on

investors as well as the companies.

 The study outlined accounting standards namely IAS 32, IAS 39, IFRS 7 and IFRS 13

with an objective to extract the principles of accounting, reporting and disclosure for

DFIs and also made comparisons with the related Ind AS.

148
It appeared through the study that due to option in some cases management has the

opportunity to treat the DFIs differently to maximize their profit margin (shown in

chapter five).

The study has also examined the differences that exist between two sets of accounting

standards namely IFRSs for DFIs and Ind AS (converged) for DFIs. Hardly any

differences are found between the two accounting standards, those found are next to

negligible.

As of now, reporting and disclosure level of DFIs of Indian companies (AS user

companies) is lower than that of IFRS user companies. Thus it indicates that Ind AS

(IFRS) would impact positively on Indian companies in respect of disclosure of DFIs.

 IFRS brings uniformity in reporting and disclosure of DFIs in the adopting

economy/counties for which comparison would be easier. The study reveals that although

IFRS adopted companies‘ reporting and disclosure level is not more than 75% of the

standard level, uniformity exists among the selected economy.

 The research work finds that level of disclosure on DFIs is higher in case of IFRS user

companies than that of Ind AS user companies.

 The study examined the impact of implementation of IFRSs for DFIs in India. Then

traced the important factors which would be influenced by the implementation of IFRSs

for DFIs in India. This concludes with the findings that adoption of IFRS for DFIs would

be in favour of business firms and investors due to uniformity and simplicity in

accounting, positive effect on risk and hedge activities, improvement of disclosures level,

control on derivative transactions etc.

149
 The study identified lack of human resource as one of the barriers to implement IFRS for

DFIs in the countries like India. Lack of trained resource persons having expert

knowledge on IFRS for DFIs, is a matter of concern.

Our study reveals that (i) reliability of accounting information of DFIs, (ii) accountability

of management for accounting and reporting of DFIs and (iii) shareholders‘ value

creation would be influenced positively by the adoption of IFRS for DFIs in India (Ref

chapter 8).

In sum, our study examines various economic consequences around voluntary or

mandatory IFRS adoption and in many cases firms reporting under IFRS appear to enjoy

substantial benefits. The IFRS have an Anglo- Saxon origin and related studies find that

the adoption of IFRS has had a greater impact on the financial statements of code (where

almost all legal implications are codified and there is little choice left for judge to

interpret) against common law (where almost no legal implications are codified and there

is vast choice left for judge to interpret) countries. In countries with code law, IFRS

increases equity and earnings. The results for the common law countries suggest that

adoption only modestly impacted the value relevance of equity or earnings.

9.3 Contributions

Despite of few limitations (mentioned in chapter-1) our research work makes important

contributions regarding the following issues.

 The study infers that how IFRS user companies maintain reporting and disclosures of

DFIs. It shows how IFRS user companies maintain uniformity for reporting and

disclosing DFIs among them. Thus the research contributes at international

150
harmonization of accounting practices in purview of IFRS for DFIs. This also certainly

helps the Indian companies to harmonize their reports and disclosure along with IFRS

user companies.

 We provide an empirical study of its kind on IFRS for DFIs in India showing how IFRSs

for DFIs would improve accounting uniformity and level of disclosure.

 The research work contributes to the field of capital market and accounting literature by

examining the reliability of IFRS for DFI, level of disclosure of DFI in the companies‘

annual reports;

9.4 Policy implications

Our study suggests the following implications:

 Regulatory environment of India

Institute of Chartered Accountants of India (ICAI) and MCA have framed Ind AS (IFRS) which

would be implemented with effect from 1st April 2016. But in India accounting practices are

affected by many laws, Companies act, SEBI regulations, Banking laws and regulations,

insurance laws and regulations etc. Thus it becomes a big challenge for corporate to adopt IFRSs

for DFIs. In this situation we suggest for making an appropriate regulatory environment so that

recognition, measurement and disclosure of DFIs become possible as per the new standard

thereby maintaining uniformity and harmonization.

151
 Institute of Chartered Accountants of India (ICAI) and SEBI

This study can be of immense use to the Institute of Chartered Accountants of India (ICAI) and

The Securities and Exchange Board of India (SEBI). It may assist those institutions to

understand better the key factors that would be impacted by the implementation of IFRS for

DFIs in India.

Further our study shows that lack of IFRS trained accounting professionals and academic courses

on IFRS for DFIs are a big challenge to implement IFRS for DFIs in India. In this case ICAI and

SEBI have to play important roles to conduct courses and trainings exclusively on IFRSs for

DFIs to enrich trained personnel in this regard.

 Investors and analysts

The study enhances the knowledge of investors with the extent to which companies are

disclosing their derivative transactions. Specific use and application of information from

different disclosures on DFIs‘ information can be used by investors in making wise investment

decisions. This study also makes investors aware about the significance of evaluating reporting

and disclosure process of a firm, for security selection, valuation and risk analysis, before

making investments in it.

But it is a big challenge for the investors to understand the accounts and reports on DFIs

prepared according to Ind AS (IFRS). Misunderstanding or oblivion in this regard might impact

business firms negatively. So it becomes essential to educate the investors and other parties so

that they can use the accounts and reports for their valuable investment decision.

152
 Companies

Companies should provide the minimum of mandated disclosures of the accounting standards for

DFIs. Companies should follow the standards as appropriate and applicable to bring the

uniformity in case of reporting and disclosures of DFIs. Companies should also voluntarily

disclose all other information necessary for investors to fully comprehend the information on

DFIs.

 Academicians and researchers

This study has implications for academicians and researchers as well. The study emphasizes on

the accounting standards specifically related with DFIs. The study makes an empirical

comparison and shows how IFRSs (converged Ind AS) are superior to that of the existing AS for

DFIs. It may help researchers as this study can provide a base for further research in the area of

derivatives and related accounting standards.

As the research indicates that adoption of IFRS (Ind AS) need trained professionals for proper

implementation in our country, academicians might consider the issue and may proceed to

produce human resource in this regard. It seems to be justified to expect that job opportunities

would also be widened for our young generation as there would be huge demand for IFRS

trained persons not only in our country but also in the neighboring countries when the countries

would adopt IFRS in recent future.

Thus we may suggest introducing courses on Ind AS (IFRS) for DFIs in educational institutions

which would enable new accounting professionals to get knowledge on new accounting

standards and their regulations.

153
 Making Data Public at Free of Cost

Empirical as well as conceptual study requires latest as well as daily data. In case of research on

financial derivative particularly in case of foreign exchange market, high frequency data is

essential. Eminent institutions like IITs, IIMs or financially rich private institutions like XLRI,

MDI etc may afford the cost. May we expect SEBI or Forward market commission to take

initiative to make data public for fostering further research in this domain?

9.5 Concluding remarks

We suggest adoption of IFRS for DFIs if and only if:

Autarky value of IFRS + Synchronization Value of IFRS > Value of local GAAP………… (1)

Net Economic value of IFRS + Net Political value of IFRs+ Synchronization Value of IFRS

>0………… (2)

Autarky is represented by national economic self sufficiency. It is a policy of establishing

independence of imports from other countries. In the case of IFRS adoption decision by a

country, we argue that direct benefits are represented by both the net economic and net political

value of IFRS over local standards. The net economic value of IFRS is intended to capture direct

pecuniary benefits as they are usually conceived in economic models of net works. Proponents of

IFRS argue that the standards reduce information cost to an economy. Net political value of

IFRS is the benefit arising from the potential political nature of international accounting standard

setting: if IFRS standard setting can be influenced by political nature of international accounting

standard setting: if IFRS standard setting can be influenced by political lobbying, more powerful

countries are more likely to be able to shape IFRS fast. In addition to standard setting power,

154
cultural sensitivities can also affect the net political value of IFRS to a country. If IASB is

perceived as European institution, countries that are culturally more distant from Europe are

likely to be less accepting of IFRS. In addition to macro level economic and political factors

discussed earlier, it is likely that a country‘s decision to adopt IFRS is influenced by its internal

politics e.g. the actions of special-interest lobbyists and ideology driven regulator.

At the end let‘s perceive the link between nature and society on the one hand and human mind

and society (institutions) on the other.. Financial market is a net work of institutions (societies,

organizations, laws). In other words what is being studied in IFRS/IAS research is the

relationship between the mind and institutions (organizations, laws) rather than the relationship

between the nature and the society (ontology). Thinking skills can be calculative or meditative

and the world can be examined from a technological phenomenon. Research can have either

mathematical or practical spirit. Of late finance research shows that the stock price behavior

continue to be better explained by irrational theories rather than rational and game theoretic

models. We have perceived IFRS/IAS adoption for DFIs in the rationalist paradigm.

However, rationalism does not explain major historical events like adoption of IFRS replacing

national standards, as irrational decisions often make historical accidents; by dismantling long

hold views and shaping the world, for good or bad. Hence, the conclusions of our research will

be conditioned by how one perceives epistemological difficulty and nihilism encountered in this

domain of accounting research.

155
9.6 Scope of further research

Following is a list of probable future research that might be undertaken in the area of

study:

 Our study is confined between the IFRS and Indian AS which is principle based rather

than rule based. In future further research could be extended among the principle based as

well as rule based standards like FAS of USA.

 The study of this thesis includes financial reporting and disclosure of derivative financial

instruments in general. Further research might be conducted on how the stakeholders

related to a specific company get affected on implementation of IFRS.

 Our study has shown if the shareholder‘s value would be influenced after implementation

of IFRS for DFIs. Further study can be made on the quantitative data how shareholder‘s

value and/or value of the firm are influenced after adoption of IFRS for DFIs by the

firms.

 In case of secondary data we have used single year annual report to draw the inference.

Where further research might be conducted considering more than one year secondary

data.

 After completion of 1st year adoption of IFRS for DFIs in India, a new research area

would be emerged to find the post implementation effect of IFRS for DFIs in our country.

156
BIBLIOGRAPHY

Books:

Acharia, V. & Richardson, M. (2009). Restoring Financial Stability: How to Repair a Failed System. Willey.

Adedeji, B.A. (2004): Accounting Theory and Regulatory Framework; Lagos Nigeria.

Agresti, A. (2007). Categorical Data Analysis (2 ed.). Hoboken: Wiley-Interscience.

Bansal, M., & Bansal, N. (2006). Derivatives and Financial Innovations. New Delhi: Tata McGraw-Hill

Publishing Company Limited.

Bhaskar, P. V., & Mahapatra, B. (2003). Derivative Simplified- An Introduction to Risk Management.

Response Books.

Bhattacharyya, A. K. (2008). Indian Accounting Standard: Practices, comparisons and Interpretations.

New Delhi: Tata McGraw-Hill Publishing Company Limited.

Brannick, T., & Roche, W. k. (2007). Business Research methods.

Bryman, A., & Bell, E. (2007). Business Research methods.

Butler, C. (2009). Accounting for Financial Instruments. England: A John Wiley and Sons Ltd, Publication.

Catty, J. P. (2010). Guide to fair value under IFRS. Canada: John Wiley & Sons.

Christian, D., & Ladenbach, N. (2013). Willey Regulatory Reporting: IFRS Essentials. John Wiley & Sons.

Chattopadhyay, K., & Sen, S. (2013). Rediments of Social Research (1 ed.). Kolkata: `Levant Books.

Clark, R. C. (1986). Corporate Law. Little, Brown

157
Debnath, B. (2010). Research Methodology Theory & Techniques.

Deloitte; Touche; Tohmatsu. (2002). International Financial Reporting Standards: A Practical Guide (3

ed.). Hong kong: IAS.

Dieter, C., & Norbert, L. (2013). IFRS Essentials. German: John Wiley & Sons.

Dubofsky, D. A., & Miller, T. (2007). Derivatives: Valuation and Risk Management (1 ed.). New Delhi:

Oxford University Press.

Elliott, A. C., & Woodwar, W. A. (2014). IBM SPSS by Example: A Practical Guide to Statistical Data

Analysis. SAGE Publication.

Epstein, J. B. (2010). Interpretation and Application of International Financial Reporting Standards.

Epstein, J. Barry & Jermakowicz, K. Eva. (2010). Interpretation and Application of International Financial

Reporting Standards.

Ernst & Young. (2010). US GAAP Vs IFRS: The basics. Ernst & Young.

Flood, J. M. (2013). Wiley GAAP 2014: Interpretation and Application of Generally Accepted Accounting

Principles (12 ed.). Somerset: Wiley.

Frush, S. (2008). Hedge Funds Demystified: A self teaching guide (1 ed.). McGraw-Hill.

George, D., & Mallery, P. (2003). SPSS for Windows step by step: A simple guide and reference (4 ed.).

Boston: Allyn & Bacon.

Glaulier, M., & Underdown, B. (2001). Accounting Theory and Practice (7th ed.). London: FT-Prentice Hall.

Grant Thornton. (2014). Comparison between U.S. GAAP and International Financial Reporting

Standards. US: Grant Thornton International Ltd.

158
Greenspan, J. (1997). Financial Futures and Options in Indian Perspective. . Jaico Publishing House.

Gujarati, D. N. (2004). Basic Econometrics (4 ed.). McGraw.

Gupta, P. (2008). Financial Instruments standards:A guide on IAS 32, IAS 39 and IFRS 7. New Delhi: Tata

McGraw- Hill Publishing co. Ltd.

Kanji, G. (2006). 100 Statistical Tests (3 ed.). New Delhi: Sage Publication.

Kaur, j. (2011). International Financial Reporting standards: A Practical approach. New Delhi: Tata

McGraw-Hill Education Pvt. Ltd.

Kormbrot, D. (2005). Spearman's Rho, Encyclopedia of statistics in Behavioral science. willey.

Kothari, C. (2004). Research Methodology Methods and Techniques (2 ed.). New Delhi: New Age

International Publishers.

Lam, N., & Lau, P. (2010). Intermediate Financial Reporting: An IFRS Perspective. New Delhi: Tata Mc-

graw Hill.

Lee, C., Lee, J., & Lee, A. (2010). Statistics for Business and Financial Economics (3 ed.). New Jersey.

Marlowe, J. (2000). Hedging Currency Risk and Options and Futures.

Nunnally, J. C. (1978). Psychometric Theory. (2, Ed.) New York: McGraw-Hill.

Patwari, D., & Bhargava, A. (2006). Options and Futures An Indian Perspective. Mumbai: Jaico

Publishing.

Powal, S. (2006). Accounting Theory: An Introduction (8th Edition ed.). New Delhi, India: Tata McGraw

Hill Publishing Co. Ltd.

159
Prasad, D. (2008). Content Analysis: A method in Social Science Research. In Research methods for Social

Work, edited by: Lal, D., D.K. and Bhaskaran, V. New Delhi,

Pricewaterhousecoopers. (2006). Similarities and Differences: A comparison of IFRS, US GAAP and Indian

GAAP. India: Pricewaterhousecoopers.

Pricewaterhousecoopers. (2010). A practical guide to IFRS 7 For investment managers and investment,

private equity and real estate funds.

Pricewaterhousecoopers. (2011). Decoding ther differences: Comparison of Ind AS with IFRS . India: PWC.

Pricewaterhousecoopers. (2013). A Global Guide to Fair Value Measurements. www.pwc.com:

PricewaterhouseCoopers LLP.

Pricewaterhousecoopers. (2013). Guide to Accounting for Derivative Instruments and Hedging Activities.

401 Merritt 7, Norwalk.

Rawat, D. (2012). Students' Guide to Accounting Standards. New Delhi: Taxmann.

Revsine, L., Collins, D., Johnson, W., & Mittelstaedt, H. (2011). Financial Reporting & Analysis (5 ed.).

Irwin: McGraw-Hill.

Robinson, J. P., Shaver, P. R., & Wrightsman, L. S. (Eds.). (1991). Measures of personality an

social psychological attitudes. San Diego: Academic Press.

Rosenfield, P. (2006). Contemporary Issues in Financial Reporting A user-oriented approach (1 ed.).

London: Routledge.

Saunders, A., & Cornett, M. (2006). Financial Institutions Management: A Risk Management Approach (7

ed.). London: McGraw Hill.

160
Shajahan,S. (2000). Research methods for management.

Shapiro, A.C. (2000). Multinational Financial Management, Prentice hall of India, New Delhi.

Similarities and Differences-A comparison of IFRS, US GAAP and INdian GAAP. (2006). Price Water House

Coopers.

Sundaram, R. K., & Das, S. R. (2012). Derivatives:Principles and Practice (5th ed.). Irwin: McGraw-Hill.

Swain, A. (2008). Text Book of Research Methodology (2nd ed.). New Delhi: Kalyani Publishers.

The Institute of Chartered Accountants of India. (2011). Indian Accounting Standards. New Delhi: ICAI.

Tohmatsu, D. (2002). International Financial Reporting standards-A Practical Guide.

Varma, J. R. (2008). Derivatives and Risk Management (10 ed.). New Delhi: Tata McGraw-Hill.

Journal/ Conference proceedings / Other Research Papers etc.

Abduli, Z., Uthman, A. B., & Sanni, M. (2014). Financial ratios as performance measure: A comparison of

IFRS and Nigerian GAAP. Accounting and Management Information Systems , 13 (1), 82-97.

Acs, Z. (2006). How Is Entrepreneurship Good for Economic Growth? Innovations: Technology,

Governance, Globalization, 2006, 1(1), 96-107.

Aderemi1, A. K., Philip, A., & Odianonsen, I. F. (2015). Assessing the Connectedness between the

Adoption of Ifrs and the Strength of Accounting Institutions in Nigeria. Journal of Accounting and

Auditing: Research & Practice , 1-12.

Adznan, S., & Nelson, S. P. (2014). Financial instruments disclosure practices: Evidence from Malaysian

listed firms. International Conference on Accounting Studies (pp. 62-67). Kuala Lumpur,

Malaysia: Procedia - Social and Behavioral Sciences, Elsevier.

161
Ahmed, A., Kilic, E., & Lobo, G. (2006). Does Recognition versus Disclosure Matter? Evidence from Value-

Relevance of Banks' Recognized and Disclosed Derivative Financial Instruments. The Accounting

Review , 81 (3), 567-588.

Ahmed, A.S. Neel, M. & Wang, D. (2013). Does Mandatory Adoption of IFRS improve Accounting

Quality? Preliminary Evidence. Contemporary Accounting …, 30(4), 1–49.

Akgun, A. H. (2012). Mandatory application of International Financial Reporting Standards: Influence

process of aimed at members of the accounting profession. The Journal of Accounting and

Finance , 173-194.

Alexandera, D., Bonacib, C., & Mustatab, R. (2012). Fair value measurement in financial reporting.

Procedia Economics and Finance , 3, 84-80.

Aliabadi, S., Chent, H., & Dorestani, A. (2011). Fair Value Determination: A Conceptual Framework.

Journal of Accounting-Business & Management , 18 (1), 93-107.

Amran, A., Bin, A. M., & Hassan, B. C. (2009). Risk reporting: An exploratory study on risk management

disclosure in Malaysian annual reports. Managerial Auditing Journal , 24 (1), 39-57.

Angela, L.J. & Hwang. (2002). Teaching and educational note Comparative analysis of accounting

treatments for derivatives. Journal of Accounting Education , 20, 205-233.

Arshad, R., & Ismail, R. (2011). Discretionary Risks Disclosure:. Asian Journal of Accounting and

Governance: A Management Perspective , 2, 67-77.

Ashbaugh, H. & Pincus, M. (2001). Domestic Accounting Standards,International Accounting

Standards,and predictability of Earnings. Journal of Accounting Research ,39 (3) 417-434.

162
Atanasovsk, A. (2015). Empirical Investigation into the Determinants of Compliance with IFRS 7

Disclosure Requirements. ACTA Universitatis Danubius , 11 (2), 5-17.

Atanasovski, A. (2015). Empirical Investigation into the Determinants of Compliance with IFRS 7

Disclosure Requirements. Business Administration and Business Economic , 11 (2), 5-17.

Ball, R. (2006). International Financial Reporting Standards (IFRS):pros and cons for Inverstors.

Accounting and business research, international accounting policy fouram , 36 (Special issue),5-

27.

Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International Accounting Standards and Accounting

Quality. Journal of Accounting Research , 46 (3), 467-498.

Bartram, S., Brown, G., & Fehle, F. (2009). International evidence on financial derivatives usage.

Financial Management , 38 (1), 185-206.

Becketti, S & Sellon, Jr. G.H. (1989). Has financial market volatility increased? Economic Review ,74, 17-

30.

Berkman,H & Bradbury,M.E. (1996). Emperical Evidence on the corporate use of derivatives. Financial

management ,25 (2), 5-13.

Bhagwat, S., Omre, R., & Chand, D. (2012). An Analysis of Indian Financial Derivatives Market and its

Position in Global Financial Derivatives Market . Journal of Business Management & Social

Science Research (JBM&SSR) ,1(2),45-59.

Bischof, J. (2009). The effects of IFRS 7 adoption on bank disclosure in Europe. Accounting in Europe , 6

(2), 167-194.

163
Blanchette, M., & Desfleurs, A. (2011). Critical Perspectives on the Implementation of IFRS in Canada.

Journal Of Global Business Administration (JGBA) , 3 (1), 19-40.

Bloom,R. & Fuglister, J. (1999). The overview of FASB statement 133-Accounting for Derivative

Instruments and headging Activities. The Ohio CPA journal , 58,23-28.

Bodnar, M. Gorden , Hayt, S. Gregory , Marston, C. Richard & Smithson, W Charles. (1995). Wharton

Survey of Derivatives usage by U.S. Non-financial firms. Financial Management , 104-114.

Bonetti, P., Mattei, M., & Palmucci, F. (2012). Market reactions to the disclosures on currency risk under

IFRS 7. Academy of Accounting & Financial Studies Journal , 16, 13-24.

Bontas, B. (2012). The Assessment of Hedge Effectiveness. Economics and Applied Informatics , 1, 57-62.

Brown, P., & Tarca, A. (2012). Ten years of IFRS: Practitioners’ comments and suggestions for research.

Australian Accounting Review , 22 (4), 319-330.

Burdus, E. (2010). Fundamentals of Entrepreneurship. Review of International Comparative

Management , 11 (1), 33-42.

Bushee, B., & Friedman, H. (2015). Disclosure Standards and the Sensitivity of Returns to Mood. The

Review of Financial Studies , 0 (0), 1-36.

Bushman, R. M., Piotroski, J., & Smith, A. J. (2004). What determines corporate transparency? . Journal

of Accounting Research , 42 (2), 207-252.

Buvaneswari, R.P. ; Ragupathi, M. ;Mani, A. & Kirubakaran, M. (2007). Indian Stock Market - Hedging of

Index Future is a boon or bane. Indian Journal of Finance , I (3), 25-23.

164
Cai, F., & Wong, H. (2010). The Effect Of IFRS Adoption On Global Market Integration. International

Business & Economics Research Journal , 9 (10), 25-34.

Cairns, D. (2006). The Use of Fair Value in IFRS. Accounting in Europe , 3 (1), 5-22.

Cairns, D., Massoudi, D., Taplin, R., & Tarca, A. (2011). IFRS fair value measurement and accounting

policy choice in the United. The British Accounting Review , 43, 1-21.

Cavanagh S. (1997) Content analysis: concepts, methods and applications. Nurse Researcher 4, 5–16.

Chakraborty, T. (2012). Resilience of Indian Equity Versus Derivatives Markets: An Analysis Using VaR

Approach. The IUP Journal of Applied Finance , 18 (3), 95-108.

Chalmers, K., & Godfrey, J. (2000). Practice versus Prescription in the Disclosure and Recognition of

Derivatives. Australian Accounting Review , 11 (2), 40-50.

Chen, H., Tang, Q., Jiang, Y., & Lin, Z. (2010). The role of International Financial Reporting Standards in

accounting quality: evidence from the European Union . Journal of International Financial

Management and Accounting , 21 (3), 220-278.

Christensen, H. & Lee, E. (2009). Do IFRS Reconciliations Convey Information? The Effect of Debt

Contracting. Journal of Accounting Research ,47 (5) 1167-1199.

Chyi Woan Tan, Greg Tower, Phil Hancock, Ross Taplin. (2005). User Views On the Complex Accounting

For Financial Instruments. International Business & Economics Research Journal , 65-76.

Daske, H; Hail, L; Leuz, C. & Verdi, R. (2008). Mandatory IFRS Reportining around the world: Early

Evidence on the Economic Consequences. Journal of accounting research , 1085-1141.

165
Dechow, P., Myers, L., & Shakespeare, C. (2010). Fair Value Accounting and Gains from Asset Securiti-

sations: A Convenient Earnings Management Tool with Compensation Side-Benefits. Journal of

Accounting and Economics , 49 (1), 2-25.

Devalle, A., Onali, E., & Magarini, R. (2010). Assessing the value relevance of accounting data after the

introduction of IFRS in Europe. Journal of International Financial Management & Accounting , 21

(2), 85-119.

Diamond, D. W. and Verrecchia, R.E. (1991). disclosure, Liquidity, and the Cost of Capital. The Journal of

Finance , 46 (4)1325-1359.

Ding, Y., Hope, O., Jeanjean, T., & Stolowy, H. (2007). Differences between domestic accounting

standards and IAS: Measurement, determinants and implications. Journal of Accouting and

Public policy , 26, 1-38.

Dinh, D., & Gong, G. (2013). Hedge accounting and impact on financial market. Journal of Finance and

Accounting , 1(1), 1-18.

Dixit, A., Yadav, S., & P.K., J. (2010) Pricing of Options in Indian Derivatives Market: A Survey of Trading

Member Organizations. South Asian journal of management , 17 (4), 105-132.

Djatej, A., Gao, G., Sarikas, R., & Senteney, D. (2010). An Investigation Of The Comparative Impact Of

Degree Of Implementation Of IFRS Upon The Public And Private Information Quality Of Asia

Pacific Country Firms. International Business & Economics Research Journal , 9 (3), 27-46.

Dodd, R. (2000). The Role of Derivatives in the East Asian Financial Crisis. Working Paper Series III,

Center for Economic Policy Analysis, New York. Working paper no-20

166
Dybvig, P. H., Liang, P. J., & Marshall, W. J. (2013). The New Risk Management: The Good, the Bad, and

the Ugly. Federal Reserve Bank of St. Louis Review , 95 (4), 273-291.

Eckstein, C. Markelevich, A. & Reinstein, A. (2008). Accounting for derivative instruments and hedging

activities (SFAS No. 133) Implications for profitability measures and stock prices. Review of

Accounting and Finance , 7 (2), 131-149.

Educational material on fair value measurement: Measuring the fair value of unquoted

equity instruments within the scope of IFRS 9 Financial Instruments (2012) ; Available at: Web:

www.ifrs.org

Edwards Jr. and Eller, G. (1996): "Derivatives Disclosures by Major U.S. Banks, 1995", Federal Reserve

Bulletin, September, 792-801.

Evans, C., Fisher, J., Gourio, F., & Krane, G. (2015). Risk Management for Monetary Policy Near the Zero

Lower Bound. BPEA Conference Draft (pp. 1-76). Chicago: Brookings Papers.

Evans, T., & Taylor, M. (1982). Bottom Line Compliance with Iasc: A Comparative Analysis. International

journal of Accounting , 18 (1), 115-128.

Ficechter, P. (2011). The Effects of the FairValue Option under IAS 39 on the volatility of Bank earnings.

Journal of International Accounting Research ,10(1), 85-108.

Frank, H. B., & Siman, G. (2012). Exploring factors affecting the proper use of derivatives: An empirical

study with active users and controllers of derivatives. Managerial Finanace , 38 (4), 414-435.

FTI Consulting (2015); India Disclosure Index 2015, How India’s Leading Listed Companies Fare on

Mandatory & Voluntary Disclosure; http://www.fticonsulting.com/insights/reports/india-

disclosure-index-2015, Accessed on: 04.10.2015

167
Gakhar, K., & Meetu. (2013). Derivatives market in India; Evolution, Trading mechanism and future.

Internal Journal of Marketing, Financial Services & Mangement Research , 2 (3), 38-50.

Garbade, K.,& Silber, W. (1983), “Price Movements and Price Discovery in Futures and Cash Markets”,

Review of Economics and Statistics, Vol. 65, No. 2, pp. 289-297.

García, S., Molina, D., Lozano, M., & Herrera, F. (2009). A study on the use of non-parametric tests for

analyzing the evolutionary algorithms’ behaviour: a case study on the CEC’2005 Special Session

on Real ParameterOptimization. J Heuristics , 15, 617-644.

Gebhardt, G. (2000). The evolution of Global Standards on Accounting. Brookings-Wharton Papers on

Financial Services , 341-368.

Gebhardt, G., Reichardt, R., & Wittenbrink, C. (2004). Accounting for Financial Instruments in the

Banking Industry: Conclusions from a Simulation Model. European Accounting Review , 13 (2),

341-371.

Glaum, M., & Klocker, A. (2011). Hedge accounting and its influence on financial hedging: When the tail

wags the dog. Accounting and Business Research , 41 (5), 459-489.

Gliem, J. A., & Gliem, R. R. (2003). Calculating, Interpreting, and Reporting Cronbach’s Alpha Reliability

Coefficient for Likert-Type Scales. Midwest Research to Practice Conference in Adult, Continuing,

and Community Education, 82-88. Midwest.

Gope, A. (2014). Indian Equity Derivative Market. international Journal of business and Management , 2

(6), 115-124.

Guay, W. & Kothari, S.P. (2003). How much do firms hedge with derivatives? Journal of Financial

Economics , 70 (3), 423-461.

168
Guggiola, G. (2010). IFRS Adoption In The E.U., Accounting Harmonisation And Markets Efficiency: A

Review. International Business & Ecoomics Research Jounal , 9 (12),99-112.

Hague, I. (2004). IAS 39: Underlying Principles. Accounting in Europe , 1 (1), 20-26.

Hamlen, S. & Largay, J. (2005). Has SFAS 133 made derivative reporting more transparent? A look at the

Dow 30. Journal of derivatives Accounting , 215-230.

Hardy, Y., & Ahalik. (2015). The impact of IFGRS implinentation, leverage, audit quality, institutional

ownership and managerial ownership towards earnings quality of Indonesian listed companies

LQ-45 index. I J A B E R , 13 (1), 399-415.

Hassan, M., Percy, M., & Stewart, J. (2006). The Transparency of Derivative Disclosures by Australian

Firms in the Extractive Industries. Corporate Governance and Control , 4 (2), 257-270.

Hassan , O; Marston , C (2010); Disclosure measurement in the empirical accounting literature - a review

article; Electronic copy available at: http://ssrn.com/abstract=1640598; Accessed on:

05/06/2015

Haugue, N. (2004). IAS 39: Underlying Principles. Accounting in Europe ,1 (2004), 21-26.

Hentschel, L. & Kothari, S. P. (2001). Are Corporations Reducing or Taking Risks with Derivatives? The

Journal of Financial and Quantitative Analysis , 36,93-108.

Herber, W., & Tsegba, I. N. (2013). Economic Consequences of International Financial Reporting

Standards (IFRS) Adoption: Evidence from a Developing Country. European Journal of Business

and Management , 5 (28), 80-100.

Holthausen, R. W. (2009). Accounting standards, Financial Reporting Outcomes, and Enforcement.

Journal of Accounting Research ,47 (2), 447-458.

169
Hon, T. (2012). The Behaviour of Small Investors in the Hong Kong Derivatives Markets: A factor analysis.

Journal of Risk and Financial Management (5), 59-77.

Hossain, M. (2008). The extent of Disclosure in Annual Reports of Banking. European Journal of Scientific

Research , 23 (4), 659-680.

Hoti, A.H. & Nuhiu, A.R. (2011). Early Adoption of International Financial Reporting Standards (IFRS) in

the US capital Markets. International Research Journal of Finance and Economics , 81, 98-105.

Htay, S. N., Rashid, H. M., Adnan, M. A., & Meera, A. K. (2011). Corporate Governance and Risk

Management Information Disclosure in Malaysian Listed Banks: Panel Data analysis.

International Review of Business Research Papers , 7 (4), 159-176.

Hukeri, P. (2007). Domestic Derivatives: Issues, Risks and Proposals. Econnomic & Political Weekly ,

1072-1077.

Hunziker, S. (2013). The disclosure of market risk information under IFRS 7 Evidence from Swiss listed

non-financial companies. IFZ Working Paper No. 0020/2013, Lucerne University of Applied

Sciences and Arts,Switzerland .

Hwang, A. (2002). Comparative analysis of accounting treatments for derivatives. Journal of Accounting

Education , 20 (3), 205-233.

Hwang, A. L. (2002). Teaching and educational note Comparative analysis of accounting treatments for

derivatives. Journal of Accounting Education , 20, 205-233.

Iatridis, G. (2010). IFRS Adoption and Financial Statement Effects: The UK Case. (38), 165-172.

170
Ikpefan, O. A., & Akande, A. O. (2012). International Financial Reporting Standard (IFRS): Benefits,

Obstacles and Intrigues for Implementation in Nigeria. Business Intelligence Journal , 5 (2), 299-

307.

Jain, P. (2011). IFRS Implementation in India: Opportunities and Challenges. World Journal Of Social

Sciences ,1 (1), 125-136.

Jyothi, D. J., & Ravinarayana, K. (2014). Convergence with IFRS: Benefits and Challenges. Asian Journal of

Management , 5 (3), 293-296.

Jankensgård, H., Hoffmann, K., & Rahmat, D. (2014). Derivative Usage, Risk Disclosure, and Firm Value.

Journal of Accounting and Finance , 14 (5), 159-174.

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings

management before and after IFRS adoption. J. Account. Public Policy (27), 480-494.

Jones, M. J., & Shoemaker, P. A. (1994). Accounting narratives: A review of empirical studies of content

and readability. Journal of Accounting Literature , 13, 142-161.

Kawaller, G. I. (2004). What analysis Need to know about Accounting for Derivatives. New york: AIMR.

Available at: http://faculty.babson.edu/halsey/acc7500/derivative%20accounting%202004.pdf;

Accessed on 12.09.2013

Khorambakht, Z., & Naderian, A. (2014). A study of differences in financial performance under Indian

GAAP and IFRS: Case of Wipro company. Asian Journal of Development Matters , 8 (1), 24-30.

Kingsley, O. O., Gina, O., & Vivian, O. (2014). A Comparative Study of Accounting Standards in Nigeria,

United Kingdom and United States of America. IOSR Journal of Economics and Finance , 3 (2), 1-

7.

171
Koonce, L., Lipe, M., & McAnaIly, M. (2008). Investor Reactions to Derivative Use and Outcomes. Review

of Accounting Studies , 13 (4), 571-597.

KPMG (2013); IFRS compared to US GAAP: An overview Web: www.kpmg.com/ifrs

Kruskal, W. H., & Wallis, A. (1952). Use of ranks in one-criterion variance analysis. Journal of the

American Statistical association , 47, 583-621.

Laux, C., & Leuz, C. (2010). Did Fair-Value Accounting Contribute to the Financial Crisis? The Journal of

Economic Perspectives , 24 (1), 93-118.

Laux, Christian & Leuz, Christian , 2009, The Crisis of Fair value accounting; Making sense of the

recentdebate, CFS ( Centre for Financial Studies) working papers No-2009/09 Available at :

www.econstor.eu, Accessed on: 28/09/2014

Leuz, C., & Verrecchia, R. (2000). The Economic Consequences of Increased Disclosure. Journal of

Accounting Research , 38, 91–124.

Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: causality and causes.

Journal of Monetary Economics , 46 (1), 31-77.

Li, H., Visaltanachoti, N., & Luo, R. H. (2014). Foreign Currency Derivatives and Firm Value: Evidence from

New Zealand. Journal of Financial Risk Management , 3, 96-112.

Lien, D., & Zhang, M. (2008). A Survey of Emerging Derivatives Markets. Emerging Markets Finance and

Trade , 44 (2), 39-69.

Lin, J. B., Pantzalis, C., & Park, J. C. (2009). Derivatives use, Information Asymmetry, and MNC post-

acquisition performance. Financial Management ,38 (3), 631-661.

172
Lins, K. V., Servaes, H., & Tamayo, A. (2011). Does Fair Value Reporting Affect Risk Management?

International Survey Evidence. Financial Management , 40 (3), 525-551.

Lipunga, A. (2014). Risk disclosure practices of Malawian commercial banks. Journal of Contemporary

Issues in Business Research , 3 (3), 154-167.

Logistic Regression: Available at :

http://estudijas.lu.lv/file.php/747/Jaunais_saturs/LogReg/Logistic_Regression_1.pdf;

Accessed: 07.08.2015

Lopes, P. T., & Rodrigues, L. L. (2007). Accounting for financial instruments: An analysis of the

determinants of disclosure in the Portuguese stock exchange. The International Journal of

accounting , 42, 25-56.

Madawaki, A. (2012). Adopttion of International Financial Reporting Standards in Developing countries;

The case of Nigeria. International Journal of Business and management ,7 (3), 152-161.

Malaquias, R., & Lemes, S. (2013). Disclosure of financial instruments according to International

Accounting Standards: empirical evidence from Brazilian companies. Brazilian Business Review ,

10 (3), 82-107.

Matis Dumitru,Bonaci Carmen Giorgiana, Coroiu Sorina Ioana. (2010). The Accounting Regulation

Process In The Field of Financial Instruments. The journal of the faculty of Economics- Economic.

, 534-540.

McCarroll, J., & Khatri, G. (2012). Fair value measurement under IFRS 13. Financial Reporting

Accountancy Ireland , 44 (4), 22-23.

173
Melumad, N., Weyns, G., & Ziv, A. (1999). Comparing Alternative Hedge Accounting Standards:sahre

holders perspective. Review of Accounting studies , 5, 265-292.

Mitra, G., & Gope, A. (2013). IFRS on Derivative Financial Instruments. DBM Social Science Reporter , 1

(1), 12-19.

Mohammad Firoz, A.Aziz Ansari, Kahkashan Akhtar. (2011). IFRS- Impact on Indian banking Industry.

International Journal of Business and Management , 6 (3), 277-283.

Nachar, N. (2008). The Mann‐Whitney U: A Test for Assessing Whether Two Independent Samples Come

from the Same Distribution. Tutorials in Quantitative Methods for Psychology , 4 (1), 13-20.

Nguyen, H, & Faff, R. (2010). Are firms hedging or speculating? The relationship between financial

derivatives and firm risk,. Applied Financial Economics ,20 (10), 827-843.

Oyeka, I. C., & Ebuh, G. U. (2012). Modified Wilcoxon Signed-Rank Test. Open Journal of Statistics , 2,

172-176.

Pacter, P. (2015). Global Reach of IFRS. The CPA Joournal , 13-16.

Palea, V. (2013). IAS/IFRS and financial reporting quality: Lessons from the European experience. China

Journal of Accounting Research , 6, 247-263.

Persons, O. (2009). IFRS FOR U.S. Companies. The Journal of Applied Business Research , 23-30.

Pinnuck, M. (2012). A Review of the Role of Financial reporting in the Global Financial Crisis. Australian

Accounting Review22 (1), 1-14 .

Pounder, B. (2011, August). A world of fair value. Srategic Finance , 15-16.

174
Prabhakara, T. (2013). Derivatives, Hedge Accounting Disclosure And Impact On Indian Financial Market.

Golden Research Thoughts , 3 (3).

PricewaterhouseCoopers (2004). Ready for take-off? Available at: www.pwc.com/ifrs

Purvis, S., Gerson, H., & Diamond, M. (1991). The IASC and its comparability project: Prerequisites for

success. Accounting Horizons , 5, 25-44.

Ragini. (2012). Corporate Disclosure of Intangibles:A Comparative Study of Practices among Indian, US,

and Japanese Companies. Vikalpa , 37 (3), 51-72.

Rajendran, M. (2007). Derivative use by Banks in India. Academy of Banking studies journal , 6 (1), 27-37.

Rakshit, D. and Chatterjee, C. (2008). Accounting for Financial Derivatives: An Overview. The Icfai journal

of Accounting Research , 24-35.

Ramanna, K & Sletten, E (2009): Why do countries adopt International Financial Reporting Standards?

Working Paper, Harvard Business School 09-102, 1-46

http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf, Accessed on: 04/12/2014

Ray, S. (2011). Emergence of International Financial Repoting Standard in India's Accounting Scennario.

Research Journal Of finance and Accounting , 47-65.

Ray, S. (2012). Testing Granger Causal Relationship between Macroeconomic Variables and Stock Price

Behaviour: Evidence from India. Advances in Applied Economics and Finance (AAEF) , 3 (1), 470-

481.

Ray, S., & Ray, I. (2012). Is Population Growth beneficial or detrimental for Economic. Advances in Asian

Social Science , 1 (3), 285-292.

175
Reddy,Y.V.& Sebastin, A. (2008). Interaction Between Equity and Derivatives Markets. ICFAI journal of

derivative markets , 19-32.

Renders, A. (2009). Changing Fair Value Accounting. FINANCIEEL FORUM / BANK- EN FINANCIEWEZEN , 2

(3), 152-155.

Rodrigo Fernandes Malaquias, S. L. (2012). Disclosure of financial instruments and Capital cost of

Brazilian Companies. Asian Journal of Business and Management , 16-27.

Ryan, S. G. 2008. Accounting in and for the subprime crisis. The Accounting Review 83(6): 1605–1638.

Sakar, E., Keskin, S., & Unver, H. (2011). Using of factor analysis scores in multiple regression for

predction of kernel weight in ankara walnuts. The Journal of Animal & Plant Sciences , 21 (2),

182-185.

Sarkar,A. (2006): Indian Derivatives Markets:

http://www.newyorkfed.org/research/economists/sarkar/derivatives_in_india.pdf; Accesed on

22.11.12

Sakthivel, P., & kamaiah, B. (2011). The effect of derivative trading on volatility of underlying stocks:

Evidence from the NSE. The Journal of Economics and Business , 511-531.

Santoro, J., & Munter, P. (2013). IFRS compared to US GAAP: An overview. kpmg.com/ifrs

Securities Contracts (Regulation) Act, 1956 [42 of 1956] Available at:

http://www.sebi.gov.in/acts/contractact.pdf; Accessed: 12. 05.2014

Selvam, V., & Rita, S. (2011). Financial Derivatives - Real Challenges in India. Advances In Management ,

4 (1), 20-23.

176
Siegel, S. Y. (1957). Nonparametric statistics. The American Statistician, 11 (3), 13-19.

Smith, C., & Stulz, R. (1985). The Determinants of firms' hedging policies. Journal of Financial and

Quantitative Analysis , 20 (4), 391-405.

Soderstrom, N. &. (2007). IFRS Adoption and Accounting Quality: A Review. European Accounting review

Srivastava, A., & Gupta, P. (2014). Factors affecting IFRS adoption and implementation in India. South

Asian Academic Research Journals , 10, 23-36.

Srivastava, S., Yadav, S. S., & Jain, P. K. (2008). Derivative Trading in Indian Stock Market: Brrokers

Perception. IIMB Management Review , 20 (3).

Strouhal, J. (2007). Opened Problem of the Application of IAS 39 on Reporting of financial Derivatives In

The Czech Republic. International Business & Economics Research Journal , 59-68.

Strouhal, J., Bonaci, C. G., & Matis, B. D. (2010). Accounting for Derivatives: Hedging or Trading? Wseas

transactions on Business and Economics , 7 (3), 242-251.

Stulz, R. (1984). Optimal hedging policies . Journal of Financial and Quantitative Analysis , 19, 127-140.

Stulz, R. (2004). Should We Fear Derivatives? Journal of Economic perspectives , 18 (3), 173-192.

Sujan, A., & Abeysekera, I. (2007). Intellectual capital reporting practices of the top Australian firms.

Australian Accounting Review , 17 (42), 71-83.

Suleiman, S., Suleman, I., Usman, U., & Salami, Y. O. (2014). Predicting an Applicant Status Using

Principal Component, Discriminant and Logistic Regression Analysis. International Journal Of

Mathematics And Statistics Invention (IJMSI) , 2 (10), 5-15.

Sunder, S. (2009). IFRS and the Accounting Consensus. Accounting Horizons , 23 (1), 101-111.

177
Sunder, S. (2002). Regulatory competition among accounting standards within and across international

boundaries. Journal of Accounting and Public Policy , 21, 219-234.

Survey of International Swaps and Derivatives Association (ISDA) in 2009

http://www.isda.org/press/press042309der.pdf; Accessed on: 21.09.2015

Swamynathan, S., & Sindhu. (2011). Financial statement effects on convergence to IFRS-a case study in

India. International Journal of Multidisisciplinary research , 1 (7), 317-336.

Tarca, A. (2004). International Convergence of Accounting Practices: Choosing between IAS and US

GAAP. Journal of International Financial Management and Accounting , 15 (1), 60-90.

Tchankova, L. (2002). Risk identification – basic stage in risk management. Environmental Management

and Health , 13 (3), 290-297.

Tendeloo, B., & Vanstraelen, A. (2005). Earnings Management under German GAAP versus IFRS.

European Accounting Review , 14 (1), 155-180.

United States General Accounting Office (1989), Available at http://archive.gao.gov/d48t13/138426.pdf;

Accessed on: 12/09/2014

Vashishtha, A., & Kumar, S. (2010). Development of Financial Derivatives Market in India- A Case.

International Research Journal of Finance and Economics (37), 15-29.

Verma, Sanjeev & Chauhan, Rohit. (2008). Opportinities in Indian Derivatives and commodioties market.

Indian Journal of Finance , 2 (1).

Verrecchia, R. E., (2001), Essays on Disclosure,

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=276699; Accessed: 28.08.2014

178
Verriest, A. Gaeremynck, A. & Thornton, D.B. (2012). The Impact of Corporate Governance on IFRS

Adoption Choices. European Accounting Review .

Vipul. (2006). Impact of the introduction of derivatives on underlying volatility: evidence from India.

Applied financial economics , 687-697.

Walton, P. (2004). IAS 39: Where Different Accounting Models Collide. Accounting In Europe , 5-16.

Welker, M. (1995). Disclosure Policy, Information Asymmetry, and Liquidity in Equity Markets.

Contemporary Accounting Research , 11 (2), 801-827.

Woods, M. & Marginson, D. (2004). Accounting for Derivatives: Anevaluation of reporting practice by UK

Banks. European Accounting Review , 13 (2), 373-391.

Websites

http://www.bseindia.com/

http://www.fasb.org

http://www.iasplus.com

http://www.icai.org

http://www.kpmg.com/ifrs

http://www.ifrs.org

http://www.investopedia.com

http://go.ifrs.org/global-standards.

http://www.nseindia.com/

http://www.sebi.gov.in

http://www.pwc.com/ifrs

https://www.wikipedia.org/

179
GLOSSARY

1. Amortised cost: Amortised cost is the amount at which a financial asset or financial

liability is measured at initial recognition, less principal repayments and plus or minus

any unamortised original premium or discount. According to IAS 39, the amortised cost

has to be calculated using the effective interest method.

2. Annual Report: A comprehensive document published by company on a company's

activities and financial performance throughout the preceding year.

3. Arbitrageur: One who profits from the differences in price when the same, or extremely

similar, security, currency, or commodity is traded on two or more markets.

4. Call Option: An option to buy assets at an agreed price on or before a particular date.

5. Content analysis: This is a set of procedures for collecting and organizing information in

a standardized format that allows analysts to make inferences about the characteristics

and meaning of written and other recorded material.

6. Corporate governance: It broadly refers to the mechanisms, processes and relations by

which corporations are controlled and directed.

7. Corrected Item-Total Correlation—this is the correlation of the item designated with

the summated score for all other items. According to Gliem & Gliem (2003), a rule-of-

thumb is that these values should be at least 0.400.

8. Derivative: A derivative is a contract to buy or sell an underlying asset at future date,

with the quantity, quality, price and other specifications defined today. On the other, a

180
derivative may be defined as an instrument whose value keeps on changing with the

change in value of the underlying.

9. Embedded derivative: It is a component of a hybrid (combined) financial instrument

that also includes a non-derivative host contract, with the effect that some of the cash

flows of the combined instrument vary in a way similar to a stand-alone derivative.

10. Exit Price: It refers to the sale price of an asset/liability that is determined based on the

amount required to exchange the asset or liability in an orderly transaction between

market participants.

11. Exotic Derivative: A derivative instrument which refers to a more specialized and

complicated one is treated as exotic derivative. A plain vanilla derivative may also

convert into an exotic derivative due to change of its features and vice versa.

12. Fair value: Fair value is the price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the

measurement date under current market conditions irrespective of whether that price is

directly observable or estimated using another valuation technique.

13. Financial Instruments: A financial instrument is any contract that gives rise to a

financial asset of one entity and a financial liability or equity instrument of another entity.

Cash, Derivative etc. are the examples of financial instruments.

14. Forward contract: A contract between two parties giving right and obligating each

other, to exchange a particular good or instrument at today's pre- agreed price where

payment takes place at a specific time in the future.

181
15. Future contract: A contract where two parties decide to purchase or sell an asset at a

given time in the future at a given price. It is similar to a forward contract. A future

contract differs from a forward contract where, a future contract is a standardized contract

written by a clearing house that operates an exchange whereas the forward contract is a

non-standardized contract written by the parties themselves.

16. GAAP: GAAP refers to the common set of accounting principles, standards and

procedures that companies use to compile their financial statements.

17. Hedging: A hedge is an investment strategy to reduce the risk of adverse price

movements in an asset. Normally, a hedge consists of taking an offsetting position in a

related security.

18. Hybrid financial instruments: A single financial security or contract that combines two

or more different financial instruments.

19. Impairment: A reduction in a company's stated capital or asset is known as impairment.

20. Option: A contract that gives the holder the right but not the obligation, to buy (in case

of a call option) or sell (in case of a put option) an asset. In such type of contract the

buyer has the right and the seller has the obligation.

21. Plain vanilla derivative: A Plain vanilla derivative refers to a simple and common

derivative financial instrument having standard features. Examples of such kind of

derivatives are Future, option, Swap etc.

22. Put Option: This is an option contract to sell assets at an agreed price on or before a

particular date.

182
23. Puttable instrument: Puttable instrument is a financial instrument that gives the holder

the right to put the instrument back to the issuer for cash or another financial asset or is

automatically put back to the issuer on the occurrence of an uncertain future event or the

death or retirement of the instrument holder.

24. Risk: Risk is potential of losing something of value. Uncertainty is the underlying force

that invites risk.

25. Shareholders’ value: The value delivered to shareholders because of management's

ability to grow earnings, dividends and share price. In other words, shareholder value is

the sum of all strategic decisions that affect the firm's ability to efficiently increase the

amount of free cash flow over time.

26. Speculators: Speculators are typically sophisticated; risk-taking investors with expertise

in the markets in which they are trading and will usually use highly leveraged

investments such as futures and options, swaps etc.

27. Swaps: These are private contracts between two entities to exchange cash flows on or

before a specified future date following a pre-decided formula. They are somewhat like

forward contracts' portfolios. Swaps are also of two types such as interest rate swaps and

currency swaps.

183
APPENDIX-A

Financial Derivative Instruments Disclosure Score Index

_____________________________________________________________________________
Disclosure items Reference Score

Basic information:
 Types of DFI used 1
 Purposes of issuing or holding derivatives 1
 Categories of DF Asset/Liability 1

Component Score 3

Recognised and derecognized information:


 DFI recognised when and only when the entity becomes a party 1
 Derecognition (Removal) of DFI when part or all the asset do not qualify 1

Component Score 2

Measurement information:
 Initial measurement of DFI 1
 Subsequent measurement of DFI 1

Component Score 2

Fair value hierarchy and Valuation technique information:


 Fair value hierarchy used 1
 Valuation techniques used 1

Component Score 2

Hedge accounting information:


 Hedge effectiveness 1
 Type of Hedge Accounting adopted 1

184
Component Score 2

Qualitative & quantitative risk information:


 Firm‘s financial risk management objective & policies 1
 Summary of quantitative data at the end of the reporting period 1

Component Score 2

Risk information
 Market risk 1
 Liquidity risk 1
 Credit risk 1

Component Score 3

Other Disclosures:
 Gains of DFI in income statement 1
 Gains of DFI in notes 1
 DFI in Balance Sheet 1

Component Score 3

Total score 19

We have calculated score of the companies following Disclosure score index where total score is

19. The index is constructed according to the literature on related areas and has two main

characteristics. Firstly-for each item the company would be allotted 1 if it is disclosed and o

otherwise, so it is dichotomous in nature. The total score for a company is

185
Where Ts is total score, di is 1 if item i is disclosed, and 0 otherwise; n is the maximum number

of items. Secondly-the total score is computed allotting same weight to each item of the

disclosures. The implied assumption is that each item is equally important for all user groups.

According to Lopes & Rodrigues (2007), although this assumption may not be realistic, but the

resulting bias is smaller than the one that would result from assigning subjective weights to the

items.

186
APPENDIX-B
Top 13 stock exchanges in the world as on 31 January 2015
Ra Stock Exchange Economy Adoption of IFRS Selected
nk for Sample
1. New York Stock IFRS is not required or permitted for No
United States
Exchange listed companies.
2. IFRS is not required or permitted for No
NASDAQ United States
listed companies.
3. IFRS Required for consolidated Yes
United financial statements. Permitted for
London Stock Exchange
Kingdom standalone/separate financial
statements.
4. Japan Exchange Group – IFRS is not required or permitted for No
Japan
Tokyo listed companies.
5. IFRS is not required or permitted for No
listed companies.However, CAS
(Chinese Accounting Standards), by
Shanghai Stock Exchange China
and large, converged with IFRS. But
several differences remain between
CAS and IFRS.
6. Domestic companies use Hong No
Hong Kong Stock
Hong Kong Kong Financial Reporting Standards
Exchange
(HKFRS), that are identical to IFRS.
7. European IFRS required or permitted for listed Yes
Euronext
Union companies.
8. IFRS is not required or permitted for No
listed companies..
However, CAS (Chinese Accounting
Shenzhen Stock Exchange China Standards), by and large, converged
with IFRS. But several differences
remain between CAS and IFRS.

9. IFRS required or permitted for listed Yes


TMX Group Canada
companies.
10. IFRS required or permitted for listed Yes
Deutsche Börse Germany
companies.
11 IFRS is not required or permitted for No
Bombay Stock Exchange India
listed companies.
12. National Stock Exchange IFRS is not required or permitted for Yes
India
of India listed companies.
13. IFRS required or permitted for listed Yes
SIX Swiss Exchange Switzerland
companies.
Source: compiled from Monthly reports, World Federation of Exchanges

187
APPENDIX-C

Name of the selected countries and number of respondents on Questionnaire

Sl Country No of No of respondents
No country/Economy
1 Albania 1 2
2 Armenia 1 1
3 Azerbaijan 1 1
4 Bahrain 1 1
5 Belgium 1 1
6 Bermuda 1 1
7 Brazil 1 13
8 Burkina Faso 1 1
9 Canada 1 3
10 Chaina 1 2
11 Chile 1 2
12 Colombia 1 3
13 Cote d‘Ivoire 1 1
14 Cyprus 1 2
15 Denmark 1 2
16 Dubai 1 1
17 Egypt 1 7
18 Fiji 1 1
19 Germany 1 4
20 Greece 1 6
21 India 1 23
22 Indonesia 1 4
23 Italy 1 2
24 Jordan 1 2
25 Lebanon 1 1
26 Luxembourg 1 1
27 Mexico 1 1
28 Nether lands 1 3
29 Nigeria 1 8
30 Oman 1 1
31 Pakistan 1 5
32 Peru 1 5
33 Philippines 1 2
34 Poland 1 2
35 Portugal 1 1
36 Romania 1 2
37 Russia 1 3
38 Serbia 1 1

188
Sl Country No of No of respondents
No country/Economy
39 South Africa 1 4
40 Sri Lanka 1 1
41 Syria 1 2
42 Tanzania 1 1
43 Thailand 1 1
44 Trinidad 1 1
45 Tunisia 1 2
46 Turkey 1 6
47 Ukraine 1 2
48 United Arab Emirates 1 4
49 United Kingdom 1 6
50 United States 1 1
51 Venezuela 1 3
52 Zambia 1 2
53 Zimbabwe 1 2
Total 53 160

189
APPENDIX-D

Questionnaire
A. Please provide the following details about you:
Name of the respondent: ………………………………………………

Profession: ……………………………………..

Name of the organisation or company: ………………………………………

Name of the Country: ……………………………

E-mail address: ………………………..

Contact No (if you want to): ……………………………..

Note:
1. Our questionnaire deals only with derivative accounting standards.

2. There is no specific accounting standard dealing with derivative instruments. But there
are few international and national accounting standards that deal with all the financial
instruments including ―derivative financial instruments‖.
So in the questionnaire IFRS for DFI indicates IFRS for Financial Instruments.
3. The questionnaire is consideredfor the countries where IFRS is about to be implemented,
e.g., India but the respondents may be anywhere of the world.

B. Put your kind response in the respective box(leave the question if no


appropriate option is there):
(No of Questions: 23)

1. How familiar are you with IFRS for Derivative Financial Instruments?

A) Extremely familiar B) Moderately familiar C) Somewhat familiar D) Slightly familiar E) Not at all familiar

Your answer:

Note: If your answer of the above question is (E) then it‘s not require to answer the
following please.

190
2. Reliability of accounting information of derivative financial instruments
(DFI) would improve after adoption of IFRS.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

3. Disclosures on derivative financial instruments (DFI) would reflect the


actual derivative transactions after implementation of IFRS.

A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

4. Adoption of IFRS for derivative financial instruments (DFI)will


improve the disclosure level for derivatives.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree
Your answer:

5. Adoption of IFRSwould improve the qualitative and quantitative


disclosure level regarding derivative’s fair value.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

6. Though different methods and assumptions (the selection of which is


tied to managers’ judgment) for DFI are used for fair value
measurement, adoption of IFRS would bring uniformity in accounting
process.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

7. Adoption of IFRS for derivative financial instruments (DFI) would


improve the comparability of financial reporting regarding qualitative
& quantitative information on risk disclosure.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

191
8. Adoption of IFRS for derivative financial instruments (DFI)
wouldimprove the comparability of financial reporting regarding
qualitative & quantitative information on hedge accounting.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

9. IFRS for derivative financial instruments (DFI) would make


management more accountable for accounting and reporting of
derivatives.
A) Strongly agree B) Agree C) Neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

10. Generally in a country, foreign capital inflow will increase after


implementation of IFRS for derivative financial instruments (DFI).
A) Strongly agree B) Agree C) Neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

11.There would be positive impact of IFRS for derivative financial


instruments (DFI) on share price.
A) Strongly agree B) Agree C) Neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

12.Adoption of IFRS for DFI would help the investors in decision making
regarding their valuable investments.
A) Strongly agree B) Agree C) Neither agree nor disagree D) Disagree E) Strongly disagree

Your answer:

13.Uniformed disclosures on DFI would be available after implementation


of IFRS for DFI.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

192
14. Use of Derivatives and hedging activities will increase after
implementation of IFRS for DFI.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

15. Investors would be able to interpret the derivative information easily


on the basis of qualitative disclosures provided by IFRS.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

16. Shareholders’ value would be increased after adoption of IFRS for


DFI.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree.

Your answer:

17. The scandals on off-Balance sheet derivative items would reduce if a


company maintains accounts as per IFRS.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree.

Your answer:

18.If IFRS has to be uniformly understood and consistently applied then


all regulators, tax authorities, auditors, employees and Stakeholders
would need to be trained first.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:
.
19. Lack of trained resource persons having expert knowledge on IFRS is a
big challenge to implement IFRS in the countries like India.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

193
20.IFRS would simplify accounting and auditing activities on Derivatives
for multinational companies as same accounting standards would be
applied by both the parent company and its subsidiaries.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

21.Adoption of IFRS for DFI would improve the comparability of financial


reporting regarding qualitative & quantitative information on risk
disclosure.
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree
Your answer:
22. Lack of training facilities and academic courses for accounting
professionals on IFRS and Derivatives are the major challenges to
implement IFRS in the countries like India.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

23.If IFRS is implemented, Government would easily be able to control


foreign companies as they would not be able to ‘hide’ complex
derivative transactions behind their foreign accounting practices.
A) Strongly agree B) Agree C) Neither agree or disagree D) Disagree E) Strongly disagree

Your answer:

Any comment please:


______________________________________________
____________________________________________
Note: Our questionnaire consists of 23 questions. Question no-1 is on awareness of respondents on IFRS for DFIs
and question no 7 and 21 are same, it is done intentionally to test the reliability of the respondents‘ responses. Thus
the questionnaire consists of net 21questions on IFRS for DFIs.

194
APPENDIX-E

Details of statistical terms

1. Analysis of variance (ANOVA) is used to analyze the differences among group means

and their associated procedures such as "variation" among groups. It has been developed

by stattician and evolutionary biologist Ronald Fisher. ANOVA is a parametric test and

has some assumptions which should be met to get the desired results.

Basic assumptions

 The population in which samples are drawn must be normally distributed.

 The sample cases must be independent of each other.

 The variance between the groups should be approximately equal.

As secondary data in our research work are not normally distributed, we used similar

kind of non parametric tests instead of ANOVA.

2. Class interval- Class interval refers to the numerical width of any class in a particular

distribution. Mathematically it is defined as the difference between the upper class limit

and the lower class limit.

Class Interval= Upper Class limit – Lower class limit

Class limits are the smallest and largest observations. The data is arranged into different

classes and the width of such class is called class interval. Class intervals are generally equal

in width but this might not be the case always. For example, number of employees of an

195
organisation is arranged age wise as 25-35; 35-45; 45-55 and 55-65 years, here Class interval

would be 10.

3. Correlation-is a statistical technique that can show whether and how pairs of variables

are related with each other which ranges between perfect negative correlation and perfect

positive correlation i.e. -1 to +1.

4. Cox & Snell R2 and Nagelkerke R2- In standard regression, the co-efficient of

determination R2value gives an indication of how much variation in y is explained by the

model. This cannot be calculated for logistic regression but the ‗Model Summary‘ table

gives the values for two pseudo R2 values which try to provide some approximation

measure that is almost similar to standard regression.

In SPSS, there are two modified versions of this basic idea, one developed by Cox &

Snell and the other developed by Nagelkerke. The Cox and Snell R-square is computed

as follows:

Cox & Snell Pseudo-R2

2/n
 2 LLnull 
R  1 
2

 2 LLk 

Because this R-squared value cannot reach 1.0, Nagelkerke modified it. The correction

increases the Cox and Snell version to make 1.0 a possible value for R-squared. The

correction increases the Cox and Snell version to make 1.0 a possible value for R-

squared.

196
Nagelkerke Pseudo-R2

2/n
 2 LLnull 
1  
R2   2 LLk 
1   2 LLnull 
2/ n

Where,

n is the sample size.

-2LL indicates 2 times the log likelihood

 Log likelihood is, in essence, the logarithm of the probability of sample data given the

parameters of model.

5. Cronbach's alpha: This is a statistical measure of internal consistency that measures

how closely a set of items are related as a group. It is generally used as a measure of

internal consistency or reliability i.e. how closely a set of items are related in a

group. Cronbach‘s alpha reliability coefficient normally ranges between 0 and 1.

However, there is actually no lower limit to the coefficient. The closer Cronbach‘s alpha

coefficient is to 1, greater is the internal consistency of the items in the scale.

Cronbach's alpha can be written as a function of the number of test items and the average

inter-correlation among the items. Formula for the standardized Cronbach's alpha is

shown below;

Here N is equal to the number of items, ̅ is the average inter-item covariance among the

items and ̅ equals the average variance.

197
6. Eigen-value

Eigen value indicates the amount of variance explained by each principal component or

each factor. The number of positive Eigen-values determines the number of factors or

components to be extracted. The concept of ‗Eigen value‘ may be clarified as follows;

An eigenvector or characteristic vector of a square matrix is a vector that does not change

its direction under the associated linear transformation. Now this condition could be

written as

Av = λv

For a square matrix A of order n, the number is an eigenvalue if and only if there

exists a non-zero vector v.

7. Exploratory factor analysis (EFA) is a statistical method used to uncover the underlying

structure of a relatively large set of variables. EFA is a technique within factor analysis

whose goal is to identify the underlying relationships between measured variables.

Principal Component Analysis (PCA) and Exploratory Factor Analysis (EFA) are both

variable reduction techniques. Principal Components retained account for a maximal

amount of variance of observed variables and EFA account for common variance in the

data.

8. Factor loading

Factor loadings is used to refer to factor pattern coefficients which represent how much a

factor explains a variable in factor analysis.

198
9. Factor scores

Factor scores are linear combinations of variables which are used to estimate values of the

factors in the factor analysis. Sakar, Keskin & Unver (2011) used factor analysis scores in

multiple regressions. Suleiman et al. (2014) used factor analysis scores to improve the

predictive power of linear discriminator and Logistic regression models using principal

components as input for predicting applicant status (i.e. creditworthy or non- creditworthy)

for new applicant (customer).

10. Hosmer and Lemeshow chi-square test

The recommended test for overall fit of a binary logistic regression model is the Hosmer and

Lemeshow test, also called the chi-square test.

H0: The model is a good fitting model.

H1: The model is not a good fitting model

The Hosmer and Lemeshow test divides subjects into several ordered groups of subjects and then

compares the number actually in the each group (observed) to the number predicted by the

logistic regression model (predicted).

Rejection of the null hypothesis explains that there is no difference between observed and model-

predicted values, implying that the model‘s estimates fit the data at an acceptable level. We have

got the result in our research work as follows

11. Internal consistency-In statistics and research, internal consistency is typically a

measure based on the correlations between different items on the same test. It measures

how well the items on the test measure the same construct or idea. It is measured through

cronbach's alpha.

199
12. Item-total correlation— an item-total correlation test is performed to check if any item

in the set of tests is inconsistent with the averaged behavior of the others. This is the

correlation of the item designated with the summated score for all other items.

According to Gliem & Gliem (2003), a rule-of-thumb is that these values should be at

least 0.400.

13. Kaiser-Meyer-Olkin & Bartlett's Test of Sphericity

 The Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy provides an index

(between 0 and 1) of the proportion of variance among the variables that might be

common variance (i.e., that might be indicative of underlying or latent common factors).

The SPSS software package suggests that a KMO near 1.0 supports a factor analysis and

anything less than 0.5 is not amenable to useful factor analysis.

 Bartlett's Test of Sphericity - This tests the null hypothesis that the correlation matrix is

an identity matrix. According to Elliott & Woodward (2014), Bartlett's Test of Sphericity

is a test of the null hypothesis that the off diagonal elements of the theoretical correlation

matrix are all 0‘s. Rejection of the null hypothesis conforms to continue with the factor

analysis.

The result obtained using SPSS software (version-21) package which includes Bartlett‘s

test of sphericity and the Kaiser-Meyer-Olkin measure of sampling adequacy to assist

users to assess the data adequacy of their correlation matrices for factor analysis.

14. Latent construct can be measured indirectly by determining its influence to responses on

measured variables. A latent construct is also referred to as a factor, underlying construct,

or unobserved variable.

200
15. Non-parametric test: It is the opposite of parametric statistics. It is also known as

distribution free methods, which do not rely on assumptions that the data are drawn from

a given normal probability distribution. The other assumption is that the variables must

be continuous; they can take any possible value within a given range. Few examples of

non-parametric tests are Kruskal-Wallis test, Wilcoxon-Mann-Whitney test etc.

16. Omnibus test may be interpreted as a test of the capability of all predictors in the model

jointly to predict the response (dependent) variable. A finding of significance corresponds

to the conclusion that there is adequate fit of the data to the model meaning that at least

one of the predictors is significantly related to the response variable.

So the model tested can be defined by:

Where

Yi is the category of the dependant variable for the i-th observation and xij is the j

independent variables (j=1,2,...k) for that observation, βj is the j-th coefficient of xij and

indicates its influence on and expected from the fitted model .

17. Parametric statistical test is one that makes assumptions about the parameters of the

population distribution(s) from which one's data are drawn, while a non-parametric test is

one that makes no such assumptions. In this strict sense, "non-parametric" is essentially a

null category, since virtually all statistical tests assume one thing or another about the

properties of the source of population.

201
For practical purposes "parametric" as referring to tests such as t-tests and the analysis of

variance that assume the underlying source of population to be normally distributed; they

generally also assume that one's measures derive from an equal-interval scale. This type

of assumption is not required for non-parametric test.

18. Scale of measurement

Scale of measurement refers to ways in which variables are defined and categorized.

Each scale of measurement has certain properties which in turn determine the

appropriateness for use of certain statistical analyses.

 Nominal: Categorical data and numbers that are simply used as identifiers or names

represent a nominal scale of measurement. Example- Male and Female

 Ordinal: An ordinal scale of measurement represents an ordered series of relationships

or rank order. Example-Agree, Neither agree nor disagree, disagree

 Interval: A scale that represents quantity and has equal units but for which zero

represents simply an additional point of measurement is an interval scale. The fahrenheit

scale is a clear example of the interval scale of measurement.

 Ratio: The ratio scale of measurement is similar to the interval scale in that it also

represents quantity and has equality of units. However, this scale also has an absolute

zero. Example-measurement of height of population of a city.

19. Simple random sampling- Simple random sampling (SRS) is a sampling design where n

units are selected, without replacement, from a population of N units, such that

probability of all samples of size n are equally likely to be Selected. We followed SRS

method to collect data for our research purpose.

202
20. Total variance explained- The number of factors with eigenvalues of 1.00 or higher in a

factor analysis is the total variance explained. It is used in factor analysis.

21. Variable- A variable is any characteristics, number, or quantity that can be measured or

counted. Age, sex, business income and expenses, country of birth, capital expenditure

are few examples of variables.

Binary variable-Observations that occur in one of two possible states, often labeled zero

and one is called binary variable.

Categorical variable- Categorical variable is a variable that can take on one of a limited

number of possible values. It is also called qualitative variables or attributes variables or

sometimes called a nominal variable. The categories are often assigned numerical values

used as labels, e.g., 1 = strongly agree; 2=agree; 3= neither agree nor disagree;

4=disagree; 5= strongly disagree.

22. Varimax rotation

This is one of the common transformation methods of the components in order to

approximate simple structure which has the effect of differentiating the original variables

by extracted factor. This is the most common rotation method. A varimax rotation

solution yields results which make it as easy as possible to identify each variable with a

single factor.

203
APPENDIX-F

Shareholders’ value creation

Shareholders‘ value creation refers the sum of all strategic decisions that affect the firm's ability

to efficiently increase the amount of free cash flow over time. This can be calculated using on

the basis of following methods

Residual income /Economic profit method: It measures the surplus earned by a business after

deducting from income, all the expenses including a notional charge for utilising the capital.

1. Economic profit = Operating profits after taxes less capital charge

2. Economic Profit = (Return on capital – cost of capital) x invested capital

Economic value added or EVA: EVA is essentially a modified version of the economic profit

described above. Adjustments are made to the operating profits and invested capital as the basic

economic profit calculation is distorted by standard accounting treatments.

1. EVA = Adjusted operating profits after taxes less adjusted capital charge

2. EVA = (Adjusted return on capital – cost of capital) x adjusted invested capital

EVA approach has the key advantages of the economic profit approach and in addition it

addresses some of the weaknesses that arise in the economic profit approach due to accounting

practices.

204
APPENDIX- G

LIST OF INTERNATIONAL & INDIAN ACCOUNTING STANDRDS

A. List of International Accounting Standards

Standards Originally Fully Superseded


Title Effective
Number issued withdrawn by
Disclosure of Accounting
Policies (1975)
January 1,
IAS 1 1975
1975
Presentation of Financial
Statements (1997)
Valuation and Presentation of
Inventories in the Context of
the Historical Cost System January 1,
IAS 2 1976
(1975) 1976

Inventories (1993)
Consolidated Financial January 1, January 1, IAS 27 and
IAS 3 1976
Statements 1977 1990 IAS 28
January 1,
IAS 4 Depreciation Accounting 1976 July 1, 1999 IAS 36
1977
Information to Be Disclosed in January 1,
IAS 5 1976 July 1, 1998 IAS 1
Financial Statements 1977
Accounting Responses to January 1, January 1,
IAS 6 1977 IAS 15
Changing Prices 1978 1983
Statement of Changes in
Financial Position (1977)
January 1,
IAS 7 1977
Cash Flow Statements (1992) 1979
Statement of Cash Flows
(2007)
Unusual and Prior Period Items
and Changes in Accounting
Policies (1978)

Net Profit or Loss for the


January 1,
IAS 8 Period, Fundamental Errors 1978
1979
and Changes in Accounting
Policies (1993)
Accounting Policies, Changes
in Accounting Estimates and
Errors (2003)

205
Standards Originally Fully Superseded
Title Effective
Number issued withdrawn by
Accounting for Research and January 1,
IAS 9 1978 July 1, 1999 IAS 38
Development Activities 1980
Contingencies and Events
Occurring After the Balance
Sheet Date (1978)
January 1,
IAS 10 1978
Events After the Balance Sheet 1980
Date (1999)
Events after the Reporting
Period (2007)
Accounting for Construction
Contracts (1979) January 1,
IAS 11 1979
1980
Construction Contracts (1993)
Accounting for Taxes on
Income (1979) January 1,
IAS 12 1979
1981
Income Taxes (1996)
Presentation of Current Assets January 1,
IAS 13 1979 July 1, 1998 IAS 1
and Current Liabilities 1981
Reporting Financial
Information by Segment
January 1, January 1,
IAS 14 (1981) 1981 IFRS 8
1983 2009
Segment reporting (1997)
Information Reflecting the January 1, January 1,
IAS 15 1981 N/A
Effects of Changing Prices 1983 2005
Accounting for Property, Plant
and Equipment (1982)
January 1,
IAS 16 1982
1983
Property, Plant and Equipment
(1993)
Accounting for Leases (1982)
January 1,
IAS 17 1982
1984
Leases (1997)
Revenue Recognition (1982)
January 1,
IAS 18 1982
1984
Revenue (1993)
Accounting for Retirement
Benefits in Financial
Statements of Employers January 1,
IAS 19 1983
(1983) 1985

Retirement Benefit Costs

206
Standards Originally Fully Superseded
Title Effective
Number issued withdrawn by
(1993)
Employee Benefits (1998)
Accounting for Government
January 1,
IAS 20 Grants and Disclosure of 1983
1984
Government Assistance
Accounting for the Effects of
Changes in Foreign Exchange
Rates (1983)
January 1,
IAS 21 1983
1985
The Effects of Changes in
Foreign Exchange Rates
(1993)
Accounting for Business
Combinations (1983) January 1, April 1,
IAS 22 1983 IFRS 3
1985 2004
Business Combinations (1993)
Capitalisation of Borrowing
Costs (1984) January 1,
IAS 23 1984
1986
Borrowing Costs (1993)
January 1,
IAS 24 Related Party Disclosures 1984
1986
January 1, January 1, IAS 39 and
IAS 25 Accounting for Investments 1986
1987 2001 IAS 40
Accounting and Reporting by January 1,
IAS 26 1987
Retirement Benefit Plans 1988
Consolidated Financial
Statements and Accounting for
Investments in Subsidiaries
(1989)
January 1,
IAS 27 1989
1990
Consolidated and Separate
Financial Statements (2003)
Separate Financial Statements
(2011)
Accounting for Investments in
Associates (1989)
January 1,
IAS 28 Investments in Associates 1989
1990
(2003)
Investments in Associates and
Joint Ventures (2011)
Financial Reporting in January 1,
IAS 29 1989
Hyperinflationary Economies 1990

207
Standards Originally Fully Superseded
Title Effective
Number issued withdrawn by
Disclosures in the Financial
January 1, January 1,
IAS 30 Statements of Banks and 1990 IFRS 7
1991 2007
Similar Financial Institutions
Financial Reporting of
Interests in Joint Ventures
(1990) January 1, January 1, IFRS 11 and
IAS 31 1990
1992 2013 IFRS 12
Interests in Joint Ventures
(2003)
Financial Instruments:
Disclosure and Presentation
(1995) January 1,
IAS 32 1995
1996
Financial Instruments:
Presentation (2005)
January 1,
IAS 33 Earnings per Share 1997
1999
January 1,
IAS 34 Interim Financial Reporting 1998
1999
July 1, January 1,
IAS 35 Discontinuing Operations 1998 IFRS 5
1999 2005
July 1,
IAS 36 Impairment of Assets 1998
1999
Provisions, Contingent
July 1,
IAS 37 Liabilities and Contingent 1998
1999
Assets
July 1,
IAS 38 Intangible Assets 1998
1999
Financial Instruments: January 1,
IAS 39 1998
Recognition and Measurement 2001
January 1,
IAS 40 Investment Property 2000
2001
January 1,
IAS 41 Agriculture 2000
2003
First-time Adoption of
January 1,
IFRS 1 International Financial 2003
2004
Reporting Standards
January 1,
IFRS 2 Share-based Payment 2004
2005
April 1,
IFRS 3 Business Combinations 2004
2004
January 1,
IFRS 4 Insurance Contracts 2004
2005
IFRS 5 Non-current Assets Held for 2004 January 1,

208
Standards Originally Fully Superseded
Title Effective
Number issued withdrawn by
Sale and Discontinued 2005
Operations
Exploration for and Evaluation January 1,
IFRS 6 2004
of Mineral Resources 2006
Financial Instruments: January 1,
IFRS 7 2005
Disclosures 2007
January 1,
IFRS 8 Operating Segments 2006
2009
2009
January 1,
IFRS 9 Financial Instruments (updated
2018
2014)
Consolidated Financial January 1,
IFRS 10 2011
Statements 2013
January 1,
IFRS 11 Joint Arrangements 2011
2013
Disclosure of Interests in Other January 1,
IFRS 12 2011
Entities 2013
January 1,
IFRS 13 Fair Value Measurement 2011
2013
January 1,
IFRS 14 Regulatory Deferral Accounts 2014
2016
Revenue from Contracts with January 1,
IFRS 15 2014
Customers 2018
Source: Wikipedia, https://en.wikipedia.org/wiki/List_of_International_Financial_Reporting_Standards

B. Existing Indian Accounting Standards (AS)

The ‗Accounting Standards‘ issued by the Accounting Standards Board, establish standards

which have to be complied with to ensure that financial statements are prepared in accordance

with generally accepted accounting standards and that auditors carry out their audits in

accordance with the generally accepted auditing practices. They become mandatory on the dates

specified either in the respective document or by notification issued by the Council.

Accounting Standards mandatory as on September 1, 2014


1 AS 1 Disclosure of Accounting Policies
2 AS 2 Valuation of Inventories
3 AS 3 Cash Flow Statements

209
4 AS 4 Contingencies and Events Occurring after the Balance Sheet Date
5 AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting
Policies
6 AS 6 Depreciation Accounting
7 AS 7 Construction Contracts (revised 2002)
8 AS 9 Revenue Recognition
9 AS 10 Accounting for Fixed Assets
10 AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)
11 AS 12 Accounting for Government Grants
12 AS 13 Accounting for Investments
13 AS 14 Accounting for Amalgamations
14 AS 15 Employee Benefits (revised 2005)
15 AS 16 Borrowing Costs
16 AS 17 Segment Reporting
17 AS 18 Related Party Disclosures
18 AS 19 Leases
19 AS 20 Earnings Per Share
20 AS 21 Consolidated Financial Statements
21 AS 22 Accounting for Taxes on Income.
22 AS 23 Accounting for Investments in Associates in Consolidated Financial Statements
23 AS 24 Discontinuing Operations
24 AS 25 Interim Financial Reporting
25 AS 26 Intangible Assets
26 AS 27 Financial Reporting of Interests in Joint Ventures
27 AS 28 Impairment of Assets
28 AS 29 Provisions, Contingent` Liabilities and Contingent Assets

Not mandatory Accounting Standards as on Sep. 1, 2014


1 AS 30 Financial Instruments: Recognition and Measurement
2 AS 31 Financial Instruments: Presentation
3 AS 32 Financial Instruments: Disclosures
Source: http://www.icai.org/post.html?post_id=8660

210
C. List of Indian Accounting Standards (Ind ASs)

Ind ASs are converged with International Financial Reporting Standards. Following is the list of

Ind ASs hosted on MCA's website.

Indian Accounting Standards (Ind ASs)


1 Ind AS 101 First-time Adoption of Indian Accounting Standards
2 Ind AS 102 Share based Payment
3 Ind AS 103 Business Combinations
4 Ind AS 105 Noncurrent Assets Held for Sale and Discontinued Operations
5 Ind AS 106 Exploration for and Evaluation of Mineral Resources
6 Ind AS 107 Financial Instruments: Disclosures
7 Ind AS 108 Operating Segments
8 Ind AS 109 Financial Instruments
9 Ind AS 110 Consolidated Financial Statements
10 Ind AS 111 Joint Arrangements
11 Ind AS 1 Presentation of Financial Statements
12 Ind AS 2 Inventories
13 Ind AS 7 Statement of Cash Flows
14 Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
15 Ind AS 10 Events after the Reporting Period
16 Ind AS 11 Construction Contracts
17 Ind AS 12 Income Taxes
18 Ind AS 16 Property, Plant and Equipment
19 Ind AS 17 Leases
20 Ind AS 19 Employee Benefits
21 Ind AS 20 Accounting for Government Grants and Disclosure of Government
Assistance
22 Ind AS 21 The Effects of Changes in Foreign Exchange Rates
23 Ind AS 23 Borrowing Costs
24 Ind AS 24 Related Party Disclosures
25 Ind AS 27 Consolidated and Separate Financial Statements
26 Ind AS 28 Investments in Associates
27 Ind AS 32 Financial Liability and Equity
28 Ind AS 33 Earnings per Share

211
29 Ind AS 34 Interim Financial Reporting
30 Ind AS 36 Impairment of Assets
31 Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
32 Ind AS 38 Intangible Assets
33 Ind AS 40 Investment Property
34 Ind as 41 Agriculture
Source: http://www.icai.org/post.html?post_id=7543

212

You might also like