Professional Documents
Culture Documents
By
Arjun Gope
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
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
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
As India is at the juncture of introducing IFRS (Ind AS) replacing its Indian AS, we justify our
Does introduction of IFRS replacing Indian AS bring more reliability and accountability
In addition to two main research questions, that follow from the comparison of Accounting
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
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
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
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
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
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
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
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
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
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
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
study how history and development of accounting practices or accounting standard setting
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
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,
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
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
International Accounting Standard Body (IASB) was found in 2005 and they adopted all
importance of issuing a new set of standards deleting some of the existing IASs. They named it
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
Exhibit 1.1
Types of IFRS
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
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
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
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
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
The International Accounting Standards (IAS) that guides reporting of DFI is as follows:
Exhibit 1.2
• Financial Instruments
IFRS 9 [Hedge effectiveness testing, Risk component, Disclosures]
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
Exhibit 1.3
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
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.
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
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
8
Misunderstanding or unjust use of derivative financial instruments may be catastrophic indeed.
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
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
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
In view of the above facts, we have undertaken the study entitled ―A comparative study of select
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.
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
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
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
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
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
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
Shapiro, A.C. (2000). Multinational Financial Management, Prentice hall of India, New Delhi.
12
CHAPTER-II
REVIEW OF LITERATURE
2.1 Introduction
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
Kingsley, Gina & Vivian (2014), opined that IFRS refers to a series of accounting
financial statements, throughout the world, produce and present high quality, transparent and
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
Convergence of IFRS (Ikpefan & Akande, 2012) will place better quality of financial reporting
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
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
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.
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
disclosures on market risk required by Financial Reporting. Haina (2008) pointed out that IFRS
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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.
1. Risk management has become one of the most important activities of recent business
concern.
4. Accounting standards are important regulatory devices for derivative financial instrument
accounting.
34
2.10.2 Research gaps
1. No study has yet been done on comparison of international and national accounting
2. No research has so far summarized the main factors relating to IFRS for DFI in case of
3. Further, no empirical study has examined whether the Indian companies and stakeholders
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
(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
(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
iv. The study would examine whether there are any positive impact of IFRS for
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44
CHAPTER III
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
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
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.
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.
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?
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
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-
HA3: Reporting and disclosure level of IFRS adopted companies is higher than the Ind AS user
H04: Reliability of accounting information of DFIs would not be influenced by IFRS in India.
H05: Accountability of management for accounting and reporting of derivatives would not be
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.
We have used primary as well as secondary data for our research purpose. These are explained as
follows:
The study involves an international survey 10 on accounting standards for derivative financial
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
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
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
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
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
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
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
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.
For accumulating data from the responses we have put five point rating scale questions in the
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
instruments.
Data for our study are sourced from the annual reports of selected companies. With the objective
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
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
To test the hypothesis One-Sample Binomial Test and One-Sample Wilcoxon signed rank test are
used;
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
Objective
Our objective is to investigate the significance of the difference between an assumed proportion
Limitation
The test is approximate and assumes that the number of observations in the sample is sufficiently
Method
proportion belongs to a specified class. The proportion p of elements in the sample belonging
Z=
√
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
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
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.
12 k
Ri2
H 3(n 1)
n(n 1) i ni
Where
H03: No differences exist between the two groups of companies namely IFRS users and Non-
Mann-Whitney 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.
Where:
U=Mann-Whitney U test
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
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
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
The factor analysis model expresses the variation and co-variation in a set of observed
Where-
Xi = i th standardized variable
Fj = common factor j
56
The common factors themselves can be expressed as linear combinations of the observed
variables.
Where:
Fi = estimate of i th factor
k = number of variables
H04: Reliability of accounting information of derivative financial instruments (DFI) would not
H05: Accountability of management for accounting and reporting of derivatives would not be
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:
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
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
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;
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
Exhibit 3.4
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)
Where-
59
Variables:
X = (X1, X2, ..., Xk) be a set of explanatory variables which can be discrete, continuous, or
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
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62
CHAPTER-IV
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
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
Exhibit 4.1
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
Exhibit: 4.2
Aspects of Derivative instrument
Derivative
Participants
instruments
Market Regulators
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.
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
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
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
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
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
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
69
Exhibit 4.5
(Based on the number of contracts traded and /or cleared at 75 exchanges worldwide)
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
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
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
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
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)
73
Rank Exchange Jan-Dec 2012 Jan-Dec 2013 Jan-Dec 2014 Annual %
Volume Volume Volume of Change
(2013-
2014)
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
74
Exhibit 4.8
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
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
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
77
Exhibit 4.11
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
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
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.
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
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
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
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,
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,
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-
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,
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
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.
82
CHAPTER-V
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
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,
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
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
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
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
equity instrument is any contract that evidences a residual interest in the assets of an entity after
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)
Derivative Non-derivative
contract Contract
No Yes Yes No
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
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
‗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
First of all, the standard i.e., IAS 39 Financial Instruments: Recognition and measurement
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
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.
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
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
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
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
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
Exhibit 5.6
6%
Fair value
Not Disclosed
94%
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
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
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
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
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)
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
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
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
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
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.
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
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
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
The reporting entity has to disclose the following items of revenue, expense, gains or losses
(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
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.
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
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
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.
Prokop (2008) pointed out that the identification, valuation and controlling of risks arising from
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,
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
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
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
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
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
The IASB has already announced its intention to create a transition resource group to support
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.
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
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
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:
often will use market multiples derived from a set of comparable transactions for the
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
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
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.
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
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
Exhibit 5.9
Level 1
Level 2
16% Level 3
Not disclosed
62%
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
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
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;
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
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
References
Alexandera, D., Bonacib, C., & Mustatab, R. (2012). Fair value measurement in financial reporting.
Ball, R. (2006). International Financial Reporting Standards (IFRS):pros and cons for Inverstors.
Blanchette, M., & Desfleurs, A. (2011). Critical Perspectives on the Implementation of IFRS in Canada.
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
Gupta, P. (2008). Financial Instruments standards:A guide on IAS 32, IAS 39 and IFRS 7. New Delhi: Tata
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
Schmidt, M. (2013). Equity and Liabilities – A Discussion of IAS 32 and a Critique of the Classification.
The Institute of Chartered Accountants of India. (2011). Indian Accounting Standards. New Delhi: ICAI.
Walton, P. (2004). IAS 39: Where Different Accounting Models Collide. Accounting in Europe , 1, 4-16.
106
CHAPTER VI
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.
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.
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
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
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
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:
HA1: Companies maintain disclosures on DFI under IFRS more than75% of the standard level.
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
Ho2: No differences exist among the selected economy for reporting and disclosure of DFIs
HA2: The selected economy are reporting and disclosing DFIs differently in their annual reports.
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
H03: No differences exist between the two groups of companies namely IFRS users and Non-
110
HA3: Reporting and disclosure level of IFRS adopted companies is higher than the AS user
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
Exhibit 6.3
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
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
Ho2: No differences exist among the selected economy for reporting and disclosure of DFIs
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
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-
HA3: Disclosure level of IFRS adopted companies is higher than the Ind AS user companies for
Exhibit 6.7
Hypothesis test summary of Mann-Whitney U test
Hypothesis Test Summary
Null Hypothesis Test Sig. Decision
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)
38
Mann-Whitney Test is described in chapter-III.
114
Exhibit 6.8
Independent-Samples Mann-Whitney U 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
References
Cavanagh S. (1997) Content analysis: concepts, methods and applications. Nurse Researcher 4, 5–16.
05/06/2015
Hossain, M. (2008). The extent of Disclosure in Annual Reports of Banking. European Journal of
Htay, S. N., Rashid, H. M., Adnan, M. A., & Meera, A. K. (2011). Corporate Governance and Risk
Jankensgård, H., Hoffmann, K., & Rahmat, D. (2014). Derivative Usage, Risk Disclosure, and Firm
116
Jones, M. J., & Shoemaker, P. A. (1994). Accounting narratives: A review of empirical studies of content
Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: causality and causes.
Lipunga, A. (2014). Risk disclosure practices of Malawian commercial banks. Journal of Contemporary
Lopes, P. T., & Rodrigues, L. L. (2007). Accounting for financial instruments: An analysis of the
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.
117
CHAPTER VII
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
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
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
H0: No relationship exists among the observed variables affected by IFRS for DFI and their
HA: Relationship exists among observed variables affected by IFRS for DFI and their underlying
To find the answer of the question we have done factor analysis (explained in chapter-3) on the
selected variables.
From the exhibit 7.2, we see that KMO value is .0.706 which confirmed the appropriateness of
Exhibit 7. 2
KMO and Bartlett's Test
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.
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
On the basis of this criterion, seven factors were extracted (Exhibit 7.3). Seven factors
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
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
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-
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
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
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
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
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
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
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
127
Exhibit 7.9
Ranks and affects of factors
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
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
References
Elliott, A. C., & Woodwar, W. A. (2014). IBM SPSS by Example: A Practical Guide to Statistical Data
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.).
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,
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.
Robinson, J. P., Shaver, P. R., & Wrightsman, L. S. (Eds.). (1991). Measures of personality an
Srivastava, A., & Gupta, P. (2014). Factors affecting IFRS adoption and implementation in India. South
Yusoff, M. (2010). The Reliability And Validity Of The Postgraduate Stressor Questionnaire (psq) Among
130
CHAPTER VIII
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
(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
H04: Reliability of accounting information of derivative financial instruments (DFI) would not be
H05: Accountability of management for accounting and reporting of derivatives would not be
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
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.
H04: Reliability of accounting information of derivative financial instruments (DFIs) would not
Exhibit 8.1
Reliability of accounting information of DFIs
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
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
independent variables.
133
Exhibit 8.4
Rotated Factor Loadings and Communalities (Case-I)
Two factor scores coefficients (independent variables) are used for Binary logistic regression
Exhibit 8.5
Case Processing Summary (Case-I)
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)
conclusion that there is adequate fit of the data to the model, meaning that at least one of the
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
Exhibit 8.8
Hosmer and Lemeshow Test( Case-I)
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)
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
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
Exhibit 8.13
variables.
138
Exhibit 8.14
Rotated Factor Loadings and Communalities (Case-II)
Exhibit 8.15
Omnibus Tests of Model Coefficients (Case-II)
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
Exhibit 8.16
139
Exhibit 8.17
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
H06: Shareholders’ value would not be influenced by the adoption of IFRS for
DFI in India.
Exhibit 8.20
Shareholders’ value creation
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
141
Exhibit 8.21
Independent variables where dependent variable is shareholders’ value (Case-III)
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
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
142
Exhibit 8.23
Rotated Factor loadings and Communalities (Case-III)
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
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
Exhibit 8.27
Contingency Table for Hosmer and Lemeshow Test (Case-III)
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
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
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
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
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
146
CHAPTER IX
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‘
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
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.
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
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
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
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
The research work finds that level of disclosure on DFIs is higher in case of IFRS user
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
accounting, positive effect on risk and hedge activities, improvement of disclosures level,
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
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).
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
9.3 Contributions
Despite of few limitations (mentioned in chapter-1) our research work makes important
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
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
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;
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
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
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
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.
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
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
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
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?
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)
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
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
The study of this thesis includes financial reporting and disclosure of derivative financial
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
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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
3. Arbitrageur: One who profits from the differences in price when the same, or extremely
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
the summated score for all other items. According to Gliem & Gliem (2003), a rule-of-
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
that also includes a non-derivative host contract, with the effect that some of the cash
10. Exit Price: It refers to the sale price of an asset/liability that is determined based on the
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
measurement date under current market conditions irrespective of whether that price is
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.
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
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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
16. GAAP: GAAP refers to the common set of accounting principles, standards and
17. Hedging: A hedge is an investment strategy to reduce the risk of adverse price
related security.
18. Hybrid financial instruments: A single financial security or contract that combines two
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
22. Put Option: This is an option contract to sell assets at an agreed price on or before a
particular date.
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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
24. Risk: Risk is potential of losing something of value. Uncertainty is the underlying force
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
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
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.
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APPENDIX-A
_____________________________________________________________________________
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
Component Score 2
Measurement information:
Initial measurement of DFI 1
Subsequent measurement of DFI 1
Component Score 2
Component Score 2
184
Component Score 2
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
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.
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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.
187
APPENDIX-C
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
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APPENDIX-D
Questionnaire
A. Please provide the following details about you:
Name of the respondent: ………………………………………………
Profession: ……………………………………..
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.
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.
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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:
A) Strongly agree B) Agree C) neither agree nor disagree D) Disagree E) Strongly disagree
Your answer:
Your answer:
Your answer:
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:
Your answer:
Your answer:
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:
Your answer:
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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:
Your answer:
Your answer:
Your answer:
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:
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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:
Your answer:
Your answer:
194
APPENDIX-E
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
As secondary data in our research work are not normally distributed, we used similar
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
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
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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
4. Cox & Snell R2 and Nagelkerke R2- In standard regression, the co-efficient of
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
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:
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,
Log likelihood is, in essence, the logarithm of the probability of sample data given the
parameters of model.
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
However, there is actually no lower limit to the coefficient. The closer Cronbach‘s alpha
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
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
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
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
Principal Component Analysis (PCA) and Exploratory Factor Analysis (EFA) are both
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
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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)
The recommended test for overall fit of a binary logistic regression model is the Hosmer and
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
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
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.
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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.
(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
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
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
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
16. Omnibus test may be interpreted as a test of the capability of all predictors in the model
to the conclusion that there is adequate fit of the data to the model meaning that at least
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
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
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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
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
Nominal: Categorical data and numbers that are simply used as identifiers or names
Interval: A scale that represents quantity and has equal units but for which zero
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
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
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20. Total variance explained- The number of factors with eigenvalues of 1.00 or higher in a
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
Binary variable-Observations that occur in one of two possible states, often labeled zero
Categorical variable- Categorical variable is a variable that can take on one of a limited
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;
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 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
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.
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
1. EVA = Adjusted operating profits after taxes less adjusted capital charge
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
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)
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
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
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
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
210
C. List of Indian Accounting Standards (Ind ASs)
Ind ASs are converged with International Financial Reporting Standards. Following is the list of
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