IMPLEMENTATION OF IFRS AND DETECTION OF FINANCIAL

MANIPULATION – A CASE STUDY OF INDIAN AUTOMOBILE INDUSTRY

Abstract-
The paper tries to find out the impact of implementation of IFRS on the Indian automobile
industry and whether IFRS help in detection of manipulation in financial statement. The study
finds although financial position of companies had significantly improved, most of them had
liquidity crises. The M- score of industry shows except Mahindra and Mahindra all had
manipulated their profits over the years.

Key words – IFRS, automobile industry, M-score, Z- score

INTRODUCTION
In the time of globalization distance doesn’t matters. Now the world has become a global
village. Companies are now operating in different countries. The globalisation is not only
helping companies to expand their business but also in getting different benefits like
economies of scale and financial aids. Although the globalisation has benefited the
organisations yet has imposed certain challenges on them. One of the important challenges
faced by the organisations is to present their financial reports in such a manner that it is
acceptable to all as different countries have different accounting standards for presenting their
financial reports. Thus there is an extensive pressure for harmonizing the presentation of
Financial Statements from the users of financial statements, the stake holders, the potential
investors, Taxation Authorities and other Government agencies. The need for Harmonization
of presentation of financial statements has gained immense popularity as the researchers are
of the view that the Diversity in the accounting practices has an immense potential to destroy
the international flow of capital. This need is not only for intelligible but also comparable
financial statements.

One solution to this problem is accepting International Accounting Standards.

International Accounting Standards Board (IASB), who took over the reins from its
predecessor, International Accounting Standards Committee (IASC), is a non-profit
organisation with its office setup in London, UK . It is an independent body with members
from nine different countries. IASB is solely responsible for the issue of International
Financial Reporting Standards. IFRS does not set rules for industry specific reporting but
they do provide a structured guidance for the companies for the preparation of their financial
statements. It provides a framework on how a company should prepare and disclose their
financial statements on the Global platform.
Objectives:
1) The main objective of IFRS is harmonization in reporting of financial status of the
companies.
2) IFRS results in creating a Global financial reporting infrastructure
3) It results in generating sound business sense among all beneficiaries
4) To develop a common set of high quality global accounting standards
5) To provide a framework for preparation of transparent and comparable financial
statements and other reporting statements for the world capital market.
6) To consider the special needs of small and medium sized entities and emerging
economies.
7) To bring convergence of The National , International standards and IFRS

Advantages:

IFRS greatly benefits the adopting firms and countries in terms of:

1) Greater transparency in financial reporting.

2) Reduction in Cost of capital by opening up doors to inflow of International capital.
3) Increased accuracy in comparability of financial statements.
4) Increased Credit rating in the International Market.

MCA , the Ministry of Corporate Affairs on the 2nd January 2015 issued a note which
outlined the phases for the introduction of Indian accounting standards which were
converged with IFRS i.e. Ind. AS . Furtherance to this The Institute of Chartered
Accountants of India announced that IFRS will be mandatory in India for all financial
statements drawn from 1st April 2016. Financial reporting has undergone a continuous
transformation owing to the introduction and adaption of Ind AS. Approximately 150
countries in the world have adopted IFRS but in India MCA have decided to go for full
adoption by 2018.

IFRS framework:
The IFRS include

 International Financial Reporting standards

 International Accounting Standards
 Interpretations originated from the International Financial Reporting Interpretations
Committee
 Standing Interpretations Committee
The List of IFRS developed are as below:

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement
IFRS 14 Regulatory Deferral Accounts
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases

IFRS 17 Insurance Contracts

REVIEW OF LITERATURE
Gurunathan.B & Mittal .E in their paper reveal that Indian Accounting Standard is different
from International Accounting Standards. Focus of their study was on company financial
position which shows bankruptcy, dilution and earning manipulation. The study showed that
adoption of IFRS slightly changed the financial position, company profitable position and tax
payable.

Siqi Li in their study tries to find out effects of cost of equity on mandatory adoption of IFRS
in the European Union. The study revealed mandatory adoption didn’t have any sufficient
changes in the cost of equity. However, after mandatory adoption of IFRS, the cost of equity
decreases and increases the disclosure and improves comparability. He noticed that IFRS
adoption is a costly process although, there are other benefits also related with IFRS
adoption.

Jain.P studies in his study tried to find out the pros and cons of IFRS in protecting a high
quality financial reporting environment. He suggests that simply adopting IFRS is not
enough. Each and every interested party namely directors, top management, accountants,
auditors, investors, regulators, law makers and employees will have to come together and
work together for an untroubled IFRS adoption procedure.

Dimple in her paper “Convergence with IFRS” evidence from financial statement state that
practice of Indian reporting will be affected by the convergence process. Therefore, it is
entailing that Indian corporate coordinate with these new accounting standards. This
coordination brings lots of benefits to the users like company’s professionals regulators
investors etc. She considers six factors of benefits to the investor in her study but among all
these factor four factors are considered beneficial factors.

Berth in his paper “International accounting standards and accounting quality” examined
the effect of IFRS/Ind AS on the financial data of firms from 21 countries. He concluded that
adaptation of IFRS/Ind AS had resulted in an improvement in accounting quality between the
after and before period.

Thapa .S in his studies tried to shows impact on financial position and financial statement of
banking industry. The finding suggested that implementation of IFRS had major impact on
hedge accounting, financial instrument, tax reporting practice, loan impairment etc.

OBJECTIVE OF THE STUDY

1. To understand the Impact of IFRS on automobile Industry pre and post adoption
period.
2. To analyse the Detection of Earnings Manipulation in automobile industry.
3. To find the financial stability of the Automobile companies.

LIMITATION OF THE STUDY

1. Actual position of the industry is not considered in this paper

2. Only secondary data is used in the study which had its own limitations.
3. Time duration of study is very limited due to adoption period of IFRS.
4. Only IFRS standards are consider in this study.
RESEARCH METHOLOGY
The Indian Auto Industry has bagged the position of being the Fourth largest industrial
segment on the world graph with a sale graph increasing by 9.5% every year. The young
population and middle class have greatly contributed in making the two wheelers segment
dominate the market. The Indian Government under the Flagship of our Prime Minister
Narendra Modi aims to establish India as a global manufacturing and research and
development hub. The government is also very determined to bring India to a platform where
only Electric Vehicles will be sold. For achieving above stated objectives 6 companies in
automobile industry of India are considered using same parameters for comparison. The
companies selected are-
Ashok Leyland: Established by Raghunandan Saran .in 1948 Ashok Leyland is the second
largest vehicle manufacturer in the Commercial segments in India. Owned by the Hinduja
Group and headquartered in Chennai, India.
Force Motors: N.K.Firodia was the promoter of Force Motors which was incorporated in
1958 with the name Baja Tempo Ltd and it was converted to a Public Limited Company in
1961. Plants were setup in Gurgaon, Mumbai in 1959 and in Akrudi, Pune in 1961.
The company is the largest producer in the Commercial Van Market .It ranks 327th (2016) in
India’s Fortune 500 Companies

Maruti Suzuki: Maruti Suzuki India Ltd holding the largest chunk of market share of
passenger car sales in India at over 50% was incorporated on 24th February 1981 under the
name and style “Maruti Udyog Ltd. The spectrum of business activities of the company
includes manufacturing, purchasing and sale of new and pre-owned motor vehicles and their
spare parts. They have plants located at Palam Gurgaon and Manesar Gurgaon.

Tata Motors: Tata Motors Limited is India’s largest automobile company, who has made its
presence felt not only in India but Globally in the manufacture of cars , utility vehicles ,
buses, trucks and defence vehicles . Tata Motors Limited was incorporated on 1st September,
1945 in Mumbai. It is a subsidiary of Tata Group and was formerly known as Tata
Engineering and Locomotive Company. It ranks among the top 4 passenger vehicle brands in
India.

Mahindra & Mahindra: Mahindra & Mahindra Ltd. ranks as 17th on a list of top companies
in India were incorporated on 2nd October 1945 under the name and style of “Mohammad &
Mahindra” which was later renamed as Mahindra and Mahindra. It is a part of Mahindra
Group and is also the largest manufacturer of automobiles and tractors in the world.

SML ISUZU: Incorporated in 1983 in the month of July under the name and style of Swaraj
Vehicles Limited, SML ISUZU was engaged in the manufacture of commercial vehicles and
spare parts. The company also produces light and medium vehicles in the commercial
segments. The company has primarily operations in India. The company has setup its
manufacturing unit in Nawanshahar in Punjab. Data has been collected from the secondary
sources it includes websites journal research papers and official websites of companies period
of the study is 2013-14 to 2018-19.

TOOL OF THE STUDY

The first objective of the study is analysed using simple statistical tool like mean and
accounting ratios. Second and third objective is analysed by using Beneish M score and
Altman Z score is use for the study.

BENEISH M SCORE - Beneish’s M-Score is a mathematical model that uses eight financial
ratios weighted by coefficients to identify whether a company has manipulated its profits or
not. It was created by Professor Messod Beneish who published a paper in June 1999 on the
detection of earning manipulation. These eight ratios are explained in greater detail as
follows:

1. Days’ Sales in Receivables Index (DSRI)

2. Gross Margin Index (GMI)
3. Asset Quality Index (AQI)
4. Sales Growth Index (SGI)
5. Depreciation (DEPI)
6. Sales, General and Administrative Expenses (SGAI)
7. Leverage Index (LVGI)
8. Total Accruals to Total Assets (TATA)

The eight variables are then weighted together according to the following formula:

Beneish M Score =-4.84 + 0.92×DSRI + 0.528×GMI + 0.404×AQI + 0.892×SGI +

0.115×DEPI – 0.172×SGAI + 4.679×TATA – 0.327×LVGI
Beneish concluded that if a company scored greater than -2.22 (i.e. a less negative or
positive number) there was a likely probability of profit manipulation.

Altman Z score
The Altman Z score is basically related with the output with the credit strength test that
measures the bankruptcy is company’s probability of bankruptcy. It is based on five financial
ratios that are based on companies annual report. Z score formula is following it is calculated
with the help of this formula-
Z = 1.2a + 1.4b + 3.3c + 0.6d + 1.0e.
Where,
a = working capital / total assets. It measures liquid assets in relative to the size of the
company.
b= retained earnings / total assets. It Measures profitability that shows the earning
power of the company as well as age of the company.
c = earnings before interest and taxes / total assets. It Measures operating efficiency
separately from tax and leveraging factors. It identifies operating earnings as being
important to long-term viability.
d = market value of equity / book value of total liabilities. It shows market dimension
that can emphasize security price fluctuation.
e = sales / total assets. It shows Standard measure for total asset turnover. (It differs
from industry to industry).
Zones of discrimination:
Z > 2.99 – “Safe” Zone

1.81 < Z < 2.99 – “Grey” Zone

Z < 1.81 – “Distress” Zone

DATA ANALYSIS:
Analysis of the study is divided in three parts as per the objective of the study. First part
shows the results of adaptation of IFRS on automobile Industry. Second section of analysis
deals with the Detection of Earnings Manipulation in automobile industry and last part, deals
with financial stability in automobile industry.

PART- I

Table no. 1 show the pre and post adaptation IFRS results on key financial elements
(average) and financial ratios (average). The result shows revenue from operation of all
selected companies had improved after adaptation of IFRS in financial statements. Same
results are found in profit before tax (PBT), profit after tax (PAT), and net worth. Net profit
ratio and earning per share of selected companies also increased after adaptation of IFRS
except in case of ISUZU where NPR decreases slightly and Mahindra & Mahindra where
EPS decreases.
TATA Motors Ashok Leyland Force Motors Maruti ISUZU Mahindra & Mahindra
Pre Post Pre Post Pre Post Pre Post Pre Post Pre Post
Revenue(Cr.) 41445.61 59293.98 16179.24 29095.92 2715.24 3512.79 56355.60 81760.30 1127.92 1345.17 42630.73 48414.37
PBT -1684.68 -294.72 735.12 2411.46 145.63 216.60 5323.47 10468.73 44.93 46.80 4276.57 5414.90
PAT (Cr.) -1488.91 -481.28 202.02 1845.45 119.49 163.44 3952.83 7524.20 35.17 35.76 3428.01 3999.70
Net Worth (Cr.) 19100.08 21165.37 4991.24 7207.77 1341.11 1732.10 24855.47 41443.30 306.48 400.93 19489.82 28539.83
NPR -0.04 -0.01 0.03 0.08 0.05 0.06 0.09 0.13 0.04 0.03 0.10 0.11
EPS -4.62 -1.42 0.71 6.35 90.69 124.04 130.85 249.10 24.30 24.71 55.36 46.85

PART- II

Based on the formula suggested by Beneish, the M-score of the selected companies were
calculated and tabulated in Table-2 and figure-1. A score of greater than -2.22 suggests that
there is a great likelihood of profit manipulation by the company.

Table-2

Year
Name of the Company
Pre Post % Change

Ashok Leyland 14.9186* 14.0018* -6.15

Force Motors -2.7588 -0.7007* 74.60

SML ISUZU -2.7486 -2.2155* 19.39

Maruti Suzuki -2.1594* -1.5451* 28.45

Mahindra & Mahindra -3.1808 -2.9493 7.28

Tata Motors -2.5753 -1.5976* 37.97

Figure 1
 Beneish Score of companies
Year 2014 Year 2018
16
BANEISH M SCORE

11

1
Ashok Leyland Force Motors SML ISUZU Maruti Suzuki Mahindra & Tata Motors
-4 Mahindra
COMPANY NAME

It can be observed from the above table and figure that there is a fall in the M-score of Ashok
Leyland Ltd. from the year 2013-14 to the year 2017-18, but for all other companies there is a
significant increase in the M-scores from the year 2013-14 to the year 2017-18. Further, the
M-score of Ashok Leyland suggests that the company had highly manipulated their
profitability and it can be concluded that the stock of this company can be bought with a great
caution that there is a strong doubt the investment will be appreciated.

Also, it can be seen from the above table that the M-score of Force Motors during the year
2013-14 was -2.76 and it has shown a considerable increase (about 75 per cent) in the year
2017-18 as it has risen up to -0.70. This implies that the company has not manipulated their
profit during the year 2013-14, but the M-score of -0.70 in the year 2017-18 suggested that
they have manipulated their profit, and therefore it is advised that care has to be taken while
making investment in this company.

The M-score of SML ISUZU has shown a positive increase of more than 19 per cent from the
year 2013-14 to the year 2017-18, but however it is greater than the bodyline of -2.22, which
implies that the company had manipulated its profit during the year 2017-18.

The M-score of Maruti Suzuki has shown a positive increase of over 28 per cent from the
year 2013-14 to the year 2017-18. In both the years the M-score was greater than the -2.22
threshold, thus confirming the profit could have been manipulated in both the years.
As far as Mahindra & Mahindra is concerned, the M-score well below -2.22 indicates that the
company has not manipulated its profit in both the years and it is suggested that the stocks of
this company can be bought with the expected appreciation.

The M-score of Tata Motors is less than -2.22 in the year 2013-14 which confirm that the
company has not manipulated its profit in that year but the score got more than -2.22
subsequently in the year 2017-18 which implies that Tata Motors had manipulated its profit
in the year 2017-18.

PART- III

Based on the formula suggested by Altman Z score of the selected companies were calculated
and tabulated in Table-3 and showing with graph-2. A score of greater than 2.99 suggests
that there is not a chance of bankruptcy and dilution and below 1.81 means company’s
likelihood of bankruptcy.

Name of the Companies 2013 2014 2017 2018

Ashoka Leyland 1.55 1 2.18 2.47
Tata motors 2.29 2.56 2.28 2.03
Mahindra &Mahindra 1.99 1.93 1.67 2.05
Force motors 2.46 2.62 6.157 5.79
Maruti Suzuki 5.51 6.37 9.89 11.62
SML Isuzu 2.91 3.4 5.72 2.83

ALTMAN Z SCORE OF COMPANIES

2013 2014 2017 2018
11.62
9.89
ALTMAN Z SCORE

6.157

6.37
5.79

5.72
5.51

2.91
3.4

2.83
2.62
2.56
2.47

2.46
2.29

2.28
2.18

2.05
2.03

1.99
1.93
1.67
1.55
1

ASHOKA TATA MOTORS MAH.&MAH. FORCE MARUTI SML ISUZU

LAYLAND MOTORS SUZUKI
NAME OF THE COMPANY
It can be observed from the above table and figure that there is a rise in the Z-score of Ashok
Leyland Ltd. from the year 2013 to 2018 ,in 2013 -14 and 2017-18 it comes in distress zone
and in grey zone which means company in the position of bankruptcy may lead to dilution
further , the Z score of Ashok Leyland indicates the liquidity problem.

It can be seen from above table and figure that there is a rise in the Z-score of Tata motors
from the year 2013 to 2018 ,in 2013 -14 and 2017-18 it comes in grey zone which means
company in the position of bankruptcy may lead to dilution further , the Z score of Tata
motors indicates the liquidity problem.

Mahindra & Mahindra is concerned about, the Z score of Mahindra & Mahindra from the
year 2013 to 2018 ,in 2013 -14 and 2017-18 it comes in grey zone which means company in
the position of bankruptcy may lead to dilution in next years further , the Z score of Mahindra
& Mahindra indicates the liquidity problem.

It can be observed from the above table and figure that there is a rise in the Z-score of force
motors from the year 2013 to 2018 ,in 2013 -14 and 2017-18 it comes in grey zone then in
safe zone which means company in the position of bankruptcy may lead to dilution in 2013-
14 but in 2017-18 it is more than 2.99 means nowhere near any situation to lead bankruptcy
now company maintain their position , the Z score of force motors indicates tthat there is not
liquidity problem and does not have bankruptcy problem.

It can be observed from the above table and figure that there is a rise in the Z-score of Maruti
Suzuki from the year 2013 to 2018 ,in 2013 -14 and 2017-18 it comes in safe zone .it is more
than 2.99 means nowhere near any situation to lead bankruptcy company maintain their
position , the Z score of Maruti Suzuki indicates that there is not liquidity problem and does
not have bankruptcy problem.

As far as Sml Isuzu is concerned, the Z score of Sml Isuzu from the year 2013 to 2018,in
2013 it was in grey zone but in 2014 and 2017 it was in safe zone but in 2018 it comes in
grey zone which means company may lead to bankruptcy and dilution in next years because
in 2018 it was not in safe zone.

Conclusion

The paper tries to find out the impact of implementation of IFRS on the Indian automobile
industry. The study showed that all the companies that have been taken into study have been
benefited by the implementation of IFRS and their financial position have also significantly
improved. The M- score of sample suggested that almost all companies except Mahindra and
Mahindra had manipulated their profits over the years. Investors in these companies must
think twice before investment as the Z- score of these automobiles companies have put them
in the grey zone. All though these findings showed negative results (study is only based on
certain ratios) regarding these companies, one should also take into consideration other
factors such as simultaneous implementation of GST, Demonetization along with many other
factors .

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Multiple element contract

Service concession arrangements
Revenue recognition on transfer of control
Customer loyalty programmes
Extended credit
Discounts / incentive schemes and Right to return
Gross v/s net presentation