A Study of Effect on Computed Current Ratios Due to Change in Financial Reporting Format - To Understand the Preparedness of Indian Companies to Accept the Change

Abstract

Starting from the financial year beginning from 1st April, 2011 all companies in India have to prepare the financial statements in the new format prescribed in Schedule VI to Companies Act, 1956. The new format, popularly known as Revised Schedule VI is a principle based reporting format as against the old Schedule VI which was rule based reporting format. This is a leap towards converging the Indian GAAP with International Financial Reporting Standard and thus for harmonisation of reporting practices of Indian companies with their global counterparts. The change in reporting has resulted into change in the sub grouping of items of Assets and Liabilities. The change in sub grouping can change the conclusion in the analysis of financial statements. This paper is an attempt to study the change in the result of liquidity analysis using current ratio for the companies included in Sensex from the Balance Sheet and notes appended to it as on the date of the year ended 31st March, 2011 for which reporting under old and new formats are available. The aim of the study is to understand the preparedness of Indian Corporates for principle based reporting by testing whether there is a significant difference in computed current ratio under old and revised format. For testing the hypothesis, ‘paired t- test’ was applied and it was found there is statistically no significant difference in the computation of Current ratio on the basis of reported values of current assets and current liabilities.