International Accounting Standard

Commission on confidence in business

In September 2002, the Swedish government set up a Commission to propose measures to strengthen the confidence in the Swedish business community in the wake of the high-profile corporate scandals internationally and domestically in recent years. The move followed a series of high-profile events, primarily in the United States, and the burst of the IT bubble. The Commission, chaired by a former minister of finance, presented a range of suggestions regarding corporate governance (SOU 2004:47, March 2004). The Commission also proposed the formation of a new Swedish Accounting Supervisory Authority responsible for accounting in unlisted companies, accounting in listed companies and supervision thereof and auditing matters. The Commission proposed, inter alias, the abolition of the Swedish wealth tax.

Code of corporate governance

In close collaboration with the above mentioned Commission on Confidence in Business a working party proposed a code of corporate governance. The code is an act of self-regulation and comprises best practises regarding, among other issues, annual general meetings, the appointment of the board of directors and auditors, the functions of the board of directors, corporate management and issues of transparency regarding corporate governance. A new industrial body comprising investor and issuer representatives and an auditor will manage the code. In so doing the group of representatives will co-operate with the Stockholm Stock Exchange and other parties concerned.

OMX Stockholmsbörsen (Stockholm Stock Exchange) - Listing requirements

Stockholmsbörsen introduced stricter listing requirements in 2002 for companies listed on the exchange. The requirements were tightened recently, requiring the board and executive decision makers - in the same way as the auditors of listed companies elected by general meetings - to complete training under the auspices of Stockholmsbörsen with regard to listing contracts, listing requirements and the issue of insider dealing. In order to ensure the independent, controlling function of the board, companies are now allowed to have only one member of the board who is also actively involved in the operation of the company. More than half of the members of the board must be independent of the company, and at least two of these must be fully independent of the largest shareholders the company. The new rules are enforced even further by the new Swedish Code of Corporate Governance.

Accounting Environment in India

Accounting standards in India are formulated by Accounting Standards Board of the Institute of Chartered Accountants of India. In formulating the standards, Accounting Standard Board gives due consideration to International Accounting Standards issued by IASC and try to integrate them to the extent possible, in the light of the conditions and practices prevailing in India.

Increasingly, Indian accounting standards are getting closer to IAS/IFRS than was the case until the 1990s. To begin with, the Accounting Standards Board (ASB) sticks faithfully to the language of standards with few exceptions. This contrasts sharply with the earlier ASB practice of making sometimes mere verbal changes. Also, in the past Indian accounting standards were tacitly influenced by tax considerations.

Another trend in India's movement towards accepting the globalisation of accounting standards is the adoption in some cases of the benchmark treatment rather than the allowed alternative treatment in the relevant IFRS.

The differences between Indian accounting standards and IAS/IFRS have been narrowing, especially in the case of standards issued since the late 1990s. Some of the differences are attributable to the need for conformity with the Companies Act. Some others exist because there is no corresponding Indian standard on the subject (e.g., financial instruments and business combinations). A general perception is that financial reporting practices have improved over the past 5 years; however, significantly strengthened enforcement mechanisms are needed to further improve the quality of corporate financial reporting.

Indian accounting standards and corporate governance requirements are now more in line with international practices. The recent developments can be attributed to the operation of economic forces arising from capital, product market and labour market pressures and to regulatory initiatives in response to overseas developments, such as the East Asian Crisis and SOX. Foreign financial institutions and listing in international stock exchanges are playing a major role in speeding the pace of raising Indian standards to international levels. India is still in the early stages of its involvement in the globalization of accounting standards. Mere adoption of superior accounting and disclosure standards will not raise the quality of Indian financial reporting. Creating a complementary institutional framework that, among others, facilitates cost effective private litigation by shareholders is critical

To understand the Indian Accounting Environment, let us look at the progressive updating of the Indian Accounting Standards and also see how it tries to reduce the extent of differences between Indian GAAP and International Accounting Standards.

Accounting Standards as on October, 2000

AS No.

Title of the Standard

Disclosure of Accounting Policies

2

Valuation of Inventories

6

Depreciation Accounting

3

Cash Flow Statements

5

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

4

Contingencies and Events Occurring after the Balance Sheet Date

7

Accounting for Construction Contracts

7

Segment Reporting

0

Accounting for Fixed Assets

9

Leases

9

Revenue Recognition

5

Accounting for Retirement Benefits in the Financial Statements of Employers

2

Accounting for Government Grants

1

Accounting for the Effects of Changes in Foreign Exchange Rates

4

Accounting for Amalgamations

6

Borrowing Costs

8

Related Party Disclosures

3

Accounting for Investments

-

Dealt with by Accounting Standard 13

8

Accounting for Research and Development

January 2001

The following Accounting Standard were issued and added to the earlier list:-

* AS 16, Borrowing Costs

* AS 17, Segment Reporting

* AS 18, Related Party Disclosures

* AS 19, Leases

July 2001

The following Accounting Standards were incorporated:

* AS 20, Accounting Standard on Earnings Per Share (EPS).

* AS 21, Accounting Standard on Consolidated Financial Statements

* AS 22, Accounting Standard on Accounting for Taxes on Income

The Exposure Drafts since 2001 are as follows:

* Exposure draft on proposed Accounting Standard on Accounting for Investments in Associates in Consolidated Financial Statements.

* Exposure draft on proposed Accounting Standard on Discontinuing Operations.

* Exposure draft on Proposed Limited Revision to AS 5, Accounting Standard on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

October-2001

AS-23- Accounting Standard on Accounting for Investments in Associates in Consolidated Financial Statements

January, 2002

* Exposure Draft on proposed Accounting Standard on Intangible Assets

* Exposure Draft on proposed Accounting Standard on Financial Reporting of Interests in Joint Ventures

* Exposure Draft on proposed Accounting Standard on Interim Financial Reporting

* Exposure Draft on proposed Accounting Standard on Impairment of Assets

April 2002

The following Accounting Standards were introduced:-

* AS 24, Accounting Standard on Discontinuing Operations

* AS 25, Accounting Standard on Interim Financial Reporting

* AS 26, Accounting Standard on Intangible Assets

* AS 27, Accounting Standard on Financial Reporting of Interests in Joint Ventures

July 2002

* AS 28- Accounting Standard on Impairment of assets was introduced

* AS 7- Accounting Standard on Construction Contract revised

* AS 24- Accounting Standard on Discontinuing Operations made mandatory

January 2004

* AS 29 - Accounting Standard on Provisions, Contingent Liabilities and Contingent Assets was introduced.

Accounting Environment in Sweden

Swedish Accounting Standards Board

The main objective of the Board

Bokföringsnämnden, BFN (The Swedish Accounting Standards Board) is a governmental body with the main objective of promoting the development of, in Sweden, generally accepted accounting principles regarding current recording as well as the setting up of annual accounts.

Legal context

The accounting legislation in Sweden consists of mandatory accounting acts, the Annual Accounts Act of 1995 and the Book-keeping Act of 1999 being the most important ones. Both the Annual Accounts Act and the Book-keeping Act are general frameworks for accounting and both acts refer to "generally accepted accounting principles".

The Standard Setting

The Board issues general advice and information material on accounting matters and accounting practices. Finansinspektionen (The Swedish Financial Supervisory Authority) is responsible for issuing standards required for financial companies.

Swedish Accounting Environment Pre 2005

Swedish accounting requirements are based on the Annual Accounts Act incorporating the EU Directives, and on the accounting standards.

In Sweden, there are two standard setters that issue accounting standards. These are the Swedish Financial Accounting Standards Council (SFASC) and the Swedish Accounting Standards Board (SASB). The standards issued by these organizations apply to different companies.

The SFASC Standards apply primarily to listed companies, although the adoption of these standards by non-listed companies is becoming increasingly common. Companies listed on the Stockholm Stock Exchange are obligated by their listing contract with the stock exchange to report in accordance with the SFASC standards. The SFASC base all their standards on IAS. The SFASC standards only differ from IAS standards when IAS is in conflict with Swedish laws, mainly the Swedish Annual Account Act. For unlisted companies (small, medium and large) the SASB issues standards similar to the SFASC, although with significant relief for small and, to some extent, medium sized companies. The SASB also issues standards and interpretations on specific issues, which are deemed to be of general interest.

The Swedish Financial Accounting Standards Council

Included below are all new standards issued by the SFASC with effective dates during 2001, 2002 and 2003, followed by a brief summary of major differences between the Swedish standard and IAS. Eight Swedish Accounting Standards issued by the SFASC became effective for financial years beginning on or after 1 January 2001. They were:

> SFASC 9, Income Taxes (based on IAS 12).

> SFASC 10, Construction Contracts (based on IAS 11).

> SFASC 11, Revenues (based on IAS 18).

> SFASC 12, Property, Plant and Equipment (based on IAS 16).

> SFASC 13, Associated Company (based on IAS 28).

> SFASC 14, Joint Ventures (based on IAS 31).

> SFASC 18, Earnings per Share (based on IAS 33).

> SFASC 20, Interim Financial Reporting (based on IAS 34).

The major differences between Swedish standards mentioned above and IAS are:

> SFASC 9, Income Taxes, the Swedish requirements differ from IAS in one material aspect. In certain specific cases, a deferred tax liability may be discounted.

> SFASC 12, Property, Plant and Equipment, the Swedish standard allows write-ups in some specific cases, which are not in accordance with IAS 16, Property, Plant and Equipment. (IAS 16 allows systematic revaluations of classes of assets, whereas SFASC 12 only allows revaluations under very strict conditions). SFASC 12 also applies to assets relating to agriculture (IAS 41, Agriculture). Finally, any revaluation of tangible fixed assets does not need to be kept up-to-date.

> SFASC 20, Interim Financial Reporting, according to Swedish requirements, the interim report of the group shall also include profit and loss information relating to the parent company.

Seven new Swedish Accounting Standards issued by the SFASC have become effective for financial years beginning on or after 1 January 2002. Earlier implementation is encouraged. These standards are:

> SFASC 1:00, Business Combinations (based on IAS 22 and 27).

> SFASC 15, Intangible Assets (based on IAS 38).

> SFASC 16, Provision, Contingent Liabilities and Contingent Assets (based on IAS 37).

> SFASC 17, Impairment of Assets (based on IAS 36).

> SFASC 19, Discontinuing Operations (based on IAS 35).

> SFASC 21, Borrowing Costs (based on IAS 23).

> SFASC 22, Presentation of Financial Statements (based on IAS 1).

> SFASC 23, Related Party Disclosures (based on IAS 24).

The major differences between the Swedish standards mentioned above and IAS are:

> SFASC 1:00, Business Combinations, according to Swedish requirements, negative goodwill shall be accounted for as a provision and classified as a liability in the balance sheet. In some cases, subsidiaries can be accounted under the equity method, which is not allowed under IAS. Reverse acquisitions are not covered by SFASC 1:00.

> SFASC 15, Intangible Assets, the Swedish Annual Account Act prescribes that the useful life for an intangible asset shall not exceed 5 years. If the company estimates that the useful life exceeds 5 years, the reason shall be specified. This disclosure requirement is incorporated in the SFASC.

> SFASC 23, Related Party Disclosures, includes certain disclosure requirements concerning transactions with group companies. In some cases, these requirements go further than the requirements in IAS 24, Related Party Disclosures.

Furthermore, listed below is a summary of other material differences between Swedish GAAP and IAS.

> Trading, available-for-sale and derivative financial assets are not recognized at fair value.

> Trading and derivative liabilities are not recognized at fair value.

> Hedge accounting is permitted more widely.

> Pension calculations generally do not use the projected unit credit method, current interest rates or estimates of future salary levels but an accrued benefit obligation based on current salary level.

> There is no requirement to use the primary/secondary basis for segment reporting.

The Swedish Financial Accounting Standards Council (SFASC) has issued two new accounting standards July 2002, which will be effective for financial years beginning on or after January 1, 2003.

> SFASC 22 - Presentation of Financial Statements (based on IAS 1, Presentation of Financial Statements).

> SFASC 24 - Investment property (based on IAS 40, Investment Property).

The major differences between the above standards and IAS are:

SFASC 22

SFASC 22 requires additional disclosures if the financial statements are not prepared under the going concern assumption. IAS 1 does not include such disclosure requirement.

According to the Swedish standard, assets must be classified in current and fixed assets, while IAS 1 permits the company to classify assets in other groups, mainly based on liquidity.

The Swedish Annual Account Act prescribes that all debts maturing later than five years after the balance sheet date must be disclosed in the notes. This disclosure requirement is incorporated in the SFASC.

IAS 1 permits consolidated financial statements to be prepared in accordance with IAS and the individual financial statements of the parent company in accordance with local standards. SFASC 22 states that the Standard shall be applied for both the consolidated financial statements and the individual financial statements of the parent company.

IAS 1 allows companies to use different accounting methods for certain assets, however this is not permitted by the Swedish Annual Account Act and therefore not permitted by SFASC 22. In those cases where different rules can be applied in the parent company and the consolidated financial statements, this is specified in the respective Standard.

SFASC 24

According to IAS 40, a company can choose to value investment property at fair value or historical cost, while SFASC 24 only permits historical cost.

IAS 40 replaces parts of IAS 25, Accounting for Investments. As SFASC has not issued any Standard based on IAS 25, there are no references to such Standard.

SFASC has also issued the following two new exposure drafts:

> SFASC Exposure Draft - Inventory (based on IAS 2, Inventories).

> SFASC Exposure Draft - Government Grants (based on IAS 20, Accounting for Government Grants and Disclosure of Government Assistance).

The exposure drafts are proposed to be effective for financial years beginning on or after January 1, 2003.

The Swedish Financial Accounting Council (SFASC) has issued three new accounting standards on October 2002, which will be effective for financial years beginning on or after January 1, 2003:

> SFASC 25 - Segment Reporting (based on IAS 14, Segment Reporting)

> SFASC 26 - Events after the Balance Sheet Date (based on IAS 10, Events after the Balance Sheet Date)

> SFASC 27 - Financial Instruments: Disclosure and Presentation (based on IAS 32, Financial Instruments: Disclosure and Presentation)

A significant difference between IAS and Swedish GAAP is found in SFASC 27: The Swedish Annual Account Act prescribes that all financial instruments in the legal form of a share shall be accounted for and classified as an equity instrument. Therefore, the paragraphs in IAS 32 prescribing that a financial instrument with a legal form of a share shall be accounted for according to the substance rather than its legal form do not exist in SFASC 27.

Regarding SFASC 25 and 26 there are no material differences compared to IAS.

Adoption of IFRSs in Europe Effective in 2005

In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. EU countries have the option to:

> Require or permit IFRSs for unlisted companies.

> Require or permit IFRSs in parent company (unconsolidated) financial statements.

> Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007.

> Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.

The European IAS regulation applies not only to the 25 EU Member States but also to the three members of the European Economic Area (EEA) - Iceland, Liechtenstein, and Norway.

Sweden is an EU Member State. Consequently, Swedish companies listed in an EU/EEA securities market will follow IFRSs starting in 2005.

-Refer to Appendix

Ashok Leyland

With three consecutive years of growth in GDP at over 7.5%, the required momentum has been generated for achieving higher growth rates in the future. Trucks are already impacting positively on the demand for commercial vehicles. It will warrant significant changes in vehicle design to enhance productivity. Another significant development is the demand for introduction of low floor city buses, which is expected to play a major role in defining urban transportation in India.

Business Review

The Company registered significant market share improvements in 2005-06. Leadership position in M&HCV buses and in the growing > 35 ton articulated trucks have been the major achievements in 2005-06. The Company also secured a significant order from the Indian Army for supply of 872 units of indigenously developed Water Bowsers. A major portion of orders from the Defense will be executed in 2006-07.

The Company has overcome production bottlenecks to a large extent and has achieved satisfactory productivity levels in all plants, following the recent wage settlements. This has enabled the Company to increase its vehicle manufacturing capacity to 77,200 units from 67,500 units.

Commercial Vehicle Industry Structure and Development

After recording an unprecedented compounded annual growth rate (CAGR) of 29.6% between 2001-02 and 2004-05, the Indian commercial vehicle production in 2005-06 grew by 10.6%. Domestic demand grew by 10.1% in 2005-06, reaching a record 350,683 units, coming after three high growth years.

Despite an estimated 8.1% growth in Indian GDP, the domestic medium and heavy commercial vehicle (M&HCV) demand was lack-lustre for most part of 2005-06. A moderate 4.5% growth was registered in 2005-06, largely aided by a 16.3% spurt in the last quarter. With 19.4% demand growth, Light Commercial Vehicles (LCV) segment contributed significantly to the overall commercial vehicle demand. Indian commercial vehicle exports grew by 35.5% in 2005-06 and registered a CAGR of 36% between 2001-02 and 2005-06. Exports accounted for 10.4% of total production. There has been a significant change in the profile of commercial vehicle industry during the last few years. This trend is expected to continue, with a mature transportation model emerging in the next few years. The recent directive of the Supreme Court is to strictly curb overloading of towards achieving improvements in cost, quality, throughput and safety.

The Company has been gradually adopting Design for Six Sigma in design process. The benefits of this approach have begun to flow in. Customer-centric products and services continue to be the Marketing Mission. Domain Expert Groups have been formed to understand customers' needs and business drivers for each application. Apart from ongoing product improvements, Newgen cab, 260 hp rear engine InterCentury Luxura coach and > 300 hp tipper and tractor will be the major new launches in 2006-07.

The Company exported 4,879 units in 2005-06. Excluding the sales to Iraq in 2004-05 under the UN Oil for Food programme, export sales increased by 22% over 2004-05. Exports constituted 8% of total sales in 2005-06 and the Company is targeting to increase the contribution of exports to 10% of total sales in the coming years.

By entering into a marketing arrangement for small and high capacity engines, the Company has expanded its offering of engines for industrial and marine applications. In 2005-06, the Company sold 7,261 engines for industrial and marine applications, up 16% over 2004-05. The Company is tapping the vast export potential for its engines and a beginning has been made in 2005-06.

Significant increase in sale of CKD kits to the Indian Army has boosted the spare parts sale value to Rs. 7,837.8 million, up 44% over 2004-05.

Opportunities and Threats

In line with developed market practices, demand for < 3.5 ton GVW and > 16 ton GVW trucks is expected to increase at a much rapid pace. With a strong presence in the HCV range, the Company is exploring expansion of its range into the growing LCV segment. Various initiatives are being pursued in this regard.

To de-risk against the cyclicality of the commercial vehicle business, the Company is aggressively progressing allied businesses. Dedicated organizations for components and aggregates business and engineering design services have been formed. The Company is seeking growth in new overseas markets as well. New urban transportation models are being contemplated in major cities and the Company is getting equipped to offer cost effective solutions.

Given the changing competitive scenario, the Company is focusing on superior cost-value equation to retain its competitive edge.

Risk Management

The commercial vehicle business has a specific set of risk characteristics, which need to be carefully evaluated, managed and mitigated. In order to effectively manage the cyclical nature of demand, the Management has adopted an internal risk management protocol. Risk management covers the entire process of business including, inter-alias, capital investment, adherence to statutory norms and customer care.

Continuance of the reform process and emphasis on infrastructure and agriculture augur well for the road transport sector. However, the cyclical nature of demand in the commercial vehicles industry needs to be factored in for capacity build up / manufacturing strategies. Capacity build up plans are periodically re-assessed, taking into account market conditions and demand forecast.

The Company is planning to expand its capacity to 100,000 vehicles by FY08. Further expansion beyond this level will depend on actual growth rate for the commercial vehicle industry. Concerns on input cost increases due to commodity price movements, coupled with cost increases arising out of improvements in product designs and up-gradation to meet emission norms continue. Due to competitive pressures, these cost increases have not been fully

Internal Control systems and their adequacy

Based on the nature of business and size of operations, the Company's internal control system has been designed to provide for:

> Accurate recording of transactions with internal checks and prompt reporting.

> Adherence to applicable Accounting standards and policies.

> Review of capital investments and long term business plans.

> Periodic review meetings to manage effectively, all working capital elements.

> Compliance with applicable statutes, policies, listing requirements and operating guidelines of the Company.

> Effective use of resources and safeguarding of assets.

> IT systems with in-built controls to facilitate all of the above.

The commercial vehicle industry in India will witness a higher level of competition following the proposed plans announced by automotive companies both Indian and foreign. The Company plans to counter these developments through product offerings to specific customer requirements and by increasing its marketing foot print across the country.

During the year under review, the Company suffered loss of vehicle volumes due to supply constraints in the first quarter, as a result of somewhat sudden changes made by the Government in the introduction of BS-II norms, in certain states. The Company's foreign exchange exposure has reduced substantially with the good level of conversion from Bonds to equity. As on date, 81% of Bondholders have / are in the process of converting their Bonds into equity shares. The Company is a net foreign exchange earner and to that extent has limited exposures if the Indian Rupee was to depreciate in future. The Company's currency exposures are mostly in USD and are actively managed through a centralized Treasury Department assisted by technical experts.

Volvo

AB Volvo (or Aktiebolaget Volvo) is a world-leading Swedish auto manufacturer was founded August 10, 1926 in the city of Gothenburg, as a spin-off from roller ball bearing maker SKF (Svenska Kullagerfabriken AB). Volvo Cars, the automobile manufacturer, has been owned by the Ford Motor Company since 1999.

Volvo is Latin for "I roll" or "I turn." The name Volvo was originally registered in May 1911 as a separate company within SKF AB and as a registered trademark with the intention to be used for a special series of ball bearing, but this idea was only used for a short period of time and SKF decided to use "SKF" as the trademark for all its bearing products. The company Volvo AB had no activities until the 10 August 1926 when the SKF Sales Manager Assar Gabrielsson and Engineer Gustav Larson, after one year of preparations involving the production of 10 prototypes, set up the car-manufacturing business Volvo AB within SKF group. Volvo AB was introduced at the Stockholm stock exchange in 1935 and SKF then decided to sell its shares in the company.

The first series produced Volvo automobile, called 'ÖV4' (Öppen vagn (Open wagon)-4 cylinders) left the factory on 14 April 1927. Just 996 cars were produced between 1927-1929. 'ÖV4' was replaced by model PV651 in April 1929. Volvo's first success in the automobile production came with the PV444 that was introduced in September 1944. The Volvo Group today has more than 81,000 employees, with manufacturing in 25 countries and sales in more than 185 markets. The group provides complete solutions for financing and service. The Volvo Group's net sales 2005 amounted to approx EUR bn 23.

Volvo Group is one of the world´s leading manufacturers of trucks, buses and construction equipment, drive systems for marine and industrial applications, aerospace components and services. The Group also provides complete solutions for financing and service.

Their products & services include:

> Trucks

> Buses & coaches

> Construction equipment

> Marine power

> Industrial engines & systems

> Power generation

> Aircraft engines

> Aviation services

> Space propulsion

> Financial services

> Industrial IT solutions

> Logistics solutions

The business areas are - Volvo Trucks, Mack, Renault Trucks, Volvo Buses, Volvo Construction Equipment, Volvo Penta, Volvo Aero and Volvo Financial Services. Several business units provide additional manufacturing development or logistical support. The largest business units are: Volvo Powertrain, Volvo 3P, Volvo IT, Volvo Logistics, Volvo Parts and Volvo Technology.

Founded in 1927, Volvo today has approx 82,000 employees, production in 25 countries and operates on more than 185 markets.

The President of AB Volvo and Chief Executive Officer of Volvo Group is Leif Johansson and the Executive Vice President of AB Volvo and Deputy CEO is Jorma Halonen.

Theory of Financial Analysis-Ratios

Ratio Analysis:

. Liquidity Ratios

a. Current Ratio - It is defined as the ration between current assets and current liabilities

Current Ratio = (Current Assets)/(Current Liabilities)

Current ratio measures the ability of the enterprise to meet its current obligations. Ideal current ratio is 2:1. Anything above this is a healthy sign.

b. Quick Ratio - It is the ration of quick assets to current liabilities.

Quick Ratio = (Quick Assets)/(Current Liabilities)

Quick Assets = (Current Assets) - (Inventories)

Quick ratio is a more stringent measure of liquidity i.e. ability of the enterprise to meet its current obligations.

c. Turnover Ratios - Receivables turnover ratios and inventory turnover ratios measure the liquidity of a firm in an indirect way. The turnover ratios give the speed of conversion of current assets into cash.

Inventory Turnover - It is the ratio of cost of goods sold to average inventory

Inventory Turnover = (Cost of Goods Sold)/(Average Inventory)

The inventory turnover or stock turnover measures how fast the inventory is moving through the firm and generating sales. Higher the ratio, greater the efficiency of inventory management i.e. a balance between shortfalls and excess inventories.

2. Profitability or Efficiency Ratios - Profitability ratios offer several different measures of the success of the firm at generating profits.

a. Gross profit ratio: The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows:

(i) Gross Profit Margin = Gross Profit/ Net Sales

(ii) Net Profit Margin = Net Profit/Net Sales

(iii) Asset Turnover Ratio = Sales / Average assets

(iv) Earning Power = PBIT/Average Total Assets

(v) Return on Equity = PAT/Average Equity

3. Ownership Ratios

Earnings Ratios - From earnings ratio we get information on earnings of the firm and their effect on price of common stock. In the following paragraphs we will discuss the above ratios in detail.

a) EPS: The investors are worried about their interest in the firm with retained earnings. These earnings are expressed on a per share basis which is in short called EPS. Its given by

EPS = Net income/ Number of outstanding shares.

b) P/E Ratio: It gives the relationship between the market price of the stock and its earning by revealing how earnings affect the market price of the firm's stock. If the ratio is low then the stock is undervalued and if its too high then its over valued.

Price Earning ratio= Market price of share/EPS

c) Capitalization Ratio: It's the inverse of P/E Ratio. It gives the rate of return investor expects before they purchase a stock.

Capitalization Ratio = EPS/Market price of the stock

4. Capital Structure Ratios

Capital Structure Ratio: They are concerned with the proportions of debt and equity in the capital structure of the firm.

Debt-Equity Ratio: The ratio indicates the relative contributions of creditors and owners. It depends on the industry the firm is in. For auto industry it lies between 2 to 2.8.

5. Dividend Ratios

Dividend Ratios: Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth. Two commonly used ratios are the dividend yield and payout ratio.

a) Dividend Yield: A high dividend yield does not necessarily translate into a high future rate of return. It is important to consider the prospects for continuing and increasing the dividend in the future. Its given by:

Dividend Yield = Dividends Per Share/ Share Price

b) Dividend Payout ratio: To over come the limitations of Dividend yield payout ratio is used. It is defined as:

Payout Ratio = Dividends Per Share/ Earnings Per Share

Financial Statement Analysis

Ashok Leyland

The year under review witnessed strong growth in sales revenue and profit, with both reaching record levels. Implementation of BS-II norms and CMVR changes and difficulties in passing on the full cost increases impacted profitability marginally. The Management had initiated many cost reduction initiatives, which are expected to yield improvements to the operating margins. The Company achieved 21% improvement in net profit.

Profit & Loss Account - Ashok Leyland

Rs. millions

2005-06

2004-05

Inc / (Dec)

Income

%

Sales Revenue (Net of Excise)

52,477

41,819

25.5

Other Income

329

538

-38.8

Total

52,806

42,357

24.7

Expenditure

Manufacturing Expenses

37,690

29,729

26.8

Employee Expenses

4,038

3,541

4.0

Other Expenses

5,347

4,321

23.7

Depreciation

,260

,092

5.4

Financial Expenses

65

28

489.3

Total

48,500

38,711

25.3

Profit Before Extraordinary items

4,306

3,646

8.1

Extraordinary item - Income / (Charge)

217

-96

326

Profit Before Tax

4,523

3,550

27.4

Tax Provision - Current

,131

895

26.4

- Deferred

72

-59

222

- Fringe Benefit Tax

47

-

-

Profit After Tax

3,273

2,714

20.6

Basic Earnings Per Share (in Rs.)

2.74

2.28

20.2

Diluted Earnings Per Share (in Rs.)

2.58

2.05

26.3

Market Price Per Share (in Rs.)

41.00

22.50

82.2

Revenues

Net sales for the year, at Rs.52,477 million, has increased by 25% as compared to previous year, contributed mainly by volume increases in vehicles by 13%, engines by 15% and a 44% increase in sales revenue from Spare Parts. The reduction in other income is mainly on account of the one-time gain earned

from sale of shares of IndusInd Bank during 2004-05.

Costs

Though steel prices softened during the year, there were significant cost increases on account of emission and noise norms. Through concerted efforts, the Company could secure better productivity norms in all the plants. This enabled the Company to reduce costs. Financial expenses increased during the current year due to higher levels of working capital needed to support increased activity. Further, during the previous financial year, income earned on funds raised through the FCCN and remaining unutilised had helped in reducing net interest burden. These FCCN funds are utilised for capital expenditure equirements. Hence, there has been a reduction in income on deployment of such temporary surplus funds.

Balance Sheet - Ashok Leyland

2006

2005

Rs. Millions

Rs. Millions

Rs. Millions

Sources of funds

Shareholders' funds

Capital

,221.59

,189.29

Reserves and surplus

2,902.94

0,489.36

4,124.53

1,678.65

Loan funds

Secured loans

,846.91

2,634.96

Unsecured loans

5,072.37

6,169.10

6,919.28

8,804.06

Deferred tax liability - net

796.89

708.48

Total

22,840.70

22,191.19

Application of funds

Fixed assets

Gross block

21,384.99

20,022.50

Less Depreciation

1,952.28

1,084.04

Net block

9,432.71

8,938.46

Capital work-in-progress

,414.17

851.55

0,846.88

9,790.01

Investments

3681.78

2,291.90

Current assets, loans and advances

Inventories

9,025.61

5,680.81

Sundry debtors

4,243.37

4,587.66

Cash and bank balances

6,028.76

7,966.82

Loans and advances

3,026.39

3,337.34

22,324.13

21,572.63

Less Current liabilities and provisions

Liabilities

1,468.95

9,611.87

Provisions

2,616.21

2,044.80

4,085.16

1,656.67

Net current assets

8,238.97

9,915.96

Miscellaneous expenditure (to the extent not written off or adjusted)

73.07

93.32

Total

22,840.70

22,191.19

Resources

During the year, the Company incurred capital expenditure of Rs. 2,434 million towards investments in capacity expansion / upgradation and R & D. Capacity increased from 67,500 vehicles to 77,200 vehicles by August 2005. The expansion of R & D facility is progressing as per plan. Net Current Assets (excluding cash / bank balances) as on 31st March 2006 stood at Rs. 2,210 million as against the previous year level of Rs. 1,949 million. Inventories have gone up to Rs. 9,026 million as on 31st March 2006 compared to Rs. 5,681 million as at 31st March 2005 due to increase in finished inventory levels to meet sudden upsurge in market demand. Debtors level decreased to Rs. 4,243 million from Rs. 4,588 million. The high level of cash and bank balance includes funds raised through the FCCN issue kept in bank deposits pending utilization in capital expenditure programmes. As of 31st March 2006, this amounted to Rs. 855 million.

Ratio Analysis - Ashok Leyland

Ratios

2006

2005

Current Ratio

.58

.85

Quick Ratio

0.94

.36

Inventory Turnover

6.56

-

Gross Profit Margin

20.48%

20.44%

Net Profit Margin

6.24%

6.49%

Asset Turnover

2.33

-

Earning Power

0.21

-

Return on Equity

0.25

-

EPS

2.74

2.28

Price Earnings Ratio

4.94

9.86

Capitalization Rate

6.69%

0.14%

Debt-Equity Ratio

0.49

0.75

Dividend Payout Ratio

0.41

0.37

Dividend Yield

2.77%

3.77%

Liquidity

During the fourth quarter, FCCNs issued by the Company began to be tendered for conversion to equity and by 31st March 2006, 23% of the FCCN issued were converted into Equity shares. This is excluding the 50.93% holding of the principal shareholders who have also advised the Company of their intention to convert. As of date, Bonds worth USD 81 million were converted / would be converted. On full conversion of all Bonds, the equity will increase to Rs.1,331.6 million from the previous year level of Rs.1,189.3 million. The overall manpower cost has increased by 14% mainly due to wage settlements in two (Ennore and Hosur II) plants. Other expenses have increased by 24%, mainly due to activity expansion. Thrust on Research and Development (R & D) is continuing and total R & D spend, including capital expenditure, accounts for Rs. 1,049 million, an increase of 14% over the previous year. Depreciation for 2005-06 has increased to Rs. 1,260 million compared to Rs. 1,092 million, mainly due to current year's additions to facilities and increase in number of shifts of operations in some plants.

Profitability Statement - Volvo

SEK M

SEK M

Particulars

2004

2005

Net sales

211076

240559

Cost of sales

-164170

-186662

Gross income

46906

53897

Research and development expenses

-7614

-7557

Selling expenses

-19369

-20778

Administrative expenses

-5483

-6301

Other operating income and expenses

-618

-590

Income from investments in associated companies

27

-557

Income from other investments

830

37

Operating income

4679

8151

Interest income and similar credit

821

654

Interest expenses and similar charges

-1254

-972

Other financial income and expenses

-1210

81

Income after financial items

3036

8014

Income taxes

-3129

-4908

Income for the period

9907

3106

Attributable to:

Equity holders of the parent company

9867

3053

Minority interests

40

53

No. of equity shares

420144190

406892269

Market Price per Share

263.5

374.5

Basic earnings per share,

23.58

32.21

Balance Sheet Of Volvo

SEK Mio

SEK Mio

Particulars

31.12.04

31.12.05

ASSETS

Intangible Assets

7612

20421

Tangible Assets

Property, Plant &Equipment

29,764

33930

Investment Property

387

071

Assets Under Operating Leases

9534

50,685

20839

55840

Financial Assets

Associated Companies , Other Shares & Participations

2003

751

Long-Term customer-Financiang Receivables

25187

31184

Deferred Tax Assets

5078

5332

Other Long-Term Receivables

2763

35031

3122

40389

Total Non-Current Assets

03328

16650

Inventories

28598

33937

Short-Term Receivables

Customer Financing Receivables

26006

33282

Current Tax Assets

426

855

Other Receivables

29864

57296

35464

69601

Marketable Securities

25955

28834

Cash & Cash Equivalents

8791

8113

Total Current Assets

20640

40485

Total Assets

223968

257135

LIABILITIES

Shareholder's Equity

Share Capital

2649

2554

Additional Contributed Capital

Reserves

-71

2924

Retained Earnings

57481

59978

Income For The Period

9867

3052

Minority Interests

229

70155

260

78768

Non-Current Provisions

Provision for Post-Employment Benefits

4703

1986

Provision for Deferred Taxes

515

2265

Other Non Current Provisions

7296

22514

7012

21263

Non-Current Liabilities

Bank Loans

27612

27570

Other Loans

2799

5985

Other Long-Term Liabilities

4653

45064

5259

48814

Current Provisions

7182

9279

Current Liabilities

Loans

21396

31330

Trade Payables

30813

35693

Current Tax Liabilities

753

726

Other Current Liabilities

25091

79053

30262

99011

Total Liabilities

223968

257135

Ratio Analysis - Volvo

Ratios

2004

2005

Current Ratio

.53

.42

Quick Ratio

.16

1.48

Inventory Turnover

5.21

-

Gross Profit Margin

22.22%

22.40%

Net Profit Margin

4.69%

5.45%

Asset Turnover

0.88

-

Earning Power

0.06

-

Return on Equity

0.13

-

EPS

23.58

32.21

Price Earnings Ratio

1.17

1.63

Capitalization Rate

8.95%

8.60%

Debt-Equity Ratio

0.64

0.71

Dividend Payout Ratio

-

-

Dividend Yield

-

-

Note: Dividend Proposed but not declared

Conclusion and Recommendations

Recommending investors a particular stock to invest in is a dangerous thing. Inspite of so much analysis you don't know what can happen in the market. Uncontrollable factors can play havoc with the whole exercise. Still we made an attempt to make certain recommendations on whether to invest in Volvo and/or Ashok Leyland or abstain. The recommendation is based on the ratio analysis and fundamental factors as already seen. Let us compare the two companies on various ratios calculated.

Ratio Analysis - Volvo

Ratios

2004

2005

Current Ratio

.53

.42

Quick Ratio

.16

1.48

Inventory Turnover

5.21

-

Gross Profit Margin

22.22%

22.40%

Net Profit Margin

4.69%

5.45%

Asset Turnover

0.88

-

Earning Power

0.06

-

Return on Equity

0.13

-

EPS

23.58

32.21

Price Earnings Ratio

1.17

1.63

Capitalization Rate

8.95%

8.60%

Debt-Equity Ratio

0.64

0.71

Dividend Payout Ratio

-

-

Dividend Yield

-

-

Note: Dividend Proposed but not declared

> Both companies have a significantly low debt-equity ratio indicative of their being cash rich companies

> P/E Ratio for Volvo is less than Ashok Leyland. However the Net Profit Margin for Ashok Leyland is higher. So one thing goes against Ashok Leyland and in favor of Volvo while the other parameter is reverse. So both are equally attractive investment propositions.

> EPS for Ashok Leyland is significantly lower as compared to Volvo - the reason being high no. of outstanding shares for Ashok Leyland vis-à-vis Volvo. This has nothing to do with investment as long as their Net Profit Margins are comparable.

> In terms of inventory turnover both are decently attractive with Ashok Leyland having a slight edge over Volvo.

> Volvo is better than Ashok Leyland as far as Quick Ratio is concerned though we see that current ratios for both are almost same. This is because of lower levels of inventory or better inventory management by Volvo.

> Ashok Leyland has a significant edge over Volvo in terms of earning power which is almost 3.5 times that of Volvo.

> Return on equity is also double for Ashok Leyland as compared to Volvo.

> Asset Turnover Ratio also goes in favor of Ashok Leyland.

Ratio analysis thus goes in favor of Ashok Leyland vis-à-vis Volvo. However Volvo is not a bad deal either. Looking beyond numbers and ratios would clearly indicate the strong fundamentals driving the growth of both the Automobile Sector Giants. They also have mutual business synergies as we already know that Volvo uses Ashok Leyland's assembly lines in India for buses. So both are investment recommendations over a medium to long term.

Limitations of Annual Reports

> Financial statements are available only after the specific period of time e.g. the balance sheet as on 31st March 2006 is available only after 31st March 2006 is over. The various legal provisions also provide for sufficient time lag for the preparation of financial statements. Thus, the financial statements give the information about the historic facts which may not be sufficient from decision making point of view for the management.

> Financial statements are necessarily interim reports and cannot be final ones. E.g. to understand the correct profitability and to understand the correct position of various assets and liabilities, it will be necessary to stop the business operations and dispose off all the assets and liquidate all the liabilities which may not be practicable and feasible. In order to prepare the financial statements for a specific period, it may be necessary to cut off various transactions involving costs and incomes at the date of closing the accounts which may not involve the personal judgements. Various policies and principles are required to be formulated for such cutting off of incomes and costs.

> As going concern principle is followed while preparing the Balance Sheet, the various assets and liabilities are shown at historical prices and do not necessarily represent the current market prices or the liquidation prices. This may affect the profitability statement as well in the form of incorrect provision for depreciation. This problem may be more critical during the periods of extreme inflation or depression. As such, any conclusions drawn on the basis of such financial statements may be misleading ones.

> Financial statements consider only those transactions which can be expressed in monetary terms. All other transactions or factors which cannot be expressed in terms of money are ignored by the financial statements. E.g. assuming that the business of the company is such that it is likely to be injurious to the health of the local community. As such, there is a strong opposition from the local community for the company's carrying on of business at the location. This opposition is something which cannot be expressed in terms of money and hence finds no place in the financial statements though it is affecting the business operations of the company to a very great extent.

> The financial statements prepared may be useful for the use of normal users under normal circumstances. If a user wants to use the financial statements for some special purposes, the necessary information or details may not be available from the financial statements. E.g. if a user, on the basis of financial statements available wants to value the equity shares of the company with the methods considering earning capacity of the company, the required details may not be available from the financial statements. Similarly, the financial statements may not give correct indications about the profitability or the financial conditions of the business under abnormal circumstances. E.g. suppose that the production and sales of a company is a particular year are abnormally high due to the prolonged strike in one of the major competitor companies, and hence profits in that particular year are abnormally high. Now when both the sales and profits are at normal level, the performance of that year may be treated as bad as compared to the abnormal year.

> Financial statements, howsoever carefully and correctly prepared, do not mean anything all by themselves unless the information stated therein is properly studied, analyzed and interpreted. As such, merely the preparation of financial statements is not sufficient; equally important is the task of their analysis and interpretation.

Limitations of Financial Statement Analysis

Analysis of financial statements using ratios can be very helpful in understanding a company's financial performance and condition. Yet there are certain problems which come in the way of such an analysis.

Development of Benchmarks

Many companies have operations spread across a number of industries. As no other company may have a presence in the same industries, that too in the same proportion, development of a benchmark becomes a problem. Even when the company is not a diversified one, figures for the various firms are needed in addition to the industry average, in order to draw a meaningful conclusion.

Window Dressing

Firms may window-dress the financial statements in order to show a rosy picture. In such a case, the whole exercise of analyzing the statements becomes useless. In order to draw some meaningful results out of the analysis, the average figures over a period of time should be looked into.

Price Level Changes

Financial statements do not take into account changes in price levels. Analysis of such statements may not give a true picture of the state of affairs.

Differences in Accounting Policies

Different companies may follow different accounting policies in respect of depreciation, stock valuation, etc. comparison between the ratios of two firms following different policies may not give the true result.

Interpretation of Results

A problem may arise on two accounts - interpretation of ratio on its own, and interpretation of all the ratios taken together. It is difficult to decide the optimum level of a ratio, inspite of the presence of industry averages. For example, it is difficult to say whether a high current ratio shows a good liquidity position or an unnecessarily high level of inventories. Secondly, some ratios may be in favor of a company, while some others may be against it. In such a case, it may be difficult to form an overall opinion about the company.

Correlation among Ratios

There may be a high degree of correlation among the various ratios calculated, due to the presence of some common factor. This may make interpretation of all the ratios confusing. Hence it becomes essential to choose a few ratios which can convey the required information.

References

> Treasury Management - ICFAI Press, ICFAI University, Hyderabad

> Financial Management - S.M. Inamdar

> www.iasplus.com

> www.icai.org

> www.ifac.org

> www.ifac.org/ComplianceAssesment/published_surveys.php

> www.deloittecountryguides.com

> www.volvo.com

> www.ashokleyland.com

> www.nseindia.com

> www.bseindia.com

> www.far.se

> www.bfn.se

> http://en.wikipedia.org

Appendices

Comparison between Swedish GAAP (IFRS-IAS39) and US GAAP:

IAS/IFRS

IAS 1

IAS 1

IAS 1

\IAS 1

Topic

General approach

Financial statement

presentation

Comparative prior year

Financial statements1

Reporting comprehensive

income"1

IFRS

More "principles- Based" standards with limited application guidance.

Specific line items required.

One year comparative

Financial information

required.

Total presented in the statement of

changes in equity.

US GAAP

More "rules-based" standards with specific application guidance.

Certain standards require specific presentation of certain items. Public companies are subject

to SEC rules and regulations, which require specific line items.

No specific requirement

under US GAAP to present comparatives. Generally at least one year of comparative financial information is presented. Public

companies are subject to SEC rules and regulations, which

generally require two years of comparative financial information.

Can be presented in statements of income, comprehensive income or changes in shareholders' equity, or within the

notes to the financial statements.

IAS 1

IAS 1

IAS 1

IAS 1

Classification liabilities

refinancing

Departure standard

When compliance

would be misleading

Classification liabilities on demand due to violation debt covenant

Extraordinary items1

Non-current if refinancing is

completed before balance sheet date.

Permitted in extremely rare" circumstances to achieve a fair presentation. Specific

disclosures are required.

Non-current if the lender has granted a 12-month waiver before the balance sheet date.

Prohibited.

Non-current if refinancing is completed before date of issuance of the financial statements.

Not directly addressed in US GAAP literature, although an auditor may, under Generally

Accepted Auditing Standards (GAAS) rule 203, conclude that by applying a certain GAAP

requirement the financial statements are misleading, thereby allowing for an override".2

Non-current if the lender has granted a waiver for period greater than one year (or operating cycle, longer) before the issuance of the financial statements or when it is probable that the violation will be corrected within the grace period, any, prescribed in the long-term debt agreement.

Extraordinary items are permitted, but are restricted to items that are both infrequent in occurrence and unusual nature.

IAS 2

IAS 2

IAS 2

IAS 7

IAS 7

IAS 11

Reversal of inventory write-downs

Measuring inventory at net realizable value even if above cost

Method for determining

inventory cost

Classification interest received and paid in the cash flow statement1

Inclusion of bank overdrafts cash

Method of accounting for construction contracts when the percentage completion

cannot be determined

Required, if certain criteria are met.

Permitted only for producers' inventories of agricultural and forest products and mineral ores and for broker-dealers' inventories of Commodities.

LIFO is prohibited.

May be classified as an operating, investing or financing activity.

Included if they form an integral part of an entity's cash management.

Cost recovery method.

Prohibited.

Similar, but not restricted to producers and broker/ traders.

LIFO is permitted.

Must be classified as an operating activity.

Excluded.

Completed contract

method.

IAS 12

IAS 12

IAS 12

IAS 12

IAS 12

Classification of deferred tax assets and liabilities3

Subsequent recognition of deferred tax asset after a business

combination3

Reconciliation of actual and expected tax expense3

Calculation of tax benefits related to share-based payments3

Impact of temporary Differences related to

Inter-company profits3

Always non-current.

First reduce goodwill to zero, any excess credited to net profit or loss.

Required for all entities applying IFRS; expected tax expense is computed by applying the applicable tax rate(s) to accounting profit, disclosing also the basis on which the applicable tax rate(s) is(are) computed.

Deferred tax is computed based on the tax deduction for the share-based payment under the applicable tax law

(i.e. intrinsic value).

Deferred tax effect is recognized at the buyer's tax rate.

Classification is split between current and non-current components based on the classification of underlying asset or liability, or on the expected reversal of items not related to an asset or liability.

First reduce goodwill to zero, then any other non-current intangible assets to zero, any excess

credited to net profit or loss.

Required for public companies only; expected tax expense is computed by applying the domestic federal statutory tax rates to pre-tax income from continuing operations. Non-public companies must disclose the nature of the reconciling items

but not amounts.

Deferred tax is computed based on the GAAP expense recognized, and trued up at realization of the tax benefit.

Deferred tax effect is recognized at the seller's tax rate, as if the

transaction had not occurred.

IAS 17

IAS 17

IAS 18

IAS 19

Recognition of a gain on a sale and leaseback

Transaction where the

leaseback is an operating

lease

Disclosure of lease

maturities

Revenue recognition

guidance

Termination benefits

The gain is recognized immediately.

Less detailed disclosure.

General principles are consistent with US GAAP, but IFRS contain limited detailed or industry-specific

guidance.

No distinction between "special"

and other termination benefits. Termination benefits recognized

when the employer is demonstrably committed to pay.

Generally, the gain is amortized over the lease term.

More detailed disclosure.

More specific guidance, particularly industry specific

issues. In addition, public companies must follow more detailed guidance provided by the SEC.

Recognize special (onetime)

Termination benefits generally when they are communicated to employees unless employees will render service beyond a minimum retention period" in which case the liability is recognized ratably over the future service period. Recognize contractual termination benefits when it is probable that employees will be entitled and the amount can be reasonably estimated.

IAS 19

IAS 19

IAS 19

Measurement of gain or loss on curtailment of a benefit plan

Timing of recognition of

gains/losses on curtailment of a benefit plan

Recognition of past service cost related to

benefits that have vested

A curtailment gain or loss comprises (a) the change in the present value of the defined benefit obligation,

(b) any resulting change in fair value of the plan assets, and (c) a pro rata share of any related actuarial gains and losses, unrecognized transition amount, and past service cost that had not previously been recognized.

Both curtailment gains and losses are recognized when the entity is demonstrably committed and a curtailment has been announced.

Recognized immediately.

Unrecognized actuarial gains and losses arising subsequent to transition do not affect the curtailment gain or loss, while the amount of gain or loss would be offset by any portion of the unrecognized transition asset or liability.

A curtailment loss is recognized when it is probable that a curtailment will occur and the effects are reasonably estimable. A curtailment gain is recognized when the relevant employees are

terminated or the plan suspension or amendment is adopted, which could occur after the entity is demonstrably committed and a curtailment is announced.

Generally amortized over the remaining service period or life expectancy.

IAS 19

IAS 19

IAS 19

IAS 19

Multi-employer plan that is a defined benefit plan

Minimum liability recognition for benefits under defined benefit

plans

Limitation on recognition of pension assets

Recognizing actuarial gains and losses, when they arise, directly in the statement of equity

Should be accounted for as a defined benefit plan if the required information is available, otherwise as a defined contribution plan.

No minimum liability requirement.

Pension assets cannot be recognized in excess of the net total of unrecognized past service cost and actuarial losses plus the present value of benefits available from refunds or reduction of future contributions to the plan.

Permitted.

Accounted for as a defined contribution plan.

At a minimum, the Unfunded accumulated benefit obligation is recognized.

No limitation on the amount that can be recognized.

Not permitted.

IAS 23

IAS 23

IAS 23

IAS 27

IAS 27

Borrowing costs related to assets that take a substantial time to complete

Types of borrowing

costs eligible for

capitalization

Income on temporary

investment of funds

borrowed for construction of an asset

Basis for consolidation

Special purpose

entities9;10

Capitalization is an available accounting policy choice.

Includes interest, certain ancillary costs, and exchange differences that are regarded as an adjustment of interest.

Reduces borrowing

costs eligible for

Capitalization.

Control (look to governance and risk

and benefits).

Consolidate if "controlled" Generally follow the same principles as for

commercial entities in

determining whether

or not control exists.

Capitalization is mandatory.

Generally includes only interest.

Does not reduce borrowing cost eligible for capitalization except in limited circumstances.

Approach depends on the type of entity. For voting interests, entities generally look to majority voting rights. For variable interest entities, look to a risks and rewards model.

If SPE is not a "qualifying SPE", then consolidation generally based on majority voting interests (if SPE is a voting interest entity) or based on a risks and rewards model (if SPE is a variable interest entity). Special rules apply for consolidation of "qualifying SPEs".

IAS 27

IAS 27

IAS 27

IAS 27

IAS 28

IAS 28

Different reporting dates of parent and Subsidiaries

Different accounting policies of parent and

subsidiaries

Accounting for investments in subsidiaries in parent's separate financial statements

Presentation of minority interest

Different reporting dates of investor and associate

Different accounting policies of investor and

associate

Reporting date difference cannot be more than three months. Must adjust for any significant intervening

transactions.

Must conform policies.

Either cost method or use IAS 39 (i.e. apply the financial instrument rules) but not equity method.

In equity.

Reporting date difference cannot be more than three months. Must adjust for any significant intervening transactions.

Must conform policies.

Reporting date difference generally should not be more than three months. Must disclose effects of any significant intervening transactions.

No specific requirement

to conform policies.

Investments in subsidiaries may be presented either using equity or cost method.

Outside of equity, between liabilities and equity.

Reporting date difference generally should not be more than three months. Must disclose any significant intervening transactions.

No specific requirement to conform policies.

IAS 28

IAS 29

IAS 31

IAS 32

IAS 32

Accounting for

investments in

associates in

parent's separate

financial statements

Adjusting financial

statements of an entity that operates in a

hyperinflationary economy

Investments in

joint ventures

Classification of

convertible debt

instruments

Offsetting amounts due

from and owed to two

different parties

Either cost method or use IAS 39 (i.e. apply the financial instrument rules) but not equity method.

Adjust using a general price level index before translating.

May use either the equity method or proportionate consolidation.

Split the instrument into its liability and equity components and measure the liability at fair value with the equity component representing the residual.

Permitted when and only when a legally enforceable right and the intention to settle net exist.

Equity method.

Adjust the financial statements as if the reporting currency of parent was the entity's functional currency.

Generally use the equity method (except in construction and oil gas industries).

Classify the entire instrument as a liability. However, the intrinsic value of the conversion feature at commitment date of instrument, if any, should be recognised as additional paid-in capital.

Prohibited.

IAS 33

IAS 33

IAS 33

IAS 34

IAS 36

Disclosures of earnings per share (EPS)

Calculation of year-to-date (YTD) diluted

EPS

Contracts that may be settled in ordinary shares or in cash, at issuer's

option

Interim reporting - revenue and

Expense recognition

Impairment methodology

for long-term assets other

than goodwill that are subject to amortization

Basic and diluted income from

continuing operations per share and net profit or loss per share.

Apply the treasury stock method on an YTD basis, that is, do not average the individual interim period calculations.

Assume always that the contracts will be settled in shares.

Interim period is a discrete reporting period (with certain

Exceptions).

Impairment is recorded when an asset's carrying amount exceeds the higher of the asset's value-in-use (discounted present value of the asset's expected future cash flows) and fair value less costs to sell.

Basic and diluted income from continuing operations, discontinued operations, extraordinary items, cumulative effect of a change in accounting policy, and net profit or loss per

share.

Average the individual interim period incremental shares.

Include based on rebuttable presumption that the contracts will be settled in shares.

Interim period is an integral part of the full year (with certain exceptions).

Impairment is recorded when an asset's carrying amount exceeds the expected future cash flows to be derived from the asset on an

undiscounted basis.

IAS 36

IAS 36

IAS 36

IAS 36

Measurement of impairment loss for long term assets other than

goodwill that are subject to amortization

Level of impairment

testing for goodwill and

other indefinite-life assets

Calculating impairment of

goodwill

Calculating impairment of

indefinite-life intangible

assets other than goodwill

Based on the recoverable amount (the higher of the asset's value-in-use and fair value less costs to sell).

Cash generating unit (CGU) - the lowest level to which goodwill can be allocated.

One-step: compare recoverable amount of a CGU (higher of (a) fair value less costs to sell and (b) value-in-use) to carrying amount.

Goodwill and other indefinite-life intangible assets are included in a CGU. The CGU is tested for impairment.

Based on fair value.

Reporting unit - either an operating segment or one organizational level below.

Two steps.

. Compare fair value of the reporting unit with its carrying amount including goodwill. If fair value is greater than carrying amount no impairment

2. Compare "implied fair value" of goodwill with its carrying amount recording an impairment loss for

the difference.

Goodwill is included in the CGU. Other indefinite-life intangible assets are tested separately.

IAS 36

IAS 37

IAS 37

IAS 37

IAS 37

Subsequent reversal of an impairment loss

Measurement of provisions

Measurement of decommissioning Provisions

Recognition of restructuring provisions

Disclosures that may prejudice seriously the

position of the entity in a

dispute

Required for all assets, other than goodwill, if certain criteria are met.

Best estimate to settle the obligation, which generally involves the expected value method. Discounting required.

Use the current, risk adjusted rate to discount the provision when initially recognized. Adjust the rate at each reporting date.

Recognize if a detailed formal plan is announced or implementation of such a plan has started.

"In extremely rare cases" amounts and details need not be disclosed, but

Disclosure is required of the general nature of the dispute and why the details have not been disclosed.

Prohibited.

Best estimate to settle the obligation. If no one item is more likely than another, use the low end of the range of possible amounts. Most provisions are not discounted.

Use the current, credit adjusted risk-free rate to discount the provision when initially recognized. Do not adjust the rate in future periods.

Recognize when a transaction or event occurs that leaves an entity little or no discretion to avoid the

future transfer or use of assets to settle the liability. An exit or disposal plan, by itself, does not create a present obligation to others for costs expected to be

incurred under the plan.

Disclosure is required.

IAS 39

IAS 39

IAS 39

IAS 39

IAS 39

Effect of selling investments classified as held-to maturity

Subsequent reversal of an Impairment loss recognized in the income statement

Derecognition of financial assets

Use of Qualifying SPEs

Use of hedge of a fair value exposure for only a

part of the term of hedged item)

Prohibited from using held-to-maturity classification for the next two years.

Required for loans and receivables, held to-maturity, and available-for-sale debt instruments, if certain criteria are met.

Combination of risks and rewards and control approach. Can derecognize part of an asset. No isolation in bankruptcy test. Partial derecognition allowed only if specific criteria are complied with.

No such category of SPEs.

Allowed.

Prohibited from using held-to-maturity classification. SEC indicates that prohibition is generally for two years.

Prohibited for held-to maturity and available for- sale securities. Reversals of valuation allowances on loans are recognized in the income statement.

Derecognize assets when transferor has surrendered control over the assets. One of the conditions is legal isolation. No partial derecognition.

Necessary for derecogntion of financial assets if transferee is not free to sell or pledge transferred assets.

Although not explicitly prohibited, these items would most probably

fail the correlation requirement of FAS 133 and hence not qualify for hedge accounting.

IAS 39

IAS 39

IAS 39

IAS 39

IAS 39

Hedging foreign currency risk in a held-to maturity investment

Assume perfect effectiveness of a hedge if critical terms match

Application of the effective interest rate method

Impairment of debt and

securities

Use of "basis adjustment"

Can qualify for hedge accounting.

Prohibited. Must always measure effectiveness.

There are various differences. It can be verified on case to case basis

All impairments must be recognized, no matter how temporary.

Fair value hedge - required. Cash flow hedge of a transaction resulting in a financial asset or liability - same as US GAAP. Cash flow hedge of a transaction resulting in a non-financial asset or liability -choice of US GAAP or basis adjustment.

Cannot qualify for hedge accounting.

Allowed for hedge of interest rate risk in a debt instrument if certain conditions are met -"Short-cut Method".

There are various differences. It can be verified on case to case basis

Impairment is recognized only when the decline in fair value is not temporary.

Fair value hedge - required. Cash flow hedge of a transaction resulting in an asset or liability - gain/loss on hedging instrument that had been reported in equity remains in equity and reclassified into earnings in the same period the acquired asset or incurred liability affects earnings.

IAS 39

IAS 39

IAS 39

IAS 40

IAS 40

IAS 41

Macro Hedging

Accounting for securities sold but not yet purchased

Written puts over own (treasury) shares

Measurement

basis for investment property

Property interests held

under an operating lease

Measurement basis of

Agricultural crops, livestock, orchards,

Forests

Fair value hedge accounting treatment for a portfolio hedge of interest rate risk is allowed if certain specified conditions are met.

Short positions (sell) must use trade date value, i.e. no choice between trade date and settlement date value as for long positions (buy).

Recognize a gross obligation for the present value of the strike price.

Option of (a) historical cost model depreciation, impairment) or (b) fair value model with value changes

Through profit or loss.

Accounted for as investment property

under IAS 40 if held for investment and if measured at fair value with value changes in profit or loss. Otherwise treated as prepayment.

Fair value with value changes recognized in profit or loss.

Hedge accounting treatment is prohibited, though similar results may be achieved by designating specific assets or liabilities as hedged items.

Buy and sell transactions are accounted for identically, i.e. at trade date value.

Recognize a derivative together with subsequent changes in fair value.

Generally required to use

historical cost model depreciation, impairment).

Always treated as a prepayment.

Historical cost is generally used. However, fair value less costs to sell is used for harvested crops and livestock held for sale.

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