Generally Accepted Accounting Principles (GAAP) and the Accounting Environment

The Development of Financial Accounting and Reporting Standards

Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).

Financial accounting information must be assembled and reported objectively. objectively. ThirdThird-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. not. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP). (GAAP).

Principles derive from tradition, such as the concept of matching. matching. In any report of financial statements (audit, compilation, review, etc.), etc. the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP. GAAP.

Generally Accepted Accounting Principles (GAAP)
The profession has developed GAAP that present fairly, clearly and completely the fairly, financial operations of the enterprise. GAAP consist of authoritative pronouncements issued by certain accounting bodies.

What¶s GAAP?
The set of concepts, conventions, rules and concepts, conventions, procedures necessary to define accepted accounting practices at a particular time is referred as Generally Accepted Accounting Principles (GAAP). GAAP represents functional positions that have been agreed upon.

Basic Accounting Concepts
Business entity concept Money measurement concept Historical cost concept Revenue realisation concept. Accounting period Matching Going concern Accrual Conservativeness

Methods of Accounting
Accruals or mercantile basis

Cash basis

Hybrid system

What¶s GAAP?
The corporate accounts and financial statements are prepared and presented on the basis of GAAP. The accounts are prepared GAAP. and presented on the basis of: of: 1. Conceptual Framework of financial statements 2. Accounting Principles 3. Accounting Standards formulated by the ICAI 4. Requirements of regulatory bodies like the SEBI, RBI 5. Requirements of the Income Tax Act

Accounting Principles & Policies
Imagine that you are a business owner and you take copies of your financial records (µbooks¶) to four different accountants. You ask each one to calculate your profit for the year. A fortnight later they provide you with their answers.

Accounting Principles & Policies
³.. based on cash in your bank at end December compared to prior year, you pretty much break even in 2005.´

´.. by the time I have written off all your old inventory and overdue receivables and provided for my fee, you incurred a significant loss (µ

´.. after re-valuing all inventory at future purchase price and, assuming a successful outcome to ongoing litigation, you have a healthy profit ofµ

³an interesting year 2009 .. how much would you like your profit to be?´

Need for guidance & consistency.

Level of ³judgement´. Consistency between time periods. Comparability between companies. Reliability of financial information. Risk of financial controls/ surprises.

Need for Accounting Standards

Accounting Standards
standards codify the generally accepted accounting principles. principles. They lay down the norms of accounting policies and practices by way of codes or guidelines to direct as to how the items appearing in the financial statements should be dealt with in the books of accounts and shown in the annual reports. reports. They present the general principles to be put to application using professional judgement. They bring judgement. about uniformity of assumptions, rules and policies adopted in financial reporting and thus ensure consistency and comparability. comparability.

Need to Develop Standards
Various users need financial information Financial Statements
Balance Sheet Income Statement Statement of Stockholders· Equity Statement of Cash Flows Note Disclosure

The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.

Generally Accepted Accounting Principles (GAAP)

FASB¶s Standard-Setting StandardProcess
Identification of problem. The task force. Research and analysis. Discussion memorandum. Public response. Exposure draft. Public response. Statement issued.




r s

Instit te f Ch rtere Acc nt nts f Indi is emp wered f r iss nce f Acc nting Standard in India. St ndard India. So far ICAI has iss ed 31 Accounting Standards and AS-32 is under preparation. ASpreparation. CBDT is also empowered to issue AS for appropriate accounting method for taxation. taxation.

Plethora of GAAPs


Indian GAAP

Country specific accounting standards


Globalisation ± opening of economies/ tariff barriers GLOCAL companies/ MNCs Access to international capital markets Global listings/ overseas operations

Need for global accounting fraternity to communicate in one language, without having to acquire newer skill sets

Accounting Standards are issued by the ASB of ICAI 31 Accounting Standards so far ± Effective 30 Other governing statutes ± Companies Act/ SEBI guidelines/ Govt circulars Broadly ± IGAAP is close to IFRS

FASB ± designated body to issue accounting standards (FAS) in the private sector Recognised by SEC/ AICPA Various other bodies/ pronouncements/ hierarchy also exist Separate Accounting Standard Board for Govt. companies (GASB)

International Financial Reporting Standards (IFRS) are issued by IASB from 2001 onwards Uptill 2000 ± International Accounting Standards Committee (IASC) would issue IAS. IASB adopted all the 41 IAS from 2001 onwards. EU has made it mandatory for all the listed companies on a European Stock exchange to use IFRS by 2005. Non compliance of IFRS may lead to delisting Various Countries are in the process of aligning their Accounting Standards to IFRS Steps towards harmonisation of USGAAP/ IFRS have been taken.



Institutions/Accounting Bodies that influence Indian GAAP
Dept. to Company Affairs International Accounting Standard Board International Federation of Accountants

Securities & Exchange Board of India

Indian GAAP

Reserve Bank of India

Institute of Chartered Accountant of India

Income Tax Authorities

Comptroller And Auditor General of India

International Organisations: International Accounting Standards Board (IASB)
Successor to International Accounting Standard Committee (IASC) Develops set of AS that will be acceptable worldwide Up to January 1, 2004, IASB has issued 41 International Financial Reporting Standards or International Accounting Standards The IASB consists of 14 members (12 fullfulltime & 2 part-time) part-

International Accounting Standards Board (IASB) Established in 1973 to narrow the range of differences in accounting standards. Increase in international trade has motivated the IASB to attempt to eliminate alternative accounting treatments.

IASB contd«
The members are appointed by the Trustees of International Accounting Standards Committee Foundation All companies in the union have to comply with the IASB¶s Standards as per announcement by the European Union w.e.f. January 1, 2005 The ICAI has committed to formulate national accounting standards in tune with the IASB,s standard as far as possible

International Federation of Accountants (IFA)
Is primarily concerned with bringing international harmony in matters such as education, ethics and auditing practices International Organisation of Securities Commissions (IOSC) and the United States Securities and Exchange Commission (USSEC) are associations of securities regulators Plays an important role in improving accounting and disclosure regulation in securities market


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