Presented By :
Devesh Narayan Ishansh Vij Koushik Sarkar Kushal Sardana Rudranil Roysharma Ramakrishna G.
Under the kind guidance of -
Prof. Vinay K. Nangia
Definition of GAAP Why GAAP is Important? Similarities & Differences between Indian GAAP, IFRS and US GAAP - Financial Statements - Revenue Recognition - Foreign Currency Translation
GAAP is the abbreviation of Generally Accepted Accounting Principle. GAAP are the common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.
In India, GAAP standards are set by the Institute of Chartered Accountants of India (ICAI). ICAI continually updates GAAP as new accounting issues and concerns arise. In USA, GAAP standard are set by Financial Accounting Standards Board (FASB). Outside the US, the equivalent of GAAP is IAS International Accounting Standards - which is maintained by the International Accounting Standards Board (IASB). Financial statements submitted to the SEBI by publicly traded companies are required to meet GAAP standards.
GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary!
. So. the resulting financial statements may be GAAP compliant yet still incorrect.Important points
When comparing financial statements from different years. even when a company uses GAAP. it is important to note any changes in GAAP over the intervening period. we still need to scrutinize its financial statements. Since GAAP is only a set of guidelines. it cannot guarantee financial statements are not fraudulent. If company management provides the auditing firm with incorrect data.
Contents of GAAP
ACCOUNTING FRAMEWORK FINANCIAL STATEMENTS CONSOLIDATED FINAL STATEMENTS BUSINESS COMBINATIONS REVENUE RECOGNITION EXPENSE RECOGNITION ASSETS LIABILITIES EQUITY DERIVATIVES & HEDGING OTHER ACCOUNTING & REPORTING TOPICS
-FOREIGN CURRENCY TRANSLATION -EARNING PER SHARE -RELATED-PARTY TRANSACTION -SEGMENT REPORTING -DISCONTINUED OPERATIONS -POST BALANCE SHEET EVENTS -INTERIM REPORTING
US GAAP & IFRS
.Similarities & Differences between Indian GAAP.
There is a presumption that compliance with accounting standards is necessary to give a ´ True and Fair Viewµ. the Companies Act and Industry specific regulatory requirements.General Requirements
Indian company should comply with Indian GAAP.
. The law requires entities to disclose whether the financial statements comply with applicable accounting standards and to give details of non compliances. Additionally listed companies should comply with the rules and regulations and financial interpretations of SEBI.
It is not mandatory to prepare consolidated financial statements but must use the consolidation standards if prepared. Pursuant to the listing agreements with stock exchanges.
One year of comparatives is required for all numerical information in the financial statements with limited exceptions and disclosures.
Preparation and Presentation:
Financial Statements are presented on a single entity parent company (stand alone) basis.General Requirements contd. Public listed companies present consolidated financial statements along with standalone financial statements.
Components of Financial Statements
Balance Sheet Income Statements Statement of changes in shareholder·s equity Fund flow Statement Accounting Policy Notes to the Financial Statements
Required Required Required Required Required Required
Required Required Required Required Required Required
Required Required Required Required Required Required
. Secured Loans. Current Assets. Public entities should follow specific SEC guidance. Reserves and Surplus. Other Current Assets) less Current Liabilities and Provisions.Share Capital. Cash and Bank balances. Minority Interest. Unsecured Loans.
Presented as total assets balancing to total liabilities and shareholder·s equity. Loans and Advances (Inventories. The Companies Act prescribes a format and requires presentation of the following items on the face of balance sheet: Sources of Funds:. Miscellaneous expenditure. Sundry debtors. Investments. Application of Funds:.Balance Sheet
Accounting Standard do not prescribe any format of balance sheet. Items are presented in decreasing order of liquidity.Fixed assets.
Assets: PPE. provisions. and current and non-current liabilities are to be presented separately except when a liquidity presentation provides more relevant and reliable information.. and cash and cash equivalents. Equity and liabilities: issued share capital and other components of shareholder·s equity. intangible assets. biological assets.
. tax liabilities. financial liabilities. investment property. financial assets. trade and other payables.Balance Sheet contd. tax assets. and minority interests (presented within equity). investment accounted for using equity method. trade and other receivables. inventories.
Current and non-current assets.
and other income and expenses are then presented to give income before tax. Other industry regulations prescribe industry-specific format of income statement. Expenses are presented by either function or nature.
Presented either as A single-step format where all expenses are classified by function and are deducted from total income to give income before tax : or A multi-step format where cost of sales is deducted from sales to show gross profit.Income Statement
Accounting standards and the Companies Act prescribe disclosure norms for certain income and expenditure items.
share of after-tax results of associates and joint ventures accounted for using equity method..Income Statement contd.
Expenses presented by either function or nature. Items presented are revenue. finance costs. post-tax gain or loss attributable to the results and remeasurement of discontinued operations and net profit or loss for the period. Portion of profit and loss attributable to the minority interest and to the parent entity is separately disclosed. tax expenses. Disclosure of expenses by nature is required in footnotes if functional presentation is used on income statement.
Supplemental equity information is presented in notes when SoRIE is presented.
.Statement of changes in Shareholder·s Equity
No separate statement is required. except that US GAAP does not have a Statement of Recognized Income and Expense (SoRIE). It should show capital transactions with owners. and SEC rules require further disclosure of certain items in notes.
It is presented as a primary statement unless a SoRIE is presented. Certain items are permitted to be disclosed in notes rather than in primary statement. Changes in shareholder·s equity are disclosed in separate schedules of ¶Share capital· and ¶Reserves and surplus·
Same to IFRS. the movement in accumulated profit and a reconciliation of all other components of equity.
It can be prepared by two ways: Direct or indirect method. Direct method (Cash flow is derived from aggregating cash receipts & payments associated with operating activities) .However only indirect method is prescribed for listed enterprises & direct for insurance companies.Fund Flow Statement
INDIAN GAAP :
Inflow & outflow of µcash & Cash equivalentµ are reported in fund flow statement. It is required for all enterprises whose turnover exceeds Rs 500 Million or having borrowing over Rs. Indirect method (Cash flow is derived from adjusting net income from transaction of non cash in nature such as depreciation ). 100 million at any point of time during accounting period.
US GAAP :
Cash flow statement provides relevant information about ´cash receipts & cash paymentsµ. There are limited exemption for certain investment entities. However. Indirect is more common in IFRS.
It is similar to Indian GAAP. investing & financing activities are classified separately. A reconciliation of net income to cash flows from operating activities is disclosed .Fund Flow Statement contd.. The cash flow from operating.
Retrospective adjustment are required in some of the cases like : method of accounting for inventory valuation. Impact of change in depreciation method is determined under the new method & is recorded in the period of change.Accounting Policy
INDIAN GAAP :
The cumulative amount of change is recognized & disclosed in the income statement in the period of change.construction contracts & adoption of full cost method in extractive industry.
US GAAP :
The cumulative amount of change is recognized & changed in the income statement of period of change. depreciation in rail industry .
. Certain new standards require adjustment of the cumulative amount of the change for opening retained earnings. the unamortized depreciable amount is charged over the revised remaining life. whereas on revision of asset life.
. For correction of errors & accounting estimates accounting policy method & income statement are required. & the amount of the readjustment relating to prior period is adjusted against the opening balance of retained earnings of the earlier year presented.
Comparative information is restated. Policy changes made by adoption of new standard are accounted for in accordance with standard Transition provisions.Accounting Policy contd.
INDIAN GAAP : Companies Act. IAS21.. FAS130. AS10. IAS29. IAS32. AS6. APB30. AS11 US GAAP : CON1-. AS5. FAS154. APB29. FAS52. ARB43. AS1. IAS19. FAS141. SIC30
. FAS16. AS3. FAS95. IAS7.References for Details. APB20. IAS8. FIN39 IFRS : IAS1. SEC Regulation S-X.
royalties and dividends.Definition of Revenue
Gross inflow of consideration ( Cash / receivables / others ) arising in the course of ordinary activities from Sale of Goods Rendering of Services Use of enterprise resources yielding interest.
Arising from these activities.Incidental to ..Furtherance of .
Consideration: Flow of economic benefits Inflows resulting in an increase in equity (Other than increase through the contribution from equity holders) Ordinary Activities: Activities undertaken as part of business Related activities engaged in .
Criteria for Revenue Recognition
CONDITION Can the revenue be recognized TIMING When will we record revenues? MEASUREMENT How much will we record? CRITERIA FOR REVENUE RECOGNITION
Criteria for Revenue Recognition : Goods
Property in goods transferred to buyer for a price Or All significant risks and rewards of ownership transferred to buyer & seller retains no effective control over goods PERFORMANCE
No significant uncertainty regarding consideration
Criteria for Revenue Recognition : Services
RECOGNITION OF REVENUE INCOME COMPLETED SERVICE METHOD Recognize revenue when the sole or final act takes place and the service becomes chargeable PROPORTIONATE SERVICE METHOD Recognize revenue by reference to performance of each act ² on the basis of contract value / associate cost / no. of acts
Driven by i) nature of service ii) incidence of costs related to service iii) when the payment of the service will be received
.On effective commencement of renewal dates of the related policies
Financial service commissions:
.When equipment is installed and accepted by customers.Service Income .Upon completion of service
Insurance agency commissions:
Advertising (Media/Production) commissions:
Accrual basis in accordance with terms of agreement
.When owner·s right to receive payment is established
.Criteria for Revenue Recognition : Others
.Time proportion basis taking into account a) Amount outstanding b) Rate applicable
Ability to asses ultimate collection .With reasonable certainty at time of collection .But not if uncertainty arises after sale
.Of circumstances under which revenue recognition is postponed
.Uncertainties in Revenue Recognition
.Consideration should be reasonably determinable .If not determinable then postpone
International Financial Reporting Standards (IFRS)
Significant risks and rewards of ownership transferred Seller retains neither continuing managerial involvement usually associated with ownership nor effective control The amount of revenue can be measured Likely that economic benefits of transaction will flow to the seller The cost incurred or to be incurred in respect of the transaction can be measured reliably
Persuasive evidence of an arrangement exists Delivery has occurred Fee is fixed or determinable Collectibility is reasonably assured
and transfer of risks and rewards of ownership to buyer
Collectibity is reasonably assured Vendor·s price is fixed or determinable Delivery has occurred or services have been rendered
Stage of completion of Vendor·s price fixed or transaction can be measured determinable
.Alternate Standards: A Comparison
Indian GAAP / IFRS
Probable that economic benefit will flow to entity Revenue and costs (including future costs) can be measured reliably Seller retains neither management nor control.
US GAAP: Value for element based on Vendor Specific Objective Evidence (VSOE). the latter is deferred and recognized over the warranty period
Software Revenue Recognition:
.IFRS/Indian GAAP: At fair value of goods/services received or given .IFRS/Indian GAAP: No guidelines.US GAAP: Similar non barter deals of the entity in past six months
.Commonalities and differences Examples
Warranty and Product maintenance contracts:
. Usually by the stage of completion . Revenue recognized as element is delivered
Barter Transactions (Advertising):
.When price includes a component for subsequent servicing.
Management characteristics and influence over the control environment .Incomplete earning process misstatements
.Lack of Internal controls/audit
Indicators of Potential Accounting Misstatements:
.Operating characteristics and financial stability .Key Issues
Risk factor which influence improper Revenue Recognition:
.Lack of delivery .Industry condition .Absence of an agreement .
freight etc.Recognize revenue on receipt of bill of lading /acknowledged lorry receipt
.CIF vs. insurance . Insurance and Freight Free on Board ( FOB ): ( CIF ):
.Sale price includes cost.All insurance.Paid by the seller . would be borne by the buyer
. FOB Sales
Cost.Sale price does not include any insurance or freight and freight .Recognize revenues at the time of on receipt of goods by the buyer dispatch .Transfer of ownership takes place .
. SOP 97-2. SAB 104. SOP 81-1. EITF 99-17. FTB 90-1 IFRS : IAS 11..
INDIAN GAAP : AS 7 (REVISED 2002).References for Details. AS 9 US GAAP : CON 5. EITF 00-21.
Foreign Currency Translation
There is greater focus on the cash flows rather than the currency that influences the pricing.Functional Currency
Does not define or require determination of functional currency.
Emphasizes the primary economic environment in determining an entity·s functional currency. It has no hierarchy of indicators.
Currency of the primary economic environment in which entity operates. Assumes an entity normally uses the currency of the country in which it is domiciled in recording its transaction. Management should use judgment to determine functional currency if indicators are not obvious.
Non-monetary foreign currency assets and liabilities are translated at the appropriate historical rate.TRANSLATION ² The Individual Entity
INDIAN GAAP.Translation is at exchange rate in operation on date of transaction.
. .Monetary assets and liabilities denominated in foreign currency are translated at the closing rate. . US GAAP & IFRS have similar requirements regarding the translation of transactions by an individual entity. as follows:
provided the exchange rate does not fluctuate significantly.Income statement accounts are translated using historical rates of exchange at the date of transaction or an average rate as a practical alternative.Non-monetary items denominated in a foreign currency and carried at fair value are reported using the exchange rate that existed when the fair value was determined .TRANSLATION ² The Individual Entity contd..Exchange gains and losses arising from an entity·s own foreign currency transaction are reported as part of the profit or loss for the year.
IFRS and INDIAN GAAP are silent on the translation of equity accounts historical rates are used under US GAAP.TRANSLATION ² Consolidated Financial Statements
When translating financial statements into a different presentation currency IFRS. Amounts in the income statements are translated using the average rate for the accounting period if the exchange rates do not fluctuate significantly.
. US GAAP and INDIAN GAAP require the assets and liabilities to be translated using the closing rate.
. The appropriate amount of cumulative translation difference relating to the entity is transferred to the income statement on disposal of a foreign operation and included in the gain or loss on sale. The cumulative translation difference may be released through income statement.Tracking of Translation Differences in Equity
Translation differences in equity are separately tracked and the cumulative amounts disclosed. The proportionate share of the related cumulative translation difference is included in the gain or loss. for a partial disposal on a pro rata basis relative to the portion disposed. The payment of dividend out of pre-acquisition profits constitutes a return of the investment and is regarded as a partial disposal.
Similar to Indian GAAP. gains and losses are transferred to the income statement only upon sale or complete or substantially complete liquidation of the investment. however.Tracking of Translation Differences in Equity contd..
Similar to Indian GAAP.
Assets and liabilities are translated at the exchange rate at the balance sheet date when financial statements are presented in a currency other than the functional currency.
Similar to IFRS. requires disclosure of the reason for using a different currency. historical rates are used in equity. Income statement items are translated ate the exchange rate at the date of the transaction or are permitted to use average rates if the exchange rates do not fluctuate significantly. If a different currency is used.Presentation Currency
It assumes an entity normally uses the currency of the country in which it is domiciled in presenting its financial statements.
These characteristic include a) general population·s attitude towards local currency b) prices linked to a price index c) cumulative inflation rate over three years is approaching or exceeds 100%
Similar to IFRS
.Foreign Currency Translation ² Hyperinflationary Economy
No specific guidance for foreign currency translation
Hyperinflation is indicated by characteristic of the economic environment of a country.
Financial statement for current & prior period are remeasured at the measurement unit current at the balance sheet date in order to present current purchasing power
Does not generally permit inflation .adjusted financial statements.Functional Currency Translation ² Hyperinflationary Economy
No specific guidance for functional currency translation
Functional currency use that currency for measurement of transactions. The use of reporting currency ( US dollar ) as the functional currency is required
year financial statement
Not applicable.When amount are translated into currency of a non inflationary economy.All item including comparatives are translated at the date of most recent balance sheet .Presentation Currency Translation ² Hyperinflationary Economy
No specific guidance for presentation currency translation
Results & financial position of those entities whose functional currency is the currency of a hyper inflationary economy are translated into a different presentation currency using following procedure: . comparative amounts are those that were presented as current year amounts in the relevant prior . because the currency of a hyperinflationary economy is not used for measuring its transactions in the hyperinflationary economy
INDIAN GAAP : AS 11 (REVISED 2003) US GAAP : FAS 52.References for Details.. FIN 37 IFRS : Framework. IAS 21.
1) Http://www.icai 2) Similarities & Differences : A comparison of IFRS. US GAAP and INDIAN GAAP ² by Price Water House Coopers: November 2006