You are on page 1of 35

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

A comparison of Indian, International and the United States GAAP

2

3

ACKNOWLEDGEMENT

The satisfaction that accompanies the successful completion of a task is incomplete without mentioning the name of the person who extended his help and support in making it a success. We are greatly indebted to Dr.Sanjay Kumar Goyal our project guide and mentor for devoting his valuable time and efforts towards our project. We thank him for being a constant source of information, inspiration and help during this period of making project

They use financial statements in order to satisfy some of their information needs. governments and their agencies and the public. suppliers and other trade creditors. lenders. There are four basic financial statements: Balance Sheet: also referred to as statement of financial position or condition. Understandability Understandability ensures that a user equipped with the basic knowledge can discern information pertaining to the performance and financial position of the enterprise. or other entity. The users of financial statements include present and potential investors. customers. are called the financial statements. employees. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period. 2. These include sale and the various expenses incurred during the processing state. Relevance . 1. All the relevant financial information of a business enterprise presented in a structured manner and in a form easy to understand. particularly its operating. investing and financing activities.4 INTRODUCTION Financial statements (or financial reports) are formal records of the financial activities of a business. reports on a company's income. 3. 2. Financial statements provide an overview of a business or person's financial condition in both short and long term. expenses. Qualitative Characteristics of Financial Statements : i) Understandability ii) Relevance iii) Reliability iv) Comparability 1. 4. and profits over a period of time. Income Statement: also referred to as Profit and Loss statement (or a "P&L"). Statement of cash flows: reports on a company's cash flow activities. person. liabilities. and Ownership equity at a given point in time. reports on a company's assets. Profit & Loss account provide information on the operation of the enterprise.

non-profit organizations. including publicly-traded and privately-held companies. Materiality is one of the assumptions used in financial reporting. other qualitative characteristics of information include completeness. prudence. The financial accountant usually exercises discretion where any conflict might occur. relevance and comparability. 3. financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" or GAAP. Financial accounting information must be assembled and reported objectively. but it merely contributes to relevance. Whether the information affects the economic decisions of users (materiality) and the nature of information affect relevance as well. Comparability is affected by consistency of presentation and disclosure of accounting policies—particularly when comparing items among entities that might use different (but equally valid) methods like straight-line/ reducing balance depreciation or FIFO/average cost method. neutrality. there exists a trade-off between or among qualitative characteristics. Comparability Comparability adds a degree of transparency to financial statements by allowing comparisons over time and among entities. reliability. Reliability In Financial Accounting reliability refers that the financial statement must fairly and consistently presents information about the performance and financial position of an entity. compilation. For this reason. Generally Accepted Accounting Principles are accounting rules used to prepare. related accounting law. the information must be relevant to the decisions that those users have to make. Principles derive from tradition. United States’ GAAP . without it being misleading or deliberately constructed in a manner that presents the entity in a favorable light. faithful representation and substance over form. Users must have confidence in the financial statement. whether deliberate or not. review. present. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency. and report financial statements for a wide variety of entities. rules and Accounting Standard. the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP. etc. 4. Besides understand ability. Sometimes. In any report of financial statements (audit. Generally GAAP includes local applicable Accounting Framework.). and governments. such as the concept of matching.5 Since financial statements are for users to make economic decisions.

One thing that may be less well known outside the US is the degree to which the United States had become an “equity culture” by that time. the balance sheet and dividends were paramount.. present. including publicly-traded and privatelyheld companies. and constraints. rules and Accounting Standard. Investors seemed to trust .S. Even for those companies that did provide investors with audited financial statements. US GAAP has been used extensively in the United States since the 1930s.S. non-profit organizations. The U. It has been suggested that at a time when the New York Stock Exchange traded the shares of approximately 800 companies. which operates under a set of assumptions.6 In the U. US GAAP is not written in law. generally accepted accounting principles. with the largest companies switching to IFRS as early as 2009. and report financial statements for a wide variety of entities. In 1929. it was nothing like today. Similar to many other countries practicing under the common law system. But. Currently. Disclosure of financial information throughout this period was voluntary. different from those of standard private-sector GAAP. is the fact that purchases of stock on margin increased 900% between 1921 and 1929. even in the early 1900s. more than half of all US households are invested in our stock markets. related accounting law. though former SEC Chairman Chris Cox set out a timetable for all U. The US GAAP provisions differ somewhat from International Financial Reporting Standards. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB). the United States government does not directly set accounting standards. GAAP is determined by the Governmental Accounting Standards Board (GASB). this figure was much lower. principles. The boldness of the financial improprieties that came to light following the 1929 Crash make some of our more recent scandals look like mere schoolyard misbehavior. are accounting rules used to prepare. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly-traded companies. The Way Back…. A telling statistic of the extent of the enthusiasm. Of course. And by the Roaring Twenties everyone seemed interested in the stock market.S. Generally GAAP includes local applicable Accounting Framework. Securities and Exchange Commission (SEC) was formed out of the crucible of the 1929 Stock Market Crash and the Great Depression. Today. and governments. as well as non-profit entities. the prices of more than 100 of these were openly manipulated by syndicated stock pools. perhaps. in the belief that the private sector has better knowledge and resources. the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies. although the U. commonly abbreviated as US GAAP or simply GAAP.S. For local and state governments. companies to drop GAAP by 2016. businesses relied heavily on the markets for capital.

org) is the national. developed and leavened for many decades in an economic environment in which retail investors — and not just banks or entrepreneurial families — have played.C. The AICPA maintains offices in New York. The strength of US GAAP derives at least partially from the fact that it has been stress-tested. its enacting legislation authorized the Commission to not only establish disclosure standards for issuers. state and local governments. D. federal. auditing standards for audits of private companies. a substantial role. It develops and grades the Uniform CPA Examination. including CPAs in business and industry. Washington. While the SEC today looks to the FASB to set US accounting standards. public practice. but also set the accounting standards to be used in preparing these disclosures. with more than 360. N. this model has served accounting well in terms of developing a robust. With active oversight of the standard setting process by the SEC through the decades... and Lewisville.J. it retains ultimate responsibility for them. well-articulated set of standards that well serves and protects the users of financial statements. in 1938 the SEC began to look to the private sector for assistance in setting these accounting standards. When the SEC was created in 1934. Durham. About the AICPA The American Institute of Certified Public Accountants (www. and not-for-profit organizations. N. professional association of CPAs.aicpa. It sets ethical standards for the profession and U. The SEC’s enacting legislation charges it with setting the accounting standards used by issuers accessing the US capital market. Accounting standards in the United States have a long and unique history.C. and education. . government. Texas. Ewing. Given the complexity of this task.000 members.7 dividend payments rather than income statements as an indicator of a company’s financial condition.S. and continue to play.

The compliance of Accounting Standards issued by ICAI have become a statutory requirement with the notification of Companies (Accounting Standards) Rules. XXXVIII of 1949) for the regulation of the profession of Chartered Accountants in India. ICAI has achieved recognition as a premier accounting body not only in the country but also globally. These are numbered AS-1 to AS-7 and AS-9 to AS-31. . The Institute has also introduced a new logo for Members . which are interested. professional development. From 1973 to 2000 the IASC has issued 32 accounting standards. These standards. The Institute of Chartered Accountants of India (ICAI) is a statutory body established under the Chartered Accountants Act. the Institute of Chartered Accountants of India has issued 31 Accounting Standards.This is from an ancient Sanskrit text and signifies the function of a Chartered Accountant as a sentinel. 2006 by the Government of India. The Institute of Chartered Accountants of India (ICAI). auditing and ethical standards. for its contribution in the fields of education. 1977. the Statements on Accounting Standards are issued by the Institute of Chartered Accountants of India (ICAI) to establish standards that have to be complied with to ensure that financial statements are prepared in accordance with generally accepted accounting standards in India (India GAAP). "That person who is awake among those who sleep" . as a matter of fact. 1949 (Act No. AS-8 is no longer in force having been merged with AS-26.8 INDIAN GAAP In India. and confidence in adopting these standards may be followed. To date.Alphabets of Trust. maintenance of high accounting. ICAI now is the second largest accounting body in the whole world. constituted the Accounting Standards Board (ASB) on 21st April. ICAI has set an internal deadline of aligning its Accounting Standards with IFRS by April 2011.'CA' . most of the countries in the world. During its nearly six decades of existence. recognizing the need to harmonize the diverse accounting policies and practices in use in India.

stock and barrel. but in many cases extraordinarily . there has been Japanese GAAP. those systems haven't been adopted lock.adding to investor confusion. calling the new standards IFRS. for instance. The Way Back…. The problem with all of these varying generally accepted accounting principles is that they have differed not just in nuance. 2001. US GAAP and so on. insurance or pension treatment in the U. It was responsible for developing the International Accounting Standards and promoting the use and application of these standards. Historically. particularly those in emerging market countries in part because many haven't had the financial wherewithal or sophisticated home-grown accounting professions capable of putting together their own accounting regimes. but piecemeal . they've adopted an accounting regime (or parts of an accounting regime) from an industrialized country.S. IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC). In most cases. As a result. Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). however. have had almost no similarity to the accounting principles for the same issues in Europe..9 International Financial Reporting Standards (IFRS) International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). Asia or elsewhere.so that accounting principles regarding derivatives. In April 2001 the IASB adopted all IAS and continued their development. The IASC was founded as a result of an agreement between accountancy bodies in the following countries: • Australia (Institute of Chartered Accountants in Australia (ICAA) and the CPA Australia (formerly known as Australian Society of Certified Practising Accountants (ASCPA)) Canada (Canadian Institute of Chartered Accountants (CICA)) France (Ordre des Experts Comptable et des Comptables Agrees (Order of Accounting Experts and Qualified Accountants)) • • . Indian GAAP. Not all countries have had their own GAAP. French GAAP. depending on the specific issue. individual countries have established their own versions of GAAP. International Accounting Standards Committee was founded in June 1973 in London and replaced by the International Accounting Standards Board on April 1.

4. United Kingdom and Ireland (counted as one) (Institute of Chartered Accountants in England and Wales (ICAEW). 16. 10. Institute of Chartered Accountants of Scotland (ICAS). 12. Institute of Chartered Accountants in Ireland (ICAI). Balance sheet Stock based Compensation Derivatives and other financial instruments – measurement of derivative instruments and hedging activities.e. US GAAP and the IFRS. Institute of Cost and Management Accountants. and the Institute of Municipal Treasurers and Accountants) United States of America (American Institute of Certified Public Accountants (AICPA)) • • • • Netherlands (Nederlands Instituut van Register accountants (NIVRA) (Netherlands Institute of Registered Auditors)) • We have identified 17 major points of differences between the Indian GAAP. 13. 7. 9. resumed in 1995). 8. 6. 15. 14. 5. These are as follows: 1. JICPA)) Mexico (Instituto Mexicano de Contadores Publicos (IMCP) (Mexican Institute of Public Accountants)) (removed from the board in 1987 due to non-payment of dues. 3.10 • Germany (Institut der Wirtschaftsprüfer in Deutschland (IDW) (Institute of Auditors in Germany) and the Wirtschaftsprüferkammer (WPK) (Chamber of Auditors)) Japan Nihon Kouninkaikeishi Kyoukai (Japanese Institute of Certified Public Accountants. 2. 11. Association of Certified Accountants. 17. the excess of the fair value of net assets acquired over the aggregate purchase consideration) Leases Prior period adjustments Accounting for Foreign Currency Transactions Goodwill Revenue Recognition Related parties Pension / Gratuity / Post Retirement Benefits Research and development costs JV ( Jointly controlled assets or corporation ) . Business Combinations Cash Flow Statement Comprehensive income Segment Information Negative Goodwill (i.

11 1. Balance Sheet • Indian GAAP – dealt by AS 31. Also. These statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group. dividend. . dividend. losses and gains relating to a financial instrument in a particular manner as income/ expense or as distribution of profits.nd/ or for presenting interest. AS 21 Conforms to statute and captions are in the following order : --Equity and reserves --Debt --Fixed assets --Investments --Net current assets --Deferred expenditure and --Accumulated losses AS 31 states that in respect of an entity there is a statutory requirement for presenting any financial instrument in a particular manner as liability or equity a. the Balance Sheet does not require segregation of current and non-current portions of assets and liabilities. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. the entity should present that instrument and/ or interest. losses and gains relating to the instrument in accordance with the requirements of the statute governing the entity. The objective of AS 21 is to lay down principles and procedures for preparation and presentation of consolidated financial statements. the obligations of the group and results the group achieves with its resources.

5. and losses—and 3 elements of financial statements of business enterprises only—investments by owners. The Statement also defines or describes certain other concepts that underlie or are otherwise related to those elements and classes. and equity and their relationships to each other at a moment in time. Balance sheet captions are presented in order of liquidity starting with the most liquid assets. distributions to owners. into financial assets. and the circumstances in which financial assets and financial liabilities should be offset. revenues. equity (business enterprises) or net assets (not-for-profit organizations).e. liabilities. from the perspective of the issuer.. Concepts Statement No. illiquid items appear earlier. Statement 6 defines 10 elements of financial statements: 7 elements of financial statements of both business enterprises and not-for-profit organizations—assets. liabilities. an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. Segregation of current and non-current portions of assets and liabilities is necessary. including the number of shares outstanding for all years presented. • IFRS – dealt by IAS 32. dividends. This requires disclosure of either changes in equity or changes in equity other than those arising from capital transactions with owners and distribution of owners. . An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.12 • US GAAP – dealt by Concepts Statement No. financial liabilities and equity instruments. The statement delineates the entity's resource structure—major classes and amounts of assets—and its financing structure—major classes and amounts of liabilities and equity. Balance sheet captions are presented in the inverse order of liquidity i. a statement of financial position provides information about an entity's assets. It also defines three classes of net assets of not-for-profit organizations and the changes in those classes during a period—change in permanently restricted net assets. IFRS 7 requires disclosures by class of financial instrument. the classification of related interest. change in temporarily restricted net assets. gains. IFRS 7 IAS 32 applies to the classification of financial instruments. and change in unrestricted net assets. expenses. losses and gains. 6 According to Statement 5. and comprehensive income. It also requires disclosure of movements in stockholders’ equity.

Addressing concerns of users and others. The fair value based method is preferable to the intrinsic method for purposes of justifying a change in accounting principle. stock options. The revised Statement eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. . However. there was a revision in the standard. This statement is not mandatory for un-listed companies. it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting. effective 2005. The principal reasons for issuing this Statement are: i. However.13 Segregation of current and non-current portions of assets and liabilities is disclosed only as part of the footnotes. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Under Opinion 25. 2. and stock appreciation rights. Improving the comparability of reported financial information by eliminating alternative accounting methods. restricted stock. • US GAAP – dealt by Statement no. This Statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Stock based Compensation • Indian GAAP – dealt by AS 15 and SEBI This Statement establishes financial accounting and reporting standards for stockbased employee compensation plans. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). ii. Examples are stock purchase plans. 123 (revised in 2004) US GAAP had similar rules as what SEBI prescribes regarding Stock based compensation. issuing stock options to employees generally resulted in recognition of no compensation cost. which requires fair value to be expensed for all options.

14 iii. iv.Measurement of Derivative Instruments and Hedging Activities. 3. or an identified portion of such an asset. Converging with international accounting standards. . (c) Hedge of a net investment in a foreign operation as defined in AS 11. Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. • IFRS – dealt by IFRS 2 The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. and the factors that cause changes in fair value are co-dependent. recognition of the compensation costs is not mandatory. Thus. In particular. Simplifying US GAAP. liability or firm commitment. that is attributable to a particular risk and could affect profit or loss. However. This statement requires the compensation costs to be disclosed in the financial statements. (b) Cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss. • Indian GAAP – dealt by AS 30 There is normally a single fair value measure for a hedging instrument in its entirety. a hedging relationship is designated by an entity for a hedging instrument in its entirety. it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions. including expenses associated with transactions in which share options are granted to employees. Hedging relationships are of three types: (a) Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment. Derivative and other Financial Instrument.

Business Combinations • Indian GAAP – dealt by AS 14 This statement deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. Gains or losses on hedge instruments used to hedge forecast transactions are included in cost of asset/liability. 4. (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. an unrecognized firm commitment. If certain conditions are met. a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. 161) This Statement establishes accounting and reporting standards for derivative instruments. This statement is directed principally to companies although some of its requirements also apply to financial statements of other enterprises.15 • US GAAP – dealt by Statement no. The accounting for changes in the fair value of a derivative (that is. or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation. 133 (superseded by statement no. an available-for-sale security. . including certain derivative instruments embedded in other contracts. • IFRS – dealt by IAS 39 This standard is similar to the US GAAP. The accounting for changes in the fair value of a derivative (that is. Gains or losses on hedge instruments used to hedge forecast transactions are included in cost of asset/liability. (b) a hedge of the exposure to variable cash flows of a forecasted transaction. gains and losses) depends on the intended use of the derivative and the resulting designation. gains and losses) depends on the intended use of the derivative and the resulting designation. or a foreign-currency-denominated forecasted transaction.

This method is used in accounting for amalgamations in the nature of purchase. except that cash may be paid in respect of any fractional shares. as a consequence. there are two main methods of accounting for amalgamations: (a) the pooling of interests method (b) the purchase method The use of the pooling of interests method is confined to circumstances which meet the following criteria referred to in paragraph 3(e) of AS 14 for an amalgamation in the nature of merger. Such amalgamations are amalgamations in the nature of ‘purchase’. after the amalgamation. (iv) The business of the transferor company is intended to be carried on. amalgamations fall into two broad categories. the assets and liabilities of the transferee company. after amalgamation. the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. (ii) Shareholders holding not less than 90%of the face value of the equity shares of the transferor company (other than the equity shares already held therein. or the business of the company which is acquired is not intended to be continued. (v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. immediately before the amalgamation. by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. by the transferee company. In the first category are those amalgamations where there is a genuine pooling not merely of the assets and liabilities of the amalgamating companies but also of the shareholders’ interests and of the businesses of these companies. In the second category are those amalgamations which are in effect a mode by which one company acquires another company and. liabilities. . (i) All the assets and liabilities of the transferor company become. (iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company. Such amalgamations are amalgamations which are in the nature of ‘merger’ and the accounting treatment of such amalgamations should ensure that the resultant figures of assets.16 Generally speaking. Hence. capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies.

One of the parties to a business combination can always be identified as the acquirer. The formation of a joint venture The acquisition of an asset or a group of assets that does not constitute a business A combination between entities or businesses under common control A combination between not-for-profit organizations or the acquisition of a for-profit business by a not-for-profit organization. iii. It does not apply to: i. including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. Formations of a joint venture or the acquisition of an asset or a group of assets that does not constitute a business are not business combinations. iv. reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. A business combination must be accounted for by applying the acquisition method. ii. including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. being the entity that obtains control of the other business (the acquiree). 141 This Statement applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree). for example.17 • US GAAP – dealt by Statement no. Where an acquirer cannot be identified then the pooling of interests method should be adopted. unless it is a combination involving entities or businesses under common control. at any time during the accounting period: . by contract alone or through the lapse of minority veto rights. 5. This Statement applies to all business entities. • IFRS – dealt by IFRS 3 The objective of the IFRS is to enhance the relevance. Cash Flow Statement • Indian GAAP – dealt by AS 3 This Standard is mandatory in nature in respect of accounting periods commencing on or after 1-4-20043 for the enterprises which fall in any one or more of the following categories.

• US GAAP – dealt by Statement no. 95 (superseded by Statement no. Holding and subsidiary enterprises of any one of the above at any time during the accounting period. Enterprises whose equity or debt securities are listed whether in India or outside India. 50 crore. vii. or financing activities and provides definitions of each category. but are not required. including public deposits. This standard is mandatory for all entities. Financial institutions. All commercial. Turnover does not include ‘other income’. Banks including co-operative banks. ii. This Statement requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating. industrial and business reporting enterprises having borrowings. viii. All commercial. whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. in excess of Rs. investing. 6. It requires a statement of cash flows as part of a full set of financial statements for all business enterprises in place of a statement of changes in financial position. The enterprises which do not fall in any of the above categories are encouraged. US GAAP – dealt by Statement no. 141) This Statement establishes standards for cash flow reporting. to apply this Standard. vi. 10 crore at any time during the accounting period. iii. industrial and business reporting enterprises. • IFRS – dealt by IAS 7 The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating.18 i. Comprehensive Income • Indian GAAP – There are no standards available and none are required. Enterprises carrying on insurance business. Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard. 52 • . investing and financing activities. v. iv.

• IFRS – dealt by IAS 21 Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise. However. Identifying the functional currency of the entity's economic environment b. if they are different d. Using the current exchange rate for translation from the functional currency to the reporting currency. Furthermore. Gains and losses on those foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary). as appropriate. Conversely.S. Transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency (for example.19 The functional currency translation approach adopted in this Statement encompasses: a. such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment. when a gain or loss on a non-monetary item is recognised in other comprehensive income. . any exchange component of that gain or loss shall be recognised in other comprehensive income. Measuring all elements of the financial statements in the functional currency c. exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation. when a gain or loss on a nonmonetary item is recognised in profit or loss. company may borrow Swiss francs or a French subsidiary may have a receivable denominated in kroner from a Danish customer). Distinguishing the economic impact of changes in exchange rates on a net investment from the impact of such changes on individual assets and liabilities that are receivable or payable in currencies other than the functional currency. any exchange component of that gain or loss shall be recognised in profit or loss. Intercompany transactions of a long-term investment nature are considered part of a parent's net investment and hence do not give rise to gains or losses. a U. Unrealized gains/losses on investment and Foreign currency translations are disclosed as a separate component of equity.

banking. vi. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. Segment Information • Indian GAAP – dealt by AS 3 The objective of this statement is to establish principles for reporting financial information. iv. ii. v. similarity of economic and political conditions relationships between operations in different geographical areas proximity of operations special risks associated with operations in a particular area exchange control regulations the underlying currency risks The dominant source and nature of risks and returns of an enterprise should govern whether its primary segment reporting format will be business segments or . Factors that should be considered in identifying geographical segments include: i. iv. for example.20 Hence. about the different types of products and services an enterprise produces and the different geographical areas in which it operates. 7. insurance. or public utilities. According to this statement. iii. the nature of the products or services the nature of the production processes the type or class of customers for the products or services the methods used to distribute the products or provide the services the nature of the regulatory environment. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. v. the segments may be classified into either business or geographical segments. ii. it gives an option to present a statement that shows all changes or only those changes in equity that did not arise from capital transactions with owners or distributions to owners. iii. Factors that should be considered in determining whether products or services are related include: i.

profitability.21 geographical segments. Segments based on information are reviewed by a CODM (Chief Operating Decision Maker) • IFRS – dealt by IFRS 8 . Generally. Similarly. with secondary information reported geographically. It requires that all public business enterprises report information about the revenues derived from the enterprise's products or services (or groups of similar products and services). certain specific revenue and expense items. for each segment of its operations qualifying as a reportable segment. This Statement requires that a public business enterprise report a measure of segment profit or loss. about the countries in which the enterprise earns revenues and holds assets. This Statement also requires that a public business enterprise report descriptive information about the way that the operating segments were determined. differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements. • US GAAP – dealt by Statement no. if the risks and returns of the enterprise are affected predominantly by the fact that it operates in different countries or other geographical areas. It requires reconciliations of total segment revenues. total segment profit or loss. financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. the products and services provided by the operating segments. identifiable assets. 131 (superseded Statement no. depletion. and amortization expense). and about major customers regardless of whether that information is used in making operating decisions. and segment assets. its primary format for reporting segment information should be business segments. and other related disclosures (such as the aggregate amount of a segment's depreciation. and changes in the measurement of segment amounts from period to period. its primary format for reporting segment information should be geographical segments. and other amounts disclosed for segments to corresponding amounts in the enterprise's general-purpose financial statements. If the risks and returns of an enterprise are affected predominantly by differences in the products and services it produces. total segment assets. 14) This Statement requires a publicly held business company to present. with secondary information reported for groups of related products and services. information on revenues. Similar information is required to be reported on a geographic basis for those companies having foreign operations and export sales.

Where it does not relate to identifiable future losses and expenses. if any immediately charged to income. Title may or may not eventually be transferred. an amount not exceeding the fair values of the acquired identifiable non-monetary Assets should be recognized as income on a systematic basis over the remaining weighted average useful life of such assets and the balance. The classification of leases adopted in this Statement is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. However. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. • IFRS – dealt by IAS 7 Negative goodwill that relates to expectations of future losses and expenses should be recognized as income when the future losses and expenses are recognized. which is a component of stockholders’ equity. A lease . 8. the excess of the fair value of net assets acquired over the aggregate purchase consideration) • Indian GAAP Negative goodwill is credited to the capital reserve account. Leases • Indian GAAP – dealt by AS 19 The objective of this Statement is to prescribe. • US GAAP Negative goodwill is allocated to reduce proportionately the value assigned to noncurrent assets.e. for lessees and lessors. The segment liabilities are also required to be shown. Negative Goodwill (i. the appropriate accounting policies and disclosures in relation to finance leases and operating leases. 9. Any remaining excess is considered to be extraordinary gain. it is mandatory only for listed companies.22 The international standard is largely similar to the US GAAP.

if not. • IFRS – dealt by IAS 17 Similar to US GAAP except that the criteria for distinguishing between capital and revenue leases are different. Quantitative thresholds have been defined. For lessees. a lease is a financing transaction called a capital lease if it meets any one of four specified criteria. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form. Lease rentals on operating leases are expensed as incurred. Capital leases are included under property. • US GAAP – dealt by Statement no. Capital leases are treated as the acquisition of assets and the incurrence of obligations by the lessee. The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. 10. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. No quantitative thresholds have been defined. Operating leases are treated as current operating expenses. Prior Period Adjustments • Indian GAAP – dealt by AS 5 The objective of this Statement is to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis. This enhances the comparability of the . 145) This Statement establishes standards of financial accounting and reporting for leases by lessees and lessors.23 is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. plant and equipment of the lessor. 13 (superseded by Statement no. it is an operating lease. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Leases are classified as capital and operating leases as per certain criteria.

an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: i. and that could not be estimated prior to the current interim period. Accounting for Foreign Currency Transactions . Prior period items are separately disclosed in the current statement of Profit and Loss together with their nature and amount in a manner that their impact on current profit and loss can be perceived. 16 This Statement limits adjustments of previously issued annual financial statements to correction of a material error and recognition of certain income tax benefits relating to preacquisition loss carryforwards of a purchased subsidiary. • IFRS – dealt by IAS 8 Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error. ii. restating the opening balances of assets. Prior period errors are generally corrected in the current financial statements. Correction of an error in previously issued financial statement is recognized by restating previously issued financial statements. restating the comparative amounts for the prior period(s) presented in which the error occurred. the error should be corrected by adjusting the opening retained earnings. 11.24 financial statements of an enterprise over time and with the financial statements of other enterprises. However. or if the error occurred before the earliest prior period presented. • US GAAP – dealt by Statement no. where the error is of such significance that the prior period financial statements cannot be considered to have been reliable at the date of their issue. liabilities and equity for the earliest prior period presented. that can be specifically identified with business activities of a prior interim period. It restricts adjustments of prior interim period (quarterly) financial statements of the current fiscal year to the settlement of certain transactions that are material in amount.

.25 • Indian GAAP – dealt by AS 11 The principal issues in accounting for foreign currency transactions and foreign operations are to decide which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise. A foreign currency transaction should be recorded. all exchange differences are included in determining net income for the period in which differences arise. exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation. • IFRS – dealt by IAS 21 A foreign currency transaction shall be recorded. Hence. as appropriate. Gains and losses on those foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity. on initial recognition in the reporting currency. all exchange differences are included in determining net income for the period in which differences arise. • US GAAP – dealt by Statement no. on initial recognition in the functional currency. 52 Transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Exchange differences on foreign currency transactions are recognized in the profit and loss account with the exception that exchange differences related to the acquisition of fixed assets adjusted to the carrying cost of the relevant fixed asset. Hence. by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. However. Intercompany transactions of a long-term investment nature are considered part of a parent's net investment and hence do not give rise to gains or losses. by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

that is expected to benefit from the synergies of the combination. Goodwill is capitalized and tested for impairment annually. an enterprise should identify whether goodwill that relates to this cash-generating unit is recognised in the financial statements.26 12. goodwill acquired in a business combination shall. or groups of cash-generating units. Goodwill is not amortized but goodwill is to be tested for impairment annually. The straight line method should be adopted unless the use of any other method can be justified. from the acquisition date. except for goodwill from amalgamation. 142 This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. • US GAAP – dealt by Statement no. be allocated to each of the acquirer’s cash-generating units. Goodwill • Indian GAAP – dealt by AS 28 In testing a cash-generating unit for impairment. The annual impairment test for a cashgenerating unit to which goodwill has been allocated may be performed at any time during an annual period. • IFRS – dealt by IAS 36 For the purpose of impairment testing. provided the test is performed at the same time every year. irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. 13. Goodwill is amortized to expense on a systematic basis over its useful life with a maximum of twenty years. Revenue Recognition • Indian GAAP – dealt by AS 9 . which is amortized over 3-5 years.

• US GAAP – mainly dealt by Statement no. The above mentioned statement does not deal with– (a) Accounting for revenue in service industries if part or all of the service revenue may be returned under cancellation privileges granted to the buyer (b) Transactions involving real estate or leases (c) Sales transactions in which a customer may return defective goods. revenue will be recognized.. This Standard identifies the circumstances in which these criteria will be met and. It must be noted that no detailed industry specific guidelines exist. therefore. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. i. such as under warranty provisions. industry specific guidelines exist. 48 There is no general principle for revenue recognition. Related parties • Indian GAAP – dealt by AS 18 This Statement deals with related party relationships described below: .e. 14. when risks and rewards of ownership are transferred to the buyer and when effective control of the seller as the owner is lost. • IFRS – dealt by IAS 18 Revenues are recognized when all significant risks and rewards of ownership are transferred.27 Revenue from sales and services should be recognised at the time of sale of goods or rendering of services if collection is reasonably certain. However.

Name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties. ii. and other similar items in the ordinary course of business. ii. iv. iv. an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise. iii. vii. during the existence of a related party relationship. iii. Financial statements shall include disclosures of material related party transactions. directly or indirectly. Enterprises that directly. However. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise. • US GAAP – dealt by Statement no. or are controlled by. v. v.28 i. 57 According to this statement. vi. and relatives of any such individual Key management personnel and relatives of such personnel Enterprises over which any person described in (iii) or (iv) is able to exercise significant influence. related parties are determined based on common ownership and control. expense allowances. This statement is mandatory for listed companies and companies meeting a certain turnover threshold. the name of the transacting related party a description of the relationship between the parties description of the nature of transactions volume of the transactions either as an amount or as an appropriate proportion any other elements of the related party transactions necessary for an understanding of the financial statements the amounts or appropriate proportions of outstanding items Related Party Disclosures 357 pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date amounts written off or written back in the period in respect of debts due from or to related parties. other than compensation arrangements. or indirectly through one or more intermediaries. or are under common control with. subsidiaries and fellow subsidiaries) Associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture Individuals owning. the reporting enterprise should disclose the following: i. If there have been transactions between related parties. the reporting enterprise (this includes holding companies. control. disclosure of transactions that are .

the party: a. or indirectly through one or more intermediaries. if different. iv. if not otherwise apparent. or is under common control with. v. is controlled by. has joint control over the entity ii. directly or indirectly. vi. Directly. iv. has an interest in the entity that gives it significant influence over the entity c. Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties. jointly controlled or significantly influenced by. controls. If neither the entity’s parent nor the ultimate controlling party produces financial . including transactions to which no amounts or nominal amounts were ascribed.29 eliminated in the preparation of consolidated or combined financial statements is not required in those statements. iii. vii. for each of the periods for which income statements are presented. The party is an associate (as defined in IAS 28 Investments in Associates) of the entity The party is a joint venture in which the entity is a venturer (see IAS 31 Interests in Joint Ventures) The party is a member of the key management personnel of the entity or its parent the party is a close member of the family of any individual referred to in (a) or (d) The party is an entity that is controlled. The disclosures shall include: i. and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period Amounts due from or to related parties as of the date of each balance sheet presented and. the terms and manner of settlement iii. or for which significant voting power in such entity resides with. • IFRS – dealt by IAS 24 A party is related to an entity if: i. or of any entity that is a related party of the entity. the entity (this includes parents. An entity shall disclose the name of the entity’s parent and. any individual referred to in (d) or (e) The party is a post-employment benefit plan for the benefit of employees of the entity. The nature of the relationship(s) involved A description of the transactions. subsidiaries and fellow subsidiaries) b. the ultimate controlling party. ii.

Pension / Gratuity / Post Retirement Benefits • Indian GAAP – dealt by AS 15 Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans. . • US GAAP – dealt by Statement no. ii. 81 (superseded by Statement no. The enterprise’s obligation is limited to the amount that it agrees to contribute to the fund. The acturial gain/losses are recognized immediately. A description of the benefits provided and the employee groups covered.30 statements available for public use. Acturial gains/losses are amortized. Thus. the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an enterprise (and also by the employee) to a post-employment benefit plan or to an insurance company. The effect of any changes in actuarial assumptions that have had a significant effect on the actuarial present value of promised retirement benefits shall also be disclosed. The cost of those benefits recognized for the period. Under defined contribution plans: i. Hence. actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall on the employee. iii. depending on the economic substance of the plan as derived from its principal terms and conditions. The statement specifies that actuarial present value of promised retirement benefits shall be based on the benefits promised under the terms of the plan on service rendered to date using either current salary levels or projected salary levels with disclosure of the basis used. A description of the employer's current accounting and funding policies for those benefits. ii. it is similar to US GAAP except that the existence of related parties is to be disclosed even if there are no transactions during the period. together with investment returns arising from the contributions. the name of the next most senior parent that does so shall also be disclosed. 15. In consequence. 141) This Statement requires the following disclosures about an employer's accounting for postretirement health care and life insurance benefits: i.

ii. • IFRS – dealt by IAS 26 The international standard is exactly similar to the US GAAP. A statement of changes in net assets available for benefits. ii. an enterprise cannot demonstrate that an intangible asset exists from which future economic benefits are probable. in the research phase of a project. whether defined benefit or defined contribution. 16. Retirement benefit plan investments shall be carried at fair value. an enterprise can.31 The financial statements shall explain the relationship between the actuarial present value of promised retirement benefits and the net assets available for benefits. A summary of significant accounting policies. a research phase a development phase This Statement takes the view that. Where plan investments are held for which an estimate of fair value is not possible disclosure shall be made of the reason why fair value is not used. Therefore. in some instances. shall also contain the following information: i. . iii. In the development phase of a project. this expenditure is recognised as an expense when it is incurred. identify an intangible asset and demonstrate that future economic benefits fromthe asset are probable. an enterprise classifies the generation of the asset into: i. This is because the development phase of a project is further advanced than the research phase. Research and Development Costs • Indian GAAP – dealt by AS 26 (earlier by IAS 8) To assess whether an internally generated intangible asset meets the criteria for recognition. and the policy for the funding of promised benefits. In the case of marketable securities fair value is market value. The financial statements of a retirement benefit plan. and A description of the plan and the effect of any changes in the plan during the period.

• US GAAP – dealt by Statement no. joint ventures. 2 This Statement establishes standards of financial accounting and reporting for research and development (R&D) costs. research costs related to activities conducted for others costs unique to extractive industries cost of intangibles which have alternative future uses. .32 The R & D costs are deferred where technical or commercial feasibility is established and the enterprise has adequate resources to enable the product or process to be marketed. JV ( Jointly Controlled Assets or Corporation ) • Indian GAAP – dealt by AS 27 The objective of this Statement is to set out principles and procedures for accounting for interests in joint ventures and reporting of joint venture assets. liabilities. iii.jointly controlled operations. The R & D costs are deferred where technical or commercial feasibility is established and the enterprise has adequate resources to enable the product or process to be marketed.which are commonlydescribed as. 17. and meet the definition of. ii. Joint ventures take many different forms and structures. This Statement identifies three broad types . This Statement requires that R&D costs be charged to expense when incurred. income and expenses in the financial statements of venturers and investors. jointly controlled assets and jointly controlled entities . All other costs are charged to expense as and when incurred. It also requires a company to disclose in its financial statements the amount of R&D that it charges to expense. • IFRS – dealt by IAS 38 The international standard is largely similar to the Indian GAAP. Research costs can be capitalized and amortized as intangible assets in the following cases: i.

regardless of the structures or forms under which the joint venture activities take place. This Standard identifies three broad types—jointly controlled operations. liabilities. jointly controlled assets and jointly controlled entities—that are commonly described as. and meet the definition of. • US GAAP – dealt by Statement no. except in certain specified industries such as Oil and Gas. whereby an interest in a joint venture is initially recorded at cost and adjusted thereafter for the post-acquisition change in the venturer’s share of net assets of the jointly controlled entity. . or acquired for the purpose of. The assets are used to obtain economic benefits for the venturers. The profit or loss of the venturer includes the venturer’s share of the profit or loss of the jointly controlled entity. 24 This statement deals with the procedures for accounting for joint ventures and reporting of joint venture assets. by the venturers of one or more assets contributed to. Proportionate consolidation is a method of accounting whereby a venturer’s share of each of the assets. liabilities. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. income and expenses in the financial statements of venturers and investors. only the Equity method of accounting is used. the joint venture and dedicated to the purposes of the joint venture. liabilities. Joint ventures take many different forms and structures. liabilities. the statement allows proportionate consolidation of the jointly controlled assets and corporation. whereby a venturer’s share of each of the assets. income and expenses in the financial statements of venturers and investors. Hence.33 Some joint ventures involve the joint control. and often the joint ownership. • IFRS – dealt by IAS 31 This Standard is applied in accounting for interests in joint ventures and the reporting of joint venture assets. A venturer may recognize its interest in a joint venture using proportionate consolidation or the equity method. Generally. joint ventures. income and expenses of a joint venture is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements. income and expenses of a joint venture is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements.

This poses a great challenge to the preparers of financial statements and also to the auditors. The profit or loss of the venturer includes the venturer’s share of the profit or loss of the jointly controlled entity. The different disclosure requirements for listing purposes have hindered the free flow of capital.with some or much skepticism.34 The equity method is a method of accounting whereby an interest in a joint venture is initially recorded at cost and adjusted thereafter for the post-acquisition change in the venturer’s share of net assets of the jointly controlled entity. A single set of global accounting standards would improve investor confidence in the market. They would serve to increase market efficiency by allowing investors to draw better comparisons among investment options. This would ease free flow of capital and reduce costs of raising capital in foreign currencies. to harmonize diverse disclosure practices followed in different countries. The capital market regulators have now agreed to accept IFRS (International Financial Reporting Standards) compliant financial statements as admissible for raising capital. and question the veracity of those numbers. so long as they are high-quality. Issuers would not have to incur the cost of preparing financial statements using different sets of accounting standards. Could a potential stakeholder examine the financial results of a major clothing manufacturer in the United States or Canada. In the past. However. Globalization has helped various companies raise funds from offshore capital markets. sufficiently comprehensive and rigorously applied. to follow the Generally Accepted Accounting Principles (GAAP) of the investing country. desirous of raising funds. Thailand or Brazil to decide which organization truly represents a better investment? . The policy makers in India have also realized the need to follow IFRS and it is expected that a large number of Indian companies would be required to follow IFRS from 2011. investors had to look at financials produced by companies worldwide particularly outside the major industrialized countries . the willingness and need for better disclosure practices have intensified only in recent times. and compare those results with figures from competitors in China. They would also lower costs for issuers. for instance. This has also made comparison of financial statements across the globe impossible. A movement was initiated by an International body called International Organization of Securities Commissions (IOSCO). This has required the companies. CONVERGENCE with the IFRS Users of financial statements have always demanded transparency in financial reporting and disclosures.

. as was the growth of the overall global economy.35 The answer: Not necessarily. investors generally chose to put their money in companies and countries where they would be most comfortable with truthfulness in accounting practices and systems and the sign-off of accounting firms standing behind those numbers. particularly in emerging-market countries. true transparency in numbers among companies worldwide simply did not exist. As a result. or was deemed possible. cross-border investments were curtailed. Many investors simply decided that only the most sophisticated analysts around the world were capable of making those comparisons and deciding who was cooking the books. Before IFRS. With the implementation of IFRS. sloppily managing numbers or misrepresenting the relationship between theoretically privately held companies and the governments in the countries where those companies are based. things are set to change. In the past. and only with great difficulty.