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A comparison of Indian, International and the United States GAAP
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
person. employees. 1. The users of financial statements include present and potential investors. 4. or other entity. Relevance . These include sale and the various expenses incurred during the processing state. investing and financing activities. Statement of cash flows: reports on a company's cash flow activities. expenses. Income Statement: also referred to as Profit and Loss statement (or a "P&L"). lenders. 2. Profit & Loss account provide information on the operation of the enterprise. 3. governments and their agencies and the public. particularly its operating. and Ownership equity at a given point in time. reports on a company's income. Qualitative Characteristics of Financial Statements : i) Understandability ii) Relevance iii) Reliability iv) Comparability 1. customers. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period. Financial statements provide an overview of a business or person's financial condition in both short and long term. are called the financial statements. suppliers and other trade creditors. They use financial statements in order to satisfy some of their information needs. and profits over a period of time. 2.4 INTRODUCTION Financial statements (or financial reports) are formal records of the financial activities of a business. Understandability Understandability ensures that a user equipped with the basic knowledge can discern information pertaining to the performance and financial position of the enterprise. reports on a company's assets. All the relevant financial information of a business enterprise presented in a structured manner and in a form easy to understand. liabilities. There are four basic financial statements: Balance Sheet: also referred to as statement of financial position or condition.
5 Since financial statements are for users to make economic decisions. prudence. Principles derive from tradition. Whether the information affects the economic decisions of users (materiality) and the nature of information affect relevance as well. etc. and report financial statements for a wide variety of entities. financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" or GAAP. The financial accountant usually exercises discretion where any conflict might occur. faithful representation and substance over form. compilation. review. non-profit organizations. and governments. neutrality. reliability. such as the concept of matching. but it merely contributes to relevance. 3. Generally Accepted Accounting Principles are accounting rules used to prepare. including publicly-traded and privately-held companies.). Sometimes. Users must have confidence in the financial statement. 4. For this reason. 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. without it being misleading or deliberately constructed in a manner that presents the entity in a favorable light. whether deliberate or not. Materiality is one of the assumptions used in financial reporting. In any report of financial statements (audit. 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. the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP. Generally GAAP includes local applicable Accounting Framework. Financial accounting information must be assembled and reported objectively. United States’ GAAP . present. rules and Accounting Standard. Comparability Comparability adds a degree of transparency to financial statements by allowing comparisons over time and among entities. other qualitative characteristics of information include completeness. the information must be relevant to the decisions that those users have to make. relevance and comparability. Besides understand ability. related accounting law. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency. there exists a trade-off between or among qualitative characteristics.
non-profit organizations.S. Securities and Exchange Commission (SEC) was formed out of the crucible of the 1929 Stock Market Crash and the Great Depression. US GAAP is not written in law. the balance sheet and dividends were paramount. which operates under a set of assumptions. rules and Accounting Standard. this figure was much lower. commonly abbreviated as US GAAP or simply GAAP. For local and state governments. Today. companies to drop GAAP by 2016. 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. In 1929. But. though former SEC Chairman Chris Cox set out a timetable for all U. and governments. is the fact that purchases of stock on margin increased 900% between 1921 and 1929.S. with the largest companies switching to IFRS as early as 2009.S. even in the early 1900s. and constraints. Even for those companies that did provide investors with audited financial statements. although the U.6 In the U. principles. and report financial statements for a wide variety of entities. The Way Back…. different from those of standard private-sector GAAP. Investors seemed to trust . the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies. perhaps. businesses relied heavily on the markets for capital. It has been suggested that at a time when the New York Stock Exchange traded the shares of approximately 800 companies. including publicly-traded and privatelyheld companies. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly-traded companies. Of course. Similar to many other countries practicing under the common law system. in the belief that the private sector has better knowledge and resources. more than half of all US households are invested in our stock markets. it was nothing like today. Disclosure of financial information throughout this period was voluntary. Generally GAAP includes local applicable Accounting Framework. as well as non-profit entities. generally accepted accounting principles. A telling statistic of the extent of the enthusiasm.S. related accounting law. The U. the United States government does not directly set accounting standards. US GAAP has been used extensively in the United States since the 1930s. present. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB).. GAAP is determined by the Governmental Accounting Standards Board (GASB). The US GAAP provisions differ somewhat from International Financial Reporting Standards. the prices of more than 100 of these were openly manipulated by syndicated stock pools. Currently. are accounting rules used to prepare. And by the Roaring Twenties everyone seemed interested in the stock market. 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.
developed and leavened for many decades in an economic environment in which retail investors — and not just banks or entrepreneurial families — have played. The strength of US GAAP derives at least partially from the fact that it has been stress-tested. but also set the accounting standards to be used in preparing these disclosures. About the AICPA The American Institute of Certified Public Accountants (www. The SEC’s enacting legislation charges it with setting the accounting standards used by issuers accessing the US capital market. With active oversight of the standard setting process by the SEC through the decades. .000 members. While the SEC today looks to the FASB to set US accounting standards. Accounting standards in the United States have a long and unique history. Texas.. and Lewisville. N. auditing standards for audits of private companies. Given the complexity of this task. in 1938 the SEC began to look to the private sector for assistance in setting these accounting standards. a substantial role. federal. professional association of CPAs. this model has served accounting well in terms of developing a robust.aicpa. and education. It develops and grades the Uniform CPA Examination. government. Ewing. D. it retains ultimate responsibility for them. its enacting legislation authorized the Commission to not only establish disclosure standards for issuers. and not-for-profit organizations.C.org) is the national..C.S. public practice. state and local governments. with more than 360. N. including CPAs in business and industry. Washington. and continue to play. Durham. The AICPA maintains offices in New York.7 dividend payments rather than income statements as an indicator of a company’s financial condition.J. It sets ethical standards for the profession and U. well-articulated set of standards that well serves and protects the users of financial statements. When the SEC was created in 1934.
8 INDIAN GAAP In India.This is from an ancient Sanskrit text and signifies the function of a Chartered Accountant as a sentinel. XXXVIII of 1949) for the regulation of the profession of Chartered Accountants in India. as a matter of fact. These are numbered AS-1 to AS-7 and AS-9 to AS-31. 2006 by the Government of India. 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). which are interested. for its contribution in the fields of education. "That person who is awake among those who sleep" . ICAI now is the second largest accounting body in the whole world. and confidence in adopting these standards may be followed. the Institute of Chartered Accountants of India has issued 31 Accounting Standards. most of the countries in the world. To date. The Institute of Chartered Accountants of India (ICAI). 1949 (Act No.'CA' . The Institute of Chartered Accountants of India (ICAI) is a statutory body established under the Chartered Accountants Act. From 1973 to 2000 the IASC has issued 32 accounting standards. auditing and ethical standards. ICAI has set an internal deadline of aligning its Accounting Standards with IFRS by April 2011. . These standards. ICAI has achieved recognition as a premier accounting body not only in the country but also globally. The compliance of Accounting Standards issued by ICAI have become a statutory requirement with the notification of Companies (Accounting Standards) Rules. recognizing the need to harmonize the diverse accounting policies and practices in use in India. constituted the Accounting Standards Board (ASB) on 21st April. maintenance of high accounting. professional development. The Institute has also introduced a new logo for Members .Alphabets of Trust. AS-8 is no longer in force having been merged with AS-26. During its nearly six decades of existence. 1977.
As a result. for instance. Asia or elsewhere.so that accounting principles regarding derivatives. those systems haven't been adopted lock.S. International Accounting Standards Committee was founded in June 1973 in London and replaced by the International Accounting Standards Board on April 1. 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. French GAAP. US GAAP and so on. stock and barrel. have had almost no similarity to the accounting principles for the same issues in Europe. calling the new standards IFRS. The problem with all of these varying generally accepted accounting principles is that they have differed not just in nuance. however. Not all countries have had their own GAAP. 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)) • • . insurance or pension treatment in the U. The Way Back…. but in many cases extraordinarily . but piecemeal . IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC).9 International Financial Reporting Standards (IFRS) International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). individual countries have established their own versions of GAAP. there has been Japanese GAAP. Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). 2001.. In April 2001 the IASB adopted all IAS and continued their development. depending on the specific issue. It was responsible for developing the International Accounting Standards and promoting the use and application of these standards. In most cases. Indian GAAP. they've adopted an accounting regime (or parts of an accounting regime) from an industrialized country.adding to investor confusion. Historically.
5. 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. 16. US GAAP and the IFRS. 2. 11. These are as follows: 1. 3. Institute of Chartered Accountants of Scotland (ICAS).e. 10. 12. Institute of Chartered Accountants in Ireland (ICAI). 9. 14. Business Combinations Cash Flow Statement Comprehensive income Segment Information Negative Goodwill (i. 15. United Kingdom and Ireland (counted as one) (Institute of Chartered Accountants in England and Wales (ICAEW). 17. Balance sheet Stock based Compensation Derivatives and other financial instruments – measurement of derivative instruments and hedging activities. 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 ) . 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. 6. 13. 7. 4. 8. Institute of Cost and Management Accountants. Association of Certified Accountants.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. resumed in 1995).
dividend. the obligations of the group and results the group achieves with its resources. 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. . Also. the Balance Sheet does not require segregation of current and non-current portions of assets and liabilities. The objective of AS 21 is to lay down principles and procedures for preparation and presentation of consolidated financial statements.nd/ or for presenting interest. losses and gains relating to a financial instrument in a particular manner as income/ expense or as distribution of profits. losses and gains relating to the instrument in accordance with the requirements of the statute governing the entity. dividend. the entity should present that instrument and/ or 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. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. Balance Sheet • Indian GAAP – dealt by AS 31.11 1.
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.e.. The Statement also defines or describes certain other concepts that underlie or are otherwise related to those elements and classes. and change in unrestricted net assets. 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. change in temporarily restricted net assets. and equity and their relationships to each other at a moment in time. financial liabilities and equity instruments. distributions to owners. including the number of shares outstanding for all years presented. . from the perspective of the issuer. and comprehensive income. Concepts Statement No. 6 According to Statement 5. Segregation of current and non-current portions of assets and liabilities is necessary. expenses. • IFRS – dealt by IAS 32. and losses—and 3 elements of financial statements of business enterprises only—investments by owners. Balance sheet captions are presented in order of liquidity starting with the most liquid assets. liabilities. and the circumstances in which financial assets and financial liabilities should be offset. equity (business enterprises) or net assets (not-for-profit organizations). the classification of related interest. dividends. Balance sheet captions are presented in the inverse order of liquidity i. revenues. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position. IFRS 7 requires disclosures by class of financial instrument. 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. It also requires disclosure of movements in stockholders’ equity. gains. Statement 6 defines 10 elements of financial statements: 7 elements of financial statements of both business enterprises and not-for-profit organizations—assets. 5. 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. into financial assets. IFRS 7 IAS 32 applies to the classification of financial instruments. losses and gains. illiquid items appear earlier. liabilities.12 • US GAAP – dealt by Concepts Statement No. a statement of financial position provides information about an entity's assets.
Improving the comparability of reported financial information by eliminating alternative accounting methods. However. Examples are stock purchase plans. This statement is not mandatory for un-listed companies. effective 2005. and stock appreciation rights. However. restricted stock. • US GAAP – dealt by Statement no. 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. issuing stock options to employees generally resulted in recognition of no compensation cost. ii. .13 Segregation of current and non-current portions of assets and liabilities is disclosed only as part of the footnotes. 2. which requires fair value to be expensed for all options. 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 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. it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting. Addressing concerns of users and others. 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. there was a revision in the standard. The fair value based method is preferable to the intrinsic method for purposes of justifying a change in accounting principle. 123 (revised in 2004) US GAAP had similar rules as what SEBI prescribes regarding Stock based compensation. The principal reasons for issuing this Statement are: i. Under Opinion 25. stock options. 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).
. 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. that is attributable to a particular risk and could affect profit or loss. Simplifying US GAAP. In particular.14 iii.Measurement of Derivative Instruments and Hedging Activities. Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. Derivative and other Financial Instrument. iv. and the factors that cause changes in fair value are co-dependent. (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. a hedging relationship is designated by an entity for a hedging instrument in its entirety. liability or firm commitment. Converging with international accounting standards. recognition of the compensation costs is not mandatory. • Indian GAAP – dealt by AS 30 There is normally a single fair value measure for a hedging instrument in its entirety. (c) Hedge of a net investment in a foreign operation as defined in AS 11. it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions. However. or an identified portion of such an asset. • 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. Thus. This statement requires the compensation costs to be disclosed in the financial statements. including expenses associated with transactions in which share options are granted to employees. 3.
gains and losses) depends on the intended use of the derivative and the resulting designation. an unrecognized firm commitment. or a foreign-currency-denominated forecasted transaction. 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. . This statement is directed principally to companies although some of its requirements also apply to financial statements of other enterprises. including certain derivative instruments embedded in other contracts. If certain conditions are met. 161) This Statement establishes accounting and reporting standards for derivative instruments. (b) a hedge of the exposure to variable cash flows of a forecasted transaction. (collectively referred to as derivatives) and for hedging activities. 133 (superseded by statement no. The accounting for changes in the fair value of a derivative (that is. The accounting for changes in the fair value of a derivative (that is. an available-for-sale security. Business Combinations • Indian GAAP – dealt by AS 14 This statement deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves.15 • US GAAP – dealt by Statement no. or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation. 4. Gains or losses on hedge instruments used to hedge forecast transactions are included in cost of asset/liability. • IFRS – dealt by IAS 39 This standard is similar to the US GAAP. Gains or losses on hedge instruments used to hedge forecast transactions are included in cost of asset/liability. 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. gains and losses) depends on the intended use of the derivative and the resulting designation.
(iv) The business of the transferor company is intended to be carried on. (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. 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. or the business of the company which is acquired is not intended to be continued. Such amalgamations are amalgamations in the nature of ‘purchase’. after the amalgamation.16 Generally speaking. This method is used in accounting for amalgamations in the nature of purchase. amalgamations fall into two broad categories. after amalgamation. (i) All the assets and liabilities of the transferor company become. . 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. the assets and liabilities of the transferee company. liabilities. by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. immediately before the amalgamation. 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. the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. as a consequence. (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. capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies. In the second category are those amalgamations which are in effect a mode by which one company acquires another company and. except that cash may be paid in respect of any fractional shares. 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. (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. by the transferee company. Hence.
iv. ii. including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. unless it is a combination involving entities or businesses under common control. One of the parties to a business combination can always be identified as the acquirer. This Statement applies to all business entities. 5. It does not apply to: i. • IFRS – dealt by IFRS 3 The objective of the IFRS is to enhance the relevance. 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. Where an acquirer cannot be identified then the pooling of interests method should be adopted. at any time during the accounting period: . A business combination must be accounted for by applying the acquisition method. iii. being the entity that obtains control of the other business (the acquiree). 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. by contract alone or through the lapse of minority veto rights. 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. including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration. 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.17 • US GAAP – dealt by Statement no.
This Statement requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating. vii. industrial and business reporting enterprises having borrowings. investing. Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard. or financing activities and provides definitions of each category. 52 • . 141) This Statement establishes standards for cash flow reporting. iv. All commercial. vi. 10 crore at any time during the accounting period. Turnover does not include ‘other income’. 6. Banks including co-operative banks. investing and financing activities. v. 50 crore. All commercial. 95 (superseded by Statement no. 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. but are not required. • 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. to apply this Standard. Holding and subsidiary enterprises of any one of the above at any time during the accounting period. viii. Financial institutions. Enterprises carrying on insurance business. Enterprises whose equity or debt securities are listed whether in India or outside India. US GAAP – dealt by Statement no. industrial and business reporting enterprises. in excess of Rs. This standard is mandatory for all entities. iii.18 i. ii. including public deposits. The enterprises which do not fall in any of the above categories are encouraged. Comprehensive Income • Indian GAAP – There are no standards available and none are required. whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. • US GAAP – dealt by Statement no.
• 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. 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 nonmonetary item is recognised in profit or loss. 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. Using the current exchange rate for translation from the functional currency to the reporting currency. 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. However. 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 profit or loss. 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. . In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary). company may borrow Swiss francs or a French subsidiary may have a receivable denominated in kroner from a Danish customer). Furthermore. if they are different d. 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. Unrealized gains/losses on investment and Foreign currency translations are disclosed as a separate component of equity. as appropriate. Conversely. Measuring all elements of the financial statements in the functional currency c. any exchange component of that gain or loss shall be recognised in other comprehensive income.S. a U. 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. Identifying the functional currency of the entity's economic environment b.
ii. Factors that should be considered in identifying geographical segments include: i. insurance. Factors that should be considered in determining whether products or services are related include: i. iv. 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. According to this statement. 7. 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 . 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. for example. or public utilities. about the different types of products and services an enterprise produces and the different geographical areas in which it operates. v. 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.20 Hence. ii. iii. iii. v. Segment Information • Indian GAAP – dealt by AS 3 The objective of this statement is to establish principles for reporting financial information. 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. iv. banking. vi. the segments may be classified into either business or geographical segments.
with secondary information reported geographically. if the risks and returns of the enterprise are affected predominantly by the fact that it operates in different countries or other geographical areas. information on revenues. identifiable assets. total segment profit or loss. 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. 14) This Statement requires a publicly held business company to present. 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). and other related disclosures (such as the aggregate amount of a segment's depreciation. differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements. Generally. 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. total segment assets. 131 (superseded Statement no. profitability. certain specific revenue and expense items. • US GAAP – dealt by Statement no. with secondary information reported for groups of related products and services. the products and services provided by the operating segments. Segments based on information are reviewed by a CODM (Chief Operating Decision Maker) • IFRS – dealt by IFRS 8 . and other amounts disclosed for segments to corresponding amounts in the enterprise's general-purpose financial statements. its primary format for reporting segment information should be business segments. and amortization expense). its primary format for reporting segment information should be geographical segments. Similarly. and changes in the measurement of segment amounts from period to period.21 geographical segments. and about major customers regardless of whether that information is used in making operating decisions. It requires reconciliations of total segment revenues. depletion. and segment assets. Similar information is required to be reported on a geographic basis for those companies having foreign operations and export sales. for each segment of its operations qualifying as a reportable segment. If the risks and returns of an enterprise are affected predominantly by differences in the products and services it produces. This Statement also requires that a public business enterprise report descriptive information about the way that the operating segments were determined.
if any immediately charged to income. Leases • Indian GAAP – dealt by AS 19 The objective of this Statement is to prescribe. The segment liabilities are also required to be shown. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership.22 The international standard is largely similar to the US GAAP. Where it does not relate to identifiable future losses and expenses. the appropriate accounting policies and disclosures in relation to finance leases and operating leases. • 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. 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. Negative Goodwill (i. 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. which is a component of stockholders’ equity. 9. A lease . 8.e. Any remaining excess is considered to be extraordinary gain. Title may or may not eventually be transferred. it is mandatory only for listed companies. However. 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. • US GAAP Negative goodwill is allocated to reduce proportionately the value assigned to noncurrent assets. for lessees and lessors.
Leases are classified as capital and operating leases as per certain criteria. • IFRS – dealt by IAS 17 Similar to US GAAP except that the criteria for distinguishing between capital and revenue leases are different.23 is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. 13 (superseded by Statement no. Capital leases are treated as the acquisition of assets and the incurrence of obligations by the lessee. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. it is an operating lease. Lease rentals on operating leases are expensed as incurred. Operating leases are treated as current operating expenses. For lessees. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form. Quantitative thresholds have been defined. This enhances the comparability of the . 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. 145) This Statement establishes standards of financial accounting and reporting for leases by lessees and lessors. 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. No quantitative thresholds have been defined. Capital leases are included under property. plant and equipment of the lessor. 10. • US GAAP – dealt by Statement no. a lease is a financing transaction called a capital lease if it meets any one of four specified criteria. if not.
and that could not be estimated prior to the current interim period. restating the comparative amounts for the prior period(s) presented in which the error occurred. Accounting for Foreign Currency Transactions . or if the error occurred before the earliest prior period presented.24 financial statements of an enterprise over time and with the financial statements of other enterprises. However. • 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. liabilities and equity for the earliest prior period presented. Correction of an error in previously issued financial statement is recognized by restating previously issued financial statements. an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: i. 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. 11. that can be specifically identified with business activities of a prior interim period. • US GAAP – dealt by Statement no. restating the opening balances of assets. Prior period errors are generally corrected in the current financial statements. 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. the error should be corrected by adjusting the opening retained earnings. ii. 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. 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 21 A foreign currency transaction shall be recorded. 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. 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. all exchange differences are included in determining net income for the period in which differences arise. 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.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. Hence. by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. 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. as appropriate. A foreign currency transaction should be recorded. 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. . 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. 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. Hence. all exchange differences are included in determining net income for the period in which differences arise. on initial recognition in the reporting currency. on initial recognition in the functional currency. • US GAAP – dealt by Statement no.
• US GAAP – dealt by Statement no. 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. 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. an enterprise should identify whether goodwill that relates to this cash-generating unit is recognised in the financial statements. Goodwill is capitalized and tested for impairment annually. goodwill acquired in a business combination shall. that is expected to benefit from the synergies of the combination.26 12. The straight line method should be adopted unless the use of any other method can be justified. Revenue Recognition • Indian GAAP – dealt by AS 9 . except for goodwill from amalgamation. irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. or groups of cash-generating units. be allocated to each of the acquirer’s cash-generating units. • IFRS – dealt by IAS 36 For the purpose of impairment testing. 13. provided the test is performed at the same time every year. from the acquisition date. Goodwill is not amortized but goodwill is to be tested for impairment annually. which is amortized over 3-5 years. Goodwill is amortized to expense on a systematic basis over its useful life with a maximum of twenty years.
e. 48 There is no general principle for revenue recognition. industry specific guidelines exist. Related parties • Indian GAAP – dealt by AS 18 This Statement deals with related party relationships described below: . when risks and rewards of ownership are transferred to the buyer and when effective control of the seller as the owner is lost. revenue will be recognized. 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. However. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. • IFRS – dealt by IAS 18 Revenues are recognized when all significant risks and rewards of ownership are transferred. • US GAAP – mainly dealt by Statement no. 14. therefore.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. i. It must be noted that no detailed industry specific guidelines exist. such as under warranty provisions.. This Standard identifies the circumstances in which these criteria will be met and.
and other similar items in the ordinary course of business. vii. the reporting enterprise (this includes holding companies. 57 According to this statement. related parties are determined based on common ownership and control. or are under common control with. iii. If there have been transactions between related parties. control. This statement is mandatory for listed companies and companies meeting a certain turnover threshold. iv. Financial statements shall include disclosures of material related party transactions. ii. directly or indirectly.28 i. iii. v. during the existence of a related party relationship. or indirectly through one or more intermediaries. However. v. disclosure of transactions that are . 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. or are controlled by. iv. 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. 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. expense allowances. vi. the reporting enterprise should disclose the following: i. • US GAAP – dealt by Statement no. an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise. Enterprises that directly. 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. 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.
v. vii. vi. directly or indirectly. the party: a. has an interest in the entity that gives it significant influence over the entity c. Directly. or for which significant voting power in such entity resides with. iii. or of any entity that is a related party of the entity. the ultimate controlling party. the entity (this includes parents. including transactions to which no amounts or nominal amounts were ascribed. if different. any individual referred to in (d) or (e) The party is a post-employment benefit plan for the benefit of employees of the entity. Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties.29 eliminated in the preparation of consolidated or combined financial statements is not required in those statements. if not otherwise apparent. subsidiaries and fellow subsidiaries) b. 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. jointly controlled or significantly influenced by. If neither the entity’s parent nor the ultimate controlling party produces financial . or is under common control with. • IFRS – dealt by IAS 24 A party is related to an entity if: i. the terms and manner of settlement iii. 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. iv. has joint control over the entity ii. ii. The disclosures shall include: i. iv. for each of the periods for which income statements are presented. is controlled by. An entity shall disclose the name of the entity’s parent and. controls. or indirectly through one or more intermediaries. The nature of the relationship(s) involved A description of the transactions.
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. iii. Thus. 15. 141) This Statement requires the following disclosures about an employer's accounting for postretirement health care and life insurance benefits: i. 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. together with investment returns arising from the contributions. The enterprise’s obligation is limited to the amount that it agrees to contribute to the fund. In consequence. 81 (superseded by Statement no. A description of the benefits provided and the employee groups covered. . 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. 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. depending on the economic substance of the plan as derived from its principal terms and conditions. Under defined contribution plans: i. Hence.30 statements available for public use. 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. The cost of those benefits recognized for the period. the name of the next most senior parent that does so shall also be disclosed. The acturial gain/losses are recognized immediately. ii. Acturial gains/losses are amortized. • US GAAP – dealt by Statement no. ii. A description of the employer's current accounting and funding policies for those benefits. 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.
in the research phase of a project. 16. identify an intangible asset and demonstrate that future economic benefits fromthe asset are probable. A summary of significant accounting policies. and the policy for the funding of promised benefits. • IFRS – dealt by IAS 26 The international standard is exactly similar to the US GAAP. this expenditure is recognised as an expense when it is incurred. The financial statements of a retirement benefit plan. whether defined benefit or defined contribution.31 The financial statements shall explain the relationship between the actuarial present value of promised retirement benefits and the net assets available for benefits. in some instances. a research phase a development phase This Statement takes the view that. ii. In the case of marketable securities fair value is market value. shall also contain the following information: i. Retirement benefit plan investments shall be carried at fair value. an enterprise cannot demonstrate that an intangible asset exists from which future economic benefits are probable. iii. Therefore. an enterprise classifies the generation of the asset into: i. 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. In the development phase of a project. an enterprise can. A statement of changes in net assets available for benefits. This is because the development phase of a project is further advanced than the research phase. and A description of the plan and the effect of any changes in the plan during the period. ii. 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. .
All other costs are charged to expense as and when incurred. joint ventures. iii.jointly controlled operations. research costs related to activities conducted for others costs unique to extractive industries cost of intangibles which have alternative future uses. This Statement identifies three broad types . 17. ii. jointly controlled assets and jointly controlled entities .which are commonlydescribed as. 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. • IFRS – dealt by IAS 38 The international standard is largely similar to the Indian GAAP. • US GAAP – dealt by Statement no. This Statement requires that R&D costs be charged to expense when incurred. 2 This Statement establishes standards of financial accounting and reporting for research and development (R&D) costs.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. and meet the definition of. Research costs can be capitalized and amortized as intangible assets in the following cases: i. Joint ventures take many different forms and structures. income and expenses in the financial statements of venturers and investors. It also requires a company to disclose in its financial statements the amount of R&D that it charges to expense. liabilities. .
or acquired for the purpose of. • IFRS – dealt by IAS 31 This Standard is applied in accounting for interests in joint ventures and the reporting of joint venture assets. 24 This statement deals with the procedures for accounting for joint ventures and reporting of joint venture assets. regardless of the structures or forms under which the joint venture activities take place. liabilities. Proportionate consolidation is a method of accounting whereby a venturer’s share of each of the assets. liabilities. liabilities. 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. • US GAAP – dealt by Statement no. whereby a venturer’s share of each of the assets. . 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. and often the joint ownership. income and expenses in the financial statements of venturers and investors. jointly controlled assets and jointly controlled entities—that are commonly described as. The assets are used to obtain economic benefits for the venturers. only the Equity method of accounting is used. income and expenses in the financial statements of venturers and investors.33 Some joint ventures involve the joint control. Generally. the statement allows proportionate consolidation of the jointly controlled assets and corporation. Hence. by the venturers of one or more assets contributed to. Joint ventures take many different forms and structures. the joint venture and dedicated to the purposes of the joint venture. A venturer may recognize its interest in a joint venture using proportionate consolidation or the equity method. This Standard identifies three broad types—jointly controlled operations. The profit or loss of the venturer includes the venturer’s share of the profit or loss of the jointly controlled entity. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. liabilities. 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. joint ventures. and meet the definition of.
Could a potential stakeholder examine the financial results of a major clothing manufacturer in the United States or Canada. A movement was initiated by an International body called International Organization of Securities Commissions (IOSCO). so long as they are high-quality. In the past. to harmonize diverse disclosure practices followed in different countries. and compare those results with figures from competitors in China. This has also made comparison of financial statements across the globe impossible. CONVERGENCE with the IFRS Users of financial statements have always demanded transparency in financial reporting and disclosures. The different disclosure requirements for listing purposes have hindered the free flow of capital. A single set of global accounting standards would improve investor confidence in the market. This poses a great challenge to the preparers of financial statements and also to the auditors. This has required the companies. This would ease free flow of capital and reduce costs of raising capital in foreign currencies. They would also lower costs for issuers. and question the veracity of those numbers. They would serve to increase market efficiency by allowing investors to draw better comparisons among investment options. sufficiently comprehensive and rigorously applied. 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. for instance. The capital market regulators have now agreed to accept IFRS (International Financial Reporting Standards) compliant financial statements as admissible for raising capital.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. to follow the Generally Accepted Accounting Principles (GAAP) of the investing country. desirous of raising funds. Globalization has helped various companies raise funds from offshore capital markets. The profit or loss of the venturer includes the venturer’s share of the profit or loss of the jointly controlled entity. However.with some or much skepticism. the willingness and need for better disclosure practices have intensified only in recent times. Issuers would not have to incur the cost of preparing financial statements using different sets of accounting standards. investors had to look at financials produced by companies worldwide particularly outside the major industrialized countries . Thailand or Brazil to decide which organization truly represents a better investment? .
35 The answer: Not necessarily. With the implementation of IFRS. true transparency in numbers among companies worldwide simply did not exist. Before IFRS. things are set to change. cross-border investments were curtailed. sloppily managing numbers or misrepresenting the relationship between theoretically privately held companies and the governments in the countries where those companies are based. particularly in emerging-market countries. As a result. 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. In the past. as was the growth of the overall global economy. 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. or was deemed possible. and only with great difficulty. .
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