GAAP

Presented By :
Devesh Narayan Ishansh Vij Koushik Sarkar Kushal Sardana Rudranil Roysharma Ramakrishna G.

Under the kind guidance of -

Prof. Vinay K. Nangia

Topics
‡ Definition of GAAP ‡ Why GAAP is Important? ‡ Similarities & Differences between Indian GAAP, IFRS and US GAAP - Financial Statements - Revenue Recognition - Foreign Currency Translation

Definition
‡ GAAP is the abbreviation of Generally Accepted Accounting Principle. ‡ GAAP are the common set of accounting principles, standards and procedures that companies use to compile their financial statements. ‡ GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Related Information
‡In India, GAAP standards are set by the Institute of Chartered Accountants of India (ICAI). ICAI continually updates GAAP as new accounting issues and concerns arise. ‡In USA, GAAP standard are set by Financial Accounting Standards Board (FASB). ‡Outside the US, the equivalent of GAAP is IAS International Accounting Standards - which is maintained by the International Accounting Standards Board (IASB). ‡Financial statements submitted to the SEBI by publicly traded companies are required to meet GAAP standards.

Why GAAP?
‡GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. ‡GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. ‡ Companies are expected to follow GAAP rules when reporting their financial data via financial statements. ‡ If a financial statement is not prepared using GAAP principles, be very wary!

. it is important to note any changes in GAAP over the intervening period. ‡ Since GAAP is only a set of guidelines. it cannot guarantee financial statements are not fraudulent. ‡ If company management provides the auditing firm with incorrect data. we still need to scrutinize its financial statements. the resulting financial statements may be GAAP compliant yet still incorrect. even when a company uses GAAP.Important points ‡ When comparing financial statements from different years. So.

Contents of GAAP ‡ACCOUNTING FRAMEWORK ‡FINANCIAL STATEMENTS ‡CONSOLIDATED FINAL STATEMENTS ‡BUSINESS COMBINATIONS ‡REVENUE RECOGNITION ‡EXPENSE RECOGNITION ‡ASSETS ‡LIABILITIES ‡EQUITY ‡DERIVATIVES & HEDGING ‡OTHER ACCOUNTING & REPORTING TOPICS -FOREIGN CURRENCY TRANSLATION -EARNING PER SHARE -RELATED-PARTY TRANSACTION -SEGMENT REPORTING -DISCONTINUED OPERATIONS -POST BALANCE SHEET EVENTS -INTERIM REPORTING .

Similarities & Differences between Indian GAAP. US GAAP & IFRS .

Financial Statements .

the Companies Act and Industry specific regulatory requirements. Additionally listed companies should comply with the rules and regulations and financial interpretations of SEBI. There is a presumption that compliance with accounting standards is necessary to give a ´ True and Fair Viewµ.General Requirements ‡Compliance Indian company should comply with Indian GAAP. The law requires entities to disclose whether the financial statements comply with applicable accounting standards and to give details of non compliances. .

General Requirements contd. It is not mandatory to prepare consolidated financial statements but must use the consolidation standards if prepared. . Pursuant to the listing agreements with stock exchanges. Public listed companies present consolidated financial statements along with standalone financial statements. ‡Comparatives: One year of comparatives is required for all numerical information in the financial statements with limited exceptions and disclosures.. ‡Preparation and Presentation: Financial Statements are presented on a single entity parent company (stand alone) basis.

Components of Financial Statements Components Balance Sheet Income Statements Statement of changes in shareholder·s equity Fund flow Statement Accounting Policy Notes to the Financial Statements Indian GAAP Required Required Required Required Required Required US GAAP Required Required Required Required Required Required IFRS Required Required Required Required Required Required .

Application of Funds:. . Investments. Public entities should follow specific SEC guidance. Other Current Assets) less Current Liabilities and Provisions. Secured Loans. ‡US GAAP: Presented as total assets balancing to total liabilities and shareholder·s equity.Balance Sheet ‡INDIAN GAAP: Accounting Standard do not prescribe any format of balance sheet. Miscellaneous expenditure. The Companies Act prescribes a format and requires presentation of the following items on the face of balance sheet: Sources of Funds:. Current Assets.Fixed assets. Unsecured Loans.Share Capital. Sundry debtors. Cash and Bank balances. Items are presented in decreasing order of liquidity. Reserves and Surplus. Minority Interest. Loans and Advances (Inventories.

. financial assets. tax assets. and minority interests (presented within equity).Balance Sheet contd. . financial liabilities. investment accounted for using equity method. intangible assets. Equity and liabilities: issued share capital and other components of shareholder·s equity. tax liabilities. investment property. trade and other receivables. Assets: PPE. and cash and cash equivalents. and current and non-current liabilities are to be presented separately except when a liquidity presentation provides more relevant and reliable information. biological assets. inventories. ‡IFRS: Current and non-current assets. provisions. trade and other payables.

‡US GAAP: Presented either as A single-step format where all expenses are classified by function and are deducted from total income to give income before tax : or A multi-step format where cost of sales is deducted from sales to show gross profit. .Income Statement ‡INDIAN GAAP: Accounting standards and the Companies Act prescribe disclosure norms for certain income and expenditure items. and other income and expenses are then presented to give income before tax. Expenses are presented by either function or nature. Other industry regulations prescribe industry-specific format of income statement.

Items presented are revenue. . post-tax gain or loss attributable to the results and remeasurement of discontinued operations and net profit or loss for the period.. Portion of profit and loss attributable to the minority interest and to the parent entity is separately disclosed. Disclosure of expenses by nature is required in footnotes if functional presentation is used on income statement. finance costs.Income Statement contd. share of after-tax results of associates and joint ventures accounted for using equity method. ‡IFRS: Expenses presented by either function or nature. tax expenses.

It should show capital transactions with owners. Certain items are permitted to be disclosed in notes rather than in primary statement. . Supplemental equity information is presented in notes when SoRIE is presented. Changes in shareholder·s equity are disclosed in separate schedules of ¶Share capital· and ¶Reserves and surplus· ‡US GAAP: Same to IFRS. and SEC rules require further disclosure of certain items in notes. ‡IFRS: It is presented as a primary statement unless a SoRIE is presented. the movement in accumulated profit and a reconciliation of all other components of equity. except that US GAAP does not have a Statement of Recognized Income and Expense (SoRIE).Statement of changes in Shareholder·s Equity ‡INDIAN GAAP: No separate statement is required.

. Indirect method (Cash flow is derived from adjusting net income from transaction of non cash in nature such as depreciation ). It can be prepared by two ways: Direct or indirect method. 100 million at any point of time during accounting period. Direct method (Cash flow is derived from aggregating cash receipts & payments associated with operating activities) . It is required for all enterprises whose turnover exceeds Rs 500 Million or having borrowing over Rs.Fund Flow Statement ‡INDIAN GAAP : Inflow & outflow of µcash & Cash equivalentµ are reported in fund flow statement.However only indirect method is prescribed for listed enterprises & direct for insurance companies.

There are limited exemption for certain investment entities. ‡US GAAP : Cash flow statement provides relevant information about ´cash receipts & cash paymentsµ. A reconciliation of net income to cash flows from operating activities is disclosed . Indirect is more common in IFRS. . The cash flow from operating. However. ‡IFRS : It is similar to Indian GAAP.Fund Flow Statement contd. investing & financing activities are classified separately..

Accounting Policy ‡INDIAN GAAP : The cumulative amount of change is recognized & disclosed in the income statement in the period of change. depreciation in rail industry . Retrospective adjustment are required in some of the cases like : method of accounting for inventory valuation. whereas on revision of asset life. the unamortized depreciable amount is charged over the revised remaining life. Certain new standards require adjustment of the cumulative amount of the change for opening retained earnings. . ‡US GAAP : The cumulative amount of change is recognized & changed in the income statement of period of change. Impact of change in depreciation method is determined under the new method & is recorded in the period of change.construction contracts & adoption of full cost method in extractive industry.

Policy changes made by adoption of new standard are accounted for in accordance with standard Transition provisions. . For correction of errors & accounting estimates accounting policy method & income statement are required.Accounting Policy contd. & the amount of the readjustment relating to prior period is adjusted against the opening balance of retained earnings of the earlier year presented.. ‡IFRS : Comparative information is restated.

ARB43. AS6. AS1.. IAS32. FAS16. IAS29. SEC Regulation S-X. FAS141. APB30. IAS7. IAS8. APB20. APB29. IAS19. ‡INDIAN GAAP : Companies Act. AS5. FIN39 ‡IFRS : IAS1.References for Details. AS10. SIC30 . IAS21. FAS154. AS3. FAS95. FAS130. FAS52. AS11 ‡US GAAP : CON1-.

Revenue Recognition .

. royalties and dividends.Definition of Revenue Gross inflow of consideration ( Cash / receivables / others ) arising in the course of ordinary activities from ‡ Sale of Goods ‡ Rendering of Services ‡ Use of enterprise resources yielding interest.

Consideration: ‡ Flow of economic benefits ‡ Inflows resulting in an increase in equity (Other than increase through the contribution from equity holders) Ordinary Activities: ‡ Activities undertaken as part of business ‡ Related activities engaged in . ..Arising from these activities.Definition contd.Incidental to .Furtherance of .

Criteria for Revenue Recognition CONDITION Can the revenue be recognized TIMING When will we record revenues? MEASUREMENT How much will we record? CRITERIA FOR REVENUE RECOGNITION .

Criteria for Revenue Recognition : Goods Property in goods transferred to buyer for a price Or All significant risks and rewards of ownership transferred to buyer & seller retains no effective control over goods PERFORMANCE No significant uncertainty regarding consideration UNCERTAINTY .

of acts No Uncertainty .Criteria for Revenue Recognition : Services RECOGNITION OF REVENUE INCOME COMPLETED SERVICE METHOD Recognize revenue when the sole or final act takes place and the service becomes chargeable PROPORTIONATE SERVICE METHOD Recognize revenue by reference to performance of each act ² on the basis of contract value / associate cost / no.

Driven by i) nature of service ii) incidence of costs related to service iii) when the payment of the service will be received . ‡Financial service commissions: .Examples ‡Advertising (Media/Production) commissions: .When equipment is installed and accepted by customers.Service Income .On effective commencement of renewal dates of the related policies ‡Installation fees: .Upon completion of service ‡Insurance agency commissions: .

Time proportion basis taking into account a) Amount outstanding b) Rate applicable ‡Royalties: .Accrual basis in accordance with terms of agreement ‡Dividends: .Criteria for Revenue Recognition : Others ‡Interest: .When owner·s right to receive payment is established .

Ability to asses ultimate collection .Consideration should be reasonably determinable .Of circumstances under which revenue recognition is postponed .But not if uncertainty arises after sale ‡Disclosure: .If not determinable then postpone ‡Collectibility: .Uncertainties in Revenue Recognition ‡Measurability: .With reasonable certainty at time of collection .

International Financial Reporting Standards (IFRS) ‡Significant risks and rewards of ownership transferred ‡Seller retains neither continuing managerial involvement usually associated with ownership nor effective control ‡The amount of revenue can be measured ‡Likely that economic benefits of transaction will flow to the seller ‡The cost incurred or to be incurred in respect of the transaction can be measured reliably .

US GAAP ‡Persuasive evidence of an arrangement exists ‡Delivery has occurred ‡Fee is fixed or determinable ‡Collectibility is reasonably assured .

Alternate Standards: A Comparison Indian GAAP / IFRS Probable that economic benefit will flow to entity Revenue and costs (including future costs) can be measured reliably Seller retains neither management nor control. and transfer of risks and rewards of ownership to buyer US GAAP Collectibity is reasonably assured Vendor·s price is fixed or determinable Delivery has occurred or services have been rendered Stage of completion of Vendor·s price fixed or transaction can be measured determinable .

When price includes a component for subsequent servicing.US GAAP: Similar non barter deals of the entity in past six months . the latter is deferred and recognized over the warranty period ‡Software Revenue Recognition: .Commonalities and differences Examples ‡Warranty and Product maintenance contracts: .US GAAP: Value for element based on Vendor Specific Objective Evidence (VSOE). Usually by the stage of completion . Revenue recognized as element is delivered ‡Barter Transactions (Advertising): .IFRS/Indian GAAP: No guidelines.IFRS/Indian GAAP: At fair value of goods/services received or given .

Incomplete earning process misstatements .Operating characteristics and financial stability .Industry condition .Lack of delivery .Absence of an agreement .Key Issues ‡Risk factor which influence improper Revenue Recognition: .Management characteristics and influence over the control environment .Lack of Internal controls/audit ‡Indicators of Potential Accounting Misstatements: .

CIF vs.Paid by the seller .Sale price includes cost. freight etc.Transfer of ownership takes place . FOB Sales ‡Cost.Sale price does not include any insurance or freight and freight .All insurance. would be borne by the buyer . Insurance and Freight ‡Free on Board ( FOB ): ( CIF ): .Recognize revenues at the time of on receipt of goods by the buyer dispatch . insurance .Recognize revenue on receipt of bill of lading /acknowledged lorry receipt .

SAB 104. EITF 99-17. IAS 18 . EITF 00-21. ‡INDIAN GAAP : AS 7 (REVISED 2002). SOP 97-2. SOP 81-1.References for Details. FTB 90-1 ‡IFRS : IAS 11. AS 9 ‡US GAAP : CON 5..

Foreign Currency Translation .

There is greater focus on the cash flows rather than the currency that influences the pricing. ‡IFRS: Currency of the primary economic environment in which entity operates.Functional Currency ‡INDIAN GAAP: Does not define or require determination of functional currency. It has no hierarchy of indicators. Management should use judgment to determine functional currency if indicators are not obvious. . ‡US GAAP: Emphasizes the primary economic environment in determining an entity·s functional currency. Assumes an entity normally uses the currency of the country in which it is domiciled in recording its transaction.

Translation is at exchange rate in operation on date of transaction.Monetary assets and liabilities denominated in foreign currency are translated at the closing rate.Non-monetary foreign currency assets and liabilities are translated at the appropriate historical rate. as follows: . US GAAP & IFRS have similar requirements regarding the translation of transactions by an individual entity. .TRANSLATION ² The Individual Entity ‡INDIAN GAAP. . .

Income statement accounts are translated using historical rates of exchange at the date of transaction or an average rate as a practical alternative.TRANSLATION ² The Individual Entity contd.Exchange gains and losses arising from an entity·s own foreign currency transaction are reported as part of the profit or loss for the year. . provided the exchange rate does not fluctuate significantly.Non-monetary items denominated in a foreign currency and carried at fair value are reported using the exchange rate that existed when the fair value was determined . . ..

TRANSLATION ² Consolidated Financial Statements When translating financial statements into a different presentation currency IFRS. IFRS and INDIAN GAAP are silent on the translation of equity accounts historical rates are used under US GAAP. US GAAP and INDIAN GAAP require the assets and liabilities to be translated using the closing rate. . Amounts in the income statements are translated using the average rate for the accounting period if the exchange rates do not fluctuate significantly.

The proportionate share of the related cumulative translation difference is included in the gain or loss. . The payment of dividend out of pre-acquisition profits constitutes a return of the investment and is regarded as a partial disposal.Tracking of Translation Differences in Equity ‡INDIAN GAAP: Translation differences in equity are separately tracked and the cumulative amounts disclosed. The cumulative translation difference may be released through income statement. for a partial disposal on a pro rata basis relative to the portion disposed. The appropriate amount of cumulative translation difference relating to the entity is transferred to the income statement on disposal of a foreign operation and included in the gain or loss on sale.

however. ‡US GAAP: Similar to Indian GAAP. ‡IFRS: Similar to Indian GAAP. .Tracking of Translation Differences in Equity contd.. gains and losses are transferred to the income statement only upon sale or complete or substantially complete liquidation of the investment.

‡US GAAP: Similar to IFRS. requires disclosure of the reason for using a different currency. Income statement items are translated ate the exchange rate at the date of the transaction or are permitted to use average rates if the exchange rates do not fluctuate significantly. . historical rates are used in equity. ‡IFRS: Assets and liabilities are translated at the exchange rate at the balance sheet date when financial statements are presented in a currency other than the functional currency.Presentation Currency ‡INDIAN GAAP: It assumes an entity normally uses the currency of the country in which it is domiciled in presenting its financial statements. If a different currency is used.

Foreign Currency Translation ² Hyperinflationary Economy ‡INDIAN GAAP: No specific guidance for foreign currency translation ‡IFRS: Hyperinflation is indicated by characteristic of the economic environment of a country. These characteristic include a) general population·s attitude towards local currency b) prices linked to a price index c) cumulative inflation rate over three years is approaching or exceeds 100% ‡US GAAP: Similar to IFRS .

Functional Currency Translation ² Hyperinflationary Economy ‡INDIAN GAAP: No specific guidance for functional currency translation ‡IFRS: Functional currency use that currency for measurement of transactions.adjusted financial statements. Financial statement for current & prior period are remeasured at the measurement unit current at the balance sheet date in order to present current purchasing power ‡US GAAP: Does not generally permit inflation . The use of reporting currency ( US dollar ) as the functional currency is required .

When amount are translated into currency of a non inflationary economy.Presentation Currency Translation ² Hyperinflationary Economy ‡INDIAN GAAP: No specific guidance for presentation currency translation ‡IFRS: Results & financial position of those entities whose functional currency is the currency of a hyper inflationary economy are translated into a different presentation currency using following procedure: . because the currency of a hyperinflationary economy is not used for measuring its transactions in the hyperinflationary economy .year financial statement ‡US GAAP: Not applicable. comparative amounts are those that were presented as current year amounts in the relevant prior .All item including comparatives are translated at the date of most recent balance sheet .

‡INDIAN GAAP : AS 11 (REVISED 2003) ‡US GAAP : FAS 52.. IAS 29 . IAS 21. FIN 37 ‡IFRS : Framework.References for Details.

US GAAP and INDIAN GAAP ² by Price Water House Coopers: November 2006 .icai 2) Similarities & Differences : A comparison of IFRS.References 1) Http://www.

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