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!

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

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

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

Financial Statements .

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

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

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 .

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

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

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. Other industry regulations prescribe industry-specific format of income statement. ‡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. Expenses are presented by either function or nature.

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

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

It can be prepared by two ways: Direct or indirect method. Indirect method (Cash flow is derived from adjusting net income from transaction of non cash in nature such as depreciation ).However only indirect method is prescribed for listed enterprises & direct for insurance companies. 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. Direct method (Cash flow is derived from aggregating cash receipts & payments associated with operating activities) . 100 million at any point of time during accounting period.

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

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

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

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

Revenue Recognition .

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. . royalties and dividends.

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

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

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

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

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

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

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 .

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 .Alternate Standards: A Comparison Indian GAAP / IFRS Probable that economic benefit will flow to entity Revenue and costs (including future costs) can be measured reliably Seller retains neither management nor control.

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

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

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

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

Foreign Currency Translation .

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

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

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 .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.

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

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 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. for a partial disposal on a pro rata basis relative to the portion disposed. The proportionate share of the related cumulative translation difference is included in the gain or loss. The cumulative translation difference may be released through income statement. .

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

. Income statement items are translated ate the exchange rate at the date of the transaction or are permitted to use average rates if the exchange rates do not fluctuate significantly. If a different currency is used. requires disclosure of the reason for using a different 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. ‡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. historical rates are used in equity. ‡US GAAP: Similar to IFRS.

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 .

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 .adjusted financial statements.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.

because the currency of a hyperinflationary economy is not used for measuring its transactions in the hyperinflationary 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: . comparative amounts are those that were presented as current year amounts in the relevant prior .When amount are translated into currency of a non inflationary economy.All item including comparatives are translated at the date of most recent balance sheet .year financial statement ‡US GAAP: Not applicable.

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

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

Thank You .