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Generally Accepted

Accounting Principles
(GAAP) and the
Accounting Environment
The Development of Financial
Accounting and Reporting Standards

Concepts,
principles, and
procedures were
developed to meet the
needs of external
users (GAAP).
Introduction
Financial accounting information must be
assembled and reported objectively.
Third-parties who must rely on such
information have a right to be assured that
the data are free from bias and
inconsistency, whether deliberate or not.
For this reason, financial accounting relies
on certain standards or guides that are
called "Generally Accepted Accounting
Principles" (GAAP).
Introduction
Principles derive from tradition, such as the
concept of matching.

In any report of financial statements (audit,


compilation, review, etc.), the
preparer/auditor must indicate to the reader
whether or not the information contained
within the statements complies with GAAP.
Generally Accepted Accounting
Principles (GAAP)

The profession has developed GAAP that


present fairly, clearly and completely the
financial operations of the enterprise.

GAAP consist of authoritative pronouncements


issued by certain accounting bodies.
What’s GAAP?
The set of concepts, conventions, rules and
procedures necessary to define accepted
accounting practices at a particular time is
referred as Generally Accepted Accounting
Principles (GAAP).

GAAP represents functional positions that have


been agreed upon.
Basic Accounting Concepts
Business entity concept
Money measurement concept
Historical cost concept
Revenue realisation concept.
Accounting period
Matching
Going concern
Accrual
Conservativeness
Methods of Accounting

Accruals or mercantile basis

Cash basis

Hybrid system
What’s GAAP?
The corporate accounts and financial
statements are prepared and presented on the
basis of GAAP. The accounts are prepared
and presented on the basis of:
1. Conceptual Framework of financial statements
2. Accounting Principles
3. Accounting Standards formulated by the ICAI
4. Requirements of regulatory bodies like the
SEBI, RBI
5. Requirements of the Income Tax Act
Accounting Principles &
Policies
Imagine that you are a
business owner and you
take copies of your financial
records (‘books’) to four
different accountants. You
ask each one to calculate
your profit for the year. A
fortnight later they provide
you with their answers.
Accounting Principles &
Policies
“.. based on cash in your bank at end “.. after re-valuing all
December compared to prior year, you inventory at future
pretty much break even in 2005.”
purchase price and,
assuming a successful
outcome to ongoing
“.. by the time I have written litigation, you have a
off all your old inventory and healthy profit of Rs.xxx.”
overdue receivables and
provided for my fee, you
incurred a significant loss
(Rs.xxx).”
“an interesting year 2009 ..
how much would you like
your profit to be?”

Need for guidance & consistency.


ISSUES
Level of “judgement”.
Consistency between time periods.
Comparability between companies.
Reliability of financial information.
Risk of financial controls/ surprises.

Need for Accounting Standards


Accounting Standards
“Accounting standards codify the generally accepted
accounting principles.
 They lay down the norms of accounting policies
and practices by way of codes or guidelines to direct
as to how the items appearing in the financial
statements should be dealt with in the books of
accounts and shown in the annual reports.
 They present the general principles to be put to
application using professional judgement. They bring
about uniformity of assumptions, rules and policies
adopted in financial reporting and thus ensure
consistency and comparability.
Need to Develop Standards

Various users Financial Statements


need financial Balance Sheet
Income Statement
information Statement of Stockholders’ Equity
Statement of Cash Flows
Note Disclosure

The accounting profession


has attempted to develop a Generally
Generally Accepted
Accepted
set of standards that are
Accounting
Accounting Principles
Principles
generally accepted and
universally practiced. (GAAP)
(GAAP)
FASB’s Standard-Setting
Process
 Identification of problem.
 The task force.
 Research and analysis.
 Discussion memorandum.
 Public response.
 Exposure draft.
 Public response.
 Statement issued.
Accounting Standards
Institute of Chartered Accountants of India is
empowered for issuance of Accounting
Standard in India.

So far ICAI has issued 31 Accounting


Standards and AS-32 is under preparation.

CBDT is also empowered to issue AS for


appropriate accounting method for taxation.
Plethora of GAAPs
US GAAP

UK GAAP

Indian GAAP

Country specific accounting standards


BURNING ISSUE

HARMONISATION OF ACCOUNTING
STANDARDS OF VARIOUS
COUNTRIES/ ECONOMIC REGIONS
WHY
Globalisation – opening of economies/ tariff barriers
GLOCAL companies/ MNCs
Access to international capital markets
Global listings/ overseas operations

Need for global accounting fraternity to


communicate in one language, without
having to acquire newer skill sets
STRUCTURE - IGAAP
Accounting Standards are issued by the ASB of ICAI

31 Accounting Standards so far – Effective 30

Other governing statutes – Companies Act/ SEBI


guidelines/ Govt circulars

Broadly – IGAAP is close to IFRS


STRUCTURE - USGAAP

FASB – designated body to issue accounting


standards (FAS) in the private sector

Recognised by SEC/ AICPA

Various other bodies/ pronouncements/ hierarchy


also exist

Separate Accounting Standard Board for Govt.


companies (GASB)
STRUCTURE - IFRS
International Financial Reporting Standards (IFRS) are
issued by IASB from 2001 onwards
Uptill 2000 – International Accounting Standards
Committee (IASC) would issue IAS.
IASB adopted all the 41 IAS from 2001 onwards.
EU has made it mandatory for all the listed companies on
a European Stock exchange to use IFRS by 2005.
Non compliance of IFRS may lead to delisting
Various Countries are in the process of aligning their
Accounting Standards to IFRS
Steps towards harmonisation of USGAAP/ IFRS have
been taken.
VISION

GLOBAL
ACCOUNTING
MARKET
PLACE
Institutions/Accounting Bodies that
influence Indian GAAP
Dept. to International International
Company Accounting Federation of
Affairs Standard Accountants
Board

Securities &
Reserve
Exchange Indian Bank of
Board of
India
GAAP India

Institute of Comptroller
Chartered Income Tax And Auditor
Accountant of Authorities General of
India India
International Organisations:
International Accounting Standards
Board (IASB)
Successor to International Accounting Standard
Committee (IASC)
Develops set of AS that will be acceptable
worldwide
Up to January 1, 2004, IASB has issued 41
International Financial Reporting Standards or
International Accounting Standards
The IASB consists of 14 members (12 full-time
& 2 part-time)
International Accounting Standards
Board (IASB)
Established in 1973 to narrow the
range of differences in accounting
standards.
Increase in international trade has
motivated the IASB to attempt to
eliminate alternative accounting
treatments.
IASB contd…
The members are appointed by the Trustees
of International Accounting Standards
Committee Foundation
All companies in the union have to comply
with the IASB’s Standards as per
announcement by the European Union w.e.f.
January 1, 2005
The ICAI has committed to formulate national
accounting standards in tune with the IASB,s
standard as far as possible
International Federation of
Accountants (IFA)

Is primarily concerned with bringing international


harmony in matters such as education, ethics and
auditing practices
International Organisation of Securities
Commissions (IOSC) and the United States
Securities and Exchange Commission (USSEC)
are associations of securities regulators
Plays an important role in improving accounting
and disclosure regulation in securities market
THE END

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