Chapter 6 Accounting Standards

Every country has its own set of industry approved accounting and reporting standards With globalization it became necessary to agree on commonly accepted standards in order to bring uniformity in reporting so that analysis can be true and fair The three main ones are IFRS, US GAAP and Indian GAAP IFRS (International Financial Reporting Standards) - Adopted by the International Accounting Standards Board (IASB) - Evolved from the International Accounting Standards (IAS) which were issued between 1973 and 2001 by the boards of the International Accounting Standards Committee (IASC) - In April 2001, IASB improved on IAS and renamed it IFRS US GAAP (US Generally Accepted Accounting Principles) - Generally accepted, not written in law - Mandatory for publicly traded companies as per US Securities and Exchange Commission (SEC) - Given by Financial Accounting Standards Board (FASB) which is the highest authority in the US for accounting principles Indian GAAP - The Institute of Chartered Accountants of India (ICAI) is a member of International Federation of Accountants (IFAC) - It is expected to promote the IASB standards, while at the same time harmonizing it with Indian standards. - The highest authority in India for accounting principles is the Accounting Standards Board (ASB) set up on 21st April, 1977 -

SR NO 1

PARTICULARS INDIAN GAAP Revenue No detailed industry Recognition specific guidelines. In may follow IFRS model, or may recognise revenue on a percentage of completion basis Share Issue Expenses Considered as a deferred expense and amortized Does not need segregation of current and non-current portions of assets and liabilities Compulsory only for: (a) Listed companies (b) Companies meeting turnover limits Include the effect in the statement of the current year

Balance Sheet

US GAAP Industry specific guidelines exist. These guidelines may be different from IGAAP guidelines Written off if incurred against proceeds of capital Segregation necessary

IFRS Revenues are recognised after transferring all risks and rewards of ownership. No specific guideline

Disclosed only as part of footnotes

Cash Flow Statement

Compulsory Compulsory for all entities for all entities

Correction o fundamental errors

Business Combinations

Restate comparatives. Adjustments required to be made to previously issued financial statements Pooling of interest Only method can only be purchase used for method is amalgamation/merger. used. For other business combinations, purchase method is used

Include cumulative effect in current year income statement. For material items, restate comparatives If it an acquisition, then purchase method should be used. If the acquirer cannot be identified, then the

Goodwill

Annual capitalization and testing of goodwill for impairement (changes). In case of amalgamation, testing of goodwill is done every 3-5 years

Stock options to Non-employees

No specific guidance

Stock Based Compensation

10.

Dividends

SEBI requires compensation cost to be recognized based on intrinsic/fair value. This is not compulsory for nonlisted companies Dividends are reflected in the financial statements of the year to which they relate even if proposed or approved after the year end

pooling of interests method should be adopted Annual Goodwill is testing of amortized to goodwill in expense on a order to systematic properly basis over its reflect useful life changes. with a Amortization maximum of is never done. 20 years. Preferably, straight line method should be used unless use of other method can be properly justified Complex Disclosures guidance required but with respect no guidance to on recognition measurement and date and measurement timing of recognition of expense Fair value Compensation has to be costs to be expensed for disclosed, all options. however it is not mandatory Dividends are accounted for when approved by the board or shareholders. If the Dividends are classified as a financial liability and are reported in the income statement as

approval is after the year end, the dividend is not considered as a subsequent event to adjusts the financials

an expense. If dividends are declared subsequent to the balance sheet date, it is not recognised as a liability.