GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

A comparison of Indian, International and the United States GAAP

ACKNOWLEDGEMENT

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

INTRODUCTION
Financial statements (or financial reports) are formal records of the financial activities of a business, person, or other entity. Financial statements provide an overview of a business or person's financial condition in both short and long term. All the relevant financial information of a business enterprise presented in a structured manner and in a form easy to understand, are called the financial statements. There are four basic financial statements: Balance Sheet: also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and Ownership equity at a given point in time.
1.

Income Statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state.
2.

Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period.
3. 4.

Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their information needs. Qualitative Characteristics of Financial Statements : i) Understandability ii) Relevance iii) Reliability iv) Comparability

1.

Understandability Understandability ensures that a user equipped with the basic knowledge can discern information pertaining to the performance and financial position of the enterprise.

2. Relevance

Since financial statements are for users to make economic decisions, the information must be relevant to the decisions that those users have to make. Whether the information affects the economic decisions of users (materiality) and the nature of information affect relevance as well. Materiality is one of the assumptions used in financial reporting, but it merely contributes to relevance. 3. 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. Users must have confidence in the financial statement, without it being misleading or deliberately constructed in a manner that presents the entity in a favorable light. 4. Comparability Comparability adds a degree of transparency to financial statements by allowing comparisons over time and among entities. Comparability is affected by consistency of presentation and disclosure of accounting policiesparticularly when comparing items among entities that might use different (but equally valid) methods like straight-line/ reducing balance depreciation or FIFO/average cost method. Besides understand ability, reliability, relevance and comparability, other qualitative characteristics of information include completeness, prudence, neutrality, faithful representation and substance over form. Sometimes, there exists a trade-off between or among qualitative characteristics. The financial accountant usually exercises discretion where any conflict might occur.

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" or GAAP. Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and Accounting Standard. 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.

United States GAAP

In the U.S., generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privatelyheld companies, non-profit organizations, and governments. Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and Accounting Standard. Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly-traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB). The US GAAP provisions differ somewhat from International Financial Reporting Standards, though former SEC Chairman Chris Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009.

The Way Back. US GAAP has been used extensively in the United States since the 1930s. The U.S. Securities and Exchange Commission (SEC) was formed out of the crucible of the 1929 Stock Market Crash and the Great Depression. 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. Of course, it was nothing like today. Today, more than half of all US households are invested in our stock markets. In 1929, this figure was much lower. But, even in the early 1900s, businesses relied heavily on the markets for capital. And by the Roaring Twenties everyone seemed interested in the stock market. A telling statistic of the extent of the enthusiasm, perhaps, is the fact that purchases of stock on margin increased 900% between 1921 and 1929. 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. It has been suggested that at a time when the New York Stock Exchange traded the shares of approximately 800 companies, the prices of more than 100 of these were openly manipulated by syndicated stock pools. Disclosure of financial information throughout this period was voluntary. Even for those companies that did provide investors with audited financial statements, the balance sheet and dividends were paramount. Investors seemed to trust

dividend payments rather than income statements as an indicator of a companys financial condition. When the SEC was created in 1934, its enacting legislation authorized the Commission to not only establish disclosure standards for issuers, but also set the accounting standards to be used in preparing these disclosures. Given the complexity of this task, in 1938 the SEC began to look to the private sector for assistance in setting these accounting standards. Accounting standards in the United States have a long and unique history. The strength of US GAAP derives at least partially from the fact that it has been stress-tested, developed and leavened for many decades in an economic environment in which retail investors and not just banks or entrepreneurial families have played, and continue to play, a substantial role. The SECs enacting legislation charges it with setting the accounting standards used by issuers accessing the US capital market. While the SEC today looks to the FASB to set US accounting standards, it retains ultimate responsibility for them. With active oversight of the standard setting process by the SEC through the decades, this model has served accounting well in terms of developing a robust, well-articulated set of standards that well serves and protects the users of financial statements.

About the AICPA

The American Institute of Certified Public Accountants (www.aicpa.org) is the national, professional association of CPAs, with more than 360,000 members, including CPAs in business and industry, public practice, government, and education. It sets ethical standards for the profession and U.S. auditing standards for audits of private companies; federal, state and local governments; and not-for-profit organizations. It develops and grades the Uniform CPA Examination. The AICPA maintains offices in New York, Washington, D.C., Durham, N.C., Ewing, N.J, and Lewisville, Texas.

INDIAN GAAP
In 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). From 1973 to 2000 the IASC has issued 32 accounting standards. These standards, as a matter of fact, most of the countries in the world, which are interested, and confidence in adopting these standards may be followed. The Institute of Chartered Accountants of India (ICAI) is a statutory body established under the Chartered Accountants Act, 1949 (Act No. XXXVIII of 1949) for the regulation of the profession of Chartered Accountants in India. During its nearly six decades of existence, ICAI has achieved recognition as a premier accounting body not only in the country but also globally, for its contribution in the fields of education, professional development, maintenance of high accounting, auditing and ethical standards. ICAI now is the second largest accounting body in the whole world. "That person who is awake among those who sleep" - This is from an ancient Sanskrit text and signifies the function of a Chartered Accountant as a sentinel. The Institute has also introduced a new logo for Members - 'CA' - Alphabets of Trust. The Institute of Chartered Accountants of India (ICAI), recognizing the need to harmonize the diverse accounting policies and practices in use in India, constituted the Accounting Standards Board (ASB) on 21st April, 1977. To date, the Institute of Chartered Accountants of India has issued 31 Accounting Standards. These are numbered AS-1 to AS-7 and AS-9 to AS-31; AS-8 is no longer in force having been merged with AS-26. The compliance of Accounting Standards issued by ICAI have become a statutory requirement with the notification of Companies (Accounting Standards) Rules, 2006 by the Government of India. ICAI has set an internal deadline of aligning its Accounting Standards with IFRS by April 2011.

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC). In April 2001 the IASB adopted all IAS and continued their development, calling the new standards IFRS. Historically, individual countries have established their own versions of GAAP; there has been Japanese GAAP, French GAAP, Indian GAAP, US GAAP and so on. The problem with all of these varying generally accepted accounting principles is that they have differed not just in nuance, depending on the specific issue, but in many cases extraordinarily - so that accounting principles regarding derivatives, insurance or pension treatment in the U.S., for instance, have had almost no similarity to the accounting principles for the same issues in Europe, Asia or elsewhere. Not all countries have had their own GAAP, 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. As a result, they've adopted an accounting regime (or parts of an accounting regime) from an industrialized country. In most cases, however, those systems haven't been adopted lock, stock and barrel, but piecemeal - adding to investor confusion.

The Way Back. International Accounting Standards Committee was founded in June 1973 in London and replaced by the International Accounting Standards Board on April 1, 2001. It was responsible for developing the International Accounting Standards and promoting the use and application of these standards. 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))

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Germany (Institut der Wirtschaftsprfer in Deutschland (IDW) (Institute of Auditors in Germany) and the Wirtschaftsprferkammer (WPK) (Chamber of Auditors)) Japan Nihon Kouninkaikeishi Kyoukai (Japanese Institute of Certified Public Accountants, 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; resumed in 1995). United Kingdom and Ireland (counted as one) (Institute of Chartered Accountants in England and Wales (ICAEW), Institute of Chartered Accountants of Scotland (ICAS), Institute of Chartered Accountants in Ireland (ICAI), Association of Certified Accountants, Institute of Cost and Management Accountants, 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, US GAAP and the IFRS. These are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Balance sheet Stock based Compensation Derivatives and other financial instruments measurement of derivative instruments and hedging activities. Business Combinations Cash Flow Statement Comprehensive income Segment Information Negative Goodwill (i.e. 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 )

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1.

Balance Sheet

Indian GAAP dealt by AS 31, 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,nd/ or for presenting interest, dividend, losses and gains relating to a financial instrument in a particular manner as income/ expense or as distribution of profits, the entity should present that instrument and/ or interest, dividend, losses and gains relating to the instrument in accordance with the requirements of the statute governing the entity.

The objective of AS 21 is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. 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, the obligations of the group and results the group achieves with its resources.

Also, the Balance Sheet does not require segregation of current and non-current portions of assets and liabilities.

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US GAAP dealt by Concepts Statement No. 5, Concepts Statement No. 6 According to Statement 5, a statement of financial position provides information about an entity's assets, liabilities, and equity and their relationships to each other at a moment in time. The statement delineates the entity's resource structuremajor classes and amounts of assetsand its financing structuremajor classes and amounts of liabilities and equity. Statement 6 defines 10 elements of financial statements: 7 elements of financial statements of both business enterprises and not-for-profit organizationsassets, liabilities, equity (business enterprises) or net assets (not-for-profit organizations), revenues, expenses, gains, and lossesand 3 elements of financial statements of business enterprises onlyinvestments by owners, distributions to owners, and comprehensive income. It also defines three classes of net assets of not-for-profit organizations and the changes in those classes during a periodchange in permanently restricted net assets, change in temporarily restricted net assets, and change in unrestricted net assets. The Statement also defines or describes certain other concepts that underlie or are otherwise related to those elements and classes. Balance sheet captions are presented in order of liquidity starting with the most liquid assets. It also requires disclosure of movements in stockholders equity, including the number of shares outstanding for all years presented. Segregation of current and non-current portions of assets and liabilities is necessary.

IFRS dealt by IAS 32, IFRS 7 IAS 32 applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. IFRS 7 requires disclosures by class of financial instrument, 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. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position. Balance sheet captions are presented in the inverse order of liquidity i.e., illiquid items appear earlier. 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.

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Segregation of current and non-current portions of assets and liabilities is disclosed only as part of the footnotes.

2.

Stock based Compensation

Indian GAAP dealt by AS 15 and SEBI This Statement establishes financial accounting and reporting standards for stockbased employee compensation plans. 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. Examples are stock purchase plans, stock options, restricted stock, and stock appreciation rights. 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. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting. The fair value based method is preferable to the intrinsic method for purposes of justifying a change in accounting principle. This statement is not mandatory for un-listed companies.

US GAAP dealt by Statement no. 123 (revised in 2004) US GAAP had similar rules as what SEBI prescribes regarding Stock based compensation. However, there was a revision in the standard, effective 2005, which requires fair value to be expensed for all options. The revised Statement eliminates the alternative to use Opinion 25s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. 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). The principal reasons for issuing this Statement are:

i. ii.

Addressing concerns of users and others. Improving the comparability of reported financial information by eliminating alternative accounting methods.

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iii. iv.

Simplifying US GAAP. Converging with international accounting standards.

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. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees. This statement requires the compensation costs to be disclosed in the financial statements. However, recognition of the compensation costs is not mandatory.

3.

Derivative and other Financial Instrument- Measurement of Derivative Instruments

and Hedging Activities.

Indian GAAP dealt by AS 30 There is normally a single fair value measure for a hedging instrument in its entirety, and the factors that cause changes in fair value are co-dependent. Thus, a hedging relationship is designated by an entity for a hedging instrument in its entirety. Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. 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, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. (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. (c) Hedge of a net investment in a foreign operation as defined in AS 11.

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US GAAP dealt by Statement no. 133 (superseded by statement no. 161) This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. 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. If certain conditions are met, 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, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. 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. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Gains or losses on hedge instruments used to hedge forecast transactions are included in cost of asset/liability.

4.

Business Combinations

Indian GAAP dealt by AS 14 This statement deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. This statement is directed principally to companies although some of its requirements also apply to financial statements of other enterprises.

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Generally speaking, amalgamations fall into two broad categories. 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. 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, liabilities, 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, as a consequence, the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company which is acquired is not intended to be continued. Such amalgamations are amalgamations in the nature of purchase. Hence, 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. (i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. (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, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. (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, except that cash may be paid in respect of any fractional shares. (iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (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. 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. This method is used in accounting for amalgamations in the nature of purchase.

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US GAAP dealt by Statement no. 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), including those sometimes referred to as true mergers or mergers of equals and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. This Statement applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. It does not apply to:

i. ii. iii. iv.

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.

IFRS dealt by IFRS 3 The objective of the IFRS is to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. A business combination must be accounted for by applying the acquisition method, 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, being the entity that obtains control of the other business (the acquiree). 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. Where an acquirer cannot be identified then the pooling of interests method should be adopted.

5.

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, at any time during the accounting period:

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i. ii. iii. iv. v. vi. vii. viii.

Enterprises whose equity or debt securities are listed whether in India or outside India. Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors resolution in this regard. Banks including co-operative banks. Financial institutions. Enterprises carrying on insurance business. All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include other income. All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at any time during the accounting period. Holding and subsidiary enterprises of any one of the above at any time during the accounting period. The enterprises which do not fall in any of the above categories are encouraged, but are not required, to apply this Standard.

US GAAP dealt by Statement no. 95 (superseded by Statement no. 141) This Statement establishes standards for cash flow reporting. 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. This Statement requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category.

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, investing and financing activities. This standard is mandatory for all entities.

6.

Comprehensive Income

Indian GAAP There are no standards available and none are required. US GAAP dealt by Statement no. 52

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The functional currency translation approach adopted in this Statement encompasses: a. Identifying the functional currency of the entity's economic environment b. Measuring all elements of the financial statements in the functional currency c. Using the current exchange rate for translation from the functional currency to the reporting currency, if they are different d. 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. 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, a U.S. company may borrow Swiss francs or a French subsidiary may have a receivable denominated in kroner from a Danish customer). 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. 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. Unrealized gains/losses on investment and Foreign currency translations are disclosed as a separate component of equity.

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. However, exchange differences arising on a monetary item that forms part of a reporting entitys 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. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), 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.

Furthermore, 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 other comprehensive income. Conversely, when a gain or loss on a nonmonetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.

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Hence, 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.

7.

Segment Information

Indian GAAP dealt by AS 3 The objective of this statement is to establish principles for reporting financial information, about the different types of products and services an enterprise produces and the different geographical areas in which it operates. According to this statement, the segments may be classified into either business or geographical segments. 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. Factors that should be considered in determining whether products or services are related include:

i. ii. iii. iv. v.

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, for example, banking, insurance, or public utilities.

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. Factors that should be considered in identifying geographical segments include: i. ii. iii. iv. v. vi. 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

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geographical segments. If the risks and returns of an enterprise are affected predominantly by differences in the products and services it produces, its primary format for reporting segment information should be business segments, with secondary information reported geographically. Similarly, if the risks and returns of the enterprise are affected predominantly by the fact that it operates in different countries or other geographical areas, its primary format for reporting segment information should be geographical segments, with secondary information reported for groups of related products and services.

US GAAP dealt by Statement no. 131 (superseded Statement no. 14) This Statement requires a publicly held business company to present, for each segment of its operations qualifying as a reportable segment, information on revenues, profitability, identifiable assets, and other related disclosures (such as the aggregate amount of a segment's depreciation, depletion, and amortization expense). Similar information is required to be reported on a geographic basis for those companies having foreign operations and export sales. 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. This Statement requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise's general-purpose financial statements. 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), about the countries in which the enterprise earns revenues and holds assets, and about major customers regardless of whether that information is used in making operating decisions. This Statement also requires that a public business enterprise report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. Segments based on information are reviewed by a CODM (Chief Operating Decision Maker)

IFRS dealt by IFRS 8

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The international standard is largely similar to the US GAAP. However, it is mandatory only for listed companies. The segment liabilities are also required to be shown.

8.

Negative Goodwill (i.e. 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, which is a component of stockholders equity.

US GAAP Negative goodwill is allocated to reduce proportionately the value assigned to noncurrent assets. Any remaining excess is considered to be extraordinary gain.

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. Where it does not relate to identifiable future losses and expenses, 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, if any immediately charged to income.

9.

Leases

Indian GAAP dealt by AS 19 The objective of this Statement is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases. 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. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. A lease

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is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form. No quantitative thresholds have been defined.

US GAAP dealt by Statement no. 13 (superseded by Statement no. 145) This Statement establishes standards of financial accounting and reporting for leases by lessees and lessors. Leases are classified as capital and operating leases as per certain criteria. For lessees, a lease is a financing transaction called a capital lease if it meets any one of four specified criteria; if not, it is an operating lease. Capital leases are treated as the acquisition of assets and the incurrence of obligations by the lessee. Capital leases are included under property, plant and equipment of the lessor. Operating leases are treated as current operating expenses. Lease rentals on operating leases are expensed as incurred. Quantitative thresholds have been defined.

IFRS dealt by IAS 17 Similar to US GAAP except that the criteria for distinguishing between capital and revenue leases are different. 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. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

10.

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. This enhances the comparability of the

24

financial statements of an enterprise over time and with the financial statements of other enterprises. 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.

US GAAP dealt by Statement no. 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. 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, that can be specifically identified with business activities of a prior interim period, and that could not be estimated prior to the current interim period. Correction of an error in previously issued financial statement is recognized by restating previously issued financial statements.

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, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by:

i. ii.

restating the comparative amounts for the prior period(s) presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. Prior period errors are generally corrected in the current financial statements. However, 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, the error should be corrected by adjusting the opening retained earnings.

11.

Accounting for Foreign Currency Transactions

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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. A foreign currency transaction should be recorded, on initial recognition in the reporting currency, 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 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.

US GAAP dealt by Statement no. 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. 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. 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. Hence, all exchange differences are included in determining net income for the period in which differences arise.

IFRS dealt by IAS 21 A foreign currency transaction shall be recorded, on initial recognition in the functional currency, 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. 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, exchange differences arising on a monetary item that forms part of a reporting entitys 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. Hence, all exchange differences are included in determining net income for the period in which differences arise.

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12.

Goodwill

Indian GAAP dealt by AS 28 In testing a cash-generating unit for impairment, 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, except for goodwill from amalgamation, which is amortized over 3-5 years.

US GAAP dealt by Statement no. 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. Goodwill is not amortized but goodwill is to be tested for impairment annually.

IFRS dealt by IAS 36 For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirers cash-generating units, or groups of cash-generating units, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. The annual impairment test for a cashgenerating unit to which goodwill has been allocated may be performed at any time during an annual period, provided the test is performed at the same time every year. Goodwill is amortized to expense on a systematic basis over its useful life with a maximum of twenty years. The straight line method should be adopted unless the use of any other method can be justified.

13.

Revenue Recognition

Indian GAAP dealt by AS 9

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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.e., when risks and rewards of ownership are transferred to the buyer and when effective control of the seller as the owner is lost. It must be noted that no detailed industry specific guidelines exist.

US GAAP mainly dealt by Statement no. 48 There is no general principle for revenue recognition. However, industry specific guidelines exist. 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, such as under warranty provisions.

IFRS dealt by IAS 18 Revenues are recognized when all significant risks and rewards of ownership are transferred. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognized.

14.

Related parties

Indian GAAP dealt by AS 18 This Statement deals with related party relationships described below:

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i. ii. iii. iv. v.

Enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, 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, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, 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. 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. If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following:

i. ii. iii. iv. v. vi. vii.

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.

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. This statement is mandatory for listed companies and companies meeting a certain turnover threshold.

US GAAP dealt by Statement no. 57 According to this statement, related parties are determined based on common ownership and control.

Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are

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eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: i. ii. The nature of the relationship(s) involved A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, 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, if not otherwise apparent, the terms and manner of settlement

iii. iv.

IFRS dealt by IAS 24 A party is related to an entity if:

i.

Directly, or indirectly through one or more intermediaries, the party: a. controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries) b. has an interest in the entity that gives it significant influence over the entity c. has joint control over the entity

ii. iii. iv. v. vi. vii.

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, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e) The party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity.

Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties. An entity shall disclose the name of the entitys parent and, if different, the ultimate controlling party. If neither the entitys parent nor the ultimate controlling party produces financial

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statements available for public use, the name of the next most senior parent that does so shall also be disclosed. Hence, 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.

15.

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, depending on the economic substance of the plan as derived from its principal terms and conditions. Under defined contribution plans:

i.

ii.

The enterprises obligation is limited to the amount that it agrees to contribute to the fund. Thus, 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, together with investment returns arising from the contributions. In consequence, 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. The acturial gain/losses are recognized immediately.

US GAAP dealt by Statement no. 81 (superseded by Statement no. 141) This Statement requires the following disclosures about an employer's accounting for postretirement health care and life insurance benefits:

i. ii. iii.

A description of the benefits provided and the employee groups covered. A description of the employer's current accounting and funding policies for those benefits. The cost of those benefits recognized for the period.

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. 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. Acturial gains/losses are amortized.

31

The financial statements shall explain the relationship between the actuarial present value of promised retirement benefits and the net assets available for benefits, and the policy for the funding of promised benefits. Retirement benefit plan investments shall be carried at fair value. In the case of marketable securities fair value is market value. 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. The financial statements of a retirement benefit plan, whether defined benefit or defined contribution, shall also contain the following information: i. ii. iii. A statement of changes in net assets available for benefits; A summary of significant accounting policies; and A description of the plan and the effect of any changes in the plan during the period.

IFRS dealt by IAS 26 The international standard is exactly similar to the US GAAP.

16.

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, an enterprise classifies the generation of the asset into:

i. ii.

a research phase a development phase

This Statement takes the view that, in the research phase of a project, an enterprise cannot demonstrate that an intangible asset exists from which future economic benefits are probable. Therefore, this expenditure is recognised as an expense when it is incurred. In the development phase of a project, an enterprise can, in some instances, identify an intangible asset and demonstrate that future economic benefits fromthe asset are probable. This is because the development phase of a project is further advanced than the research phase.

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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.

US GAAP dealt by Statement no. 2 This Statement establishes standards of financial accounting and reporting for research and development (R&D) costs. This Statement requires that R&D costs be charged to expense when incurred. It also requires a company to disclose in its financial statements the amount of R&D that it charges to expense. Research costs can be capitalized and amortized as intangible assets in the following cases:

i. ii. iii.

research costs related to activities conducted for others costs unique to extractive industries cost of intangibles which have alternative future uses.

All other costs are charged to expense as and when incurred.

IFRS dealt by IAS 38 The international standard is largely similar to the Indian GAAP. 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.

17.

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, liabilities, income and expenses in the financial statements of venturers and investors. Joint ventures take many different forms and structures. This Statement identifies three broad types - jointly controlled operations, jointly controlled assets and jointly controlled entities - which are commonlydescribed as, and meet the definition of, joint ventures.

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Some joint ventures involve the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of the joint venture. The assets are used to obtain economic benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. Hence, the statement allows proportionate consolidation of the jointly controlled assets and corporation, whereby a venturers share of each of the assets, liabilities, income and expenses of a joint venture is combined line by line with similar items in the venturers financial statements or reported as separate line items in the venturers financial statements.

US GAAP dealt by Statement no. 24 This statement deals with the procedures for accounting for joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors. Generally, only the Equity method of accounting is used, whereby an interest in a joint venture is initially recorded at cost and adjusted thereafter for the post-acquisition change in the venturers share of net assets of the jointly controlled entity. The profit or loss of the venturer includes the venturers share of the profit or loss of the jointly controlled entity, except in certain specified industries such as Oil and Gas.

IFRS dealt by IAS 31 This Standard is applied in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place. Joint ventures take many different forms and structures. This Standard identifies three broad typesjointly controlled operations, jointly controlled assets and jointly controlled entitiesthat are commonly described as, and meet the definition of, joint ventures. A venturer may recognize its interest in a joint venture using proportionate consolidation or the equity method.

Proportionate consolidation is a method of accounting whereby a venturers share of each of the assets, liabilities, income and expenses of a joint venture is combined line by line with similar items in the venturers financial statements or reported as separate line items in the venturers financial statements.

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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 venturers share of net assets of the jointly controlled entity. The profit or loss of the venturer includes the venturers share of the profit or loss of the jointly controlled entity.

CONVERGENCE with the IFRS Users of financial statements have always demanded transparency in financial reporting and disclosures. However, the willingness and need for better disclosure practices have intensified only in recent times. Globalization has helped various companies raise funds from offshore capital markets. This has required the companies, desirous of raising funds, to follow the Generally Accepted Accounting Principles (GAAP) of the investing country. The different disclosure requirements for listing purposes have hindered the free flow of capital. This has also made comparison of financial statements across the globe impossible. A movement was initiated by an International body called International Organization of Securities Commissions (IOSCO), to harmonize diverse disclosure practices followed in different countries. The capital market regulators have now agreed to accept IFRS (International Financial Reporting Standards) compliant financial statements as admissible for raising capital. This would ease free flow of capital and reduce costs of raising capital in foreign currencies. 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. This poses a great challenge to the preparers of financial statements and also to the auditors. A single set of global accounting standards would improve investor confidence in the market, so long as they are high-quality, sufficiently comprehensive and rigorously applied. They would serve to increase market efficiency by allowing investors to draw better comparisons among investment options. They would also lower costs for issuers. Issuers would not have to incur the cost of preparing financial statements using different sets of accounting standards. In the past, investors had to look at financials produced by companies worldwide particularly outside the major industrialized countries - with some or much skepticism, and question the veracity of those numbers. Could a potential stakeholder examine the financial results of a major clothing manufacturer in the United States or Canada, for instance, and compare those results with figures from competitors in China, Thailand or Brazil to decide which organization truly represents a better investment?

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The answer: Not necessarily, and only with great difficulty.

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, sloppily managing numbers or misrepresenting the relationship between theoretically privately held companies and the governments in the countries where those companies are based. Before IFRS, true transparency in numbers among companies worldwide simply did not exist, or was deemed possible. As a result, cross-border investments were curtailed, as was the growth of the overall global economy, particularly in emerging-market countries. In the past, 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. With the implementation of IFRS, things are set to change.