INDIAN GAAP Vs US GAAP

Ronita A (1)
Shashikant S
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Ashutosh
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Shraddha T
(47)
Kiran P (35)
Arun P (32)
Piyush P (30)
Sachin S ( 42)

Introduction to GAAP
Indian Accounting Standards (AS) & US GAAP
Why US GAAP
Comparison between Indian GAAP Vs US GAAP
AS2 Vs ARB 43 Valuation of Inventories
AS28 Vs SFAS 144 Impairment of Assets
AS17 Vs SFAS-131 - Segmental Reporting
AS21 Vs SFAS-94 - Consolidation of Balance Sheet
Agenda
What is GAAP?
Books of Original
Entries
Subsidiary
Books
Ledger Accounts

Accounting
Practices /
Accounting
Standards
(GAAP)
Profit & Loss
Accounts
Balance Sheet
Cash flow
Statements
Etc.
Input / Row
Material
Process Output
Generally Accepted Accounting Principles (GAAP) :-
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
government authorities.
PRINCIPLES OF GAAP
GAAP is based on a few principles which include
Consistency
Relevance
Reliability
Comparability
Indian Accounting Standards - Principle based
In India the Institute of Chartered Accounts of India (ICAI) is
responsible to frame guideline and standards relating to
various accounting issues.
US GAAP - Rule-based
In US Financial Accounting Standards Board (FASB)
establishes GAAP for public and private companies.

PRINCIPLES OF GAAP
There are significant differences between Indian
GAAP and US GAAP. US GAAP stipulate stringent
accounting treatment as well as disclosure norms,
whereas their Indian GAAP in many cases have
relaxed requirements e.g. AS 3,AS 17,AS 18.
Similarly, there are several areas where no
Accounting Standard have been issued by ICAI .
These differences lead to wide variations when
Financial Results of Indian Companies are
computed under US GAAP and it is found that
Profits computed under US GAAP are generally
lower.

Why Compare?
Indian GAAP & US GAAP
In Indian GAAP financial statements are prepared
according to the principal of conservatism which states that
Anticipate no profits and provide for all losses

And in US GAAP conservatism is not considered- Revenue
is recognized as and when it is earned or realized or
realizable.

For example a media company recognizes revenue when
the ads are aired even if the payment is not received or
where payment is received in advance.





Valuation of Inventories (AS2 Vs ARB
43)
Inventories includes assets that are held in the normal
course of business for sale or assets in process of
production for such sale or materials consumed for
such production process.
INDIAN GAAP AS 2 US GAAP ARB-43
BASIS OF MEASUREMENT
As per Indian GAAP inventories are valued at
lower of cost or Net realizable value.
As per us GAAP the prime basis for
accounting for inventory is cost.
CALCULATION OF NET REALISABLE VALUE (NRV)
NRV = SELLING PRICE SELLING EXPENSES NRV = SELLING PRICE SELLING EXPENSES
PROFIT.
METHODS USED FOR VALUATION
FIFO, WEIGHTED AVG COST METHOD FIFO, LIFO, WEIGHTED AVG COST METHOD
Companies following above methods - Aditya
Birla Nuvo Ltd, Pidlite, Tata Motors
Multinational companies like ABBOTT,
Apple, American express, Microsoft,
Verizon, Pfizer, Wallmart (LIFO), .
Impairment of Assets (AS28 Vs SFAS
144)

If recoverable amount of an asset < carrying amount
Carrying amount should be reduced to its recoverable
amount
This reduction is an impairment of loss


Illustration
Company purchased $2,000,000 of equipment
(to be used in the production of a new type of laser printer)
Depreciation is determined over a useful life of six years
At the beginning of year 3 :
- the machine's book value : reduced by accumulated depreciation
to $1,400,000 (given)
At that time,
- new technology is developed
causing a significant reduction in the selling price
as well as a reduction in anticipated demand for the product.

Impairment of Assets (AS28 Vs SFAS
144)
Management estimates that the equipment will be
useful for only two more years and will have no
significant residual value.

Management must decide if the events occurring in
year 3 warrant a write-down of the asset below
$1,400,000.

A write-down would be appropriate if the company
decided that it would be unable to fully recover this
amount through future use.


Impairment of Assets (AS28 Vs SFAS
144)
Impairment loss : recognised as an expense in statement
of profit and loss immediately
For revalued assets : deducted from revaluation reserve.

A disclosure note is needed to describe the
impairment loss.
A description of the impaired asset or asset group
The facts and circumstances leading to the impairment
The amount of the loss if not separately disclosed on
the face of the income statement
The method used to determine fair value.

Applicability
Applicable to
Not Applicable to
Fixed assests
Intangible assests

Inventories
Asset arising from
construction contract
Financial asset &
contractual right to
receive cash (debtors)

Standard is effective from 1-4-2005
exception : effective from 1-4-2004
1) whose equity shares are listed in stock exchange or in the
process of listing
2) whose turnover exceeds 50 crores

Todays Discussion
PROPERTY, PLANT, AND EQUIPMENT & Finite-
Life INTANGIBLE Assets

Indefinite Life INTANGIBLE Assets OTHER
THAN Goodwill

GOODWILL

REVERSAL


PROPERTY, PLANT, AND EQUIPMENT & Finite-Life INTANGIBLE
Assets
The Jasmine Tea Company has a factory that has significantly
decreased in value due to technological innovations in the
industry.

U.S. GAAP : - there is no impairment loss
because the sum of undiscounted future cash flows
exceed the book value

INDIAN GAAP : there is impairment loss
book value of $18.5 million
The recoverable amount is $16 million,
Because its higher of :
NPV (value-in-use) : ($16 million)
NSP (fair value less costs to sell) : ($15.5 million).
Impairment loss : $2.5 million. ( 18.5 16 )

Indefinite Life INTANGIBLE Assets OTHER THAN
Goodwill
U.S. GAAP : The impairment loss is measured as the
difference between book value and fair value,

While calculating NSP : cost of disposal is reduced only when the
asset is to be disposed off
If certain criteria are met, indefinite-life intangible assets should be
combined for the required annual impairment test.

INDIAN GAAP : Impairment loss is the difference between book
value and the recoverable amount (higher of NPV or NSP )

NSP is calculated by reducing cost of disposal from its Fair value
irrespective of the fact whether asset is to be disposed off or not
indefinite-life intangible assets may not be combined with other
indefinite-life intangible assets for the required annual impairment test.


GOODWILL
U.S. GAAP : only Bottom-Up test is followed



2010
Upjane Corp.
$400 million
$100 million
F.V.
Goodwill
Pharmacopia
acquisition
$500 million
GOODWILL
End of 2011
Pharmacopia
C.V. (including goodwill : $100)
F.V. (except goodwill)
F.V.
$440 million
$360 million
$335 million
Impairment test performed by
Upjane corp
GOODWILL
Step I : Recoverability
Book value (440) > Fair value (360)
impairment loss is indicated
GOODWILL
implied F.V. of Goodwill
=
units F.V.
-
FV except GW
$360 million $335 million
$25 million
Therefore, Implied Fair Value of Goodwill = $25 million
GOODWILL
BV of Pharmacopia s net assets : $440 million
(including $100 goodwill asset)
BV of Goodwill
=
$100 million
Impairment loss on GW = BV - implied FV
-
$25 million
$100 million
$75 million
Year 2011
SL
Recognized
Goodwill @ 25 lacs
acquired
X Y Z
77 lacs
C.V. of assets (except Goodwill) of X,Y, Z
Z Y X
20 lacs 25 lacs 30 lacs
19 lacs
R.V. (estimated)
2001
INDIAN GAAP : if required, both Bottom-Up & Top-down are followed

Senario:-
Goodwill can not be allocated on a reasonable and consistent basis to
the CGU under consideration
AL
GOODWILL ...(Contd.....)
1st stage : AL performs bottom up test for X
X
20 lacs
19 lacs
1 lacs
C.V. Except Goodwill
Less R.V.
Impairment loss
allocated to assets of Div.X (except Goodwill)
Year 2004
GOODWILL ...(Contd.....)
C.V. (except goodwill)
5 lacs
80 lacs
C.V. Goodwill
Total C.V.
revised C.V. 79 lacs
R.V. 77 lacs
Impairment loss 2 lacs
Larger CGU : SL
X Y Z
20 lacs
2nd stage : AL performs Top down test for X
25 lacs 30 lacs
GOODWILL ...(Contd.....)

Therefore, Goodwill should be written down to 3 lac
In the P & L account of year 2004,
AL recognises impairment loss on account of goodwill at Rs. 3 lac &
Impairment loss of other asset of division X at Rs. 1 lac

REVERSAL
U.S. GAAP : Prohibits the reversal of impairment loss

INDIAN GAAP : It is permitted.

External sources of information
The assets market value has increased significantly during the period
Significant changes during the period
Changes in discount rate used in calculating the assets value in use

Internal sources of information
significant changes with a favourable effect on the enterprise
Evidence is available from internal reporting




Segmental Reporting (AS17 Vs SFAS
131)
To Better understand the performance of the
enterprise
To Better Assess the risks and returns of the
enterprise
To make more informed Judgement about the
enterprise as whole



ICAI FASB
As per Indian GAAP, Segmental Information
should be prepared in confirmative with AS1 (
Accounting policies)
As per US GAAP doesn't prescribe the
accounting policies to be used.
As per Indian GAAP, Segmental &
Geographical reporting in compulsory
As per US GAAP, Presentation of only operating
Segmental reporting is compulsory
Consolidated Balance Sheet (AS21 Vs SFAS 94)
.
ICAI FASB
Two major aspects:-

1) Control

2) Requirement
Consolidated Balance Sheet : - A financial statements of a parent and its
subsidiaries as a single economic entity.
Major Difference between AS21 Vs SFAS 94

ICAI FASB
Indirect control in companies are
considered as subsidiaries.
Only majority owned companies are
considered as subsidiaries.
IC AI- S hould be part of C BS F AS B - c an not be part of C BS
X
1) C ontrol
Major Difference between AS21 Vs SFAS 94


ICAI FASB
As per Indian Balance Sheet - 69
subsidiaries are taken in to accounts
for preparation of Consolidated
Balance Sheet (CBS)
As per US GAAP only - 65 subsidiaries
are taken in to account for preparation
of Consolidated Balance Sheet (CBS)
Consolidated Balance Sheet of Tata Motors Ltd. FY 11-12
Figures in Rs. Crores Indian Balance Sheet 20-F US Balance Sheet Difference
Assets 145,382.64 142,921.26 2,461.38

Equity & Liabilities 145,382.64 142,921.26 2,461.38

Net Profit 13,516.50 11,644.04 1,872
Figures in Rs. Crores
Major Difference between AS21 Vs SFAS 94
ICAI FASB
Standalone statement is mandatory
requirement as per ICAI
Standalone statement is not permitted
as per FASB
As per ICAI, Only listed companies are
required to prepare Consolidated
Balance Sheet (CSB) as per format
prescribed.
US GAAP Consolidated Balance Sheet is
compulsorily requirement.
2) Requirement
Major Difference between AS21 Vs SFAS 94


ICAI FASB
Both, Standalone & Consolidated Balance
sheets are required as per Indian GAAP,
hence it provides more information to stake
holders.
Only consolidated statement might mislead
to stake holders in absence of Standalone
statement.
Consolidated balance sheet is inflated with
figures even though company doesn't have
majority contol in subsidairy's business
affairs.
Figures of only majority stake holding are
included in CBS, Hence it will reduce the
chances of inflating CBS.
Observation
Thank you..