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Indian GAAP , IFRS & US GAAP

a comparison
A Presentation by: Sanjoy Banka, FCA,FCS Reliance infocomm Limited,Kolkata

IGAAP, IFRS & US GAAP Comparison

Presentation topics

Conceptual framework Balance Sheet Income Statement

IGAAP, IFRS & US GAAP Comparison

Conceptual Framework
1. Conceptual frameworks define the fundamental accounting principle and theories for formulation of accounting standards. They also decide : Elements of Financial statements,qualitative characteristics, fundamental assumptions , other concepts etc. 2. Framework statements have been issued in IGAAP and IFRS . In US GAAP, Statement of Financial Accounting Concepts (SFAC) act as framework statement which are detailed and rule oriented . 3. Framework assist in- Standard Setting process, interpretation and application of Accounting standards, harmonisation with other standards, enabling Auditors in forming an opinion wherever there are no standard or standards are silent etc.

IGAAP, IFRS & US GAAP Comparison

Conceptual Framework ..Indian GAAP


ICAI framework statement was issued in July 2000. This is NOT an Accounting standard in itself and does not override any AS.

Users identified as - Investors, Lenders, suppliers, Customers, Employees, Government and Public.
Underlying Assumptions- Accrual basis, Going Concern, Consistency, Qualitative characteristics- Understandability, Relevance, Reliability, Comparability , true and fair view. Elements of FS- Assets, Liabilities, equity, performance, income, expenses, Capital maintenance adjustments. Also defines the guidelines for recognition of elements of Financial statements. Outlines the measurement criteria for elements of Financial statements including Historical Cost, Current cost , Realisable Value Lays down concept of Financial and operating Capital and their maintenance
IGAAP, IFRS & US GAAP Comparison

Conceptual framework.Indian GAAP..


ICAI is working on project to harmonise IGAAP with IFRS . New Accounting standards are on the anvil for Financial instruments, Share based payments, Retirement benefit Plans, Agriculture, Insurance etc. Adoption of Accounting standards issued by ASB is made compulsory for Indian Companies as per Companies Act, GAAP announced by ASB of ICAI. Till date 29 AS announced, and effective 28 GAAP, after withdrawal of AS 8 on R&D. Several guidance notes also issued which members are required to follow. GAAP also pronounced by SEBI, Listing agreement and statutes like Companies Act, RBI Act, Banking Act, IRDA Act , Electricity Act etc. Enterprises have been classified in 3 categories for application of Accounting standards: Level 1, Level 2 and Level 3
IGAAP, IFRS & US GAAP Comparison

Conceptual Framework ..IFRS


IFRS framework was issued in April, 1989. This Framework deals with Objective of Financial statement, Qualititative characteristics, elements of financial statement, Concept of Capital and capital maintenance. Qualitative characteristics- Understandability, Relevance, materiality, Reliability, faithful representation, substance over form, neutrality, prudence, completeness, Comparability and true and fair view Measurement criteria includes PV in addition to Historical Cost, Current cost and Realisable Value Concept of Financial and Physical Capital as well their maintenance enunciated in framework which have also been incorporated in IGAAP. IFRS is required or permitted for use in over 90 Countries for Financial reporting, EU has recently mandated application of IFRS for all listed Companies affecting over 7000 companies .
IGAAP, IFRS & US GAAP Comparison

Conceptual Framework ..US GAAP


Under US GAAP, detailed framework for pronouncing accounting standards are contained in SFAC- Statement of Financial Accounting Concepts .Total seven SFAC have been issued, out of which SFAC-3 is replaced. SFAC forms the basis of pronouncement of FAS. SFAC is not authoritative GAAP, but can be used if no GAAP exists. There are 6 SFAC in force on Objective , Quality Characteristics, Recognition and measurement, Elements and Cash flow. GAAP /SFAC pronouncement are made by FASB which is not an accounting Body like ICAI. AICPA does not pronounce GAAP.

Over 150 FAS announced till date, many of which are amendment / replacement.
Separate Accounting Board for Government Companies called GASB.
IGAAP, IFRS & US GAAP Comparison

US GAAP Hierarchy
SFAC GASB

FAS & FIN, APB Opinion, ARB Bulletin FASB Tech Bulletin, AICPA guides, SOP (AICPA)
AICPA AcSEC Practice Bulletins( FASB Cleared) , FASB EIFT Consensus Positions

AICPA Accounting interpretation, FASB Q&A, other Industry literature and Practices
IGAAP, IFRS & US GAAP Comparison

Conceptual Framework ..Comparison


Historical Costing IGAAP and IFRS permits revaluation in contrast to Historical Cost convention, while US GAAP does not permit revaluation. Only securities and derivatives can be valued at Fair Value under IFRS and US GAAP. True & Fair View: Under IFRS and IGAAP framework , there is an assumption that adoption of IFRS /IGAAP leads to a true and fair presentation, there is no such assumption under US GAAP. Prudence Vs Rules: There is a common allegation against US GAAP, that they are rule oriented and based on specific cases. However this is not true, as FAS are also more detailed and lay down detailed principles for application. No such allegation is leveled against IGAAP and IFRS. Comparative Position : under IGAAP and IFRS, comparative financial figures are to be provided for one previous years, whereas under USGAAP (SEC requirement for listed companies ) comparatives are to be provided for two previous years except for Balance Sheet.
IGAAP, IFRS & US GAAP Comparison

Conceptual Framework ..comparison


Over-riding of Standards IFRS permits that a company may withhold application of IFRS in extremely rare situation, where it is felt that application of IFRS would defeat the very objective of Financial reporting. Disclosure must be made for reason for override. No such override is generally permitted under IGAAP and US GAAP.

Reporting Elements : IFRS prescribes the minimum structure and content of financial statement including Statement of Changes in equity (in addition to Balance sheet, Income statement, Cash flow statement , notes comprising significant accounting Policy and other explanatory notes). Under US GAAP in addition to statement of changes in Equity, Statement of Comprehensive Income is required. Both of these statements are NOT required under IGAAP.

IGAAP, IFRS & US GAAP Comparison

Balance Sheet..IGAAP.
Balance sheet is required under the GAAPs to give disclosure about assets and Liabilities and as a primary financial statement . Format : IGAAP provides two format of Balance Sheet- Horizontal and Vertical format ( Part I of schedule VI to the Companies Act, 1956) IGAAP does not prescribe any current and non current classification. It rather lists out line items in increasing order of liquidity as sources and application of funds. Vertical format requires details of each item in separate schedule, read with notes. Additional disclosures include no of shares held by Holding co as well as the ultimate holding co, aggregate value of quoted investments, their market value, amount of guarantee given by the Company on behalf of directors etc.
IGAAP, IFRS & US GAAP Comparison

Balance Sheet...IFRS (IAS1)


IFRS does not prescribe any format, but stipulates minimum line items like PPE, Investment property, Intangible assets, Financial assets, Biological assets, inventory, receivables etc. Additional line items, subheadings and subtotals shall be presented on the face of BS if relevant. The order of presentation within the group or otherwise in not mandatory. An organisation has an option to adopt Current or Non current classification of assets and liabilities . Deferred Tax Assets not to be shown as Current assets, if Current /non current classification adopted. ( IAS 1.53 ) While many items of disclosure are common, the following items must be disclosed on the face of balance sheet : Biological assets, Tax Liability, Minority Interest etc (IAS 1.66 ) IFRS permits an enterprise to disclose any long term interest bearing liability due for settlement within 12 months,as long term liability if the same is likely to be refinanced and can be supported by adequate documentary evidence.
IGAAP, IFRS & US GAAP Comparison

Balance Sheet...US GAAP


US GAAP also does not prescribe any format , but Rule S-X of SEC stipulates for listed companies minimum line items to be disclosed either on face of Balance sheet or Notes to Accounts like Current Assets ( Cash and cash items, marketable securities, allowance for Bad debts, prepaid expenses, other current assets) and Non Current Assets on asset side and current and non current liabilities on liabilities side.

While many items of disclosure are common, the following items must be disclosed like Unearned Income, Securities of related parties, Minority Interest in consolidated subsidiaries, non current indebtedness to related parties.

IGAAP, IFRS & US GAAP Comparison

Balance Sheet..comparison
Format : IGAAP provides two formats of Balance Sheet- Horizontal and Vertical format and order of presentation as well . IFRS and USGAAP do not prescribe any format , Order of line items: Under US GAAP, items in assets and liabilities are presented in decreasing order of liquidity, whereas under IFRS (if Current and non current order followed ) and IGAAP, line items are presented in increasing order of liquidity. Consolidation : Under IGAAP and IFRS consolidation of Financial statements of subsidiaries is not compulsory until it is required under some other law or regulation, whereas under US GAAP consolidation of results of Subsidiaries and Variable interest entity (FIN 46R) is compulsory. A VIE is an entity in which the organisation does not hold majority interest but is responsible to provide necessary funding support.
IGAAP, IFRS & US GAAP Comparison

Income statement...IGAAP
Under Indian GAAP no format is prescribed , but minimum line items have been specified in Part II of schedule VI to Companies Act, 1956 including Aggregate Turnover, Gross Service revenue for Commission paid to Sole selling agent, Brokerage and discount on sales, depreciation, consumption of stores and spare parts, power and fuel, rent, repairs, rates and taxes etc. Indian GAAP requires disclosure of several additional information by way of notes like Licensed and installed capacity, actual production details, details of imports, forex earnings and outgo, Net Profit computation u/s 349 etc. Any item of expenditure which exceeds 1% of total revenue or Rs 5000/- whichever is higher should be shown as a distinct items and should not be clubbed as Misc expenses. Requires separate disclosure of exceptional and non recurring items.
IGAAP, IFRS & US GAAP Comparison

Income statement... IFRS


IFRS does not prescribe any standard format for income statement but prescribes minimum disclosure includes revenue, finance costs, share of post tax results of JV and associates using equity method, pre tax gain/loss on asset disposal, discontinued operation tax charge, and Net profit or loss etc. Under IFRS , the reporting entity has an option to prepare income statement either by nature of expenses or by Function (Cost of sales method ) (IAS 1.84) Under IFRS , Income is defined as Revenue and gains and expenses are defined to include losses and are decreases in economic activity that result in decrease in equity. Additional disclosure under IFRS include amount of dividend and DPS declared or proposed (IAS 1.95) , Share in profit /loss of associates under equity method, profit/loss attributable to minority interest (IAS 1.82) .
IGAAP, IFRS & US GAAP Comparison

Income statement...US GAAP


Under US GAAP as well there is no prescribed format, SEC guidelines Rule S-X prescribe minimum line items to be shown on the face of income statement. SEC rules also suggest 2 alternatives a) a single step format where expenses are classified by function and b) a Multiple step format where Cost of sales is deducted from Sales . Income can be classified as from net sale of tangible products, operating revenue of public utilities, rentals ,services & other revenue. Revenue from any class which is less than 10% of total revenue can be clubbed with other class. Costs and exp include cost of tangible goods sold, operating exp of public utility, exp relating to rental income, Selling general and admn exp,Provisions . Non operating income like dividend, interest on securities, net profit on securities, misc income as well as non operating exp like loss on securities, misc income ,deductions can be shown in notes to accounts
IGAAP, IFRS & US GAAP Comparison

Income statement... Comparison


Change in accounting policy : Under IGAAP effect for change in accounting policy is given with prospective effect , if the same is material. Only in case of change in method of depreciation, the same has to be applied with retrospective effect. Other disclosures required like need for change etc IFRS requires retroactive application for the earliest period practical and adjustment of opening retained earning. Exemption given for prospective application, if resulting adjustment are not reasonably determinable US GAAP 1) requires prospective application of change in accounting policy and proforma disclosure of effect on income before extraordinary items on the face of income statement as separate section. US GAAP -2) In case of specific situations like change from LIFO method of valuation of stock,accounting for long term construction contract, change from/ to full cost method in extractive Industry and Change in depreciation Policy, retrospective application required to restate opening retained earning. Effect of changes on income before extraordinary items, net income and EPS should be disclosed for all periods on the face of Income statement in the period of change.
IGAAP, IFRS & US GAAP Comparison

Income statement... Comparison


Prior period items : IGAAP (AS 5.15,19) requires separate disclosure of prior period in the current financial statement either as part of current years results or as an alternative approach after determination of current net profit or loss. No restatement of retained earnings are required.however complete disclosure of prior period and its impact on financial statements should be disclosed.

US GAAP (FAS 16) also mandates retrospective application of error and requires restatement of comparative opening balance with suitable
footnote disclosure. IFRS requires that a prior period item/error should be corrected by retrospective effect by restatement of opening balance of assets, liabilities or equities for the earliest period practicable. Entity should also disclose nature of error and the amount of correction for each financial line item. IFRS also requires that such disclosure should not be repeated in subsequent period.
IGAAP, IFRS & US GAAP Comparison

Income statement... Comparison


Discounting : IFRS provides that where the inflow of cash is significantly deferred without interest, discounting is needed. US GAAP also permits discounting in certain cases, while there is no concept of discounting under IGAAP. Persuasive evidence: US GAAP requires availability of a persuasive evidence for revenue recognition with several elements while there is no such requirement in IGAAP and IFRS . Consolidation : US GAAP mandates consolidation of results of subsidiaries and VIEs, whereas IGAAP and IFRS do not mandate consolidation as such except as required under law. Others :There are significant differences in the 3 GAAP on measurement and disclosure of various heads of Income and Expenditure including forex losses, extinguishment of debts, Employee benefits, ESOP, Dividend Tax, Loss on investments etc. leading to reconciliation issues between IGAAP results vis a vis IFRS and USGAAP.
IGAAP, IFRS & US GAAP Comparison

SUMMARY
Conceptual framework: While IGAAP and IFRS have conceptual framework statement, US GAAP has SFAC. Broadly similar principles except Revaluation , True and fair view override, comparative financial statements, statement of changes in equity and comprehensive income. Balance sheet : Indian GAAP provides 2 formats of Balance sheet presentation and minimum line items to be shown on the face of balance sheet. IFRS and US GAAP do not provide any format, but suggest minimum line items. Liquidity order differs in Indian GAAP vis a vis USGAAP and IFRS. Income statement : No format suggested in the 3 GAAP but minimum line items suggested.difference in definition of Income, expenses, treatment of change in accounting Policy, prior period items and miscellaneous items leading to reconciliation issues.

IGAAP, IFRS & US GAAP Comparison

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IGAAP, IFRS & US GAAP Comparison