GENERALLY ACCEPTED

ACCUNTING PRINCIPLES
A comparison of Indian, International and
the United States GAAP

Prepared by-

SARTHAK MALHOTRA (4850)

AMIT SINGH (4853)
DIVAM ANAND (4859)
INTRODUCTION

Financial statements form part of the process of financial reporting. A complete set of
financial statements normally includes a balance sheet, a statement of profit and loss (also
known as ‘income statement’, a cash flow statement and those notes and other statements
and explanatory material that are an integral part of the financial statements.
They may also include supplementary schedules and information based on or derived from,
and expected to be read with, such statements.

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

 Understandability
 Relevance - to be useful, information must be relevant to the decision-making needs of
users.
 Reliability - to be useful, information must also be reliable.
 Comparability - users must be able to compare the financial statements of an
enterprise through time in order to identify trends in its financial position, performance
and cash flows.
 Constraints on Relevant and Reliable Information - timeliness, balance between
benefit and cost, valance between Qualitative Characteristics
 True and Fair View - Financial statements are frequently described as showing a true
and fair view of the financial position, performance and cash flows of an enterprise.

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

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 next year.

HISTORY

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 company’s
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 SEC’s 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.
 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
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.

HISTORY

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))
 Germany (Institut der Wirtschaftsprüfer in Deutschland (IDW) (Institute of Auditors in
Germany) and the Wirtschaftsprüferkammer (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. Revenue Recognition
2. Balance sheet
3. Comprehensive income
4. Derivatives and other financial instruments – measurement of derivative instruments
and hedging activities.
5. Business Combinations
6. Cash Flow Statement
7. Leases
8. Prior period adjustments
9. Accounting for Foreign Currency Transactions
10. Goodwill
11. Negative Goodwill (i.e. the excess of the fair value of net assets acquired over the
aggregate purchase consideration)
12. Related parties
13. Pension / Gratuity / Post Retirement Benefits
14. Stock based Compensation
15. Segment Information
16. Research and development costs
17. JV ( Jointly controlled assets or corporation )
1. Revenue Recognition

 Indian GAAP – dealt by AS 9

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
recognised.

2. 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 and/ 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.

 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 structure—major
classes and amounts of assets—and its financing structure—major 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 organizations—assets,
liabilities, equity (business enterprises) or net assets (not-for-profit organizations),
revenues, expenses, gains, and losses—and 3 elements of financial statements of
business enterprises only—investments 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 period—change 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.

Segregation of current and non-current portions of assets and liabilities is disclosed

only as part of the footnotes.

3. Comprehensive Income

 Indian GAAP – There are no standards available and none are required.

 US GAAP – dealt by Statement no. 52

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 entity’s 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 non-
monetary item is recognised in profit or loss, any exchange component of that gain or
loss shall be recognised in profit or loss.

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.

4. 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.

 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.
5. 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.

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.

 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. The formation of a joint venture

ii. The acquisition of an asset or a group of assets that does not constitute
a business
iii. A combination between entities or businesses under common control
iv. 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.
6. 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:

i. Enterprises whose equity or debt securities are listed whether in India or

outside India.
ii. Enterprises which are in the process of listing their equity or debt securities as
evidenced by the board of directors’ resolution in this regard.
iii. Banks including co-operative banks.
iv. Financial institutions.
v. Enterprises carrying on insurance business.
vi. 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’.
vii. 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.
viii. 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.
7. 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 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.
8. 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
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. restating the comparative amounts for the prior period(s) presented in

which the error occurred; or
ii. 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.
9. Accounting for Foreign Currency Transactions

 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 entity’s 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.

10. 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 acquirer’s 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 cash-generating 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.
11. 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 non-

current 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.

12. Related parties

 Indian GAAP – dealt by AS 18

This Statement deals with related party relationships described below:

i. 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)
ii. 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
iii. 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
iv. Key management personnel and relatives of such personnel
v. 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. the name of the transacting related party

ii. a description of the relationship between the parties
iii. description of the nature of transactions
iv. volume of the transactions either as an amount or as an appropriate
proportion
v. any other elements of the related party transactions necessary for an
understanding of the financial statements
vi. 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
vii. 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
eliminated in the preparation of consolidated or combined financial statements is not
required in those statements. The disclosures shall include:

i. The nature of the relationship(s) involved

ii. 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
iii. 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
 iv. 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

 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. The party is an associate (as defined in IAS 28 Investments in
Associates) of the entity
iii. The party is a joint venture in which the entity is a venturer (see IAS 31
Interests in Joint Ventures)
iv. The party is a member of the key management personnel of the entity
or its parent
v. the party is a close member of the family of any individual referred to
in (a) or (d)
vi. 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)
vii. 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 entity’s parent and, if different, the ultimate controlling
party. If neither the entity’s parent nor the ultimate controlling party produces
financial 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.
13. 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. The enterprise’s 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.
ii. 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. A description of the benefits provided and the employee groups
covered.
ii. A description of the employer's current accounting and funding policies
for those benefits.
iii. 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.

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. A statement of changes in net assets available for benefits;

ii. A summary of significant accounting policies; and
iii. 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.

14. Stock based Compensation

 Indian GAAP – dealt by AS 15 and SEBI

This Statement establishes financial accounting and reporting standards for stock-
based 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 25’s 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. Addressing concerns of users and others.

ii. Improving the comparability of reported financial information by
eliminating alternative accounting methods.
iii. Simplifying US GAAP.
iv. 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.

15. 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. the nature of the products or services

 ii. the nature of the production processes
iii. the type or class of customers for the products or services
iv. the methods used to distribute the products or provide the services
v. 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. similarity of economic and political conditions

ii. relationships between operations in different geographical areas
iii. proximity of operations
iv. special risks associated with operations in a particular area
v. exchange control regulations
vi. 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
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

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.

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. a research phase
ii. 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.
 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. research costs related to activities conducted for others
ii. costs unique to extractive industries
iii. 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.

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 venturer’s share of each of the assets, liabilities,
income and expenses of a joint venture is combined line by line with similar items in
the venturer’s financial statements or reported as separate line items in the
venturer’s 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 venturer’s share of net assets of the jointly controlled entity. The profit
or loss of the venturer includes the venturer’s 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 types—jointly controlled operations, jointly controlled assets and jointly
controlled entities—that 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 venturer’s share of

each of the assets, liabilities, income and expenses of a joint venture is combined line
by line with similar items in the venturer’s financial statements or reported as
separate line items in the venturer’s financial statements.

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
venturer’s share of net assets of the jointly controlled entity. The profit or loss of the
 venturer includes the venturer’s 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?
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.