Accounting standards - Comparative study by veeru5656

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									Recd from Mr.Agarwal, Prakash (CAP) [Prakash.A@GEIND.GE.com] on 23.03.02

Accounting standards – Comparative study

   Financial statements
     – Indian GAAP: Balance sheet, Profit and loss account and Cash
        flows statement* (*only in case of listed companies). Comparative
        financial statements of previous period necessary
     – US GAAP: Balance sheet, Income statement, Statement of
        stockholders’ equity and statement of cash flows. Balance sheet for
        two years and Income statement, Statement of stockholders’ equity
        and Cash flows statement for three years* (*two years for non-
        listed companies)
     – IAS: Balance sheet, Income statement, Statement of changes in
        equity, cash flows statement and accounting policies and notes.
        Comparative information for previous period necessary

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    Accounting standards – Comparative study

 Accrual concept
   – AS 1 and Sec. 209(3)(b) of the Companies Act, 1956
   – US GAAP SFAC 6
   – IAS 1
 Going concern assumption
   – AS 1
   – US GAAP APB 13, SAS 59
   – IAS 1



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    Accounting standards – Comparative study

 Materiality
   – AS 1
   – US GAAP SFAC 2
   – IAS 1
 Consistency
   – AS 1
   – US GAAP SFAC 2
   – IAS 1



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    Accounting standards – Comparative study

   Accounting changes – Indian GAAP
     – Change in an accounting policy permitted only if
         Change required by any statute

         For compliance with any other AS

         Results into a more meaningful presentation

     – AS 5 requires disclosure of change, if impact material
     – Impact of change to be reported in the period of change




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    Accounting standards – Comparative study

   Accounting changes – US GAAP
     – Change in principle, estimate or reporting enterprise
     – Cumulative effect of a change in principle to be
       included in net income of the period of change net of
       tax effects after extraordinary items except certain types
       of changes
     – Proforma effect of retroactive application of principle
       to be shown on the face of income statement
     – A change in accounting estimate shall be reported in the
       current period or both current and future periods
     – Correction of an error is not an accounting change.
       Should be reported as a prior period adjustment
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    Accounting standards – Comparative study

   Accounting changes – IAS
     – A change in accounting policy is to be applied
       retroactively unless amount is indeterminable
     – Opening retained earnings adjusted for cumulative
       effect and comparative information is restated
     – A change in accounting estimate is reported in the
       current period or both current and future periods
     – Correction of a fundamental error that relates to prior
       periods should be reported by adjusting the opening
       balance of retained earnings. Comparative information
       should be restated unless impracticable

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    Accounting standards – Comparative study

   Inventories
     – Indian GAAP
         Cost or net realisable value (NRV) whichever lower

         Cost determination – FIFO or weighted average

     – IAS
         Cost or NRV whichever lower

         Cost determination methods includes LIFO also

          however, simultaneous disclosure of lower of NRV
          or FIFO/weighted average/current cost required

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    Accounting standards – Comparative study

   Inventories (contd…)
     – Lower of cost or market
     – Items like precious metals having a fixed monetary
       value with no substantial cost of marketing may be
       valued at such monetary value
     – Agricultural, mineral and other products, the units of
       which are interchangeable and have an immediate
       marketability at quoted price may be valued at stated
       sales prices less costs to sell


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    Accounting standards – Comparative study

   Research and development
     – Indian GAAP
          R&D costs may be deferred if certain criteria are satisfied such
           as identification of clearly defined product or process,
           demonstration of technical feasibility study, marketability of
           the product or service etc.
     – US GAAP
          Benchmark treatment is that all R&D expenses are charged to
           income when incurred
     – IAS
          Research costs to be charged when incurred, development
           costs may be recognised as intangible asset if certain criteria
           are satisfied

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    Accounting standards – Comparative study

   Property plant and equipment – Indian GAAP
     – Carried at historic cost less depreciation or at revalued amount
     – Foreign exchange gains and losses adjusted to carrying value if
       relate to the funds borrowed for acquisition of assets
     – Upward revaluation possible
     – Assets retired from active use and held for disposal are stated at the
       lower of net book value or net realisable value and are disclosed
       separately
     – If revalued, entire class of an asset shall be revalued and the basis
       of revaluation to be disclosed
     – Depreciation at rates specified in Sch. XIV or at higher rates


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    Accounting standards – Comparative study

   Property plant and equipment – US GAAP
     – No specific pronouncement
     – Upward revaluation not permitted in any case
     – Foreign exchange gains or losses on funds borrowed for
       acquisition of assets to be charged to income
     – No depreciation rates specified, to be determined on the
       basis of estimated useful life




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    Accounting standards – Comparative study

   Property plant and equipment – IAS
     – Upward revaluation possible
     – Exchange losses on settlement of foreign currency
       liabilities to be charged to income (can be adjusted to
       carrying amount of related asset only in certain
       circumstances as an alternate treatment)
     – No depreciation rates specified, to be determined on the
       basis of estimated useful life



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    Accounting standards – Comparative study

   Interest capitalisation
     – Definition of qualifying asset as per all GAAPs are same except
        that the US GAAP also includes investments accounted for by
        using the equity method when the investee has activities in
        progress to commence its planned principal production
        provided it uses the funds to acquire qualifying assets
     – Indian GAAP disclosure: accounting policy adopted for
        borrowing costs and amount of interest capitalised
     – US GAAP disclosure: Interest capitalised. No specific
        requirement to disclose accounting policy
     – IAS disclosure: In addition to Indian GAAP requirements, the
        capitalisation rate used to determine the borrowing costs shall
        also be disclosed

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    Accounting standards – Comparative study

   Segment information
     – Applicability
     – Business segment, geographical segment and
       operating segment
     – Unit or division producing products consumed
       internally
     – Accounting policies/principles used to disclose
       segment information
     – Reporting formats
     – Change in structure of internal organisation

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    Accounting standards – Comparative study

   Segment information (contd…)
     – Indian GAAP disclosure
          Total cost incurred to acquire segment assets, depreciation
           and amortisation, provisions and unrealised exchange
           gains/losses to be disclosed for each reportable segment
          Changes in accounting polices having material effect on
           segment information and description of nature of change
          Reconciliations between the information for reportable
           segments and the aggregate amount in the enterprise FSs.
          Types of products and services included in each reported
           business segment and composition of each reported
           geographical segment


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    Accounting standards – Comparative study

   Segment information (contd…)
     – US GAAP disclosure (in addition to what is required as per Indian
       GAAP)
         An enterprise shall report interest revenue and interest expense
          separately for each reportable segment. (Indian GAAP leaves
          this requirement voluntary)
         The amount of investment in equity method investees

         Total expenditures for additions to long-lived assets other than

          financial instruments, long-term customer relationships of a
          financial institution, mortgage and other servicing rights,
          deferred policy acquisition costs, and deferred tax assets


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    Accounting standards – Comparative study

   Segment information (contd…)
     – IAS Disclosure (in addition to what is required as per
       Indian GAAP)
         Share of profit or loss of equity and JV investments

         The basis of inter-segment pricing




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    Accounting standards – Comparative study

   Related party disclosures
     – No major difference between Indian GAAP and IAS
     – Indian GAAP also requires to disclose provision for doubtful
       debts due from RPs and any write off or write back during
       the period
     – US GAAP excludes other than compensation arrangements,
       expense allowances, and other similar items in the ordinary
       course of business from the purview of RP transactions
     – AS 18 does not require disclosure of transactions that would
       conflict the duties of confidentiality under an agreement or a
       statute. No such provision is stipulated in US GAAP or in
       IAS

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    Accounting standards – Comparative study

   Leases
     – Applicability
     – Classification of leases from the stand point of the
       lessor and the lessee
          Indian GAAP : Operating and Finance lease

          US GAAP : Operating and Capital lease from the
           stand point of the lessee – Sales-type, Direct
           financing, Leveraged and Operating lease from the
           stand point of the lessor
          IAS : Operating and Finance lease


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    Accounting standards – Comparative study

   Leases (contd…)
     – Following criteria are additionally specified in US
       GAAP which, if not met, the lease can only be
       classified as an operating lease (from the stand point of
       the lessor)
          Collectibility of the minimum lease payments is
           reasonably predictable
          No important uncertainties surround the amount of

           unreimbursable costs yet to be incurred by the lessor
           under the lease

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    Accounting standards – Comparative study

   Earnings per share – Indian GAAP
     – AS 20 applicable to companies whose equity shares and
       potential equity shares are listed
     – Basic and Diluted EPS to be disclosed with equal
       prominence for all periods, on the face of Profit and
       loss account
     – To be disclosed separately for each class of equity
       shareholders having different right to share profit
     – Shares issued during the reporting period as
       consideration in an amalgamation are treated as issued
       at the beginning of the period

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    Accounting standards – Comparative study

   Earnings per share – Indian GAAP (contd…)
     – Bonus issue: Restatement of prior year EPS
     – Basic and diluted EPS need not be adjusted for effects
       of fundamental errors and changes resulting from
       accounting policies
     – Nominal value of shares along with EPS also required
       (not required as per US GAAP and IAS)
     – Anti-dilutive securities are ignored for the purpose of
       calculation of diluted EPS by all GAAP


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    Accounting standards – Comparative study

   Earnings per share – US GAAP
     – Requires to disclose reconciliation of the numerator and
       denominator of the basic EPS to to the numerator and
       denominator of the diluted EPS
     – Treasury stock method to be applied to check the
       dilutive effects of options and warrants
     – Shares issued in a business combination to be
       considered from the date of combination



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    Accounting standards – Comparative study

   Earnings per share – IAS
     – Applicable to public companies only
     – Equal prominence of basic and diluted EPS disclosure
       on the face of Income statement for all periods
       presented
     – To be disclosed for each class of common shareholders
       having different dividend rights
     – Numerator is calculated net of minority interest and
       preference dividends


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    Accounting standards – Comparative study

   Earnings per share – IAS (contd…)
     – To see if potential equity shares are dilutive or not,
       preference dividend, items of discontinued operations
       and extra ordinary items and effects of errors and
       changes in accounting policies excluded
     – Treasury stock method used for options and warrants
     – Shares issued upon a business combination to be
       considered from the date of combination



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    Accounting standards – Comparative study

   Consolidation – Indian GAAP
     – Mandatory for only listed companies
     – Consolidated FSs include Consolidated Balance sheet,
       Consolidated Profit and loss account and notes thereto
     – Consolidated cash flows necessary only if parent presents its own
       cash flows statement
     – Cost of investment to parent eliminated
     – Any excess of cost over parent’s portion in subsidiary’s equity on
       the date of investment to be recognised as goodwill. No specific
       guidance available at present to treat this goodwill, impairment test
       still necessary
     – Negative goodwill to be treated as Capital reserve in the
       consolidated accounts

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    Accounting standards – Comparative study

   Consolidation – Indian GAAP (contd…)
     – In case of step-acquisition, the CFSs are prepared from the date
       when the investee becomes subsidiary (IAS at par)
     – Parent’s portion of equity in a subsidiary
     – Cessation of a subsidiary, Investment to be accounted for as per
       AS 13 unless it becomes an associate, results of operations to be
       disclosed in the CFSs until the date of cessation (IAS at par)
     – In parent’s separate FSs, investment in subsidiary to be accounted
       for as per AS 13
     – Different accounting year followed by subsidiary (Gap not more
       than 6 months, 3 for US GAAP and IAS)
     – Minority interest disclosure
     – Uniform accounting policies to be followed to the extent possible
       or else the fact that different policies followed to be stated
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    Accounting standards – Comparative study

   Consolidation – US GAAP
     – Different accounting year followed by parent and
       subsidiary
     – Consolidation policy to be disclosed
     – Income taxes paid on inter company profits on assets
       remaining within the group are deferred or the inter
       company profits to be eliminated are appropriately
       reduced
     – Step acquisition, no change compared to Indian GAAP
     – Acquisition during the year, period of CFSs, two
       methods permitted
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    Accounting standards – Comparative study

   Consolidation – US GAAP (contd…)
     – Disposal of investment in subsidiary during the year:
       Omit the details of operations of subsidiary from CFSs,
       parent’s share in equity till the date of disposal to be
       shown separately
     – Excess of losses applicable to MI in excess of
       subsidiary’s equity capital is charged against majority
       interest (same as Indian GAAP unless MI has agreed to
       make good the losses)


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    Accounting standards – Comparative study

   Consolidation – IAS
     – Uniform accounting policies to be followed to the
       extent practicable else the fact that different accounting
       policies followed should be stated
     – If a Special Purpose Entity (SPE) is controlled by an
       entity, SPE is consolidated with that entity




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    Accounting standards – Comparative study

   Taxes on income
     – Applicability
     – Methodology
          Income statement approach

          Asset and liability approach

          Balance sheet liability approach

     – Recognition of deferred tax asset
          Reasonable certainty

          Virtual certainty

          Valuation allowance

     – Tax rates
     – Disclosure

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    Accounting standards – Comparative study

   Stock-based compensation




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