GAAP

Presented By :
Devesh Narayan
Ishansh Vij
Koushik Sarkar
Kushal Sardana
Rudranil Roysharma
Ramakrishna G.

Under the kind guidance of -

Prof. Vinay K. Nangia
 Topics
• Definition of GAAP
• Why GAAP is Important?
• Similarities & Differences between Indian GAAP,
IFRS and US GAAP
- Financial Statements
- Revenue Recognition
- Foreign Currency Translation
 Definition
• GAAP is the abbreviation of Generally Accepted
Accounting Principle.

• GAAP are the common set of accounting principles,

standards and procedures that companies use to
compile their financial statements.

• GAAP are a combination of authoritative standards

(set by policy boards) and simply the commonly
accepted ways of recording and reporting accounting
information.
Related Information
•In India, GAAP standards are set by the Institute of
Chartered Accountants of India (ICAI). ICAI continually
updates GAAP as new accounting issues and concerns
arise.

•In USA, GAAP standard are set by

Financial Accounting Standards Board (FASB).

•Outside the US, the equivalent of GAAP is IAS -

International Accounting Standards - which is maintained
by the International Accounting Standards Board (IASB).

•Financial statements submitted to the SEBI by publicly

traded companies are required to meet GAAP standards.
 Why GAAP?
•GAAP are imposed on companies so that investors have a
minimum level of consistency in the financial statements
they use when analyzing companies for investment
purposes.
•GAAP cover such things as revenue recognition, balance
sheet item classification and outstanding share
measurements.
• Companies are expected to follow GAAP rules when
reporting their financial data via financial statements.
• If a financial statement is not prepared using GAAP
principles, be very wary!
 Important points
• When comparing financial statements from different
years, it is important to note any changes in GAAP over
the intervening period.

• Since GAAP is only a set of guidelines, it cannot

guarantee financial statements are not fraudulent. So, even
when a company uses GAAP, we still need to scrutinize
its financial statements.

• If company management provides the auditing firm

with incorrect data, the resulting financial statements may
be GAAP compliant yet still incorrect.
Contents of GAAP
•ACCOUNTING FRAMEWORK •OTHER ACCOUNTING &
REPORTING TOPICS
•FINANCIAL STATEMENTS
-FOREIGN CURRENCY TRANSLATION
•CONSOLIDATED FINAL
-EARNING PER SHARE
STATEMENTS
-RELATED-PARTY TRANSACTION
•BUSINESS COMBINATIONS -SEGMENT REPORTING
•REVENUE RECOGNITION -DISCONTINUED OPERATIONS
-POST BALANCE SHEET EVENTS
•EXPENSE RECOGNITION
-INTERIM REPORTING
•ASSETS
•LIABILITIES
•EQUITY
•DERIVATIVES & HEDGING
 Similarities &
Differences between
Indian GAAP, US
GAAP & IFRS
Financial Statements
 General Requirements
•Compliance
Indian company should comply with Indian GAAP, the Companies
Act and Industry specific regulatory requirements. Additionally listed
companies should comply with the rules and regulations and financial
interpretations of SEBI.

The law requires entities to disclose whether the financial statements

comply with applicable accounting standards and to give details of non
compliances. There is a presumption that compliance with accounting
standards is necessary to give a “ True and Fair View”.
 General Requirements contd..
•Comparatives:
One year of comparatives is required for all numerical
information in the financial statements with limited exceptions and
disclosures.

•Preparation and Presentation:

Financial Statements are presented on a single entity parent company
(stand alone) basis. It is not mandatory to prepare consolidated
financial statements but must use the consolidation standards if
prepared. Pursuant to the listing agreements with stock exchanges,
Public listed companies present consolidated financial statements along
with standalone financial statements.
Components of Financial
Statements

Components Indian GAAP US GAAP IFRS

Balance Sheet Required Required Required
Income Statements Required Required Required
Statement of changes in Required Required Required
shareholder’s equity
Fund flow Statement Required Required Required
Accounting Policy Required Required Required
Notes to the Financial Required Required Required
Statements
 Balance Sheet
•INDIAN GAAP:
Accounting Standard do not prescribe any format of balance sheet.
The Companies Act prescribes a format and requires presentation of the
following items on the face of balance sheet:
Sources of Funds:- Share Capital, Reserves and Surplus, Secured
Loans, Unsecured Loans, Minority Interest.
Application of Funds:- Fixed assets, Investments, Current Assets,
Loans and Advances (Inventories, Sundry debtors, Cash and Bank
balances, Other Current Assets) less Current Liabilities and Provisions,
Miscellaneous expenditure.

•US GAAP:
Presented as total assets balancing to total liabilities and shareholder’s
equity. Items are presented in decreasing order of liquidity. Public
entities should follow specific SEC guidance.
 Balance Sheet contd..
•IFRS:
Current and non-current assets, and current and non-current liabilities
are to be presented separately except when a liquidity presentation
provides more relevant and reliable information.
Assets: PPE, investment property, intangible assets, financial assets,
investment accounted for using equity method, biological assets,
inventories, trade and other receivables, tax assets, and cash and cash
equivalents.
Equity and liabilities: issued share capital and other components of
shareholder’s equity, financial liabilities, provisions, tax liabilities, trade
and other payables, and minority interests (presented within equity).
 Income Statement
•INDIAN GAAP:
Accounting standards and the Companies Act prescribe disclosure
norms for certain income and expenditure items. Expenses are presented
by either function or nature. Other industry regulations prescribe
industry-specific format of income statement.

•US GAAP:
Presented either as
A single-step format where all expenses are classified by function and
are deducted from total income to give income before tax : or
A multi-step format where cost of sales is deducted from sales to show
gross profit, and other income and expenses are then presented to give
income before tax.
 Income Statement contd..

•IFRS:
Expenses presented by either function or nature. Portion of profit
and loss attributable to the minority interest and to the parent entity is
separately disclosed. Disclosure of expenses by nature is required in
footnotes if functional presentation is used on income statement.
Items presented are revenue, finance costs, share of after-tax results
of associates and joint ventures accounted for using equity method,
tax expenses, post-tax gain or loss attributable to the results and
remeasurement of discontinued operations and net profit or loss for
the period.
 Statement of changes in
Shareholder’s Equity
•INDIAN GAAP:
No separate statement is required. Changes in shareholder’s equity
are disclosed in separate schedules of ‘Share capital’ and ‘Reserves
and surplus’
•US GAAP:
Same to IFRS, except that US GAAP does not have a Statement of
Recognized Income and Expense (SoRIE), and SEC rules require
further disclosure of certain items in notes.
•IFRS:
It is presented as a primary statement unless a SoRIE is presented.
Supplemental equity information is presented in notes when SoRIE is
presented. It should show capital transactions with owners, the
movement in accumulated profit and a reconciliation of all other
components of equity. Certain items are permitted to be disclosed in
notes rather than in primary statement.
Fund Flow Statement
•INDIAN GAAP :
Inflow & outflow of ”cash & Cash equivalent” are reported in fund
flow statement. It can be prepared by two ways: Direct or indirect
method. Direct method (Cash flow is derived from aggregating cash
receipts & payments associated with operating activities) , Indirect
method (Cash flow is derived from adjusting net income from
transaction of non cash in nature such as depreciation ).However only
indirect method is prescribed for listed enterprises & direct for
insurance companies.
It is required for all enterprises whose turnover exceeds Rs 500
Million or having borrowing over Rs. 100 million at any point of time
during accounting period.
Fund Flow Statement contd..
•US GAAP :
Cash flow statement provides relevant information about “cash
receipts & cash payments”. A reconciliation of net income to cash flows
from operating activities is disclosed .
There are limited exemption for certain investment entities.

•IFRS :
It is similar to Indian GAAP. However, Indirect is more common
in IFRS.
The cash flow from operating, investing & financing activities are
classified separately.
Accounting Policy
•INDIAN GAAP :
The cumulative amount of change is recognized & disclosed in the
income statement in the period of change. Certain new standards
require adjustment of the cumulative amount of the change for opening
retained earnings.
Impact of change in depreciation method is determined under the
new method & is recorded in the period of change, whereas on revision
of asset life, the unamortized depreciable amount is charged over the
revised remaining life.
•US GAAP :
The cumulative amount of change is recognized & changed in the
income statement of period of change.
Retrospective adjustment are required in some of the cases like :
method of accounting for inventory valuation, depreciation in rail
industry ,construction contracts & adoption of full cost method in
extractive industry.
Accounting Policy contd..

•IFRS :
Comparative information is restated, & the amount of the
readjustment relating to prior period is adjusted against the opening
balance of retained earnings of the earlier year presented.
Policy changes made by adoption of new standard are accounted for
in accordance with standard Transition provisions.
For correction of errors & accounting estimates accounting policy
method & income statement are required.
References for Details..

•INDIAN GAAP : Companies Act, AS1, AS3, AS5,

AS6, AS10, AS11
•US GAAP : CON1-, FAS16, FAS52, FAS95, FAS130,
FAS141, FAS154, APB20, APB29, APB30, ARB43, SEC
Regulation S-X, FIN39
•IFRS : IAS1, IAS7, IAS8, IAS19, IAS21, IAS29, IAS32,
SIC30
Revenue Recognition
Definition of Revenue
Gross inflow of consideration ( Cash / receivables /
others ) arising in the course of ordinary activities from
• Sale of Goods
• Rendering of Services
• Use of enterprise resources yielding interest,
royalties and dividends.
Definition contd..
Consideration:
• Flow of economic benefits
• Inflows resulting in an increase in equity (Other than
increase through the contribution from equity holders)
Ordinary Activities:
• Activities undertaken as part of business
• Related activities engaged in
- Furtherance of
- Incidental to
- Arising from
these activities.
Criteria for Revenue Recognition

CONDITION
Can the revenue be recognized
CRITERIA FOR
TIMING
REVENUE
When will we record revenues?
RECOGNITION
MEASUREMENT
How much will we record?
Criteria for Revenue Recognition :
Goods
Property in goods transferred to
buyer for a price
Or
All significant risks and rewards of PERFORMANCE
ownership transferred to buyer &
seller retains no effective control over
goods

No significant uncertainty regarding

UNCERTAINTY
consideration
Criteria for Revenue Recognition :
Services
RECOGNITION OF
REVENUE INCOME

COMPLETED PROPORTIONATE
SERVICE METHOD SERVICE METHOD

Recognize revenue Recognize revenue by

when the sole or final reference to
act takes place and the performance of each
service becomes act – on the basis of
chargeable contract value /
associate cost / no. of
acts

No Uncertainty
Service Income - Examples
•Advertising (Media/Production) commissions:
- Upon completion of service

•Insurance agency commissions:

- On effective commencement of renewal dates of the related
policies

•Installation fees:
- When equipment is installed and accepted by customers.

•Financial service commissions:

- Driven by i) nature of service ii) incidence of costs related to
service
Criteria for Revenue Recognition :
Others
•Interest:
- Time proportion basis taking into account
a) Amount outstanding
b) Rate applicable

•Royalties:
- Accrual basis in accordance with terms of agreement

•Dividends:
- When owner’s right to receive payment is established
Uncertainties in Revenue
Recognition
•Measurability:
- Consideration should be reasonably determinable
- If not determinable then postpone

•Collectibility:
- Ability to asses ultimate collection
- With reasonable certainty at time of collection
- But not if uncertainty arises after sale

•Disclosure:
- Of circumstances under which revenue recognition is postponed
International Financial Reporting
Standards (IFRS)
•Significant risks and rewards of ownership transferred

•Seller retains neither continuing managerial

involvement usually associated with ownership nor
effective control

•The amount of revenue can be measured

•Likely that economic benefits of transaction will flow

to the seller

•The cost incurred or to be incurred in respect of the

transaction can be measured reliably
US GAAP

•Persuasive evidence of an arrangement exists

•Delivery has occurred

•Fee is fixed or determinable

•Collectibility is reasonably assured

Alternate Standards: A Comparison
Indian GAAP / IFRS US GAAP
Probable that economic benefit Collectibity is reasonably
will flow to entity assured
Revenue and costs (including Vendor’s price is fixed or
future costs) can be determinable
measured reliably
Seller retains neither Delivery has occurred or
management nor control, services have been rendered
and transfer of risks and
rewards of ownership to
buyer
Stage of completion of Vendor’s price fixed or
transaction can be measured determinable
Commonalities and differences -
Examples
•Warranty and Product maintenance contracts:
- When price includes a component for subsequent servicing, the latter is
deferred and recognized over the warranty period

•Software Revenue Recognition:

- IFRS/Indian GAAP: No guidelines. Usually by the stage of completion
- US GAAP: Value for element based on Vendor Specific Objective
Evidence (VSOE). Revenue recognized as element is delivered

•Barter Transactions (Advertising):

- IFRS/Indian GAAP: At fair value of goods/services received or given
- US GAAP: Similar non barter deals of the entity in past six months
Key Issues
•Risk factor which influence •Indicators of Potential
improper Revenue Accounting Misstatements:
Recognition:
- Management characteristics and - Absence of an agreement
influence over the control
- Lack of delivery
environment
- Incomplete earning process
- Industry condition
misstatements
- Operating characteristics and
financial stability
- Lack of Internal controls/audit
CIF vs. FOB Sales
•Cost, Insurance and Freight •Free on Board ( FOB ):
( CIF ):
- Sale price includes cost, insurance - Sale price does not include any
and freight insurance or freight
- Paid by the seller - All insurance, freight etc. would
be borne by the buyer
- Transfer of ownership takes place
on receipt of goods by the buyer - Recognize revenues at the time
of dispatch
- Recognize revenue on receipt of
bill of lading /acknowledged lorry
receipt
References for Details..

•INDIAN GAAP : AS 7 (REVISED 2002), AS 9

•US GAAP : CON 5, SAB 104, SOP 81-1, SOP 97-2,
EITF 99-17, EITF 00-21, FTB 90-1
•IFRS : IAS 11, IAS 18
Foreign Currency
Translation
Functional Currency
•INDIAN GAAP:
Does not define or require determination of functional currency.
Assumes an entity normally uses the currency of the country in which it
is domiciled in recording its transaction.
•US GAAP:
Emphasizes the primary economic environment in determining an
entity’s functional currency. It has no hierarchy of indicators. There is
greater focus on the cash flows rather than the currency that influences
the pricing.
•IFRS:
Currency of the primary economic environment in which entity
operates. Management should use judgment to determine functional
currency if indicators are not obvious.
 TRANSLATION – The
Individual Entity
•INDIAN GAAP, US GAAP & IFRS have similar
requirements regarding the translation of transactions by
an individual entity, as follows:

- Translation is at exchange rate in operation on date of transaction.

- Monetary assets and liabilities denominated in foreign currency are

translated at the closing rate.

- Non-monetary foreign currency assets and liabilities are translated at

the appropriate historical rate.
 TRANSLATION – The
Individual Entity contd..
- Non-monetary items denominated in a foreign currency and carried at
fair value are reported using the exchange rate that existed when the fair
value was determined

- Income statement accounts are translated using historical rates of

exchange at the date of transaction or an average rate as a practical
alternative, provided the exchange rate does not fluctuate significantly.

- Exchange gains and losses arising from an entity’s own foreign

currency transaction are reported as part of the profit or loss for the year.
TRANSLATION – Consolidated
Financial Statements

When translating financial statements into a different

presentation currency IFRS, US GAAP and INDIAN GAAP
require the assets and liabilities to be translated using the
closing rate. Amounts in the income statements are
translated using the average rate for the accounting period
if the exchange rates do not fluctuate significantly. IFRS
and INDIAN GAAP are silent on the translation of equity
accounts historical rates are used under US GAAP.
Tracking of Translation
Differences in Equity
•INDIAN GAAP:

Translation differences in equity are separately tracked and the

cumulative amounts disclosed. The appropriate amount of cumulative
translation difference relating to the entity is transferred to the income
statement on disposal of a foreign operation and included in the gain or
loss on sale. The cumulative translation difference may be released
through income statement, for a partial disposal on a pro rata basis
relative to the portion disposed. The proportionate share of the related
cumulative translation difference is included in the gain or loss. The
payment of dividend out of pre-acquisition profits constitutes a return
of the investment and is regarded as a partial disposal.
Tracking of Translation
Differences in Equity contd..
•US GAAP:
Similar to Indian GAAP, however, gains and losses are transferred to the
income statement only upon sale or complete or substantially complete
liquidation of the investment.

•IFRS:
Similar to Indian GAAP.
Presentation Currency
•INDIAN GAAP:
It assumes an entity normally uses the currency of the country in which it is
domiciled in presenting its financial statements. If a different currency is used,
requires disclosure of the reason for using a different currency.

•IFRS:
Assets and liabilities are translated at the exchange rate at the balance sheet
date when financial statements are presented in a currency other than the
functional currency. Income statement items are translated ate the exchange rate
at the date of the transaction or are permitted to use average rates if the exchange
rates do not fluctuate significantly.

•US GAAP:
Similar to IFRS; historical rates are used in equity.
Foreign Currency Translation –
Hyperinflationary Economy
•INDIAN GAAP:
No specific guidance for foreign currency translation

•IFRS:
Hyperinflation is indicated by characteristic of the economic
environment of a country. These characteristic include a) general
population’s attitude towards local currency b) prices linked to a price
index c) cumulative inflation rate over three years is approaching or
exceeds 100%

•US GAAP:
Similar to IFRS
Functional Currency Translation –
Hyperinflationary Economy
•INDIAN GAAP:
No specific guidance for functional currency translation

•IFRS:
Functional currency use that currency for measurement of
transactions. Financial statement for current & prior period are
remeasured at the measurement unit current at the balance sheet date in
order to present current purchasing power

•US GAAP:
Does not generally permit inflation - adjusted financial statements.
The use of reporting currency ( US dollar ) as the functional currency is
required
 Presentation Currency Translation
– Hyperinflationary Economy
•INDIAN GAAP:
No specific guidance for presentation currency translation
•IFRS:
Results & financial position of those entities whose functional
currency is the currency of a hyper inflationary economy are translated
into a different presentation currency using following procedure:
- All item including comparatives are translated at the date of most
recent balance sheet
- When amount are translated into currency of a non inflationary
economy, comparative amounts are those that were presented as current
year amounts in the relevant prior - year financial statement
•US GAAP:
Not applicable, because the currency of a hyperinflationary economy
is not used for measuring its transactions in the hyperinflationary
economy
References for Details..

•INDIAN GAAP : AS 11 (REVISED 2003)

•US GAAP : FAS 52, FIN 37
•IFRS : Framework, IAS 21, IAS 29
References
1) Http://www.icai

2) Similarities & Differences : A comparison of IFRS, US GAAP

and INDIAN GAAP – by Price Water House Coopers:
November 2006
Thank You