Transcript Accounting standards – Comparative study

Accounting standards – Comparative
study
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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 nonlisted 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
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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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Materiality
– AS 1
– US GAAP SFAC 2
– IAS 1
Consistency
– AS 1
– US GAAP SFAC 2
– IAS 1
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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 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 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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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Stock-based compensation
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