The Difference Between The US GAAP and Indian Accounting Standards

Prof. GURU PRASAD

FACULTY

INC GUNTUR

PGPPGP

ACCOUNTING STANDARDS

The flexibilities offered by a choice of accounting treatments distinctly diminish, and even distort the comparability of relevant information in the financial statements.

Pressures on the accounting profession to establish uniform accounting standards, led to evolution of International Accounting Standards

US GAAP

The US GAAP is established by the Financial Accounting Standard Board (FASB) and American Institute of Certified Public Accountants (AICPA). Failure to comply with the standards is reported in the external auditors report.

THREE REPORTS

The financial statements include three reports 1. Balance Sheet. 2. Income Statement, and 3. Funds Flow Statement (not required in India).

The Financial Accounting , Management Accounting, and Income Tax Accounting are essentially separate processes in the United States.

GAAP provides the principle for Financial Accounting, Management Accounting and the IRS for tax accounting purpose

Globalized environment

Indian companies like Infosys and HDFC who have sought NASDAQ listing have already appreciated the wisdom in restating their accounts as per US GAAP.

It will not be long before other Indian companies are also forced to follow suit. In such situations the US GAAP will provide the best benchmark for greater transparency and disclosure.

Abbreviations

The following abbreviations are used in the text to represent accounting and auditing principles.

APB – Accounting Principles BoardARB - Accounting Research BulletinASR - Accounting Series Release FAS –Financial accounting standardsFIN – FASB interpretation

US GAAP

Though there is basic similarity in accounting principles throughout the world, Indian Accounting Standards differ in some respects from US GAAP. The US GAAP has nearly 100 accounting standards as compared to 15 in India

The essential differences

The theme of the difference or the inherent superiority of the US GAAP over the Indian accounting standards needs to be evaluated on the following four parameters:

1. Reporting Versus Disclosure2. Form Versus Substance3. Accounting Versus Analysis4. Globalization Versus

Localization

Major differences between US GAAP No specific format is required for

the preparation of financial statement, as long as they comply with the disclosure requirements of US accounting standards.

• Consolidation of group company accounts is compulsory

• Deferred tax assets or liabilities should be booked using the asset–liability approach

Major differences between US GAAP 3.Disclosure of earnings per share data

is compulsory 4.Revaluation of assets is not

permitted. 5.Depreciation is over the useful

economic lives of assets. Depreciation and profit/loss on sale is based on historical costs

6.Investments in own shares are permitted. It is shown as a reduction from shareholders equity

Major differences between US GAAP 7.Research and development costs are

expenses as incurred 8.Related party transactions

disclosures are stringent and require descriptions of nature of relationships and control, transactions, amounts involved and amounts due.

9.Good will is treated as any other intangible asset, and is capitalized and amortized . Then carry forward period is 40 years

Major differences between US GAAP10.The concept of pre-operative

expenses does not exits.11.Current and long-term components of

assets and liabilities should be disclosed separately. Current component normally refers to one year of the period of the operating cycle.

12.Segmental reporting is mandatory for SEC registered companies

Major differences between US GAAP13.Exchange gain/loss is taken to the

income statement. The concept of capitalization of exchange fluctuation arising from foreign currency liabilities incurred for acquiring fixed assets does not exit.

14.Impairment evaluation is compulsory for all assets. Impairment loss is recognized on the basis of the fair value of the asset

Major differences between US GAAP15.Cash flow statement is

compulsory16.Financial leases are to be

capitalized 17.Mandatory fair values are

ascertained based on certain specific principles for items, such as loans, current assets, current liabilities, etc

Contra entries

If a transaction affects both cash account and bank account in the opposite sides, the entry for recording the transaction is called a contra entry.

Entries which are made on both sides of the cashbook are called contra entries. For contra entries no posting is required because the double entry is completed in the cashbook itself.

Contra entries

For example, cash deposited into bank and cash withdrawn from bank affect cash and bank account only. Both aspects of these transactions recorded in cash column and bank column of the cashbook respectively.

No ledger posting is required, because both aspects of the transaction are recorded in the cashbook itself. This fact is indicated in the cashbook by writing ‘C’ in L.F column.

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