distinction between indian gaap and us gaap

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INTRODUCTIO N Accounting is language of business and is about the provision of figures to people about their resources. Users of Accounts Internal User : Employee, Management External User: Creditor, Investor, Govt. Different User Different Requirement with different degree of complexity. Globalization and economic growth opens the new source of funds from outside the country. This brings new set of users from outside the country with their own style of analyzing the accounting statement.

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Page 1: DISTINCTION BETWEEN INDIAN GAAP AND US GAAP

INTRODUCTION

• Accounting is language of business and is about the provision of figures to

people about their resources.• Users of Accounts

– Internal User : Employee, Management– External User: Creditor, Investor, Govt.

• Different User Different Requirement with different degree of complexity.

• Globalization and economic growth opens the new source of funds from outside the country.– This brings new set of users from

outside the country with their own style of analyzing the accounting statement.

• As nations have different histories, values, and political systems, they also have different patterns of financial accounting development.

Page 2: DISTINCTION BETWEEN INDIAN GAAP AND US GAAP

FACTORS AFFECTING INTERNATIONAL ACCOUNTING SYSTEM

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FACTORS

• Political Factors• Legal Factor

– Legal System– Taxation

• Economic Factors– Basic economic orientation – The stage of economic development – Source of funds and working capital– Inflation– Degree of International Business – Activity

• Cultural Factors– Professionalism versus Statutory Control– Conservatism versus Optimism– Secrecy versus Transparency– Uniformity versus flexibility

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NATIONAL ACCOUNTING PRACTICES

OTHER INFLUENCES

LEGAL SYSTEM

PROVIDER OF CAPITAL

TAXATION SYSTEM

NATIONAL CULTURE

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POLITICAL AND LEGAL FACTORS

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• Political System The higher the political rights and civil liberties,

the more freedom and flexibility the accounting profession will have, and accounting disclosure will be more honest and balanced.

• Legal System– Common Law :

Develop case by case and which does not prescribe general rules, which could be applied to all cases. Accounting practice tend to rely on professional judgment. E.g. United States, different small accounting standards/boards dealing with different industries like accounting standards for food industry, for minerals etc.

– Civil Law :Company law or commercial codes need to establish rules in detail for accounting and financial reporting.Accounting becomes effectively a process of compliance with the laws of the country.E.g. In Germany, company accounting is to a large extent a branch of company law.

POLITICAL AND LEGAL FACTORS

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• Taxation– Countries where Tax law has more

influence , there is no difference between tax accounting and financial accounting. In such countries the costs are only tax deductible if they are part of the P&L account. These countries that do not have an explicit investor approach.

E.g. Germany, Belgium, and the Czech Republic.

– In other countries, such as United Kingdom, the United States and the Netherlands, published accounts are designed particularly as performance indicators for investment decisions. Separate accounts are filed for tax purposes.

POLITICAL AND LEGAL FACTORS

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ECONOMIC FACTORS

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• Macro Aspect Factors– Basic economic orientation and degree of

government involvement • In Communist countries, the state owns

all production facilities, makes most of the economic and business decisions, and controls virtually all operations through a central planning and control system. These countries have a highly standardized and uniform accounting system to facilitate the government’s planning and control function, and there are few users of accounting information other than the government.

• In market-capitalist economies, there is predominantly private ownership. With greater individual freedom in economic activity and decision-making, a correspondingly greater diversity in accounting practices is permitted and practice. There are also more users of accounting information— stockholders, auditors, suppliers, and creditors—in addition to the government

ECONOMICFACTORS

Page 10: DISTINCTION BETWEEN INDIAN GAAP AND US GAAP

– The stage of economic development • The higher the level and growth of

income, the higher the political and economic freedom and the better the adequacy of reporting and disclosure.

• At extremely low levels of economic development, there is few economic activities and correspondingly little financial, tax, or managerial accounting.

ECONOMICFACTORS

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• Micro Aspect Factors;– Sources of Funds

• For the creditor orientated accounting system, the major source of funds is loans from banks, financial intermediatories, or even wealthy individuals, accounting standards, principles, and procedures will tend to be more conservative and reflective to creditor preferences and requirements. Some countries in this situation include Switzerland, Germany, and Japan.

• For the equity orientated accounting system, the majority of funds is invested by investors, and the accounting system will include such important investor information as earnings per share and more extensive public disclosure. The objective of the financial statements is to describe the financial position of a business and the results of its recent operations.

ECONOMICFACTORS

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– Inflation• It affects the asset valuation method.

Countries such as the U.S. or Great Britain in which inflation levels are mostly under control apply the historical cost method for the needs of financial reporting.

• In economies experiencing spiral inflationary rates, such as most of the countries in Latin America, this standard is replaced with principles that deal with the changing value of the nation’s currency. There the concept of fair value has come.

ECONOMICFACTORS

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– Complexity of Business• Complexity of business may decide the

complexity of accounting methods. Business firms of different size and complexity may have different needs for accounting. Namely, the accounting needs of large businesses that have several different production lines and a wide variety of products differ from the accounting needs of smaller enterprises producing, for example, only a single product.

• The information needs of multinational companies are different from the needs of large businesses that manufacture only for the home market, and they differ even more from the needs of small enterprises.

ECONOMICFACTORS

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CULTURAL FACTORS

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• Professionalism versus Statutory Control– Concerned with attitudes towards

regulations, in particular how Accounting control is done. A high level of professionalism describes a system of self-regulation and a lower degree denotes high level of government regulation.

• In the United Kingdom, for example, the concept of presenting “a true and fair view” of a company’s financial position and results depends heavily on the judgment of the accountant as an independent professional.

• In France and Germany, where the professional accountant’s role has been concerned primarily with the implementation of detailed legal requirements.

CULTURALFACTORS

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• Conservatism versus Optimism– Explains the attitudes towards

measurement in financial reporting. While conservatism aims at a more cautious approach to value assets and recognize income, optimism is a more risk taking and liberal approach to measurement.

• Secrecy versus Transparency– This value reflects a preference for

confidentiality and the disclosure of information about the business only to those who are most closely involved with its management and financing. Transparency is characterized by a willingness to disclose much more open to the public.

• Uniformity versus flexibility

CULTURALFACTORS

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COMPARISON OF INDIAN AND UNITED STATES ACCOUNTING STANDARDS

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• With consideration of all factors of International Accounting differences, here are some comparative features of

US GAAP and Indian GAAP.– Conceptual framework– Balance Sheet– Income Statement

INDIAN GAAP&

USA GAAP

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CONCEPTUAL FRAMEWORK

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• Conceptual frameworks define the fundamental accounting principle and theories for formulation of accounting standards.

• Underlying assumption– Under Indian GAAP, Financial

statements are prepared in accordance with the principle of conservatism which basically means “Anticipate no profits and provide for all possible losses”. As developing country, India has adopted conservative approach. Under US GAAP conservatism is not considered, if it leads to deliberate and consistent understatements. E.g. We are doing provision for bad debts for account receivable but no provision for gain on account non payment to Creditors.

CONCEPTUAL FRAMEWORK

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• Revaluation of Assets– In Indian GAAP, a company can revalue its

assets and the unrealised gain is transferred to “Revaluation Reserve”.

US GAAP does not allow revaluing of assets.

• Prudence and Rules– The Institute of Chartered Accountants of

India (ICAI) has been structuring Accounting Standards based on the International Accounting Standards ( IAS) , which employ concepts and `prudence' as the principle.

– As explain above US has legal system based on Common Law which applies case to case differently. So US GAAP is more “rule oriented”, detailed and complex. These rules are less descriptive and their application is based on prudence. US GAAP has thus issued several Industry specific GAAP , like SFAS 51 ( Cable TV), SFAS 50 (Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc.

CONCEPTUAL FRAMEWORK

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• Indian GAAP provides two formats of Balance Sheet (Horizontal and Vertical) as per part I of schedule VI of the Companies Act. Vertical formats requires details of each item in separate schedule, read with notes.

• US GAAP does not prescribe any format, but Rule S-X of SEC stipulates for listed companies minimum line items to be disclosed either on the face of Balance Sheet of Notes to Accounts.

• Order of Item – Being a conservative country, we Indian

always think about our Liabilities and like to get out of it. So under Indian GAAP assets and liabilities are presented in increasing order of liquidity. Under US GAAP items in Assets and liabilities are presented in decreasing order of liquidity.

BALANCE SHEET

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• Consolidation of Accounts – Under Indian GAAP and IFRS consolidation of

Financial statements of subsidiaries is not compulsory until it is required under some other law or regulation, whereas under US GAAP consolidation of results of Subsidiaries and Variable interest entity (FIN 46R) is compulsory. A VIE is an entity in which the organisation does not hold responsible to provide majority interest but is necessary funding support.

• Depreciation– Under the Indian GAAP, depreciation is

provided based on rates prescribed by the Companies Act, 1956. Higher depreciation provision based on estimated useful life of the assets is permitted, but must be disclosed in Notes to Accounts. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out.

BALANCE SHEET

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• Goodwill: – Under the Indian GAAP goodwill is

capitalized and charged to earnings over 5 to 10 years period. Under US GAAP (SFAS 142), Goodwill and intangible assets that have indefinite useful lives are not amortized ,but they are tested at least annually for impairment

– Under the Indian GAAP, depreciation is provided based on rates prescribed by the Companies Act, 1956. Higher depreciation provision based on estimated useful life of the assets is permitted, but must be disclosed in Notes to Accounts. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out.

BALANCE SHEET

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• Capital issue expenses– Under the US GAAP, capital issue

expenses are required to be written off as when incurred against proceeds of capitals, whereas under Indian GAAP, capital issue expense can be amortized or written off against reserves.

• Long Term Debts– Under US GAAP, the current portion of

long term debt is classified as current liability, whereas under the Indian GAAP, there is no such requirement and hence the interest accrued on such long term debt in not taken as current liability.

BALANCE SHEET

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INCOME STATEMENT

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• Cash flow statement: – Under Indian GAAP (AS 3) , Cash Flow

statement is mandatory only for companies whose share are listed on recognized stock exchanges and Certain enterprises whose turnover for the accounting period exceeds Rs. 50 crore. Thus, unlisted companies escape the burden of providing cash flow statements as part of their financial statements.

– Where as in US GAAP (SFAS 95) every company whether it is listed or not is required to prepare cash flow statements for 3 years –

• current year • 2 immediate preceding years

INCOME STATEMENT

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• Research and development Expenditure– Indian GAAP ( AS 8) requires

research and development expenditure to be charged to profit and loss account, except equipment and machinery which are capitalized and depreciated.

– Under US GAAP (SFAS 2) , all R&D costs are expenses except intangible assets purchased from others and Tangible assets that have alternative future uses which are capitalized and depreciated or amortized as R&D Expense. Under US GAAP, R&D expenditure incurred on software development are expensed until technical feasibility is established

INCOME STATEMENT

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• Proposed dividend: – Under Indian GAAP, dividends declared are

accounted for in the year to which they relate. For example, if dividend for the FY 2010-2011 is declared in Sep 2010, then the corresponding charge is made in 2010-2011 as below the line item under profit and loss appropriation account.

– Contrary to this, under US GAAP dividends are reduced from the reserves in the year they are declared by the Board. Hence in this case under US GAAP, it will be charged Profit and loss account of 2010-2011 above the line.

INCOME STATEMENT