PRESENTED

BY

NEETU.P.S

PGDBM

‘B’ SEC

WHAT IS GAAP?

• International convention of good accounting practices.

• The rules that govern accounting are called ‘GAAP’.

DEFINITION:-

The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authorities standards [set by policy boards] and simply the commonly accepted ways of recording and reporting accounting information.

IN GENERAL…….

GAAP is a term that applies to the broad concepts or guidelines and detailed practices in accounting including all the conventions, rules and procedures that make up accepted accounting practice at a given time.

GAAP WAS ESTABLISHED BY-

Securities and exchange commission [SEC]

Financial accounting standards board [FASB]

Governmental accounting standards board [GASB]

GAAP PROVIDES…

A fair financial image of the company

With different information

-Revenue recognition

-Balance sheet item classification

-o/s share measurements

3 Main categories of GAAP:

Assets- An asset is an item of value owned by a company.

Liabilities- In accounting, liabilities are obligations of the company, to transfer something of value to another party.

Equity- It is the owners value in an asset or group of assets.

DIFFERENCE BETWEEN INDIANGAAP AND US GAAP

What is underlying assumption?

• Underlying assumptions are the basic foundation that underlies generally accepted accounting principles

MAJOR DIFFERENCES

UNDERLYING ASSUMPTIONS • Financial statements

are prepared in accordance with the principle of conservatism-‘Anticipate no profits & provide for all possible losses’

• Conservatism is not considered ,if it leads to deliberate & consistent understatements

FORMAT/PRESENTATION OF FINANCIAL STATEMENTS

• Financial statements are prepared in accordance with the presentation requirements of schedule VI to the companies act, 1956

• Financial statements are not required to be prepared under any specific format as long as they comply with the disclosure requirements

CASH FLOW STATEMENT

• Cash flow statement in financial statements is mandatory only for listed companies[AS-3]

• Cash flow statement is mandatory for 3years-current year & 2 immediate preceding years irrespective of whether the company is listed/not[AS-95]

DEPRECIATION

• 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

• Depreciation has to be provided over the estimated useful life of the asset , thus making the accounting more realistic & providing sufficient funds for replacement when the asset becomes obsolete & fully worn out

What is long term debt?

• Long term debt are loans & financial obligations lasting over one year. Such obligations would include company’s bond issues or long term leases that have been capitalized on a firm’s balance sheet.

LONG TERM DEBTS

• There is no such requirement & hence the interest accrued long term debt is not taken as current liability

• The current portion of long term debt is classified as current liability

Subsidiary company- A company controlled by holding company i:e the company holding more than 51% of shares.

Consolidation- It refers to the aggregation[collection] of financial statements of a group company as consolidated financial statements.

CONSOLIDATION OF SUBSIDIARY ACCOUNTS

• Consolidation of accounts of subsidiary companies is not mandatory[AS-21]

• Consolidation of results of subsidiary companies is mandatory, hence eliminating material, inter company transactions & giving a true picture of the operations & profitability [AS-94]

INVESTMENTS

• Investments are classified as current & long term. Current investments are carried out in financial statements at lower cost & fair value, but not on an overall basis

• Investments are required to be segregated in 3 categories i:e held to maturity security, trading security & available for sales security

What is prudence?

• It is a good judgement or wisdom gained by experience & knowledge, expressed in a realistic & frugal attitude. It is not the same as grave caution or wariness concerned only with preserving status quo[existing state of affairs]. If there is no real cause for fear, prudence lies in avoiding excessive deliberations & in the readiness to sacrifice today’s gain for tomorrow’s greater gain.

PRUDENCE Vs RULES

• ICAI has been structuring based on IAS, to employ concepts & prudence as the principle of contrast

• The rules are less descriptive & their application is based on prudence

What is foreign currency transactions?

• A foreign currency transaction gain or loss is produced from redeeming receivables/payables that are fixed in terms of amounts of foreign currency received/paid. Gain or loss results from changes in exchange rates between the functional currency and the foreign currency in which the transaction is denominated. Foreign transaction gains or losses are typically included in the income statement for the period in which the exchange rate changes.

FOREIGN CURRENCY TRANSACTIONS

• Exchange fluctuations on liabilities incurred for fixed assets can be capitalized[AS-11]

• Capitalization of exchange fluctuation arising from liabilities incurred for acquiring fixed assets does not exist[AS-52]

EXPENDITURE DURING CONSTRUCTION PERIOD

• All incidental expenditure on construction of assets during project stage are accumulated & allocated to the cost of asset

• Such expenses are divided into 2 heads direct & indirect. While direct expense is accumulated & allocated to the cost of asset, indirect are charged to revenue[AS-7]

RESEARCH & DEVELOPMENT EXPENDITURE

• R&D to be charged to P/L, except equipment & machinery which are capitalized & depreciated[AS-8]

• All R&D costs are expenses except intangible assets purchased from others & tangible assets that have alternative future uses which are capitalized & depreciated[AS-2]

What is revaluation reserve?

• An accounting term used when a company has to enter a line item on their balance sheet due to a revaluation performed on an asset, this line item is used when the revaluation finds the current & probable future value of the asset is higher than the recorded historic cost of the same asset.

REVALUATION RESERVE

• The asset can be revalued upward & unrealized gain can be credited to revaluation reserve

• Does not allow revaluing upward property, plant & equipment/investment

Extraordinary items- The gain or loss resulting from a transactions or event that is both unusual in nature & infrequent in occurrence.

Prior period items- It refer to the effects of errors & omissions in the preparation of financial statements of one or more prior years whether it includes all failure of accounting in prior years.

EXTRAORDINARY ITEMS & PRIOR PERIOD ITEMS

• Extraordinary & prior period items are disclosed without netting off for tax effects[AS-5]

• Adjustments for tax effects are required to be made while reporting the prior period items[AS-16

GOODWILL

• Goodwill is capitalized & charged to earnings over 5-10yrs period

• Goodwill & intangible assets are amortized, but they are tested at least annually for impairment[AS-142]

What is capital expense?

• Capital expenses are payments by a business for fixed assets, like buildings & equipments. Capital expenses are not used for ordinary day to day operating expenses of a business, like rent, utilities & insurance.

CAPITAL ISSUE EXPENSES

• Capital issue expenses are required to be written off against proceeds of capitals

• Capital issue expenses can be amortized or written off against reserves

PROPOSED DIVIDEND

• Dividends declared are accounted for in the year to which they relate

• Dividends are reduced from reserves in the year they are declared & will be charged to P/L above the line

INVESTMENTS IN ASSOCIATED COMPANIES

• Investments in associate companies is initially recorded at cost, identifying goodwill/capital reserve arising at the time of acquisition[AS-23]

• Investments in associates are accounted under equity method in group accounts but would be held at cost in the investor’s own A/c[AS-115]

PREOPERATIVE EXPENSES

• Direct revenue expenses like preliminary & indirect like incidental, are allowed to be capitalized

• Expenses have to be charged to revenue & assets are capitalized as a normal organization[AS-7]

EMPLOYEE BENEFITS

• Provision for leave encashment is accounted based on actuarial valuation

• Provision for leave encashment is not usually based on actuarial valuation

LOSS ON EXTINGUISHMENT OF DEBT

• Debt extinguishment premiums are adjusted against securities premium A/c

• Premiums for early extinguishment of debt are expended as incurred

THANK YOU