Analysis of Financial Statement 11

8/9/2019 Analysis of Financial Statement 11

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ANALYSIS OF FINANCIAL STATEMENT

INDIAN GAAP

v/s

US GAAP


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Rakesh Puthran 08

VijayRajawat 10

Kunal Shah 30

Abhishek Sharma 36

Shweta Sheth 57

Shyam Yadav 65

Bhavik Badani 66

Dipen Mehta 70

Analysis Team


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Roadmap

Introduction Of GAAP

Why GAAP is Important?

Similarities & Differences between Indian GAAP and US

GAAP

Balance Sheet


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Definition

GAAP is the abbreviation of Generally AcceptedAccounting Principle.

GAAP are the common set of accountingprinciples, standards and procedures thatcompanies use to compile their financialstatements.

GAAP are a combination of authoritativestandards (set by policy boards) and simply thecommonly accepted ways of recording andreporting accounting information.


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KEY INFORMATION

In India, GAAP standards are set by the Institute ofChartered Accountants of India (ICAI). ICAI continuallyupdates GAAP as new accounting issues and concernsarise.

In USA, GAAP standard are set by FinancialAccounting Standards Board (FASB).

Outside the US, the equivalent of GAAP is IAS -International Accounting Standards - which ismaintained by the International Accounting StandardsBoard (IASB).

Financial statements submitted to the SEBI by publicly

traded companies are required to meet GAAP standards


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Why GAAP?

GAAP areimposedon companies so that investors haveaminimum levelofconsistencyin thefinancial statementsthey usewhenanalyzing companies for investmentpurposes.

GAAP cover such things as revenue recognition, balancesheet item classificationandoutstanding sharemeasurements.

Companies areexpected tofollow GAAP rules when

reporting their financialdata viafinancial statements.

Ifafinancial statement is not prepared using GAAPprinciples, be verywary!


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Similarities &Differences between

Indian GAAP AND USGAAP


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Financial Statements


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General Requirements

Compliance

Indian company should complywith Indian GAAP, theCompanies Act and Industry specific regulatoryrequirements. Additionallylisted companies should complywith the rules and regulations andfinancialinterpretationsofSEBI.

Thelaw requires entities todisclosewhether thefinancialstatements complywith applicableaccounting standardsand togivedetails ofnon compliances. Thereis apresumption that compliancewith accounting standards isnecessary togivea Trueand Fair View.


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CONT.

Comparatives:One year of comparatives is required for all numericalinformation in the financial statements with limitedexceptions and disclosures.

Preparation and Presentation:Financial Statements are presented on a single entityparent company (stand alone) basis. It is notmandatory to prepare consolidated financial

statements but must use the consolidation standards ifprepared. Pursuant to the listing agreements withstock exchanges, Public listed companies presentconsolidated financial statements along withstandalone financial statements.


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Format/ Presentation of financial

statements:

Under Indian GAAP,financial statements are

preparedinaccordancewith thepresentation

requirements ofScheduleVI to theCompanies

Act, 1956.

Under US GAAP arenot required to be

prepared under any specific format as longas

they complywith thedisclosure requirements

ofUS GAAP.


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Components of Financial

StatementsComponents Indian GAAP US GAAP

Balance Sheet Required Required

Income Statements Required Required

Statement of changesS/H equity

Required Required

Fund flow Statement Required Required

Accounting Policy Required Required

Notes to the FinancialStatements

Required Required


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Balance Sheet INDIAN GAAP: Accounting Standard do not prescribe any format of balance

sheet. The Companies Act prescribes a format and requirespresentation of the following items on the face of balancesheet:

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 CurrentLiabilities and Provisions, Miscellaneous expenditure.

US GAAP:Presented as total assets balancing to total liabilities andshareholders equity. Items are presented in decreasing orderof liquidity. Public entities should follow specific SECguidance.


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Income Statement

INDIAN GAAP:Accounting standards and the Companies Act prescribe disclosurenorms for certain income and expenditure items. Expenses are presented

by either function or nature. Other industry regulations prescribeindustry-specific format of income statement.

US GAAP:Presented either asA single-step format where all expenses are classified by function and arededucted from total income to give income before tax : orA multi-step format where cost of sales is deducted from sales to showgross profit, and other income and expenses are then presented to giveincome before tax.


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Statement of changes inShareholders Equity

INDIAN GAAP:No separate statement is required. Changes in shareholders equity

are disclosed in separate schedules of Share capital and Reservesand surplus

US GAAP:US GAAP does not have a Statement of Recognized Income and

Expense (SoRIE), and SEC rules require further disclosure of certainitems in notes.

.


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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 indirectmethod. Direct method (Cash flow is derived from aggregating cashreceipts & payments associated with operating activities) , Indirectmethod (Cash flow is derived from adjusting net income fromtransaction of non cash in nature such as depreciation ).However onlyindirect method is prescribed for listed enterprises & direct forinsurance companies.

It is required for all enterprises whose turnover exceeds Rs 500Million or having borrowing over Rs. 100 million at any point of timeduring accounting period.


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Fund Flow Statement contd..

US GAAP :fund 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.


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Proposed dividend

Under Indian GAAP ,dividends declaredareaccountedfor in theyear to which theyrelate. For example,ifdividendfor the FY

1999-2000is declaredin Sep 2000, then thecorresponding chargeis madein 2000-2001as below thelineitem .

Under US GAAP dividends are reducedfromthe reserves in theyear theyaredeclared bythe Board.


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Cash Flow Statement

Under Indian GAAP inclusionofCash Flow statement infinancial statements is mandatoryonlyfor companieswhose sharearelistedon recognized stockexchanges

andC

ertainenterprises whose turnover for theaccountingperiodexceeds Rs.50 crore. Thus, unlistedcompanies escape the burdenofproviding cash flowstatements as part oftheir financial statements.

US GAAP mandates furnishingofcash flow statementsfor 3 years current year and 2 immediateprecedingyears irrespectiveofwhether the companyis listedornot .


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Depreciation

Under the Indian GAAP,depreciationis provided basedonrates prescribed by theCompanies Act, 1956. Depreciationcannot beprovidedat a ratelower thanprescribedinanycircumstance. Similarly, thereis no compulsion toprovide

depreciationat a higher rate,eveniftheactualwear and tearoftheequipments is higher than the rates providedinCompanies Act.

Under the US GAAP ,depreciation has to beprovidedover theestimated usefullifeoftheasset, thus making the Accounting

more realistic andproviding sufficient funds for replacementwhen theasset becomes obsoleteandfullywornout.


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Investment

Under Indian GAAP, Investments are classifiedasCurrent and Long term. Theseare to befurtherclassified Government or Trust securities ,Shares,

debentures or bonds Investment propertiesO

thers-specifyingnature.

Under US GAAP, Investments are required to besegregatedin 3 categories i.e. held to MaturitySecurity ( Primarily Debt Security), Trading Securityand Availablefor sales Securityand should befurthersegregatedas Current or Non current on Individualbasis.


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Intangible Assets

Goodwill Under the Indian GAAP goodwillis capitalizedand

charged toearnings over 5 to 10years period.

Under US GAAP, Goodwillandintangibleassets thathaveindefinite usefullives arenot amortized,but

theyare testedat least annuallyfor impairment using

a two-stepprocess that begins with anestimationof

thefair valueofa reporting unit.1. Potentialimpairment

2. Measures theamount ofimpairment


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Foreign CurrencyTranslation


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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 itis domiciled in recording its transaction.

US GAAP:

Emphasizes the primary economic environment in determining anentitys functional currency. It has no hierarchy of indicators. There isgreater focus on the cash flows rather than the currency that influencesthe pricing.


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TRANSLATION The IndividualEntity

INDIAN GAAP and US GAAP have similarrequirements regarding the translation of transactions byan individual entity, as follows:

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

- Monetary assets and liabilities denominated in foreign currency aretranslated at the closing rate.

- Non-monetary foreign currency assets and liabilities are translated atthe appropriate historical rate.


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TRANSLATION ConsolidatedFinancial Statements

When translating financial statements into a differentpresentation currency IFRS, US GAAP and INDIAN GAAP

require the assets and liabilities to be translated using theclosing rate. Amounts in the income statements aretranslated using the average rate for the accounting periodif the exchange rates do not fluctuate significantly. IFRSand INDIAN GAAP are silent on the translation of equity

accounts historical rates are used under US GAAP.


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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.

US GAAP:

Similar to IFRS; historical rates are used in equity.


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Long term Debt

Under US GAAP , the current portionoflong

term debt is classifiedas current liability.

Under the Indian GAAP, thereis no such

req

uire

men

tand

hen

ce

the

in

te

re

sta

ccrued

on such long term debt innot takenas current

liability.


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Employee benefits

Under Indian GAAP,provisionfor leaveencashment

is accounted basedonactuarial valuation.

Compensation toemployees whoopt for voluntary

retirement scheme can beamortizedover 60months.

Under US GAAP,provisionfor leaveencashment is

accountedonactual basis. Compensation towards

voluntary retirement schemeis to be chargedin theyear inwhich theemployees accept theoffer.


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Revaluation reserve

Under Indian GAAP,ifanenterpriseneeds to revalueits assetdue toincreasein cost ofreplacement andprovide highercharge toprovidefor such increased cost ofreplacement,then the Asset can be revalued upwardand the unrealised

gainon such revaluation can be credited toRevaluationReserve .Theincrementaldepreciationarisingout of higherbook value may beadjustedagainst theRevaluationReserveby transfer to P&L Account. However for windowdressingsomepromoters misutilise this facility to hoodwink the

shareholders on manyoccasions. US GAAP does not allow revaluing upwardproperty,plant and

equipment or investment.


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Consolidation of subsidiary

companies Under Indian GAAP ,ConsolidationofAccounts ofsubsidiary

companies is not mandatory,is mandatoryifanenterprisepresents consolidatedfinancial statements. Inother words,theaccounting standarddoes not mandateanenterprise topresent consolidatedfinancial statements but,iftheenterprisepresents consolidatedfinancial statements forcomplyingwith the requirements ofany statuteor otherwise,it shouldprepareandpresent consolidatedfinancialstatement.

Under US GAAP,Consolidationofresults ofSubsidiary

Companies is mandatory, henceeliminating material,intercompany transaction andgivinga truepictureoftheoperations and Profitabilityofthe various majorityownedBusiness ofthe Group.


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Thank You

Analysis of Financial Statement 11

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