indian gaap v/s us gaap

5/20/2018 indian gaap v/s us gaap

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INDIAN GAAP Vs US GAAP

Ronita A (1)Shashikant S(45)

AshutoshM(58)

Shraddha T(47)

Kiran P (35)


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Introduction to GAAP

Indian Accounting Standards (AS) & US GAAP

Why US GAAP

Comparison between Indian GAAP Vs US GAAP AS2 Vs ARB 43Valuation of Inventories

AS28 Vs SFAS 144Impairment of Assets

AS17 Vs SFAS-131 - Segmental Reporting

AS21 Vs SFAS-94 - Consolidation of Balance Sheet

Agenda


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What is GAAP?

Books of OriginalEntriesSubsidiaryBooks

Ledger Accounts

AccountingPractices /

AccountingStandards

(GAAP)

Profit & LossAccountsBalance SheetCash flowStatementsEtc.

Input / Row

MaterialProcess Output

Generally Accepted Accounting Principles (GAAP) :-

Accounting rules used to prepare, present and report financial

statements

For a wide variety of entities, including publicly traded and

privately held companies, non-profit organizations, and

government authorities.


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PRINCIPLES OF GAAP GAAP is based on a few principles which include

Consistency

Relevance

Reliability

Comparability

Indian Accounting Standards - Principle based

In India the Institute of Chartered Accounts of India (ICAI) isresponsible to frame guideline and standards relating tovarious accounting issues.

US GAAP - Rule-based

In US Financial Accounting Standards Board (FASB)establishes GAAP for public and private companies.

PRINCIPLES OF GAAP


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There are significant differences between IndianGAAP and US GAAP. US GAAP stipulate stringentaccounting treatment as well as disclosure norms,whereas their Indian GAAP in many cases have

relaxed requirements e.g. AS 3,AS 17,AS 18.Similarly, there are several areas where no

Accounting Standard have been issued by ICAI .These differences lead to wide variations whenFinancial Results of Indian Companies arecomputed under US GAAP and it is found thatProfits computed under US GAAP are generallylower.

Why Compare?


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Indian GAAP & US GAAP

In Indian GAAP financial statements are preparedaccording to the principal of conservatism which states that

Anticipate no profits and provide for all losses

And in US GAAP conservatism is not considered- Revenueis recognized as and when it is earned or realized or

realizable.

For example a media company recognizes revenue when

the ads are aired even if the payment is not received or

where payment is received in advance.


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Valuation of Inventories (AS2 Vs ARB43)

Inventories includes assets that are held in the normalcourse of business for sale or assets in process ofproduction for such sale or materials consumed forsuch production process.

INDIAN GAAP AS 2 US GAAP ARB-43

BASIS OF MEASUREMENT As per Indian GAAP inventories are valued at

lower of cost or Net realizable value.

As per us GAAP the prime basis for

accounting for inventory is cost.

CALCULATION OF NET REALISABLE VALUE (NRV)

NRV = SELLING PRICESELLING EXPENSES NRV = SELLING PRICESELLING EXPENSES

PROFIT.

METHODS USED FOR VALUATION

FIFO, WEIGHTED AVG COST METHOD FIFO, LIFO, WEIGHTED AVG COST METHOD

Companies following above methods - Aditya

Birla Nuvo Ltd, Pidlite, Tata Motors

Multinational companies like ABBOTT,

Apple, American express, Microsoft,

Verizon, Pfizer, Wallmart (LIFO), .


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Impairment of Assets (AS28 Vs SFAS144)

If recoverable amount of an asset < carrying amount

Carrying amount should be reduced to its recoverable

amountThis reduction is an impairment of loss


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Illustration

Company pu rchased $2,000,000of equipment

(to be used in the production of a new type of laser printer)

Depreciationis determined over a useful l i fe of six y ears

At the beginn ing of year 3:

- the machine's book va lue: reducedby accumulated depreciat ionto $1,400,000 (given)

At that time,

- new techno logyis developed

causing a significant reduction in the selling price

as well as a reduction in anticipated demand for the product.


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Management estimates that the equipment will beuseful for only two more yearsand will have nosignificant residual value.

Management must decide if the events occu rr ing inyear 3warrant a wri te-downof the assetbelow$1,400,000.

A wri te-downwould be appropr iateif the companydecided that it would be unable to ful ly recoverthisamount through fu ture use.


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Impairment loss : recognised as an expense in statementof profit and loss immediately

For revalued assets : deducted from revaluation reserve.

A disc losu re no te is needed to descr ibe the

impairment loss .

A description of the impaired asset or asset group

The facts and circumstances leading to the impairment The amount of the loss if not separately disclosed on

the face of the income statement

The method used to determine fair value.


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Applicability

Applicable to Not Applicable to

Fixed assests

Intangible assests

Inventories

Asset arising from

construction contract

Financial asset &contractual right toreceive cash (debtors)

Standard is effective from 1-4-2005exception : effective from 1-4-20041) whose equity shares are listed in stock exchange or in theprocess of listing2) whose turnover exceeds 50 crores


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Todays Discussion

PROPERTY, PLANT, AND EQUIPMENT & Fin ite-

Life INTANGIBLE Assets

Indefin ite L ife INTANGIBLE Assets OTHER

THAN Goodwi l l

GOODWILL

REVERSAL


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PROPERTY, PLANT, AND EQUIPMENT & Finite-Life INTANGIBLEAssets

The Jasmine Tea Company has a factory that has significantlydecreased in value due to technological innovations in theindustry.

U.S. GAAP: - there is no im pairment loss

because the sum of undiscounted future cash flowsexceed the book value

INDIAN GAAP: there is impairment loss

book valueof $18.5 m ill io nThe recoverable amountis $16 mil l io n,

Because its higher of :

NPV(value-in-use) : ($16 million)

NSP(fair value less costs to sell) : ($15.5 million).

Impairment loss : $2.5 m ill ion. ( 18.516 )


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Indefinite Life INTANGIBLE Assets OTHER THANGoodwill

U.S. GAAP : The impairment loss is measured as thedifference between book value and fair value,

While calculating NSP : cost of d ispos alis reduced onlywhen theasset is to be dispo sed off

If certain criteria are met, indefinite-life intangible assets should becombined for the required annual impairment test.

INDIAN GAAP : Impairment loss is the difference between book

value and the recoverable amount (higher of NPV or NSP )

NSP is calculated by reducing cost of disposal from its Fair valueirrespective of the fact whether asset is to be disposed off or not

indefinite-life intangible assets may not be combined with otherindefinite-life intangible assets for the required annual impairment test.


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GOODWILL

U.S. GAAP : only Bottom-Uptest is followed

2010

Upjane Corp.

$400 million

$100 million

F.V.

Goodwill

Pharmacopia

acquisition $500 million


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GOODWILL

End of 2011

Pharmacopia

C.V. (including goodwill : $100)

F.V. (except goodwill)

F.V.$440 million$360 million

$335 million

Impairment test performed byUpjane corp


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GOODWILL

Step I : Recoverability

Book value (440) > Fair value (360)

impairment loss is indicated


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GOODWILL

implied F.V. of Goodwill = units F.V. - FV except GW

$360 million $335 million

$25 million

Therefore, Implied Fair Value of Goodwill = $25 million


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GOODWILL

BV of Pharmacopia s net assets : $440 million(including $100 goodwill asset)

BV of Goodwill = $100 million

Impairment loss on GW = BV - implied FV

- $25 million$100 million

$75 million

Year 2011


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SL

RecognizedGoodwill @ 25 lacs

acquired

X Y Z

77 lacs

C.V. of assets (except Goodwill) of X,Y, Z

ZYX20 lacs 25 lacs 30 lacs

19 lacsR.V. (estimated)

2001

INDIAN GAAP : if required, both Bottom-Up& Top-downare followed

Senario:-

Goodwill can not be allocated on a reasonable and consistent basis to

the CGU under consideration AL


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GOODWILL ...(Contd.....)

1st stage: AL per forms bo t tom up test for X

X

20 lacs

19 lacs

1 lacs

C.V. Except Goodwill

Less R.V.

Impairment loss

allocated to assets of Div.X (except Goodwill)

Year 2004


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C.V. (except goodwill)

5 lacs

80 lacs

C.V. Goodwill

Total C.V.

revised C.V. 79 lacs

R.V. 77 lacs

Impairment loss 2 lacs

Larger CGU : SL

X Y Z

20 lacs

2nd stage: AL per forms Top down test for X

25 lacs 30 lacs


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Therefore, Goodwill should be written down to 3 lac

In the P & L account of year 2004,

AL recognises impairment loss on account of goodwill at Rs. 3 lac &

Impairment loss of other asset of division X at Rs. 1 lac


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REVERSAL

U.S. GAAP : Prohibits the reversal of impairment loss

INDIAN GAAP : It is permitted.

External sources of information

The assets market value has increasedsignificantly during the period

Signi f icant changes du r ing the per iod

Changes in discount rateused in calculating the assets value in use

Internal sources of information

signi f icant ch anges with a favourable effect on the enterpr ise

Evidence is avai lable from internal repo rt ing


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Segmental Reporting (AS17 Vs SFAS131)

To Better understand the performance of theenterprise

To Better Assess the risks and returns of the

enterprise To make more informed Judgement about the

enterprise as wholeICAI FASB

As per Indian GAAP, Segmental Information

should be prepared in confirmative with AS1 (

Accounting policies)

As per US GAAP doesn't prescribe the

accounting policies to be used.

As per Indian GAAP, Segmental &

Geographical reporting in compulsory

As per US GAAP, Presentation of only operating

Segmental reporting is compulsory


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Consolidated Balance Sheet (AS21 Vs SFAS 94)

.ICAI FASB

Two major aspects:-

1) Control

2) Requirement

Consolidated Balance Sheet : - A financial statements of a parent and itssubsidiaries as a single economic entity.


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Major Difference betweenAS21 Vs SFAS 94

ICAI FASB

Indirect control in companies are

considered as subsidiaries.

Only majority owned companies are

considered as subsidiaries.

IC A I- S hould be part of C B S F A S B - c an not be part of C B S

X

1) C ontrol


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ICAI FASB

As per Indian Balance Sheet - 69

subsidiaries are taken in to accounts

for preparation of Consolidated

Balance Sheet (CBS)

As per US GAAP only - 65 subsidiaries

are taken in to account for preparation

of Consolidated Balance Sheet (CBS)

Consolidated Balance Sheet of Tata Motors Ltd. FY 11-12

Figures in Rs. Crores Indian Balance Sheet 20-F US Balance Sheet Difference

Assets 145,382.64 142,921.26 2,461.38

Equity & Liabilities 145,382.64 142,921.26 2,461.38

Net Profit 13,516.50 11,644.04 1,872Figures in Rs. Crores


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ICAI FASB

Standalone statement is mandatory

requirement as per ICAI

Standalone statement is not permitted

as per FASB

As per ICAI, Only listed companies are

required to prepare Consolidated

Balance Sheet (CSB) as per format

prescribed.

US GAAP Consolidated Balance Sheet is

compulsorily requirement.

2) R equirement


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ICAI FASB

Both, Standalone & Consolidated Balance

sheets are required as per Indian GAAP,

hence it provides more information to stake

holders.

Only consolidated statement might mislead

to stake holders in absence of Standalone

statement.

Consolidated balance sheet is inflated with

figures even though company doesn't have

majority contol in subsidairy's business

affairs.

Figures of only majority stake holding are

included in CBS, Hence it will reduce the

chances of inflating CBS.

Observation


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Thank you..

indian gaap v/s us gaap

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