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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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Impairment of Assets (AS28 Vs SFAS144)
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 of Assets (AS28 Vs SFAS144)
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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GOODWILL ...(Contd.....)
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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GOODWILL ...(Contd.....)
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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Major Difference betweenAS21 Vs SFAS 94
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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Major Difference betweenAS21 Vs SFAS 94
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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Major Difference betweenAS21 Vs SFAS 94
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..