Escolar Documentos
Profissional Documentos
Cultura Documentos
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
A comparative analysis of accounting pronouncements under US GAAP, Indian GAAP and IAS is
presented in the table below. The analysis seeks to identify the significant areas of accounting, a
summary of the important applicable pronouncements under these three frameworks of reporting and a
comparison of the similarities and differences between these. In this analysis, US GAAP is taken as the
primary reporting framework and Indian GAAP and IAS pronouncements are compared alongside.
This is organized by principal accounting area. To enable ease of use, a topic-wise index is presented
first. This index identifies the accounting area under US GAAP together with the relevant accounting
pronouncements and the corresponding applicable pronouncement under Indian GAAP and IAS. A
comparison between US GAAP, Indian GAAP and IAS is then presented for each identified area.
Index
US GAAP Indian GAAP IAS
Accounting changes (Source: APB 20) Changes in Accounting Policies Changes in Accounting Policies
(Source: AS 5) (Source: IAS 8)
Accounting policies (Source: APB 22) Disclosure of Accounting Policies Presentation of Financial Statements
(Source: AS 1) (Source: IAS 1)
Adjustments to financial statements of Prior period adjustments (Source: Prior period adjustments (Source:
prior periods (Sources: FAS 16 and AS 5) IAS 8)
109, APB 9 and 20)
Balance sheet – classification and No specific accounting Presentation of Financial Statements
display (Sources: ARB 43, ch3A, pronouncement (Source: IAS 1)
APB 6 and 10, FAS 6, FIN 39 and 41)
Business Combinations (Sources: Accounting for Amalgamations Business Combinations (Source:
ARB 43, Ch 1A, ARB 51, APB 16, (Source: AS 14) IAS 22)
AIN-APB 16, FAS 10, 38, 72, 79, 87,
106, 109, 111, 121 and 135, FIN 4
and 9, FTB 85-5)
Capital stock (Sources: ARB 43, ch1A, No specific accounting Presentation of Financial Statements
ch1B and ch7B, APB 6, 9, 12, 14 and pronouncement (Source: IAS 1)
29, FAS 129)
Cash flow statements (Sources: Cash flow statements (Sources: AS 3 Cash flow statements (Source: IAS 7)
FAS 95, 102, 104, 115 and 117) and SEBI guidelines on cash flow
statements for listed companies)
Commitments: Long-term obligations No corresponding accounting No corresponding accounting
(Sources: FAS 47 and 129) pronouncement pronouncement
Compensation: Stock based (Sources: SEBI (Employee Stock Option Scheme No corresponding accounting
APB 25, AIN-APB 25, ARB 43, ch13B, And Employee Stock Purchase pronouncement
FAS 109, 123 and 128, FIN 28 and Scheme) Guidelines, 1999.
FTB 97-1) [applicable to listed companies only]
Compensation to Employees: No specific accounting No specific accounting pronouncement
Deferred Compensation Agreements pronouncement
and Paid Absences [Sources: APB 12,
FAS 43, 106, 111, 112 and 123]
Comprehensive income (Source: No corresponding accounting Presentation of Financial Statements
FAS 130) pronouncement (Source: IAS 1)
70
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
undertaken by ASB.
Income taxes (Sources: APB 2, 4, 10 Income taxes (Source: GN, Income taxes (Source: IAS 12)
and 23, AIN-APB 4, FAS 37, 60, 95, Accounting for Taxes on Income) AS
109, 115, 123, 130 and 135, FTB 82- under finalisation by ASB in
1) December 2000.
Intangible assets (Sources: ARB 43, No corresponding accounting Intangible assets (Source: IAS 38)
Ch5, APB 9 and 17, AIN-APB 17, pronouncement. AS 14 covers
FAS 44, 72, 109, 121 and 135, FIN 9, goodwill and AS 10 covers Patents,
FTB 85-6) etc.
Interest: Capitalization of Interest AS - 16 Interest: Capitalization of Interest
Costs (Sources: FAS 34, 42, 58, 62, 87 Costs (Sources: IAS 23)
and 121, FIN 33)
Interest: Imputation of an Interest No corresponding accounting No corresponding accounting
Cost (Sources: APB 12 and 21, AIN- pronouncement pronouncement
APB 21, FAS 34 and 109)
Interim Financial Reporting (Sources: No corresponding accounting Interim Financial Reporting (Source:
APB 28, FAS 3, 16, 69, 95, 109, 128, pronouncement IAS 34)
130, 131 and 135, FIN 18, FTB 79-9;)
Inventory (Sources: ARB 43, Ch3A Valuation of Inventories (Source: Inventories (Source: IAS 2)
and 4, FAS 133) AS 2)
Investments: Debt and Equity Accounting for Investments (Source: Accounting for Investments (Source:
Securities (Sources: ARB 43, FAS 91, AS 13) IAS 25)
115, 124, 125, 130, 133 and 135,
FTB 79-19 and 94-1)
Investments: Equity Method (Sources: No corresponding accounting Accounting for Investments in
APB 18, AIN-APB 18, FAS 58, 94, pronouncement Associates (Source: IAS 28) and
109, 115, 128 and 133, FIN 35, Financial Reporting of Interests in
FTB 79-19) Joint Ventures (Source: IAS 31)
Leases (Sources: FAS 13, 22, 23, 27, AS-19 Accounting for Leases Leases (Source: IAS 17)
28, 29, 91, 94, 98, 109 and 125,
FIN 19, 21, 23, 24, 26 and 27,
FTB 79-10, 79-12, 79-13, 79-14, 79-
15, 79-16(R), 85-3, 86-2 and 88-1)
Lending activities (Sources: FAS 91, No corresponding accounting No specific accounting pronouncement
115, 124, 125 and 133 pronouncement
Liabilities: Extinguishments (Sources: No corresponding accounting Liabilities: Extinguishments (Source:
APB 26, AIN-APB 26, FAS 4, 64, 84, pronouncement IAS 39)
111 and 125, FTB 80-1)
Non-monetary transactions (Sources: No corresponding accounting No specific accounting pronouncement
APB 29, FAS 109 and 123, FIN 30) pronouncement
Pension costs (Sources: FAS 87, 88, Accounting for Retirement Benefits in Employee benefits (Source: IAS 19)
106, 109, 130, 132 and 135) the Financial Statements of Employers
(Source: AS 15)
Postretirement Benefits Other Than No specific accounting No specific accounting pronouncement
Pensions (Sources: FAS 88, 106, 112, pronouncement
132 and 135)
Property, Plant and Equipment Accounting for Fixed Assets (AS 10) Property, Plant and Equipment
72
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Accounting changes
US GAAP Indian GAAP IAS
Accounting changes are defined as a Accounting policies are defined as the A change in accounting policy is
change in (a) an accounting principle, “specific accounting principles and the treated retrospectively by restating all
(b) an accounting estimate, or (c) the methods of applying those principles prior periods presented and adjusting
reporting enterprise (which is a special adopted by an enterprise in the opening retained earnings
type of change in accounting principle. preparation and presentation of (benchmark).
The correction of an error in financial statements”.
Changes in accounting policy are
previously issued financial statements
Changes in accounting policies are made only if required by statute, or by
is not deemed to be an accounting
permitted only if the adoption of a an accounting standard setting body,
change.
different accounting policy is required or if the change will result in a more
A presumption in preparing financial by statute or for compliance with an appropriate presentation of events or
statements is that an accounting accounting standard or if it is transactions in the financial statements
principle once adopted should not be considered that the change would of the enterprise.
changed in accounting for events and result in a more appropriate
Changes in accounting policies are
transactions of a similar type. That presentation of the financial statements
applied retrospectively unless the
presumption may be overcome only if of the enterprise.
amount of any resulting adjustment
the enterprise justifies the use of an
The following are not considered as that relates to prior periods is not
alternative acceptable accounting
changes in accounting policies: reasonably determinable. Resulting
principle on the basis that it is
adjustments are reported as an
preferable. Adoption of an accounting policy
adjustment to the opening balance of
for events or transactions that
The cumulative effect of a change in an retained earnings. Comparative
differ in substance from previously
accounting principle shall be included information is restated unless it is
occurring events or transactions,
in net income of the period of the impracticable to do so.
e.g., introduction of a formal
change and presented in the income
retirement gratuity scheme by an Changes in accounting policy are
statement net of related tax effects after
employer in place of ad hoc ex- applied prospectively when the amount
extraordinary items. This does not
gratia payments to employees on of the adjustment to the opening
apply to changes in certain specified
retirement; and balance of retained earnings required
accounting principles that are made by
above cannot be reasonably
retroactive restatement. Adoption of a new accounting
determined.
policy for events or transactions
73
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Accounting policies
US GAAP Indian GAAP IAS
Accounting policies are the specific Accounting policies are defined as the IAS 1 defines overall considerations
accounting principles and the methods “specific accounting principles and the for financial statements including:
of applying those principles that are methods of applying those principles
Fair presentation;
judged by the management of the adopted by an enterprise in the
Accounting policies;
enterprise to be the most appropriate preparation and presentation of
Going concern;
in the circumstance to present fairly financial statements”.
Accrual basis of accounting;
financial position, and results of
AS 1 states that there is no single list of Consistency of presentation;
operations in accordance with GAAP
accounting policies applicable to all Materiality and aggregation;
and that accordingly are adopted for
circumstances. Differing circumstances Offsetting; and
preparing financial statements.
in which enterprises operate in a Comparative information.
(APB 22, ¶6)
situation of diverse and complex
IAS 1 also prescribes the minimum
When financial statements are issued economic activity make alternative
structure and content, including
purporting to present fairly financial accounting principles and methods of
certain information required on the
position, changes in financial position, applying those principles acceptable.
face of the financial statements:
and results of operations in
The choice of appropriate accounting
accordance with generally accepted Balance sheet (current/non-current
principles and the methods of applying
accounting principles, a description of distinction is not required);
those principles in the specific
all significant accounting policies of
circumstances of each enterprise calls Income statement (operating/non-
the reporting entity should be included
for considerable judgement by the operating separation is required);
as an integral part of the financial
management of the enterprise.
statements. (APB 22, ¶8) Cash flow statement (IAS 7 sets
The following are examples of the out the details); and
Disclosure of accounting policies
areas in which different accounting
should identify and describe the Statement showing changes in
policies may be adopted by different
accounting principles followed by the equity.
enterprises.
reporting entity and the methods of
applying those principles. In IAS 1 also requires entities to disclose
Methods of depreciation, depletion
particular, it should encompass those the significant accounting policies
and amortization;
accounting principles and methods that adopted in the preparation and
Conversion or translation of
involve any of the following: presentation of their financial
foreign currency items;
statements.
Valuation of inventories;
Selection from existing acceptable
Treatment of goodwill;
alternatives;
Valuation of investments;
Principles and methods peculiar to Accounting for retirement benefits;
the industry in which the reporting Recognition of profit on long-term
entity operates; and contracts;
Valuation of fixed assets; and
Unusual or innovative applications
Treatment of contingent liabilities.
of generally accepted accounting
principles [and principles and
methods peculiar to the industry in
which the reporting entity
operates]. (APB 22, ¶12)
The primary considerations governing
the selection and application of
accounting policies are:
Prudence: In view of the uncertainty
attached to future events, profits are
not anticipated but recognized only
when realized though not necessarily
in cash. Provisions are made for all
known liabilities and losses even
75
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Current assets are those assets that are that intention is supported by an
reasonably expected to be realized in agreement to refinance, or to
cash or sold or consumed during the reschedule payments, which is
normal operating cycle of the business. completed before the financial
(ARB 43, ch3A, ¶4) statements are approved.
Current liabilities are those Assets and liabilities are not offset
obligations whose liquidation is except when offsetting is required or
reasonably expected to require the use permitted by another standard.
of existing resources properly A financial asset and a financial
classifiable as current assets or the liability are offset and the net amount
creation of other current liabilities. reported in the balance sheet when an
(ARB 43, ch3A, ¶7) enterprise both:
Operating cycle is the average time has a legally enforceable right to
intervening between the acquisition of set off the recognized amounts;
materials or services and the final cash and
realization [from the sale of products
or services. (ARB 43, ch3A, ¶5) intends either to settle on a net
basis, or to realize the asset and
Short-term obligations are those settle the liability simultaneously.
obligations that are scheduled to (IAS 32, ¶33)
mature within one year after the date
of an enterprise's balance sheet or, for Items of income and expense are not
those enterprises that use the operating offset except when:
cycle concept of working capital, an IAS requires or permits it; or
within an enterprise's operating cycle
that is longer than one year. (FAS 6, gains, losses and related expenses
¶2) arising from the same or similar
transactions and events are not
material.
The general principle of accounting is
that offsetting of assets and liabilities
in the balance sheet is improper except
when a right of setoff exists. (APB 10,
¶7(1))
Generally, a right of setoff is a debtor's
legal right, by contract or otherwise, to
discharge all or a portion of the debt
owed to another party by applying
against the debt an amount that the
other party owes to the debtor. A right
of setoff exists when all of the following
conditions are met:
Each of two parties owes the other
determinable amounts;
The reporting party has the right to
set off the amount owed with the
amount owed by the other party;
The reporting party intends to set
79
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
off; and
The right of setoff is enforceable at
law.
A debtor having a valid right of setoff
may offset the related asset and
liability and report the net amount.
(FIN 39, ¶5)
As regards the offsetting of assets
against the tax liability, the only
exception to the general principle
occurs when it is clear that a purchase
of securities (that are acceptable for
the payment of taxes) is in substance
an advance payment of taxes that will
be payable in the relatively near future,
so that in the special circumstances the
purchase is tantamount to the
prepayment of taxes. (APB 10, ¶7(3))
80
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Business combinations
US GAAP Indian GAAP IAS
A business combination occurs when a AS 14 contemplates two types of IAS 22 discusses the accounting
corporation and one or more amalgamations namely, treatment to record a business
incorporated or unincorporated amalgamations where there is a combination as a purchase or uniting of
businesses are brought together into genuine pooling of interests including interests.
one accounting entity. The single entity assets, liabilities, shareholders’
From the date of acquisition, an
carries on the activities of the interests and businesses of the
acquirer:
previously separate, independent amalgamating companies and
enterprises. The purchase method and amalgamations as a result of which incorporates into the income
the pooling-of-interests method are one company acquires another statement the results of operations
both acceptable in accounting for company. The former is known as of the acquiree; and
business combinations, although not as amalgamations in the nature of a
recognizes in the balance sheet the
alternatives in accounting for the same merger and is accounted for by the
identifiable assets and liabilities of
business combination. pooling-of-interests method. The
latter are known as amalgamations in the acquiree and any goodwill or
A business combination is accounted negative goodwill arising on the
the nature of purchase and are
for as a pooling of interests if it meets acquisition.
accounted for by the purchase method.
certain specified criteria. Business
An acquisition is accounted for at its
combinations that do not meet all of the The use of the pooling-of-interests
cost which is the amount of cash or
specified criteria are accounted for as method is applied to amalgamations
purchases. cash equivalents paid or the fair value,
in the nature of a merger. The
at the date of exchange, of the other
conditions to be satisfied for an
The criteria for the pooling method purchase consideration given by the
amalgamation to be classified as a
relate to the attributes of the combining acquirer in exchange for control over
merger are set out below.
enterprises before the combination, the the net assets of the other enterprise,
manner of combining the enterprises, All assets and liabilities of the plus any costs directly attributable to
and the absence of certain planned transferor company become the the acquisition.
transactions after the combination. assets and liabilities of the
Identifiable assets and liabilities that
There are 12 specified criteria. The transferee company after
amalgamation; are recognized above are those of the
pooling-of-interests method accounts
acquiree that existed at the date of
for a business combination as the
At least 90% of the shareholders acquisition together with any liabilities
uniting of the ownership interests of
of the transferor company become recognized below.
two or more companies by exchange of
equity shareholders of the
equity securities. No acquisition is They are recognized separately as at
transferee company after the
recognized because the combination is the date of acquisition if it is probable
amalgamation. This excludes
accomplished without disbursing that any associated future economic
shares held by the transferee
resources of the constituents. benefits will flow to, or resources
company, its subsidiaries or
Ownership interests continue and the embodying economic benefits will flow
nominees;
former bases of accounting are from, the acquirer and a reliable
retained. The recorded assets and The consideration payable to the measure is available of their cost or
liabilities of the constituents are equity shareholders of the fair value.
carried forward to the combined transferor company who agree to
corporation at their recorded amounts. become equity shareholders of the
transferee company is wholly
discharged by the issue of equity
shares of the transferee company,
except that cash may be paid to
settle fractional shares;
The combined enterprise recognizes The transferee company intends to Liabilities are not recognized at the
those assets and liabilities recorded in continue the business of the date of acquisition if they result from
conformity with generally accepted transferor company; and the acquirer’s intentions or actions.
accounting principles by the separate Liabilities are not recognized for future
No adjustments are made to the
enterprises at the date the combination losses or other costs expected to be
book values of the assets and
is consummated. The combined incurred as a result of the acquisition,
liabilities of the transferor
81
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
enterprise records the historical cost- company as incorporated in the whether they relate to the acquirer or
based amounts of the assets and books of account of the transferee the acquiree.
liabilities of the separate enterprises company, except to ensure
At the date of acquisition, the acquirer
because the existing basis of uniformity of accounting policies.
recognizes a provision that was not a
accounting continues.
Under the pooling-of-interests liability of the acquiree at that date if
Where the separate enterprises have method, assets, liabilities and reserves the acquirer has:
recorded assets and liabilities under of the transferor company are
at, or before, the date of
differing methods of accounting, the recorded at their existing carrying
acquisition, developed the main
amounts are adjusted to the same basis amounts. Where the transferor and
features of a plan that involves
of accounting if the change was transferee companies have conflicting
terminating or reducing the
otherwise appropriate for the separate accounting policies, a uniform set of
activities of the acquiree and that
enterprise. A change in accounting accounting policies is adopted. The
relates to compensating employees
method to conform the individual effect of a change in accounting
of the acquiree for termination of
methods is applied retroactively, and policies on the financial statement
their employment, closing facilities
financial statements presented for prior should be reported in accordance with
of the acquiree, eliminating
periods are restated. AS 5.
product lines of the acquiree or
An enterprise that applies the pooling- The difference between the amount of terminating contracts of the
of-interests method of accounting to a equity shares or other securities acquiree that have become onerous
combination reports results of issued by the transferor company because the acquirer has
operations for the period in which the (including any additional communicated to the other party at,
combination occurs as though the consideration in the form of cash or or before, the date of acquisition
enterprises were combined as of the other assets distributed) and the share that the contract will be terminated;
beginning of the period. Results of capital of the transferor company is
by announcing the main features of
operations for that period thus adjusted to the reserves of the
the plan at, or before, the date of
comprise those of the separate transferee company.
acquisition, raised a valid
enterprises combined from the
An amalgamation that does not meet expectation in those affected by the
beginning of the period to the date the
any one or more of the conditions set plan that it will implement the
combination is consummated and those
out above is accounted for as a plan; and
of the combined operations from that
purchase.
date to the end of the period.
The transferee company has the
Income of the combined corporation
option of either incorporating assets
include income of the constituents for
and liabilities of the transferee
the entire fiscal period in which the
company at their existing carrying
combination occurs. The reported
amounts or allocating the
income of the constituents for prior
consideration to individual
periods are combined and restated as
identifiable assets and liabilities of the
income of the combined corporation.
transferor company on the basis of
their fair values at the date of
amalgamation.
Balance sheets and other financial Identifiable assets and liabilities may by the earlier of three months after
information of the separate enterprises include assets and liabilities not the date of acquisition and the date
as of the beginning of the period are earlier included in the financial when the annual financial
presented as though the enterprises had statements of the transferor company. statements are approved, developed
been combined at that date. Financial The determination of fair values may those main features into a detailed
statements and financial information of be dependent on the intentions of the formal plan identifying at least the
the separate enterprises presented for transferee company. business or part of a business
prior years are restated on a combined concerned, the principal locations
Reserves of the transferor company,
basis to furnish comparative affected; the location, function, and
other than statutory reserves are not
information. All restated financial approximate number of employees
included in the reserves of the
statements and financial summaries who will be compensated for
transferee company. Statutory
should indicate clearly that financial terminating their services; the
reserves are recorded in the financial
data of the previously separate expenditures that will be
statement of the transferee company
undertaken and when the plan will
82
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
The purchase method accounts for a Schemes of amalgamation may If the fair value of an intangible asset
business combination as the acquisition provide for the payment of additional cannot be measured by reference to an
of one enterprise by another. The amounts contingent upon the active market (as defined in IAS 38),
acquiring corporation records at its occurrence of one or more future the amount recognized for that
cost the acquired assets less liabilities events. Such contingent consideration intangible asset at the date of the
assumed. The difference between the should be included in the acquisition is limited to an amount that
cost of an acquired enterprise and the consideration if the payment is does not create or increase negative
sum of the fair values of tangible and probable and a reasonable estimate of goodwill that arises on the acquisition.
identifiable intangible assets less the amount can be made.
Any excess of the cost of the acquisition
liabilities assumed is recorded as
The treatment prescribed by a scheme over the acquirer’s interest in the fair
goodwill. The reported income of an
of amalgamation sanctioned under a value of the identifiable assets and
acquiring corporation includes the
statute, of reserves of the transferor liabilities acquired as at the date of the
operations of the acquired enterprise
company, should be followed. exchange transaction is described as
after acquisition, based on the cost to
goodwill and recognized as an asset.
the acquiring corporation. The disclosures to be made in the first
Goodwill is carried at cost less any
financial statements following the
The general principles to apply the accumulated amortization and any
amalgamation are set out below.
historical cost basis of accounting to an accumulated impairment losses.
acquisition of an asset depend on the Names and general nature of
Goodwill is amortized on a systematic
nature of the transaction: business of the amalgamating
basis over its useful life. The
companies;
An asset acquired by exchanging amortization period reflects the best
cash or other assets is recorded at Effective date of amalgamation estimate of the period during which
cost, i.e. at the amount of cash for accounting purposes; future economic benefits are expected
disbursed or the fair value of other to flow to the enterprise. There is a
Particulars of the scheme rebuttable presumption that the useful
83
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
assets distributed; sanctioned under a statute; life of goodwill will not exceed twenty
years from initial recognition. The
An asset acquired by incurring Description and number of shares
amortization method used reflects the
liabilities is recorded at cost, i.e. at issued, together with the
pattern in which the future economic
the present value of the amounts to percentage of each company’s
benefits arising from goodwill is
be paid; and equity shares exchanged to effect
expected to be consumed. The straight-
the amalgamation;
An asset acquired by issuing shares line method is adopted unless there is
of stock of the acquiring enterprise In case of a pooling-of-interests, persuasive evidence that another
is recorded at the fair value of the the amount of any difference method is more appropriate in the
asset, i.e. shares of stock issued are between the consideration and the circumstances. The amortization for
recorded at the fair value of the value of net identifiable assets each period is recognized as an
consideration received for the acquired, and the treatment expense.
stock. thereof; and
The amortization period and the
The nature of an asset determines an In case of a purchase, the amount amortization method are reviewed at
acquirer's subsequent accounting for of any difference between the least at each financial year end. If the
the cost of that asset. The basis for consideration and the value of net expected useful life of goodwill is
measuring the cost of an asset, whether identifiable assets acquired, and significantly different from previous
amount of cash paid, fair value of an the treatment thereof including the estimates, the amortization period is
asset received/given up, amount of a period of amortization of any changed accordingly.
liability incurred, or fair value of stock goodwill arising on the
issued, has no effect on the subsequent amalgamation.
accounting for that cost.
The enterprise that distributes cash or If there has been a significant change
other assets or incurs liabilities to in the expected pattern of economic
obtain the assets or stock of another benefits from goodwill, the method is
enterprise is clearly the acquirer. The changed to reflect the changed pattern
identities of the acquirer and the and accounted for as a change in
acquired enterprise are usually evident accounting estimates by adjusting the
in a business combination effected by amortization charge for the current and
the issue of stock. The acquiring future periods.
enterprise normally issues the stock
Any excess, as at the date of the
and commonly is the larger enterprise.
exchange transaction, of the acquirer’s
If a new enterprise is formed to issue
interest in the fair values of the
stock to effect a business combination
identifiable assets and liabilities
to be accounted for by the purchase
acquired over the cost of the
method, one of the existing combining
acquisition, is recognized as negative
enterprises is considered the acquirer
goodwill.
on the basis of the evidence available.
When the acquisition agreement
The same accounting principles apply
provides for an adjustment to the
to determining the cost of assets
purchase consideration contingent on
acquired individually, those acquired
one or more future events, the amount
in a group, and those acquired in a
of the adjustment is included in the cost
business combination. A cash payment
of the acquisition as at the date of
by an enterprise measures the cost of
acquisition if the adjustment is
acquired assets less liabilities assumed.
probable and the amount can be
Similarly, the fair values of other assets
measured reliably.
distributed, such as marketable
securities or properties, and the fair The cost of the acquisition is adjusted
value of liabilities incurred by an when a contingency affecting the
acquiring enterprise measure the cost amount of the purchase consideration
of an acquired enterprise. is resolved subsequent to the date of the
acquisition, so that payment of the
The cost of an enterprise acquired in a
amount is probable and a reliable
business combination accounted for by
84
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
the purchase method includes the direct estimate of the amount can be made.
costs of acquisition. Costs of
Identifiable assets and liabilities, which
registering and issuing equity securities
are acquired but which do not satisfy
are a reduction of the otherwise
the criteria above for separate
determinable fair value of the
recognition when the acquisition is
securities. However, indirect and
initially accounted for, are recognized
general expenses related to
subsequently as and when they satisfy
acquisitions are deducted as incurred
the criteria. The carrying amounts of
in determining net income.
assets and liabilities acquired are
adjusted when, subsequent to
acquisition, additional evidence
becomes available to assist with the
estimation of the amounts assigned to
those assets and liabilities.
A business combination agreement may In applying the pooling of interests
provide for the issuance of additional method, the financial statement items of
shares of a security or the transfer of the combining enterprises for the
cash or other consideration contingent period in which the combination occurs
on specified events or transactions in and for any comparative periods
the future. Contingent consideration disclosed are included in the financial
may be based on earnings or security statements of the combined enterprises
prices or a combination of both. as if they had been combined from the
beginning of the earliest period
Some agreements provide that a
presented.
portion of the consideration be placed
in escrow to be distributed or to be The financial statements of an
returned to the transferor when enterprise do not incorporate a uniting
specified events occur. Either debt or of interests to which the enterprise is a
equity securities may be placed in party if the date of the uniting of
escrow, and amounts equal to interest interests is after the date of the most
or dividends on the securities during recent balance sheet included in the
the contingency period may be paid to financial statements.
the escrow agent or to the potential
Any difference between the amount
security holder.
recorded as share capital issued plus
Cash and other assets distributed, any additional consideration in the
securities issued unconditionally and form of cash or other assets and the
amounts of contingent consideration amount recorded for the share capital
that are determinable at the date of acquired is adjusted against equity.
acquisition are included in determining
Expenditures incurred in relation to a
the cost of an acquired enterprise and
uniting of interests are recognized as
recorded at that date. Consideration
expenses in the period in which they
that is issued or issuable at the
are incurred.
expiration of the contingency period or
that is held in escrow pending the
outcome of the contingency is disclosed
but not recorded as a liability or shown
as outstanding securities unless the
outcome of the contingency is
determinable beyond reasonable doubt.
Contingent consideration is usually
recorded when the contingency is
resolved and consideration is issued or
becomes issuable.
85
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Capital stock
US GAAP Indian GAAP IAS
Items that are normally charged to Although Indian GAAP does not have IAS 1 sets out the presentation
expense in the current or future years any accounting pronouncements as requirements in respect of share
cannot be charged against additional regards “Share capital” and capital as discussed below.
paid-in capital. The only exception to “Reserves and surplus”, CA 56 sets
for each class of share capital, the
this rule occurs when an enterprise out the disclosure requirements in this
number of shares authorized,
undergoes reorganization or quasi area.
issued and fully paid, and issued
reorganization, in which the
SchVI, Part I requires the following but not fully paid, par value per
shareholders have been fully informed
disclosures in respect of share capital: share or that the shares have no par
and have approved the action.
value, a reconciliation of the
(ARB 43, ch1A, ¶2) Authorized, issued, subscribed,
number of shares outstanding at
called up and paid up capital,
The following capital transactions are the beginning and at the end of the
(distinguishing between the
always excluded from the year, the rights, preferences and
various classes of capital);
determination of net income or the restrictions attaching to that class,
results of operations: In respect of each class of capital, including restrictions on the
number of shares allotted as fully distribution of dividends and the
Adjustments or charges or credits
paid up pursuant to a contract repayment of capital, shares in the
resulting from transactions in the
without payment being received in enterprise held by the enterprise
enterprise's own capital stock;
cash; itself or by subsidiaries or
Transfers to and from accounts associates of the enterprise; and
In respect of each class of capital, shares reserved for issue under
properly designated as
number of shares allotted as fully options and sales contracts,
appropriated retained earnings
paid up by way of bonus shares, including the terms and amounts;
(such as general purpose
including source namely,
contingency reserves or provisions
capitalization of profits, share a description of the nature and
for replacement costs of fixed
premium account etc; purpose of each reserve within
assets); and
owners’ equity;
Calls unpaid separately disclosing
Adjustments made pursuant to a
calls unpaid by secretaries, when dividends have been
quasi reorganization. (APB 9, ¶28)
directors and others; proposed but not formally
Disclosure of changes in the separate approved for payment, the amount
Forfeited shares;
accounts comprising stockholders' included (or not included) in
equity (in addition to retained Terms of redemption or liabilities; and
earnings) and of the changes in the conversion of preference share the amount of any cumulative
number of shares of equity securities capital together with the earliest preference dividends not
during at least the most recent annual date for the redemption or recognized.
fiscal period and any subsequent conversion;
interim period presented is required. If the enterprise is without share
Particulars of options on unissued
(APB 12, ¶10) capital, information equivalent to that
share capital; and required above is disclosed, showing
Particulars of different classes of movements during the period in each
preference share capital. category of equity interest and the
rights, preferences and restrictions
attaching to each category of equity
interest.
The distribution of non-monetary SchVI, Part I specifies the following Treasury shares are presented in the
assets, other than an enterprise's own disclosures in respect of reserves and balance sheet as a deduction from
capital stock, to stockholders as surplus: equity. The acquisition of treasury
dividends is generally referred to as a shares is presented in the financial
Separate disclosure of capital
dividend-in-kind. A dividend-in-kind is statements as a change in equity. No
reserves, capital redemption
recorded at the fair value of the asset gain or loss is recognized in the
reserves, share premium account,
transferred, and a gain or loss is income statement on the sale, issuance,
other reserves (specifying their
recognized by the enterprise on the or cancellation of treasury shares.
nature) after deducting debit
Consideration received towards
88
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
disposition of the asset. (APB 29, ¶18) balances in profit and loss account treasury shares is presented in the
(if any), balance in profit and loss financial statements as a change in
The issuer of a dividend-in-kind is
account after proposed allocations equity. (SIC 16, ¶4)
required to disclose in the financial
such as dividends, bonus or
statements for the period the nature of There are no specific pronouncements
transfers to reserves and proposed
the transaction, the basis of accounting for the treatment of dividends in kind,
additions to reserves;
for the assets transferred, and the stock dividends and stock splits.
gains and losses recognized. (APB 29, Additions and deductions since the
¶28) last balance sheet date are to be
disclosed separately under each of
Enterprises are required to disclose the
the above heads;
aggregate liquidation preference of
their outstanding preferred stock and The word “fund” in relation to any
the price at which the preferred stock reserve is used where such reserve
may be called or redeemed. is specifically represented by
Enterprises are also required to earmarked investments; and
disclose the aggregate and per-share
The share premium account should
amounts of cumulative preferred
provide details of its utilization in
dividends in arrears. (FAS 129, ¶6 and
the manner provided in Sec 78 of
¶7)
CA 56 in the year of utilization.
Enterprises issuing stock dividends
Sec 78 specifies that the share
shall capitalize retained earnings in an
premium account should be used for:
amount equal to the fair value of the
additional shares issued. Enterprises Paying up unissued shares of the
effecting stock splits shall capitalize company to be issued to the
retained earnings to the extent members of the company as fully
required by law. Stock distributions paid bonus shares;
involving issuance of additional shares
Writing off preliminary expenses
of more than 25 percent of the number
of the company;
previously outstanding are generally
accounted for as stock splits. (ARB 43, Writing off the expenses of, or the
ch7B) commission paid or discount
allowed on any issue of shares or
debentures of the company; or
In providing for the premium
payable on the redemption of any
redeemable preference shares or of
any of the debentures of the
company.
Stock dividends do not give rise to any There are no specific pronouncements
change in either the enterprise's assets for the treatment of dividends in kind,
or its respective shareholders' stock dividends and stock splits and
proportionate interests therein. treasury stock.
However, many recipients of stock
dividends look upon them as
distributions of corporate earnings and
usually in an amount equivalent to the
fair value of the additional shares
received. Furthermore, when
issuances of stock dividends are small
in comparison with the shares
previously outstanding, they do not
have any apparent effect upon the
share market value. Therefore, stock
dividends are accounted for by
89
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
operating cash receipts and payments cash receipts and payments for flows of a foreign subsidiary are
and (b) all items that are included in items in which the turnover is translated at the exchange rates at the
net income that do not affect operating quick, the amounts are large, and dates of the cash flows.
cash receipts and payments. If the the maturities are short. (AS 3, Cash flows associated with
direct method is used, a reconciliation ¶22) extraordinary items are classified as
of net income and net cash flow from
Cash flows arising from each of the operating, investing or financing
operating activities should be provided
following activities of a financial activities as appropriate.
in a separate schedule. (FAS 95, ¶28)
enterprise may be reported on a net Cash flows from interest and dividends
The statement of cash flows reports the basis: received and paid are appropriately
reporting currency equivalent of
cash receipts and payments for the classified consistently from period to
foreign currency cash flows, using the
acceptance and repayment of period as either operating, investing or
current exchange rate at the time of the
deposits with a fixed maturity date; financing activities.
cash flows. The effect of exchange rate
changes on cash held in foreign the placement of deposits with and
currencies is disclosed as a separate withdrawal of deposits from other
item in the reconciliation of beginning financial enterprises; and
and ending balances of cash and cash
equivalents. (FAS 95, ¶25) cash advances and loans made to
customers and the repayment of
Information about investing and those advances and loans. (AS 3,
financing activities not resulting in ¶24)
cash receipts or payments in the period
is provided separately. (FAS 95, ¶32) Cash flows arising from transactions in
a foreign currency are recorded in an
enterprise's reporting currency. The
effect of changes in exchange rates on
cash and cash equivalents held in a
foreign currency is reported separately
in the reconciliation of the changes in
cash and cash equivalents during the
period. (AS 3, ¶25)
Cash flows associated with
extraordinary items are classified as
arising from operating, investing or
financing activities as appropriate and
separately disclosed. (AS 3, ¶28)
Cash flows from interest and dividends
received and paid are disclosed
separately depending on their source
and the nature of operations of the
enterprise. (AS 3, ¶30)
Cash flows arising from taxes on
income are separately disclosed and
classified as cash flows from operating
activities unless they are specifically
identified with financing and investing
activities. (AS 3, ¶34)
The aggregate cash flows arising from
acquisitions and from disposals of
subsidiaries or other business units
should be presented separately and
classified as investing activities. (AS 3,
¶37)
93
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
vesting period. treatment shall be reversed by a credit the number of share options held
to employee compensation expense. by equity compensation plans, or
Fair value is determined using an
option-pricing model that takes into The SEBI guidelines are effective held by employees under such
account the stock price at grant date, June 19, 1999 and apply to all stock plans, that lapsed during the
the exercise price, the expected option compensation plans established after period;
life, the volatility of the underlying this date. the amount, and principal terms, of
stock and the expected dividends on it any loans or guarantees granted by
and the risk-free interest rate over the the reporting enterprise to, or on
expected option life. Nonpublic behalf of, equity compensation
entities are permitted to exclude the plans;
volatility factor in estimating the value
of their stock options, which results in the fair value, at the beginning and
measurement at minimum value. the end of the period, of the
enterprise’s own equity financial
The fair value of an option estimated at instruments (other than share
the grant date is not subsequently options) held by equity
adjusted for changes in the price of the compensation plans;
underlying stock or its volatility, the
life of the option, dividends on the the fair value at the date of issue,
stock, or the risk-free interest rate. of the enterprise’s own equity
financial instruments (other than
Equity instruments granted or share options) issued by the
otherwise transferred directly to an enterprise to equity compensation
employee by a principal stockholder plans or to employees, or by equity
are stock-based employee compensation plans to employees,
compensation and should be accounted during the period.
for by the entity under either APB 25
or FAS 123, whichever method the If it is not practicable to determine the
entity is applying, unless the transfer fair value of the equity financial
clearly is for a purpose other than instruments (other than share options),
compensation. disclose that fact.
Employee stock purchase plans that When there is more than one equity
allow employees to purchase stock at a compensation plan, disclosures may be
discount from market price are not made in total, separately for each plan
compensatory if they satisfy three or in groupings that are considered
conditions: most useful for assessing the
enterprise’s obligations. Where
The discount is relatively small (5
disclosure is given in total for a
percent or less, though in some
grouping of plans, they are provided in
cases a greater discount also might
the form of weighted averages or of
be justified as non-compensatory);
relatively narrow ranges.
Substantially all full-time
When there is more than one equity
employees may participate on an
compensation plan, disclosures may be
equitable basis; and
made in total, separately for each plan
The plan incorporates no option or in groupings that are considered
features such as allowing the most useful for assessing the number
employee to purchase the stock at and timing of shares that may be issued
a fixed discount from the lesser of and the cash that may be received as a
the market price at grant date or result. It may be useful to distinguish
date of purchase options that are “out-of-the-money”
from those that are “in-the-money”. It
The cumulative amount of may also be useful to combine the
compensation cost recognized for a disclosures in groupings that do not
stock-based award that ordinarily
97
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
results in a future tax deduction under aggregate options with a wide range of
existing tax law should be considered exercise prices or dates.
to be a deductible temporary difference
in applying FAS 109. The deferred tax
benefit (or expense) that results from
increases (or decreases) in that
temporary difference, for example, as
additional service is rendered and the
related cost is recognized, shall be
recognized in the income statement.
FAS 123 requires that an employer's
financial statements include certain
disclosures about stock-based
employee compensation arrangements
regardless of the method used to
account for them.
Pro forma disclosures required by an
employer that continues to apply the
accounting provisions of APB 25
should reflect the difference between
compensation cost, if any, included in
net income and the related cost
measured by the fair value based
method defined in FAS 123, including
tax effects, if any. The required pro
forma amounts will not reflect any
other adjustments to net income or
earnings per share.
A summary of APB 25 and related
interpretations is presented below.
Entities should recognize
compensation costs for stock issued
through non-variable employee stock
option, purchase, and award plans as
the difference between the quoted
market price of the stock at the
measurement date (ordinarily the date
of grant or award) less the amount, if
any, the employee is required to pay.
This cost is charged to expense over
the periods in which the employee
performs the related services.
The measurement date for stock
appreciation rights and other variable
stock option and award plans is not the
date of grant or award. Compensation
relating to such variable plans is
measured at the end of each period as
the amount by which the quoted market
value of the shares of the employer's
stock covered by a grant exceeds the
option price or value specified under
the plan. This is charged to expense
98
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Comprehensive income
US GAAP Indian GAAP IAS
Comprehensive income is defined as IAS 1 requires entities to prepare and
“the change in equity [net assets] of a present a statement of changes in
business enterprise during a period equity.
from transactions and other events and
This statement shows:
circumstances from non-owner
sources. It includes all changes in each item of income and expense,
equity during a period except those gain or loss that is recognized
resulting from investments by owners directly in equity, and the total of
and distributions to owners”. (CON 6, these items. Examples include
¶70) property revaluation, certain
foreign currency translation gains
A full set of financial statements for a
and losses, and changes in fair
period should show financial position
values of financial instruments;
at the end of the period, earnings (net
and
income) for the period, comprehensive
income (total non-owner changes in net profit or loss for the period.
equity) for the period, cash flows
A total of these two items is not
during the period, and investments by
presented.
and distributions to owners during the
period. (CON 5, ¶13) Owners' investments and withdrawals
of capital and other movements in
The term “comprehensive income” is
used to describe the total of all retained earnings and equity capital
components of comprehensive income, are shown in the footnotes
accompanying the financial
including net income. The term “other
statements:
comprehensive income” is used to
refer to revenues, expenses, gains, and Same as above, but with a total of
losses that are included in the two items (sometimes called
comprehensive income but excluded 'comprehensive income'). Again,
from net income. (FAS 130, ¶10) owners' investments and
withdrawals of capital and other
The purpose of reporting
movements in retained earnings
comprehensive income is to report a
and equity capital are shown in the
measure of all changes in equity of an
footnotes accompanying the
enterprise that result from recognized
financial statements.
transactions and other economic
events of the period other than The statement shows both
transactions with owners. (FAS 130, recognized gains and losses that
¶11) are not reported in the income
statement and owners' investments
Items included in other comprehensive
and withdrawals of capital and
income are classified based on their
other movements in retained
nature. For example, other
earnings and equity capital. An
comprehensive income is classified
example of this would be the
separately into foreign currency items,
traditional multicolumn statement
minimum pension liability adjustments,
of changes in shareholders' equity.
and unrealized gains and losses on
certain investments in debt and equity
securities. (FAS 130, ¶17)
The total of other comprehensive
income for a period is required to be
transferred to a component of equity
that is displayed separately from
retained earnings and additional paid-
101
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Consolidation
US GAAP Indian GAAP IAS
The purpose of consolidated statements The Report of the Kumar Mangalam A parent company presents
is to present the results of operations Committee on Corporate Governance consolidated financial statements
and the financial position of a parent took note of the discussions of the SEBI unless it:
company and its subsidiaries Committee on Accounting Standards.
is itself a wholly owned
essentially as if the group were a single The report recommends that
subsidiary; or
enterprise with one or more branches companies should be required to give
or divisions. Consolidated statements consolidated financial statements in is virtually wholly owned and the
are more meaningful than separate respect of all subsidiaries in which parent obtains the approval of the
statements and are usually necessary they hold 51 % or more of the share owners of the minority interest.
for a fair presentation when one of the capital.
enterprises in the group directly or All subsidiaries, domestic and foreign,
SEBI is currently discussing this issue are consolidated unless:
indirectly has a controlling financial
with the ICAI to issue an AS on
interest in the other enterprises. control is intended to be temporary
consolidated financial statements.
(ARB 51, ¶1) because the subsidiary is acquired
and held exclusively with a view
If an enterprise has one or more
to its subsequent disposal in the
subsidiaries, consolidated statements
near future; or
rather than parent-company financial
statements are the appropriate it operates under severe long-term
general-purpose financial statements. restrictions that significantly
(FAS 94, ¶61) impair its ability to transfer funds
to the parent.
The usual condition for a controlling
financial interest is ownership of a Subsidiaries excluded from
majority voting interest, i.e. ownership consolidation on the grounds above
by one enterprise, directly or are accounted for in the consolidated
indirectly, of over fifty percent of the financial statements as if they are
outstanding voting shares of another investments in accordance with IAS 25.
enterprise. A majority-owned
subsidiary shall not be consolidated if Intra-group balances and transactions,
control is likely to be temporary or if it resulting unrealized profits and
does not rest with the majority owner resulting unrealized intra-group losses
(as, for instance, if the subsidiary is in are eliminated in full on consolidation.
legal reorganization or in bankruptcy When the financial statements of a
or operates under foreign exchange subsidiary used in preparing the
restrictions, controls, or other consolidation are drawn up to a date
governmentally imposed uncertainties which is different from that of the
so severe that they cast significant parent, adjustments are effected for
doubt on the parent's ability to control significant transactions or other events
the subsidiary). (FAS 94, ¶13) that occur between the two dates
(which should be within three months
of each other).
A difference in fiscal periods of a Consolidated financial statements are
parent and subsidiary does not justify prepared using uniform accounting
the latter’s exclusion from policies for like transactions and other
consolidation. It is ordinarily feasible events in similar circumstances.
for the subsidiary to prepare
When an investment ceases to be a
statements for a period that
subsidiary, it is accounted for as if it
corresponds with or closely
were an investment under IAS 25 or an
approaches the fiscal period of the
associate under IAS 28, as applicable.
parent. Where the difference is not
more than three months, it is In a parent’s separate financial
acceptable to use the subsidiary's statements, investments in subsidiaries
105
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
statements for its fiscal period. that are included in the consolidated
Recognition is given to the effect of financial statements are either:
intervening events that materially
accounted for using the equity
affect the financial position or results
method (under IAS 28); or
of operations by disclosure. (ARB 51,
¶4) carried at cost or revalued amounts
under the parent’s accounting
Consolidated statements should
policy for long term investments
disclose the consolidation policy being
(under IAS 25).
followed. (ARB 51, ¶5)
Investments in subsidiaries that are
In the preparation of consolidated
excluded from consolidation are
statements, intercompany balances and
accounted for in the parent’s separate
transactions are eliminated. Further,
financial statements as if they are
any intercompany profit or loss on
investments in accordance with IAS 25.
assets remaining within the group shall
be eliminated. The concept usually An SPE is consolidated when the
applied for this purpose is gross profit substance of the relationship between
or loss (ARB 51, ¶6) an enterprise and the SPE indicates
that the SPE is controlled by that
Income taxes paid on intercompany
enterprise.
profits on assets remaining within the
group are deferred or the
intercompany profits to be eliminated
in consolidation are appropriately
reduced. (ARB 51, ¶17)
If one enterprise purchases two or
more blocks of stock of another
enterprise at various dates and
eventually obtains control of the other
enterprise, the date of acquisition
depends on the circumstances.
(ARB 51, ¶10)
Where two or more purchases are The following circumstances, for
made over a period of time, the example, may indicate a relationship in
retained earnings of the subsidiary at which an enterprise controls an SPE
acquisition are generally determined and consequently consolidate the SPE:
on a step-by-step basis. Where small
in substance, the activities of the
purchases are made over a period of
SPE are being conducted on behalf
time and then a purchase is made
of the enterprise according to its
which results in control, the date of the
specific business needs so that the
latest purchase may be considered as
enterprise obtains benefits from
the date of acquisition. (ARB 51, ¶10)
the SPE’s operation;
When a subsidiary is acquired during
in substance, the enterprise has the
the year, there are two methods of
decision-making powers to obtain
dealing with the results of its
the majority of the benefits of the
operations in the consolidated income
activities of the SPE or, by setting
statement. One method is to include
up an “autopilot” mechanism, the
the subsidiary in the consolidation as
enterprise has delegated these
though it had been acquired at the
decision making powers;
beginning of the year, and to deduct at
the bottom of the consolidated income in substance, the enterprise has
statement the pre-acquisition earnings rights to obtain the majority of the
applicable to each block of stock. This benefits of the SPE and therefore
presents results that are more may be exposed to risks incident to
106
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Contingencies
US GAAP Indian GAAP IAS
A contingency is an existing condition, Contingencies are conditions or IAS 37 requires that provisions are
situation, or set of circumstances situations, the ultimate outcome of recognized in the balance sheet when
involving uncertainty as to possible which are known or determined only an enterprise has a present obligation
gain (gain contingency) or loss (loss on the occurrence, or non-occurrence, (legal or constructive) as a result of a
contingency) to an enterprise that will of one or more uncertain future events. past event, it is probable (i.e. more
ultimately be resolved when one or (AS 4, ¶3) likely than not) that an outflow of
more future events occur or fail to resources embodying economic
Contingent losses are provided for by a
occur. (FAS 5, ¶1) benefits will be required to settle the
charge in the statement of profit and
obligation and a reliable estimate can
The likelihood that the future event or loss if:
be made of the amount of the
events confirm the loss or impairment
it is probable that future events obligation.
of an asset or the incurrence of a
will confirm that an asset has been
liability can range from probable to Provisions should be measured in the
impaired or a liability has been
remote. The terms probable, balance sheet at the best estimate of
incurred as at the balance sheet
reasonably possible, and remote are the expenditure required to settle the
date, after taking into account any
used to identify three areas within that present obligation at the balance sheet
related probable recovery; and
range: date, in other words, the amount that
a reasonable estimate of the an enterprise would rationally pay to
Probable means the future event or
amount of the resulting loss can be settle the obligation, or to transfer it to
events are likely to occur.
made. (AS4, ¶10) a third party, at that date.
Reasonably possible means the
The existence of a contingent loss is An enterprise should take risks and
chance of the future event or
disclosed in the financial statements if uncertainties into account. However,
events occurring is more than
either of the conditions above is not uncertainty does not justify the
remote but less than likely; and
met, unless the possibility of a loss is creation of excessive provisions or a
Remote means the chance of the remote. (AS4, ¶11). This arises on the deliberate overstatement of liabilities.
future event or events occurring is premise that where there is conflicting An enterprise should discount a
slight. (FAS 5, ¶3) or insufficient evidence for estimating provision where the effect of the time
the amount of a contingent loss, value of money is material and should
An estimated loss from a loss take future events, such as changes in
readers of financial statements should
contingency is accrued by a charge to the law and technological changes,
be made aware of the existence and
income if both of the following into account where there is sufficient
nature of the contingency.
conditions are met: objective evidence that they will occur.
The existence and amount of
a. Information available prior to The amount of a provision should not
guarantees, obligations arising from
issuance of the financial be reduced by gains from the expected
discounted bills of exchange and
statements indicates that it is disposal of assets (even if the expected
similar obligations are generally
probable that an asset was disposal is closely linked to the event
disclosed in financial statements by
impaired or a liability was giving rise to the provision) nor by
way of note, even though the possibility
incurred at the date of the financial expected reimbursements (for example,
that a loss to the enterprise will occur
statements. It must be probable through insurance contracts, indemnity
is remote. (AS 4, ¶5.5)
that one or more future events will clauses or suppliers' warranties).
occur confirming the fact of the
loss; and
b. The amount of loss can be
reasonably estimated. (FAS 5, ¶8)
If condition a. is met with respect to a The amount at which a contingency is When it is virtually certain that
particular loss contingency and the stated in the financial statements is reimbursement will be received if the
reasonable estimate of the loss is a based on information available at the enterprise settles the obligation, the
range, condition b. is met and an date on which the financial statements reimbursement should be recognized
amount is accrued for the loss. If some are approved. Events occurring after as a separate asset.
amount within the range appears at the the balance sheet date that indicate
A provision is used only for
time to be a better estimate than any that an asset was impaired, or that a
expenditures for which the provision
108
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
other amount within the range, that liability existed, at the balance sheet was originally recognized and should
amount shall be accrued. If no amount date are taken into account in be reversed if an outflow of resources
within the range is a better estimate identifying contingencies and in is no longer probable.
than any other amount, however, the determining the amounts at which such
IAS 37 sets out three specific
minimum amount in the range shall be contingencies are included in financial
applications of these general
accrued. (FIN 14, ¶3) statements. (AS 4, ¶7.1)
requirements:
A disclosure of the nature of an Provisions for contingencies are not
a provision is not recognized for
accrual made pursuant to the above made in respect of general or
future operating losses;
provisions and, in some circumstances unspecified business risks as they do
the amount accrued, may be necessary not relate to conditions or situations a provision is recognized for an
for the financial statements not to be existing at the balance sheet date. onerous contract - a contract in
misleading. The terminology used (AS 4, ¶5.6) which the unavoidable costs of
should be descriptive of the nature of meeting the obligations under the
Contingent gains are not recognized in
the accrual. (FAS 5, ¶9) contract exceed the expected
the financial statements. (AS4, ¶12)
economic benefits; and
Where an accrual is not made for a
Events occurring after the balance
loss contingency because one or both a provision for restructuring costs
sheet date are those significant events,
of the conditions above are not met, or is recognized only when an
both favorable and unfavorable, that
if an exposure to loss exists in excess of enterprise has a detailed formal
occur between the balance sheet date
the amount accrued, disclosure of the plan for the restructuring and has
and the date on which the financial
contingency is made when there is a raised a valid expectation in those
statements are approved by the Board
reasonable possibility that a loss or an affected that it will carry out the
of Directors in the case of a company,
additional loss may have been restructuring by starting to
and, by the corresponding approving
incurred. The disclosure should implement that plan or announcing
authority in the case of any other
indicate the nature of the contingency its main features to those affected
entity.
and also give an estimate of the by it. For this purpose, a
possible loss or range of loss or state AS 4 discusses two types of events: management or board decision is
that such an estimate cannot be made. not enough. A restructuring
(FAS 5, ¶10) those which provide further
provision should exclude costs -
evidence of conditions that existed
such as retraining or relocating
General or unspecified business risks at the balance sheet date; and
continuing staff, marketing or
do not meet the conditions for accrual
those that are indicative of investment in new systems and
and no accrual for loss (reserves for
conditions that arose subsequent to distribution networks - that are not
general contingencies) shall be made.
the balance sheet date. necessarily entailed by the
(FAS 5, ¶14)
restructuring or that are associated
with the enterprise's ongoing
activities.
After the date of an enterprise's Post balance sheet date events may IAS 37 prohibits the recognition of
financial statements but before those indicate the need for adjustments to contingent liabilities and contingent
financial statements are issued, assets and liabilities as of the balance assets. An enterprise should disclose a
information may become available sheet date or may require disclosure. contingent liability, unless the
indicating that an asset was impaired (AS 4, ¶8.1) possibility of an outflow of resources
or a liability was incurred after the embodying economic benefits is
Adjustments to assets and liabilities are
date of the financial statements or that remote, and disclose a contingent asset
required for post balance sheet date
there is at least a reasonable possibility if an inflow of economic benefits is
events that provide additional
that an asset was impaired or a liability probable
information affecting the determination
was incurred after that date. The
of the amounts relating to conditions An enterprise should adjust its
information may relate to a loss
existing at the balance sheet date. financial statements for events after the
contingency that existed at the date of
(AS 4, ¶8.2) balance sheet date that provide further
the financial statements. On the other
evidence of conditions that existed at
hand, the information may relate to a Assets and liabilities are adjusted for
the balance sheet. An enterprise
loss contingency that did not exist at post balance sheet date events that
should not adjust its financial
the date of the financial statements. In indicate that the going concern
statements for events after the balance
none of the cases was an asset assumption is not appropriate. (AS 4,
sheet date that are indicative of
impaired or a liability incurred at the
109
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
date of the financial statements, and the ¶15) conditions that arose after the balance
condition for accrual is therefore not sheet date.
Adjustments to assets and liabilities are
met. Disclosure of those kinds of losses
not appropriate for events occurring If dividends to holders of equity
or loss contingencies may be necessary,
after the balance sheet date, if such instruments are proposed or declared
however, to keep the financial
events do not relate to conditions after the balance sheet date, an
statements from being misleading.
existing at the balance sheet date. enterprise should not recognize those
Where disclosure is deemed necessary,
(AS 4, ¶8.3) dividends as a liability. An enterprise
the financial statements should indicate
may give the disclosure of proposed
the nature of the loss or loss Disclosures are made in the report of
dividends either on the face of the
contingency and give an estimate of the the approving authority of events
balance sheet as an appropriation
amount or range of loss or possible occurring after the balance sheet date
within equity or in the notes to the
loss or state that such an estimate that represent material changes and
financial statements.
cannot be made. Occasionally, in the commitments affecting the financial
case of a loss arising after the date of position of the enterprise. (AS 4, ¶15) An enterprise should not prepare its
the financial statements where the financial statements on a going
Certain events that take place post
amount of asset impairment or liability concern basis if management
balance sheet date are sometimes
incurrence can be reasonably determines after the balance sheet date
reflected in the financial statements
estimated, disclosure may best be made either that it intends to liquidate the
by supplementing the historical because of statutory requirements or
enterprise or to cease trading, or that it
financial statements with pro forma because of their special nature. These
has no realistic alternative but to do so.
include the amount of dividend
financial data giving effect to the loss There is no requirement to adjust the
proposed or declared by the enterprise
as if it had occurred at the date of the financial statements where an event
after the balance sheet date in respect
financial statements. It may be after the balance sheet date indicates
of the period covered by the financial
desirable to present pro forma that the going concern assumption is
statements. (AS 4, ¶8.5)
statements, usually a balance sheet not appropriate for part of an
only, in columnar form on the face of enterprise.
the historical financial statements.
(FAS 5, ¶11) An enterprise should disclose the date
when the financial statements were
authorized for issue and who gave that
authorization.
Certain loss contingencies are Where the enterprise's owners or others
disclosed in financial statements even have the power to amend the financial
though the possibility of loss may be statements after issuance, the
remote. The common characteristic of enterprise should disclose that fact.
those contingencies is a guarantee,
An enterprise should update
normally with a right to proceed
disclosures that relate to conditions
against an outside party in the event
that existed at the balance sheet date in
that the guarantor is called upon to
the light of any new information that it
satisfy the guarantee. Examples
receives after the balance sheet date
include (a) guarantees of indebtedness
about those conditions.
of others, (b) obligations of commercial
banks under standby letters of credit,
and (c) guarantees to repurchase
receivables that have been sold or
otherwise assigned. Disclosure of
those loss contingencies, and others
that in substance have the same
characteristics, should be continued
and should include the nature and
amount of the guarantee.
Consideration should be given to
disclosing, if estimable, the value of
any recovery that could be expected to
result, such as from the guarantor's
110
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Accounting for the costs of computer software developed or obtained for internal use (continued)
US GAAP Indian GAAP IAS
The process of data conversion from
old to new systems includes purging or
cleansing of existing data,
reconciliation or balancing of the old
data and the data in the new system,
creation of new/additional data, and
conversion of old data to the new
system. Data conversion often occurs
during the application development
stage. Data conversion costs are
expensed as incurred.
Post-Implementation/Operation Stage.
Internal and external training costs and
maintenance costs are expensed as
incurred.
Internal costs incurred for maintenance
are expensed as incurred. Entities that
cannot separate internal costs on a
reasonably cost-effective basis between
maintenance and relatively minor
upgrades and enhancements should
expense such costs as incurred.
External costs incurred under
agreements related to specified
upgrades and enhancements are
expensed or capitalized depending on
their nature. External costs related to
maintenance, unspecified upgrades and
enhancements, and costs under
agreements that combine the costs of
maintenance and unspecified upgrades
and enhancements are recognized in
expense over the contract period on a
straight-line basis unless another
systematic and rational basis is more
representative of the services received.
Impairment is recognized and
measured in accordance with the
provisions of FAS 121. [Refer
Impairment below]
The capitalized costs of computer
software developed or obtained for
internal use should be amortized on a
straight-line basis unless another
systematic and rational basis is more
representative of the software's use.
If, after the development of internal-use
software is completed, an entity decides
to market the software, proceeds
received from the license of the
113
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Debt
US GAAP Indian GAAP IAS
Convertible debt securities are debt SchVI, Part I sets out the disclosure The only requirement relates to
securities that are convertible into requirements in respect of debt. Debt disclosure of debt in a classified
common stock of the issuer or an disclosures are made on the basis of balance sheet as current or non-
affiliated enterprise at a specified price the underlying security. current. This is in accordance with the
at the option of the holder and that are guidance contained in AS 1.
The following disclosures are required
sold at a price or have a value at
for secured debt:
issuance not significantly in excess of
the face amount. The terms of such Classified between debentures,
securities generally include: loans and advances from banks,
subsidiaries and others;
An interest rate that is lower than
the issuer could establish for Classified between loans taken
nonconvertible debt; from directors, secretaries,
treasurers and managers of the
an initial conversion price that is
company;
greater than the market value of the
common stock at time of issuance; Nature of the security offered;
and
Terms of redemption or conversion
a conversion price that does not of debentures together with the
decrease except pursuant to earliest date for the redemption or
antidilution provisions. conversion;
In most cases such securities are Guarantees given by directors,
callable at the option of the issuer and secretaries, treasurers and
are subordinated to nonconvertible managers of the company together
debt. (APB 14, ¶3) with the aggregate amount of loans
guaranteed;
The proceeds from issuance of debt
securities with detachable warrants is Interest accrued and due on
allocated between the warrants and the secured debt.
debt securities based on their relative
Note (k) of the “General instructions for
fair values at time of issuance. The
preparation of balance sheet” contained
portion allocable to the warrants is
in SchVI, Part I also requires
accounted for as additional paid-in
companies to disclose the nominal
capital. No similar allocation is made
amount and carrying amount of any of
for the issuance of either convertible
debt or debt securities with non- the company’s debentures that are held
detachable warrants. by a nominee or trustee for the
company.
When a debtor induces conversion of
convertible debt by issuing additional
securities or paying other
consideration to convertible debt
holders, there is a recognition of
expense equal to the fair value of the
additional securities or other
consideration issued to induce
conversion.
All entities that have issued securities, The following disclosures are required
including options, warrants, debt, and for unsecured debt:
stock, must comply with the disclosure
Classified between fixed deposits,
requirements of FAS 129 dealing with
loans and advances from
disclosures on capital structures.
subsidiaries, short-term loans and
115
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
Depreciation
US GAAP Indian GAAP IAS
The cost of an asset is one of the costs AS 6 does not apply to: The depreciable amount of a
of the services it renders during its depreciable asset is allocated on a
Forests, plantations and similar
useful economic life. GAAP requires systematic basis to each accounting
regenerative natural resources;
that this cost be spread over the period during the useful life of the
expected useful life of the asset in such Wasting assets including asset.
a way as to allocate it as equitably as expenditure on the exploration for
The useful lives of assets are estimated
possible to the periods during which and extraction of minerals, oils,
after considering expected physical
services are obtained from the use of natural gas and similar non-
wear and tear, obsolescence and legal
the asset. regenerative resources;
or other limits on the use of the asset.
Depreciation accounting is a system of expenditure on research and
The useful lives of major depreciable
accounting that aims to distribute the development;
assets or classes of depreciable assets
cost or other basic value of tangible
goodwill; and are reviewed periodically and
capital assets, less salvage (if any),
depreciation rates adjusted for current
over the estimated useful life of the unit live stock. and future periods if expectations are
(which may be a group of assets) in a
AS 6 also does not apply to land unless significantly different from previous
systematic and rational manner. It is a
it has a limited useful life for the estimates.
process of allocation, not of valuation.
(ARB 43, ch9C, ¶5) enterprise. The depreciation method selected is
The depreciable amount of a applied consistently unless altered
The process of using up the future
depreciable asset is allocated on a circumstances justify a change.
economic benefit or service potential of
land often takes place over a period so systematic basis to each accounting Disclosures include:
long that its occurrence is period during the useful life of the
asset. The valuation bases used for
imperceptible. Land used as a building
depreciable assets with other
site is perhaps the most common Depreciable amount means historical accounting policies.
example. In contrast, however, that cost, or other amount substituted for
process also sometimes occurs much historical cost in the financial For each major class of depreciable
more rapidly—land used as a site for statements, less the estimated residual asset, the depreciation methods
toxic waste, as a source of gravel or value. used, the useful lives or
ore, or for farming under conditions in depreciation rates used, total
which fertility dissipates relatively Depreciable assets are assets that are depreciation allocated for the
quickly and cannot be restored expected to be used during more than period and the gross amount of
economically are examples. (FAS 93, one accounting period; have a limited depreciable assets and related
¶34) useful life and are not held by an accumulated depreciation.
enterprise for the purpose of sale in the
ordinary course of business. Effect of changes in the useful
lives of major depreciable assets or
Useful life is the period over which a classes of depreciable assets in the
depreciable asset is expected to be used accounting period in which the
by the enterprise or the number of change occurs.
production or similar units expected to
be obtained from the use of the asset by In an accounting period in which
the enterprise. the depreciation method is
changed, disclosure of the
quantified effect and the reason for
the change.
Property, plant, and equipment is not The depreciation method selected is
written up by an enterprise to reflect applied consistently from period to
appraisal, market, or current values period. A change from one method of
which are above cost to the enterprise. providing depreciation to another
This may not apply to foreign should be made in accordance with
operations under unusual conditions AS 1 and 5. When such a change in the
such as serious inflation or currency method of depreciation is made,
119
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
organization costs).
Costs relating to the consumption of
economic benefits during a period may
be recognized either directly or by
relating it to revenues recognized
during the period. Other costs are
recognized as expenses in the period in
which they are incurred because the
period to which they otherwise relate is
indeterminable or not worth the effort
to determine.
Certain expenditures for start-up and
preoperative activities and
development stage enterprises are
examples of the kinds of items for
which assessments of future economic
benefits may be especially uncertain.
Costs of start-up activities, including
organization costs, are consequently
expensed as incurred.
SOP 98-5 applies to all non-
governmental entities and is effective
for financial statements for fiscal years
beginning after December 15, 1998.
128
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)
that is consistent with the way the nature of the instruments and their
entity manages or adjusts those risks. relative significance to the enterprise.
Determination of the level of detail to
A financial instrument is defined as
be disclosed about particular financial
cash, evidence of an ownership interest
instruments is a matter for judgement.
in an entity, or a contract that both:
Disclosures include:
Imposes on one entity a
contractual obligation (1) to Terms, conditions and accounting
deliver cash or another financial policies in respect of various types
instrument to a second entity or (2) of financial instruments;
to exchange other financial
Interest rate risk disclosures;
instruments on potentially
unfavorable terms with the second Credit risk disclosures;
entity; and
Fair values including information
Conveys to that second entity a on assets carried in excess of their
contractual right (1) to receive fair values;
cash or another financial
Hedges of anticipated future
instrument from the first entity or
transactions; and
(2) to exchange other financial
instruments on potentially Treasury stock.
favorable terms with the first
entity. (FAS 107, ¶3)
If it is not practicable for an entity to
estimate the fair value of a financial
instrument or a class of financial
instruments, the following is disclosed:
Information pertinent to estimating
the fair value of that financial
instrument or class of financial
instruments, such as the carrying
amount, effective interest rate, and
maturity; and
The reasons why it is not
practicable to estimate fair value.
(FAS 107, ¶14)
Appendix A to FAS 107 provides
examples of procedures for estimating
the fair value of financial instruments.
These examples are illustrative and are
not meant to portray all possible ways
of estimating the fair value of a
financial instrument in order to comply
with the provisions of FAS 107.
(FAS 107, ¶18)
Appendix B to FAS 107 provides
examples of illustrations applying the
disclosure requirements about fair
value of financial instruments. The
examples are guides to implementation
of the disclosure requirements.
Entities are not required to display the
information contained in the specific
131
Annexure IV
Comparison between USGAAP, Indian GAAP and IAS (as on April 2000)