ppt on ifrs, us gaap and indian gaap

7/15/2019 ppt on IFRS, US GAAP and Indian GAAP

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Differences

between

IFRS, US GAAP and Indian GAAP

Presented by :

Group 11Jaideep Singh Drall (201/2012)

Praveen Yadav (248/2012)

Rishi Pathak (254/2012)

Shreyans Jain (257/2012)

Deepraj Pathak (258/2012)

Kuldeep Singh (259/2012)


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GAAP

Abbreviation of Generally accepted Accounting Principles

Common set of accounting principles, standards and

procedures that companies use to compile their financial

statements

Combination of Authoritative standards and simply the

commonly accepted ways of recording and reporting accountinginformation

In India, GAAP standards are set by the Institute of

Chartered Accountants of India(ICAI)

In US, GAAP standards are set by the Financial AccountingStandards Board(FASB)

IFRS standards are set by the International Accounting

Standards Committee(IASC)


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Why GAAP

GAAP are imposed on companies so that investors have aminimum level of consistency in the financial statements used by

them

GAAP covers things as revenue recognition, balance sheet

item classification and outstanding share measurements

Companies are expected to follow GAAP rules when

reporting their financial data via financial statements

GAAP is only a set of guidelines, it cannot ensure that

financial statements are fraudulent

When comparing financial statements over the years, it isimportant to note any changes in GAAP over the intervening

period

If company management provides the incorrect data to

auditing firm, the resulting financial statements can be GAAP

compliant yet incorrect


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Session 1

Topics covered in the Session

Shareholders Equity

Cash Flow Statements

Foreign Currency Translations

Consolidation

Accounting for Subsidiaries including consolidation of Variable

Interest Entities (VIEs) under US GAAP and Special Purpose

Entities (SPEs) under IFRS

Accounting for Associates

Accounting for Joint Ventures


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Shareholders Equity

IFRSRecognition and Classification:

Equity Instrument:

If the instrument does not contain an obligation to transfer economic resources

Are non redeemable preference shares equity? Yes, if

Non redeemable preference shares or redeemable solely at the option of issuer and

where distributions are at the discretion of issuer

Are derivatives on own equity shares equity?

Only if they result in the delivery of a fixed amount of cash, or other financial asset for a

fixed number of an entitys own equity instruments

Purchase of own shares:

Repurchase shown as deduction from equity

Profit / loss on saleChange in equity

Dividend on ordinary equity shares

Presented as a deduction in the statement of changes in shareholders equity

Dividends are accounted in the year when proposed.


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Recognition and Classification:

Similar to IFRSAdditionally shareholder's equity analyzed between shareholders equity and other equity


Repurchased for retiring stock, excess of cost over par value may be

Charged entirely to retained earnings; or

allocated between retained earnings and additional paid-in-capital (APIC); or

charged entirely to APIC

When stock repurchased for purposes other than retiring stock, the cost of acquired stock may be

shown separately as a deduction from equity; or

treated the same as retired stock


Presented as a deduction in the statement of changes in shareholders equity

Dividends are accounted in the year when declared..

Shareholders Equity

US GAAP


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Recognition and Classification:

Equity Instrument:

If the instrument is not a preference share

A preference share is one which carries preferential right to be paid a fixed amount

or an amount calculated at a fixed rate and/ or carries a preferential right to be repaid

on a winding up or repayment of capital.


Entity may purchase its own shares provided it is in consonance with the complex legal

requirements stipulated in the Companies Act.

Also, such shares are required to be cancelled, i.e. cannot be kept in treasury.


Presented as a appropriation of profits

Dividends are accounted in the year when proposed.

Shareholders Equity

Indian GAAP


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Indian GAAP2 years

Share capital and reserves are disclosed by way of a schedule

IFRS2 years

Primary statement

Shows capital transactions with owners, movement in accumulated profits andreconciliation of equity

Other Comprehensive Income may be shown as a part of it

US GAAP3 years

May be shown as a part of notes to accounts

Shows capital transactions with owners, movement in accumulated profits and

reconciliation of equity

Other Comprehensive Income may be shown as a part of it

Shareholders Equity

Statement of changes in shareholders equity


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Common

Stock

Additional

Paid inCapital

Retained

earnings

Treasury

Stock

Cumulative

TranslationAdjustment

Accumulated

OtherComprehensive

Income

Total

Balance at

beginning of

the year

Net Income

Other

Comprehensive

Income

Dividend paid

Cumulative

Translation

Adjustment

Stock Options

Balance as at

end of the year

9

Shareholders Equity

Statement of changes in shareholders equity


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Basis of

Difference

IFRS US GAAP IGAAP

Exemptions No exemptions Limited exemptions

for certain

investment entities

Unlisted enterprises,

enterprises with a turnover

less than Rs.500 Million and

those with borrowings less

than Rs.100 Million.

Direct /

Indirect

Method

Both allowed Both allowed. Both allowed. Listed

CompaniesIndirect method

Insurance Companies Direct

method

Cash and cash

equivalents

Includes OD

repayable ondemand but not

short term bank

borrowings

OD treated as

financing cash flowrather than cash and

cash equivalents

Bank borrowings treated as

financing activities unlessused as a cash management

techniques

Periods to be

presented

2 Years 3 Years 2 Years

10

Cash Flows Statement

Major Differences


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Basis of

Difference

IFRS US GAAP IGAAP

Interest Paid Operating or

financing activity

Operating activity (to

be disclosed by way of

a note)

Financing. In the case of a

financial enterprise,

operating activities

Interest

Received

Operating or

investing activity

Operating activity Investing. In the case of a


operating activity

Dividends paid Operating or

financing

Financing Financing

Tax payments Operating Operating (to bedisclosed by way of a

note)

Operating

Dividends

received

Operating or

Investing

Operating Investing. In the case of a


operating activity.

11

Cash Flows Statement

Classification of specific items


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Foreign Currency Item Treatment

Foreign Currency Transactions Exchange rate in operation on the date of thetransaction

Foreign Currency Monetary assets

and liabilities

Closing (year-end) rate

Non-monetary foreign currency

assets and liabilities

Appropriate historical rate

Fair Valued Non-monetary items

denominated in a foreign currency

Exchange rate that existed when the fair value

was determined (IFRS and Indian GAAP

only)

Income statement amounts Historical rates of exchange at the transaction

date or a weighted average rate as a practical

alternative

Exchange gains and losses on own

foreign-currency transactions

Reported in Profit and Loss Account for the

year from ordinary activities (except in case of

imported fixed assets under Indian GAAP )

12

Foreign Currency Translation

Translation of transactionsThe individual entity


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Item TreatmentIntegral Operations in

consolidated financial

statements

Use principles applicable for individual entity

NonIntegral operations in

consolidated financialstatements

Equity BalancesHistorical rate

Other Balance Sheet ItemsClosing rate

Income Statement ItemsAverage rate

Translation DifferencesAccounted in equity (OCI)

Translation differences on

disposal of entity

Transfer to Income Statement on sale

Translation of goodwill and

fair value adjustments on

acquisition of foreign entity

Translate at closing rates

13

Foreign Currency Translation

Other Differences


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Consolidation

Definitions - Subsidiaries

Indian GAAP

Based on controlling interest, control directly or indirectly through

subsidiary (ies), by the virtue of holding the majority of voting shares or

control over the board of directors.

IFRS

Based on voting control or power to govern.

The existence of currently exercisable potential voting rights is also taken

into consideration. SPEs also need to be consolidated.

US GAAP

Controlling interest through majority ownership of voting shares or bycontract.

Consolidate variable interest entities (VIEs) in which a parent does not have

voting control but absorbs the majority of losses or returns.


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Indian GAAP

If there are severe long-term restrictions on transfer of funds to the

parent; or

the subsidiary is acquired and held for re-sale i.e. temporary

control.

US GAAP

A majority owned subsidiary shall not be consolidated if control

does not rest with the majority owner,for example

if the subsidiary is in legal reorganization or in bankruptcy or operates under foreign exchange restrictions, controls, or

other governmentally imposed uncertainties so severe that

they cast significant doubt on the parent's ability to control the

subsidiary.

Consolidation

Exclusions from Consolidation - Subsidiaries


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# DISPOSAL # LONG TERMRESTRICTION

MATERIALITY

No exclusion

S was boughtand is being

held solely

for the

purpose of

resale.

No exclusion

Severe long termrestrictions apply

to the Subsidiary,

which

significantly

impair Ss ability

to transfer funds to

P (i.e. liquidation)

No exclusion

applies (but

IAS apply onlyto material

items)

Do not exclude

2 or more

subsidiarieswho together

are material

DISSIMILARACTIVITIES

No exclusion

because Ss

business

activities are

dissimilar

from those of

the rest of the

group

# Excluded from consolidation only for annual periods ending up to December 31, 2004

Consolidation

Exclusions from ConsolidationSubsidiaries - IFRS


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Under IFRS, a parent may avoid consolidation if

the parent is a wholly owned subsidiary or a partially owned subsidiary of

another entity and its other owners, including those not entitled to vote, have been

informed about and do not object to the parent not preparing consolidated

financial statements

the parent is neither listed nor it is in the process of listing

the ultimate or any intermediate parent of the parent produces IFRS compliant

consolidated financial statements

Recent Changes

Temporary control (unless the intended period of holding is less than12 months)

is nota justification for non consolidation.

Severe long term restrictions to transfer funds to the parent are nota justification

for non consolidation.

Equity compensation plans need to be consolidatedfor annual periods beginning

on or after January1, 2005.

Consolidation

Exclusions from ConsolidationSubsidiaries - IFRS


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US GAAPConsolidate

Indian GAAPDO NOT

consolidate

IFRS

Consolidate

Employee Benefit

Funds

18

Consolidation

Employee Benefit Funds


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ConsolidationQuestion?

PrimaryBeneficiary?VIE? Consolidate

TraditionalControl

Model

Yes Yes

Yes

No

Majority

voting

rights

owned?

No consolidation

No

Consolidation

Variable Interest Entities - US GAAP


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Variable Interest Model Traditional VotingInterest Model

Applies to VIEs

Enterprise will absorb the majority ofexpected losses, receive a majority of

expected residual returns, or both

Decision-making ability is an indicator

that the party may be the primarybeneficiary

Applies to legal entities including VIE.

Unilateral control

Decision-making authority that permitscontrol over

On-going, major or central

operations of an entity

Selection, hiring and firing of

management

20

Consolidation

Variable Interest Entities - US GAAP


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Consolidation

Associates - DefinitionAssociate:

An enterprise in which the investor has significant influence and which

is neither a subsidiary nor a joint venture of the investor.

Significant Influence:

The power to participate in the financial and operating policy decisions

of the investee but is not control or joint control over those policies.

Significant influence is presumed to exist If an investor holds, directly

or indirectly (eg. through subsidiaries), 20 per cent or more of the

voting power of the investee unless it can be clearly demonstrated that

this is not the case.

Should Potenti al equity shares be taken into consideration for determiningthe 20% threshold?

Under IFRS (IAS 28)Yes.

US GAAP (APB18) and Indian GAAP (ASI 18) - No .


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Consolidation

Accounting for Investments in Associates

IFRS - IAS 27 (revised)

Use equitymethod in

consolidated

accounts

except

when

Investment is held

exclusively with a

view to disposal in

next 12 months

Associate operates

under severe long

term restrictions #

Apply IAS 39

Account for

investments as

Financial assets

# Applicable only till December 31, 2004 under IAS.


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Consolidation

Accounting for Investments in Associates

US GAAPEquity Method

Discontinue using equity method

only 3 possible circumstances

The associate

has to beconsolidated

The percentage of

voting stock in theinvestee falls below

20%

Investor loses its

ability to exercisesignificant

influence


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Near Future means a period not exceeding 12 months unless a longer

period can be justified on the basis of facts and circumstances.

Consolidation

Exceptions to use of Equity MethodIndian GAAP

Exceptions to usingEquity Method

under Indian

GAAP

The investment

is acquired and

held exclusively

with a view to

its subsequent

disposal in thenear future

The associate

operates under

severe long-term

restrictions that

significantly

impair its ability

to transfer funds

to the investor

In case the associate is not

consolidated, it should beaccounted for as an investment

under AS 13.


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US GAAP defines a Joint Venture as:

an arrangement whereby two or more parties (the venturers) jointly

control a specific business undertaking and contribute resources

towards its accomplishment.

life of the joint venture is limited to that of the undertaking which

may be of short or long-term duration depending on thecircumstances.

relationship between the venturers is governed by an agreement

(usually in writing) which establishes joint control

none of the individual venturers is in a position to unilaterally control

the venture

This feature of joint control distinguishes investments in joint

ventures from investments in other enterprises where control of

decisions is related to the proportion of voting interest held.

Consolidation

Joint Ventures - Definition


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IAS 31 (Revised) under IFRS and AS 27 under Indian GAAP: A joint venture is a contractual arrangement whereby two or

more parties undertake an economic activity that is subject to

joint control.

Joint Control

Contractually agreed

Ensures no single venture is in a position to exert unilateral

control

Consolidation

Joint Ventures - Definition


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Consolidation

Joint VenturesAccountingUS GAAP

Prescribed Method

Equity Method

Record Initially at

cost and

subsequently adjust

for share of profit /

loss

Proportionate

Consolidation:

If the venture is not

subject to joint

control and

the venturers are

individually

responsible for their

proportionate share

of the venture's

obligations.

Cost method:

when control of

the investment is

likely to be

temporary; or

when control

does not rest

with the

investor.

Proportionate consolidation is rarely used unless it is established industry practice


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Consolidation

Joint Ventures - Accounting

IFRS and Indian GAAP

Accounting driven by form of the Joint Venture

Jointly Controlled

Entities

Jointly Controlled

Operations

Jointly Controlled

Assets

An asset that is

shared and jointly

controlled

No legal entity formed

Each venturer bears

own costs and takes a

share of the proceeds

An entity is

created and

jointly controlled

Separate legal

entity formed


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Consolidation

Jointly Controlled Entities - Accounting

IFRSEither

Proportionate Consolidation; or

Equity Method

Indian GAAP

Proportionate Consolidation

C lid ti


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Consolidation

Jointly Controlled Entities - Exceptions

Indian GAAP: Exception to using proportionate consolidation:

an interest in a jointly controlled entity which is

acquired and held exclusively with a view to its

subsequent disposal in the near future; and

an interest in a jointly controlled entity whichoperates under severe long-term restrictions that

significantly impair its ability to transfer funds to the

venturer

Investment to be accounted for under AS 13Investments in case

of exceptions


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Consolidation

Fair Value Vs. Book Value Accounting

Consolidation Goodwill

IFRS 1st time consolidation Cannot be

mandatorly at Fair Value amortized

US GAAP 1st time consolidation Cannot be amortizedmandatorly at Fair Value

Indian GAAP Generally Can be amortized

at Book Value


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Session 2

Topics in this Session

Business Combinations

Intangible Assets

Capitalization of borrowing costs

Impairment of asset


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Types of Business Combinations

Types of

Business

Combinations

Acquisition or

purchase

Uniting /

Pooling of

Interests

Group

Reorganization

Combining entity obtains

control over the other.

The acquirer is easily

identified.

Group reorganization canarise from transactions

among entities that

operate under common

control

The shareholders of the

combining entities join in

substantially equalarrangements to share

control.

It is not possible to

identify the acquirer.

B i C bi ti


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Scope and definitionsDefinition of a business combination

US GAAP:Acquisition of net assets that constitute a

business or controlling equity interests ofentities. Prohibits Pooling of Interest.

IFRS:

Bringing together of separate entities oroperations into one reporting entity.Prohibits Pooling of Interest.

I ndian GAAP:If the combination satisfies the specifiedconditions, it is an amalgamation in theform of a merger (Pooling of InterestMethod), else an amalgamation in thenature or purchase.

Scope Exceptions

US GAAP: Common control transactions and

Joint Ventures

Not for profit organizations

IFRS:

Common control transactions andformation of joint ventures

Acquisition of minority interest

Entities brought together bycontract

I ndian GAAP:

Purchase by one company of the whole ofthe shares or assets of one company byother company, without the acquiredcompany being dissolved

B i C bi ti


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Issue IFRS US GAAP I GAAP

Customer

relationships

No specific

guidance

Guidance in EITF

02-17

No specific guidance

In process

research and

development

Recognised as an

asset and

amortised

Recognised and

charged in income

statement

Recognize as intangible if

meet the criterion in AS 26,

else a part of goodwill.

Restructuring

costs

Never included in

purchase price

allocation

Included in

purchase price

allocation when

strict criteria met

Recognized only when it is

a present obligation and

can be estimated reliably

Contingent

liabilities

Included in

purchase price

allocation at fair

value

Included in

purchase price

allocation only

when settled

Include if payment is

probable and can be

reasonable estimated. Else,

recognize in income

statement when

determined.

35


Purchase Consideration

B i C bi ti


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Treatment of

Goodwill

Capitalize and test

for impairment

Capitalize and test

for impairment

Estimate the useful life

and amortize accordingly

Negative

goodwill

Recognised in the

income statement

Reduce fair value

of non-monetary

assets

Disclose as capital

reserve

Adjustments

to initial

accounting

Within one year of

acquisition

Pre-acquisition

contingencies only

Any subsequent

adjustments are recorded

in Income Statement..

Contingent

consideration

Recognised at fair

value

Recognised when

resolved

Include if payment is

probable and can be

reasonable estimated.

Else, recognize in

income statement when

determined

36





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Adjustments to

deferred tax

Recognised in income

statement, with adjustment

to goodwill

Adjustment first

against goodwill

Similar to IFRS

Step

acquisitions

Option to revalue previous

steps when control

obtained

No change in basis

for previous steps

No change in basis

for previous steps

Push down

accounting

No basis in IAS Required in certain

circumstances

No concept of push

down accounting

Date of

acquisition

When control transferred When assets

received or equity

issued /

convenience

exemption

Date specified by

the court or the

purchase agreement

37




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Intangible Assets

Initial Recognition and MeasurementWhat is an intangible asset?

Non monetary asset

Without physical substance

Controlled by the entity and held for use either

in the production or supply of goods or services; or

for rental to others; or

for administration purposes

May be purchased or internally generated

When to initially recognize?

future economic benefits attributable to the asset are probable

the cost of the asset can be measured reliably

Initial Measurement at

Fair Value

Intangible Assets


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Intangible Assets

Internally Generated Intangible Assets

Internally Generated

Intangible Assets

US GAAP

Research Cost

Charge Off

Development CostCharge Off

I GAAP

Research CostCharge Off

Development Cost

Capitalize if criterion

met

IFRS

Research CostCharge Off

Development Cost

Capitalize if criterion

met

Intangible Assets


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Intangible Assets

Revaluation, Amortization and Impairment

Revaluation

IFRSUS GAAP /

IGAAP

Although

allowed, but

rare

Not allowed

Amortization and Impairment

US GAAP /

IFRS

IGAAP

Amortize if asset has a finite life

If indefinite life, annual test for

impairment

No Presumed Maximum Life

Reversal of Impairment Losses

permitted in some

circumstances in IFRS Not

permitted in US GAAP

Presumption of

10 year life

If life exceeds

10 years, annual

review for

impairment

Borrowing Costs


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Borrowing Costs

Accounting Treatment

IGAAPCapitalization

mandatory

Benchmark Allowed alternative

Expense Capitalise where directly attributable to

cost of qualifying asset

Capitalisation should match timing of

acquisition, construction or production ofasset

Start Suspension Cessation

Accounting Treatment under IFRS

Borrowing Costs


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Specific Funds General Funds Notional Funds

Use actual costs Use weighted

average cost ofborrowings

No capitalisation

Can include

income on

investment of

funds

Borrowing Costs

Measurement

US GAAP - Foreign Exchange fluctuation

cannot be treated as a part of

borrowing cost

IFRS and Indian - Foreign Exchange fluctuation

GAAP can be treated as a part of

borrowing cost, although

under tightly defined

conditions

Impairment of Assets


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Difference Criterion IFRS and IGAAP US GAAP

Timing of impairmentreview Annually whenever events or changes incircumstances indicate that the

carrying amount may not be

recoverable

Asset is Impaired if Recoverable amount

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