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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
Purchase of own shares:
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
Dividend on ordinary equity shares
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.
Purchase of own shares:
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.
Dividend on ordinary equity shares
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
financial enterprise,
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
financial enterprise,
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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Business Combinations
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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Business Combinations
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
Business Combinations
Purchase Consideration
B i C bi ti
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Issue IFRS US GAAP I GAAP
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
Business Combinations
Purchase Consideration
Business Combinations
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Issue IFRS US GAAP I GAAP
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
Business Combinations
Purchase Consideration
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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