SUMMARY OF IMPORTANT US GAAP

US GAAP (Generally Accepted Accounting Principle) is the new mantra for

Accounting and Corporate Finance Professionals world over . Globalisation and
access to Global Capital and securities market has enhanced the need to
assimilate the principles of US GAAP into national Accounting Standards. To get
listed on NYSE or NASDAQ and float GDR , an Indian company either needs to
publish accounts under US GAAP or expressly publish the reconciliation of its
Financial Results with US GAAP. Further many foreign companies whose shares are
listed on US Stock Exchanges, require that their Indian Subsidiaries or Associates,
should prepare separate sets of Accounts under US GAAP for ease of consolidation.
Some of Indian Companies who have launched GDR/ ADR are Bajaj Auto, Dr
Reddys Lab, HDFC Bank, Hindalco, ICICI Bank, Infosys, ITC, L&T, MTNL, Ranbaxy
Labs, Reliance, Satyam Computers, SBI, VSNL and WIRPO and required to follow US
GAAP Accounting/reconciliation.
1. Financial statements: Under US GAAP , the Financial statements include the
following::
1. Consolidated Balance Sheet (showing comparatives for 2 years)
2. Consolidate statement of Income (showing comparatives for 3 years)
3. Consolidated statement of Stock holders Equity and comprehensive Incomes
(showing comparatives for 3 years)
4. Consolidated statement of Cash flow (showing comparatives for 3 years)
5. Summary of Significant Accounting Policies as required by APB 22
6. Forward looking statement as per section 27A of the Securities Act , 1933
and Section 21E of Securities Act , 1934
7. Certification by CEO as well as CFO as required u/s 302 of Sarbanes Oxley
Act , 2002 in Annual Report ( 20-F) and also in quarterly report ( 6 K)
8. Certification by CEO as well as CFO as required u/s 906 of Sarbanes Oxley
Act , 2002 in Annual Report ( 20-F) . and also in quarterly report ( 6 K)
The Presentation of items in Balance sheet moves from current to Non Current for
Assets as well as Liabilities. The Consolidated statement of Income has to
show comparatives for 3 years and also has to contain EPS data ( Basic and/or
Diluted EPS) as applicable on the face of said statement. The consolidated
statement of Stock holders Equity and comprehensive Incomes contains
aggregation of Par Value of Common stock along with Additional paid in capital
Comprehensive Income, Accumulated Comprehensive Income, deferred Stock
compensation and retained earnings. The consolidated statement of cash flow
prepared in accordance with SFAS 95 contains break up of cash from Operating,
Financing and Investing Activities
2. Compliance for Indian Companies: Indian Companies which issue ADR
( American Depository Receipt) or GDR (Global Depository Receipt) and listed on
NASDAQ or NYSE, have to submit Quarterly (6-K) and Annual Report ( 20-F) with
Securities Exchange Commission , Washington EC in accordance with Rule 13a 16
or rule 15d-16 of Securities Exchange Act, 1934.

There is no organization like Registrar of Companies (ROC) in US , hence unlisted

companies do not have any file their financial statements with any bodies except
Auditing from CPA and filing the statements with IRS as per Internal revenue Code
for taxation purposes.
The Sarbanes Oxley Act 2002 requires that in the Annual Report in form 20-F , the
issuing company has to include a statement of Compliance signed by its CEO and
its CFO under Section 302 of the Act .Similarly section 906 of the Said Act requires
that CEO and CFO should file similar compliance for quarterly statement in form 6K
3. Disclosure of Accounting Policies : APB Opinion Number 22 provides
guidelines for disclosure of accounting policies. Accounting policies include
accounting principles and its application in the preparation of financial
statements, A companys major accounting policies should be disclosed in the
first footnote or in a section called Summary of Significant Accounting Policies,
before the footnotes.
Examples of accounting policies to be disclosed includes revenue recognition,
Investments, Fixed Assets, Goodwill & intangible Assets, Foreign currency
translation, Derivative Instruments, Stock Based Compensation, retiral benefits
etc.
4. Revenue Recognition: The GAAP for revenue recognition applies to Sales of
Good as well as services. Revenue Recognition: According to SFAC Number 5,
revenue is generally recognized when
1. it is realized or realizable, and
2. It has been earned.
There are four points of revenue recognition:
1.
2.
3.
4.

Realization (at time of sale of merchandise or rendering of service)

At the completion of production
During production
On a cash basis

Revenue from service transactions is recognized based upon performance.

Performance may either be based upon the passing of time or may involve a single
action or a series of actions. The following four methods should be used to
recognize revenue from service transactions:
1. The specific performance method should be used when performance involves
a single action and revenue is recognized when that action is completed. For
example, a CPA is retained to prepare a tax return. Revenue is recognized
when the single action of preparing the tax return is completed.
2. The proportional performance method is used when performance involves a
series of actions. If the transaction involves an unspecified number of actions
over a given period of time, an equal amount of revenue should be
recognized at fixed intervals. The use of the straight-line method is
recommended unless another method is deemed to be more Appropriate. If

the
transaction
involves
a specified
number of similar or essentially
similar actions, an equal amount of revenue should be recognized when each
action
is
performed.
If
the
transaction
involves
a specified
number of dissimilar or unique actions,
3. The completed performance method should be used to recognize revenue
when completing the final action is so critical that the entire transaction
would be considered incomplete without it.
4. The collection method is used to recognize revenue when there is significant
uncertainty regarding the collection of revenue.
5. Revenue should not be recognized until cash is collected. The matching
principle requires that expenses be matched to revenues .In other words,
revenues should be recognized in the same period as their associated
expenses. If expenses are expected to be recovered from future revenues,
then those expenses should be deferred.
Three major categories of costs result from service transactions: Initial direct
costs are incurred to negotiate and obtain a service agreement. They include costs
such as commissions, credit investigation, processing fees, legal fees, etc. They do
not include indirect costs such as rent and other administrative costs.
In case of Sale of Goods, revenue is recognized, when delivery has happened,
property in good has passed from Seller to Buyer and there is no chance of Return
of good sold or any claim
1. Sales with buy Back agreements: No sale is recognized when a company sells
a product in one accounting period and agrees to buy it back in the next
accounting period at a set price which includes not only the cost of inventory
but also related holding costs. While the legal title may transfer in such a
transaction, the economic substance of the transaction is to leave the risk with
the seller, and hence no sale is recognized
2. Sales where right of return exists: When a company experiences a high rate of
return, it may be necessary to delay reporting sales until the right of return
has substantially expired. The right of return may either be specified in a
contract or it may be a customary business practice involving guaranteed
sales or consignments. Three methods are generally used to record sales
when the right of return exists. First, the company may decide not to record
any sale until the right of return has substantially expired. Second, the
company may record the sale and estimated future returns. Finally, the
company may record the sale and account for returns as they occur. According
to FASB Statement No. 48, Revenue Recognition When Right of Return
Exists, the company may recognize revenue at the time of sale only if all of
the following six conditions are satisfied: 1. The price is fixed or determinable
at the date of sale.2. The obligation of the buyer to pay the seller is not
contingent on resale of the product, or the buyer has paid the seller.3. Theft or
other damage to the product would not affect the buyers obligation to the
seller.4. The product being acquired by the buyer for resale has economic
substance apart from that provided by the seller.5. Seller does not have
significant future obligations to assist directly in the resale of the product by
the buyer. 6. Future returns can be reasonably estimated.

Software Revenue recognition: The contract with Customers can either be on

fixed price, fixed timeframe or time and material basis.
1. Revenue from fixed price and fixed time frame contract should be recognized
on percentage of completion method. (SOP 81-1) The input method may be
used to measure progress towards completion as there is a direct correlation
between input and output
2. Revenue from time and material contracts should be recognized as the related
services are performed and revenue from end of last billing till balance sheet
date is recognized an unearned revenue
3. Maintenance revenue should be recognized over the period of maintenance
contract .In case fixed warranty on telephone support is provided then the
cost associated with such warranties shall be accrued at the time such
revenue are recognized and included as cost of revenue.
4. License fee revenue (SOP 97-2) should be recognized when persuasive
evidence of an agreement exists, delivery has occurred, license fee is fixed
and determinable and collection of fee is probable. Arrangement to deliver SW
products have 3 elements license, implementation and Annual Technical
Services ( ATS)
5. Advances and deposits received should be recorded as client deposit until all
conditions for revenue recognition as stated above are met.
5. Current Assets: Promulgated GAAP for current assets is provided in the
American Institute of CPAs Accounting Principles Boards Accounting Research
Bulletin Number 43, chapter 3A. Current assets have a life of one year or the
normal operating cycle of the business, whichever is greater. The accounting
policies and any restrictions on current assets must be disclosed.
Inventory : The accounting, reporting, and disclosures associated with inventory
are provided by various authoritative pronouncements, including Accounting
Research Bulletin Number 43, chapter 4 (Inventory Pricing), FASB Interpretation
Number 1 (Accounting Changes Related to the Cost of Inventory), and Emerging
Issues Task Force Consensus Summary Number 8646 (Uniform Capitalization
Rules for Inventory under The Tax Reform Act of 1986). Inventories consist of
merchandise to be sold for a retailer. Inventories for a manufacturing company
include raw materials, work-in-process (partially completed goods), finished goods,
operating supplies, and ordinary maintenance parts. Inventories are presented
under current assets. However, if inventory consists of slow-moving items or
excessive amounts that will not be sold within the normal operating cycle of the
business, such excess amounts should be classified as non current assets.
Inventory includes direct and indirect costs associated with preparing inventory for
sale or use. Therefore, the cost of inventory to a retail store includes the purchase
price, taxes paid, delivery charges, storage, and insurance. A manufacturer
includes in its cost of inventory the direct materials (including the purchase price
and freight-in), direct labor, and factory overhead (including factory utilities, rent,
and insurance). Inventory may be valued at the lower of cost or market value. The
value of inventory may decrease because of being out-of-date, deteriorated, or
damaged or because of price-level changes.
Specialized inventory methods also exist including retail, retail lower of cost or
market, retail LIFO, and dollar value LIFO.

Footnote disclosure for inventory includes the valuation basis method, inventory
categorization by major type, unusual losses, and inventory pledged or
collateralized.
FASB Statement Number 49 (Accounting for Product Financing Arrangements)
states that a financing arrangement may be entered into for the sale and
repurchase of inventory. Such an arrangement is reported as a borrowing, not a
sale. In many situations, the product is kept on the companys (sponsors)
premises. In addition, a sponsor may guarantee the debt of the other company.
Typically, most of the financed product is ultimately used or sold by the sponsor.
However, in some instances, minimal amounts of the product may be sold by the
financing entity to other parties. The company that provides financing to the
sponsor is typically a creditor, non business entity, or trust. In a few cases, the
financing entity may have been set up solely to furnish financing to the sponsor.
The sponsor should footnote the terms of the product financing arrangement.
6. Fixed assets: GAAP for the accounting, reporting, and disclosures associated
with fixed assets are included in the American Institute of CPAs Accounting
Principles Board Opinion Number 6 dealing with depreciation, Accounting Principles
Board Opinion Number 12, paragraphs 4 and 5 (Disclosure of Depreciable Assets
and Depreciation), American Institute of CPAs Accounting Research Bulletin
Number 43, chapter 9A (Depreciation and High Costs), and Emerging Issues Task
Force Consensus Summary Number 8911 (Allocation of Purchase
Price to Assets to be sold).
Fixed Assets are to be stated at cost of acquisition less accumulated depreciation.
Depreciation is provided based on estimated useful lives of the assets and no
depreciation rate are provided in US GAAP. Cost of improvements that substantially
extend the useful lives of assets can be capitalized. Repairs and maintenance
expenses are to be charged to revenue when incurred. In case of sale or disposal of
an asset, the cost and related accumulated depreciation are removed from
consolidated financial statement.
Revaluation: US GAAP prohibits upward revaluations except for a discovery on a
natural resource, in a business combination accounted for under the purchase
method, or in a quasi reorganization. If a natural resource is discovered on land,
such as oil or coal, the appraised value is charged to the land account and then
depleted using the units of production method.
Self-constructed assets are recorded at the incremental or direct costs to build
(material, labor, and variable overhead) assuming idle capacity. Fixed overhead is
excluded unless it increases because of the construction effort. However, selfconstructed assets should not be recorded at an amount in excess of the outside
cost.
A donated fixed asset should be recorded at its fair market value by debiting fixed
assets and crediting contribution revenue4A FASB Statement Number
116 (Accounting for Contributions Received and Contributions Made). The Donor
should recognize an expense for the fair market value of the donated asset. The
difference between the book value and fair market value

of the donated asset represents a gain or loss.

If fair market value is not determinable and the present value (discounted) of
expected future cash flows is used, then the assets should be grouped at the
lowest level at which the cash flows are separately identifiable. Reasonable and
supportable assumptions and projections should be used to make the best
estimate. All evidence pertinent to impairment of assets should be considered.
Evidence which is objectively verifiable should be given more weight.
6 A Capitalization of Interest cost Interest on Funds borrowed for Asset
Purchased (SFAS 34) : SFAS 34 provides that interest on borrowed funds should
be is expensed. However, where borrowing is made for purchase of assets ,
the interest on borrowings is deferred to the asset account and amortized if a) it
pertains to self-made assets for the companys own use b) Assets for sale or lease
built as discrete, individual projects. An example is real estate development. If
land is being prepared for a specific use in the company, the cost of buying the
land meets the test for capitalized interest. c) Asset is bought for the entitys own
use by agreements requiring a down payment and/or process payments d) Assets
is received due to gift or grant in which donor restrictions exist .
Interest should not be capitalized in case a) Assets in use or ready for use b)
Assets are manufactured in large quantity or on a continual basis c) Asset is not in
use and not being prepared for use .
Interest capitalization is based on the average accumulated expenditures for that
asset. The interest rate used is generally based on the Interest rate on the specific
borrowing . Interest capitalization begins when the asset is being made ready for
use in terms of construction or when administrative and technical activities before
construction are taking place. The capitalization period ends when the asset is
substantially finished and ready for use.
7. ACCOUNTING FOR INVESTMENTS ( SFAS 115 -Accounting for Certain
Investments in Debt and Equity Securities): SFAS 115 sets forth the accounting
and financial reporting Requirements for investments in equity securities with
determinable fair Market value and for all investments in debt securities. FASB 115
applies to preferred stock and common stock (if ownership is below 20% or if
ownership exceeds 20% but effective control [significant influence] is lacking). The
statement is not applicable to investments under the equity method, consolidated
subsidiaries, specialized industries such as brokers and dealers, or not-for-profits.
Nonprofit entities are governed by FASB 124, which requires fair value reporting for
all investment categories, including held to maturity.
Equity and debt securities are broken down into 3 classes i.e. Trading securities
Available-for-sale securities and Held-to-maturity securities based on factors such
as management intent considering past history of investments, subsequent events
after the balance sheet date, and the nature and objective of the investment.
Trading securities This includes equity, debt securities, Mortgage-backed
securities held mainly to sell in short term (usually 3months or less) and there in
active trading to earn short-term profits Trading securities are recorded in the
balance sheet under current assets at fair market value. Realised gains and losses

are treated as Income in income statement. Unrealized (holding) gains and

losses on trading securities are presented separately in the income statement. Fair
market value is based on stock or bond quotation un listed exchanges or in the
over-the-counter market or if price is unavailable, other valuation methods may be
used, including present value of future cash flows, fundamental analysis, matrix
pricing, and Option-adjusted spread models. Market value is compared to cost on
a total portfolio basis.
Available-for-sale securities may include equity and debt securities which are not
held for short-term profits, nor are they to be held to maturity. Therefore, they are
in between trading and held-to-maturity classifications. Available-for-sale securities
are presented in the balance sheet as either current assets or non current assets
atfair market value. They are often listed as non current assets. However, if the
intent is to hold for less than one year, they are current assets.
Market value is compared to cost on a total portfolio basis. The Unrealized
(holding) gains and losses during the period is presented in the Statement of
Comprehensive Income as Other comprehensive Income. Cumulative effects is
included as a separate item in the stockholders equity section as accumulated
other comprehensive loss or gain.
Held-to-maturity securities can only be debt securities (principally bonds) because
they have maturity dates and the intent is to hold to maturity. Held-to-maturity are
presented under noncurrent assets securities in the balance sheet at amortized
cost. However, those held-to-maturity securities maturing within one year are
presented under current assets .
The classification of these investment must be reviewed annually and transfers
should be accounted for at fair market value. The fair value becomes the new basis
Dividend and interest earned on investments are realized income and should be
included in Income statement as other Income
The following information should be disclosed about investments
1. Valuation basis used
2. Total portfolio market value.
3. Method used to determine cost (e.g., FIFO, average cost, specific
identification) in computing the realized gain or loss on sale of
securities
4. Unrealized (holding) gains and losses for trading and available-for-sale
securities
5. Reasons for selling or transferring securities
6. Gains and losses from transferring available-for-sale securities to
trading included in the income statement
7. Market value and cost by major equity security
8. Investment in Associate Companies : Where an Individual or a Company
20% of more of voting common stock of another entity , the accounting , reporting,
and disclosures shall be done as per equity method as per GAAP enunciated in APB
Opinion Number 18

Under this method, the investor treats the investment as if it were a consolidated
subsidiary and includes its proportionate share in the profit or loss profit as part
of carrying value of investments. For example, say ABC limited holds 30% in XYZ
Limited at an initial cost of US$ 1,000,000 and has significant control, over XYZ
Limited. If XYZs annual Profit is US$ 200,000 and dividend declared is US$
50,000 . The carrying value of investment shall be 1,000,000+30% of 200,00030% of 50,000 ( 1,000,000+60,000-15,000=US$ 1,045,000)
APB Opinion no 18 also provides that a) cost of Investments to include brokerage
charges b) No adjustment for temporary declines, but in case of permanent
decline, loss is debited and the value of investment is reduced c) Share in profit is
determined afar subtracting Cumulative preferred dividend, whether declared or
not d)
The equity method is to be used if :
1. An investor owns between 20 and 50% of the investees voting common
stock.
2. The investor owns less than 20% of the investees voting common stock
but has effective control (significant influence).
3. The investor owns in excess of 50% of the investees voting common
stock, but a negating factor exists, preventing consolidation.
4. There is a joint venture. A joint venture is an entity that is owned, operated,
and jointly managed by a common group of investors. Other accounting
aspects exist.
Significant influence may be indicated by a number of factors, including
substantial inter company transactions, exchanges of executives between
investor and investee, investors significant input in the investees decisionmaking process, investors representation on the investees Board of directors,
investees dependence on investor (e.g., operational, technological, or
financial support), and substantial ownership of the investee by investor
relative to other widely disbursed shareholder interests. Under FASB
Interpretation Number 35, if there is a standstill agreement stipulating that
either the investor has relinquished major rights as a stockholder or that
significant influence does not exist, it may indicate that the equity method is
not appropriate. Interpretation Number 35 also may preclude the equity method
if the investor attempts unsuccessfully to obtaining representation on the
investees board of directors.
The equity method basically uses the consolidation approach to results of
investees accounts by eliminating inter company profits and losses. Such profits
and losses are eliminated by reducing the investment balance and the equity
earnings in investee for the investors share of the unrealized inter company profits
and losses. Investee capital transactions affecting the investor are treated as in
consolidation. The investee is treated as if it were a consolidated subsidiary.
If the investors share of the investees losses exceeds the carrying value of the
investment account, the equity method should be discontinued at the zero
amount. Thereafter, the investor should not record additional losses unless it has
guaranteed the investees debts or is otherwise committed to provide additional
financial support to the investee, or immediate profitability is forthcoming. If the

investee later shows net income, the investor can reinstate using the equity
method only after its share of profit equals the share of unrecorded losses when
the equity method was suspended.
If ownership falls below 20%, or if the investor loses effective control over the
investee, the investor should stop recording the investees earnings. The equity
method is discontinued, but the balance in the investment account is retained. The
investors will then follow SFAS for regular investment . If the investor increases its
ownership in the investee to 20% or more (e.g., 30%), the equity method should
be used for current and future years. The effect of using the equity method instead
of the market value method on previous years at the old percentage (e.g., 10%)
should be recognized as a retroactive adjustment to retained earnings and other
affected accounts (e.g., investment in investee).The retroactive adjustment on the
investment, earnings, and retained earnings should be applied in a similar way as
a step-by- step acquisition of a subsidiary.
If the investor sells the investees stock, a realized gain or loss is recognized for
the difference between the selling price and carrying value of the investment in
investee account at the time of sale. The realized gain or loss appears in the
investors income statement.
The investor must disclose the following information in the footnotes, in separate
schedules, or parenthetically:
1. Statement that the equity method is being used
2. Identification of investee along with percent owned
3. Quoted market price of investees stock
4. Investors accounting policies
5. Significant subsequent events between the date and issuance of the
financial statements
6. Reason for not using the equity method even though the investor owned
20% or more of the investees common stock
7. Reason why the equity method was used even though the investor owned
less than 20% of the investees common stock
8. Summarized financial information as to assets, liabilities, and earnings of
significant investments in unconsolidated subsidiaries
9. Significant realized and unrealized gains and losses applying to the
subsidiarys portfolio taking place between the dates of the financial
statements of the parent and subsidiary
Thus , we find that there are 3 treatment for Investments:
1. Normal investment upto 20% and no control- SFAS 115
2. Investment between 20% to 50% with significant control - SFAS , APB 18
3. Investment > 50% and majority control- SFAS 94
9. Consolidation : SFAS 94 mandates that the Financial statement of all
Subsidiary should be Consolidated when the parent owns more than 50% of
the voting common stock of the subsidiary , to report as one economic unit the
financial position and operating performance of a parent and its majority-owned
subsidiaries.

A consolidation is negated, even if more than 50% of voting common stock is

owned by the parent, in the following cases: Parent is not in actual control of
subsidiary, such as when the subsidiary is in receivership (arising from bankruptcy
or receivership) or in a politically unstable foreign region. When control is
temporary, consolidation is negated. Significant foreign exchange restrictions may
be a negating factor. Parent has sold or agreed to sell the subsidiary shortly after
year-end. In this case, the subsidiary is a temporary investment. The results of
acquired business in which company owns more than 50% of voting rights should
be included in consolidated financial statements Inter-company balances and
transactions should be eliminated
10. Business Combination/Mergers and Amalgamation (SFAS 141): (Other
Ref APB Opinion No 16 (Business Combinations), Accounting Interpretations of APB
Opinion Number 16, FASB Interpretation Number 4 (Applicability of FASB Statement
Number 2 to Business Combinations Accounted for by the Purchase Method), FASB
Statement Number 38 (Accounting for Pre acquisition Contingencies of Purchased
Enterprises), and FASB Technical Bulletin 855 (Issues Relating to Accounting for
Business Combinations).
A business combination takes place when two or more entities combine to form a
single company. A business combination occurs before the consolidation
process. Business combinations are accounted for under either the pooling-ofinterests method or the purchase method.
Pooling of interest Method: Applied used when the acquirer issues its voting
common stock for 90% or more of the voting common stock of the Acquiree, and
all of the 12 criteria as stated in are met . Hence, business combinations are
accounted for under purchase method . A pooling of interests presumes that for
accounting purposes both Companies were always combined. No purchase or sale
is assumed to have occurred. In other words, stockholders of the combining
companies become stockholders in the combined company. In this method, Net
assets of the acquired business are carried forward at book value. No assets or
liabilities are added or withdrawn by the acquirer or acquired. Retained earnings
and paid-in-capital of the acquired business are brought forth at book value. While
total stockholders equity does not change, the equity components do change. Any
necessary adjustments are made to paid-in-capital .If paid-in-capital is inadequate
to absorb the difference; retained earnings would be reduced for the balance. A
deficit in retained earnings for a combining company is retained in the combined
entity. Net income of the acquired company is carried forth for the entire year
regardless of the acquisition date. Expenses of the pooling are charged against
earnings immediately. A gain or loss from disposing of a major part of the assets of
the acquired business (e.g., duplicate warehouse) within two years after
combination is treated as an extraordinary item (net of tax).
Purchase Method: an application of the cost principle in that assets acquired are
recorded at the price paid (which is their fair market value), fair values of other
assets distributed, or fair values of the liabilities incurred. This gives rise to a new
basis for the net assets acquired. Under the purchase method, none of the equity
accounts of the acquired business appears on the acquirers records or on the
consolidated financial statements. In effect, ownership interests of the acquired
companys stockholders are not continued after the combination.

11. Goodwill & Intangible Assets ( SFAS 142 ) : Goodwill represents cost of
acquired business in excess of the fair value of identifiable tangible and intangible
net assets purchased. Goodwill should be tested for impairment on an annual basis
relying on a number of factors including operational results, business plans and
future cash flow. Goodwill should also be tested between annual tests, if there is an
extraordinary event that is more likely than not to reduce to fair value of Goodwill.
Recoverability of goodwill should be tested using a two-step process. The first step
involves comparison of fair value of the entity with the carrying value and the
excess of book value over the fair value is recorded as impairment loss. If the
carrying value is excess then the second step is followed. Under the second step
the fair value and book value (carrying value) of goodwill itself is tested. The
excess of book value over the fair value is recorded as impairment loss
12. REPORTING COMPREHENSIVE INCOME ( SFAS 130) : SFAS No 130
requires companies to report comprehensive income and its components in a
complete set of financial statements (including investment companies, but not non
profit entities). Comprehensive income refers to the change in equity (net asset)
arising from either transactions or other occurrences with non owners. Investments
and withdrawals by owners are excluded Comprehensive income consists of two
components: net income and other comprehensive income which includes: Foreign
currency items, including translation gains and losses, gains and losses on foreign
currency transactions designated as hedges of net investment in a foreign entity
Holding losses or gains on available-for-sale securities , excess of additional
pension liability over unamortized (unrecognized) prior service cost , Changes in
market value of a futures contract that is a hedge of an asset reported as fair
values
There are 3 options of reporting other comprehensive income and its components
as follows:1. Below the net income figure in the income statement, or 2. In a
separate statement of comprehensive income starting with net income. FASB
Statement Number 130 encourages reporting under options 1 and 2 .The 3 rd option
is in a statement of changes in equity as long as such statement is presented as a
primary financial statement. Options 1 and 2 are termed income-statement-type
formats, while option 3 is termed a statement-of-changes-in-equity format.
In the stockholders equity section in Balance Sheet, accumulated other
comprehensive income is presented as one amount for all items or listed for each
component separately. The elements of other comprehensive income for the year
may be presented on either a net of tax basis or on a before tax basis, with one
amount for the tax effect of all the items of other comprehensive income.
A reclassification adjustment may be needed so as not to double count items
reported in net income for the current year which have also been taken into
account as part of other comprehensive income in a prior year. An example is the
realized gain on an available-for-sale security sold in the current year when an
unrealized (holding) gain was also included in other
comprehensive income in a prior year. Besides an available-for-sale security,
reclassification adjustments may apply to foreign currency translation. However,
reclassification adjustments do not apply to the account excess of additional

pension liability over unamortized prior service cost (minimum pension liability
adjustment).The reclassification adjustment associated with
foreign exchange translation only applies to translation gains and losses realized
from the sale or liquidation of an investment in a foreign entity. The presentation of
reclassification adjustments may be shown with other comprehensive income or in
a footnote. The reclassification adjustment
may be presented on a gross or net basis (except the minimum pension liability
adjustment must be shown on a net basis).
13. Research and Development Costs ( SFAS 2) : Research is defined as
testing to search for a new product, service, technique, or process. Research may
also be undertaken to improve already existing products or services. Development
is defined as translating the research into a design for a new product or process
and also encompass improvements made to existing products or processes.
SFAS 2 (Accounting for Research and Development Costs) requires the expensing
of research and development costs as incurred. Equipment, facilities, materials,
and intangibles (e.g., patents) bought that have alternative future benefit in R&D
activities are capitalized. Any resulting depreciation or amortization expense on
such assets is presented as an R&D expense. R. &D costs are presented separately
within income from continuing operations. When research is performed under
contract for a fee from a third party, a receivable is charged. When there is no
future alternative use, the costs must be immediately expensed. R&D costs include
employee salaries directly tied to R&D efforts, and directly allocable indirect costs
for R&D efforts. If a group of assets is bought, proper allocation should be made to
those applicable to R&D activities. As per FASB Interpretation Number
4 (Applicability of FASB Statement Number 2 to Business Combinations Accounted
for by the Purchase Method), in a business combination accounted for under the
purchase method, acquired R&D assets should be based on their fair market value.
If payments are made to others to undertake R&D efforts on the companys behalf,
R&D expense is charged. FASB Statement Number 2 is not applicable to the
extractive (e.g., mining) or regulated industries.
14. Impairment of Long Lived Assets ( FASB Statement Number 121
-Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of) - A long-lived asset is deemed impaired if the total
(undiscounted) estimated cash flows from using it are less than the book value of
the asset. Future cash flows applicable to environmental exist costs that have
been accrued for the asset should not be included in determining the undiscounted
anticipated future cash flows in applying the asset impairment test.
In determining if asset impairment exists, the assets book value should include
any associated goodwill. An impairment may be due to such reasons as
1. A major change in how the asset is used
2. A decline in the market value of the fixed asset
3. Excess construction costs relative to estimated amounts
If this recoverability test for asset impairment is met, an impairment loss must be
calculated as the excess of the assets book value over its fair market value. Fair
value is the amount at which the asset could be bought or sold between willing

parties; fair value is not determined by the value of an asset in a forced or

liquidation sale. SFAS 121 , para 7 identifies three methods for determining fair
value:
1. Market price quoted in an active market
2. Estimate based on prices of similar assets
3. Estimate based on valuation techniques, including discounted cash
flows and other asset-specific models, such as options pricing model,
fundamental analysis, etc.
If fair market value is not determinable and the present value (discounted) of
expected future cash flows is used, then the assets should be grouped at the
lowest level at which the cash flows are separately identifiable. Reasonable and
supportable assumptions and projections should be used to make the best
estimate. All evidence pertinent to impairment of assets should be considered.
Evidence which is objectively verifiable should be given more weight.
An impairment loss is charged against earnings with a similar reduction in the
recorded value of the impaired fixed asset. If there is any related goodwill, it should
be eliminated before reducing the carrying value of the fixed asset. After
impairment, the reduced carrying value becomes the new cost basis for the fixed
asset. Thus, the fixed asset once impaired cannot be written up for a later recovery
in market value. In other words, the impairment loss cannot be restored.
Depreciation is based on the new cost basis. If an impaired asset is intended to be
disposed of rather than kept in service, the impaired asset should be recorded at
the lower of cost or net realizable value.
Loss due to impairment of assets held for use is recognized as a component of
income from continuing operations before taxes (1) in the income statement of forprofit entities, and (2) in the statement of activities for nonprofit entities.
The disclosure requirements for impaired assets held for use are as follows
:Complete description of the impaired assets, including the events that resulted in
the impairment ; The amount of loss due to impairment and how the fair value of
impaired asset was determined ; The location in the income statement or
statement of activities where the impairment loss is situated (e.g., an individual
caption, parenthetical disclosure, or caption where the loss is aggregated ; The
business segments, if any, that were affected by loss impairment an impaired
asset is to be disposed rather than held for use; the impaired asset is reported at
the lower of cost or net realizable value (fair value less cost to sell).The costs to
sell an impaired asset include such costs as brokers commission and transfer fees.
Insurance, security services, utility expenses, and other costs to protect or
maintain the asset are generally not considered costs to sell for determining the
net realizable value. The present value of costs to sell may used when the fair
value of the asset is determined using discounted cash flows and the sale is
expected to occur after one year. When the asset will be disposed shortly, the net
realizable value is a better indicator of the cash flows that one can expected to
receive from the impaired asset. Assets held for disposal are not depreciated.
Conceptually, these assets are more like inventory, since they are expected to be
sold shortly. Assets held for disposal are revalued at the lower of cost or net
realizable value during each period that they are reported. These assets maybe

written up or down in future periods as long as the write-up is not greater than the
carrying amount of the asset before the impairment. Such losses or gains are
reported as a component of income from continuing operations.
15. Loan Impairment FASB Statement Number 114, Accounting by Creditors for
Impairment of a Loan, is the primary authoritative guideline for recognizing
impaired loans . A loan is a contractual right to receive cash either on demand or
at a fixed or determinable date. Loans include accounts receivable and notes only
if their term is longer than one year. If it is probable (likely to occur) that some or
all of the principal or interest will not be collected, then the loan is considered
impaired. Any loss on an impaired loan should be recognized immediately by
debiting bad debt expense and crediting the valuation allowance. Creditors may
exercise their judgment and use their normal review procedures in determining the
probability of collection. If a loan is considered impaired, the loss is the difference
between the investment in loan and the present value of the future cash flows
discounted at the loans effective interest rate. The investment in loan will
generally be the principal and the accrued interest. Future cash flows should be
determined using reasonable and supportable assumptions and projections. The
discount rate will generally be the effective interest used at the time the loan was
originally made. As a practical matter, the loans value may be determined using
the market price of the loan, if available. The loans value may also be determined
using the fair value of the collateral, less estimated costs to sell, if the loan is
collateralized and the collateral is expected to be the sole source of repayment.
16. Stock Options/ ESOP ( SFAS 123,148) : Under US GAAP stock option plans
may be accounted for by either the intrinsic value method or the fair value
method. SFAS 123 encourages adoption of the fair value method and will
become mandatory from 1.4.2006
Intrinsic Method : In this method, compensation expense is recorded on the date
of grant only if current market price ( CMP ) of underlying stock exceeds option
exercise price . The difference between CMP and Exercise price (total
compensation expense) is allocated over the vesting ( the time between the date
of grant and the vesting date or compensatory or service period) . The intrinsic
method is so termed because the computation is not based on data derived from
external circumstances. If an employee chooses not to exercise a stock option,
previously recognized compensation expense is not negated or adjusted.
Fair Value method: Under this method, Compensation expense is taken as
equivalent to fair value of options at the grant date which is computed by using an
option-pricing model that considers several factors. Compensation expense is
recognized over the period between the date of grant and the vesting date, in a
manner similar to the intrinsic value method.
A popular option pricing model is Black- Scholes Model which computes the
present value of hypothetical instruments. Assumptions include freely trading of
Options, and the total return rate (considering the change in price plus dividends)
may be determined based on a continuous compounding over the life of the
option. Under SFAS 123, the life of the option is the anticipated time period until
the option is exercised rather than the contractual term The Black-Scholes model
was formulated based on European-style options exercisable only at expiration.

However, most employee stock options are American-style and are exercisable at
any time during the life of the option once vesting has occurred. The Black-Scholes
model uses the volatility anticipated for the options life.
Example 1: On January 1, 2005, ABC Limited granted stock options to its senior
executives to
purchase 100,000 shares of U$ 5 par value common stock at an exercise price of
$20 per share exercisable any time after December 31, 2009. The current market
price of the stock is $30.
Under the Black-Scholes option price model, fair value of the option plan is
estimated as $800,000. hence the fair value i.e. US$ 800,000 will be deemed as
compensation expense and will be recognized evenly over this period (200052009).
Scenario
Journal Entries
Grant of stock Date of GrantJanuary 1, 2005
option plan
No entry is to be made on date of Grant
December 31, 2005
Compensation Expense($800,000/4) 200,000
Paid-in-capital
options
200,000
December 31, 20062008
Compensation Expense ($800,000/4) 200,000
Paid-in-capital
options
200,000

stock

stock

All
Stock Cash ($20 [exercise price] 100,000 shares)
2,000,000
options
are
Paid-in-capital stock options
800,000
exercised
by
the employees
Common stock ($ 5 100,000
at
the shares)
500,000
beginning
of
Paid-in-capital in excess of
the
exercise par
2,300,000
period
( Paid-in-capital in excess of par is the balancing figure and
is, of course a stockholders equity account) T
If
the
stock
options
were Paid-in-capital stock options
800,000
not
exercised Paid-in-capital from expired stock options
800,000
because
the
market
price
did not exceed
the
exercise
price during the
exercise
period,

If an employee forfeits a stock option because he or she leaves the employer and
fails to satisfy the service requirement, then the recorded compensation expense
and paid-in-capital stock option should be adjusted (as a change in accounting
estimate) to account for the forfeiture.
SFAS 148 require that Provisions of SFAS 123 shall be transitory in nature and
companies may continue to use intrinsic value method for Stock Options.
However ,SFAS 148 requires that companies should disclose the effect on net
income and earning per share , if Fair value method was used. In case of Infosys
Limited ( FY ended March, 2005) which deploys Intrinsic method of Accounting,
disclosure as per SFAS 148 led to a further loss of US$ 57 Million
17. EARNINGS PER SHARE ( SFAS 128) : All public companies ( excluding Non
public entities ) are required to state earnings per share (EPS) on the face of the
income statement, either basic or basic and diluted EPS depending on simple or
complex capital structure, if the capital structure is complex (it includes potentially
dilutive securities), then presentation of both basic and diluted earnings per share
is mandated.
Basic EPS is derived by dividing the net income (less declared preferred dividends
on non cumulative preferred stock) available to common stockholders by the
weighted average number of common shares outstanding. On the other hand, if
the preferred stock is cumulative, then the dividends are subtracted even if they
are not declared in the current year. The weighted-average number of common
shares outstanding is determined by multiplying the number of shares issued and
outstanding for any time period by a fraction, the numerator being the Basic
earnings per share and diluted earnings per share (if required) for income from
continuing operations and net income must be disclosed on the face of the income
statement. In addition, the earnings per share effects associated with the disposal
of a business segment, extraordinary gains or losses, and the cumulative effect of
a change in accounting principle must be presented either on the face of the
income statement or notes thereto.
Diluted EPS: In case of convertible securities, if converted method is used whereby
it is assumed that the dilutive convertible security is converted into common stock
at the beginning of the period or date of issue, if later. Interest expense(net of tax)
, Any dividend on convertible preferred stock on must be added back to net
income to result in an adjusted net income Correspondingly, the number of
common shares the convertible securities are convertible into (or their weightedaverage effect if conversion to common stock actually took place during the year)
must also be added to the weighted-average outstanding common shares in the
denominator.
In the case of dilutive stock options, stock warrants, or their equivalent, the
treasury stock method is used. Under this approach, there is a presumption that
the option or warrant was exercised at the beginning of the period, or date of
grant, if later. The assumed proceeds received from the
exercise of the option or warrant are assumed to be used to buy treasury stock at
the average market price for the period. However, exercise is presumed to occur

only if the average market price of the underlying shares during the period is
greater than the exercise price of the option or warrant.
A reconciliation is required of the numerators and denominators for basic and
diluted earnings per share. Disclosure is also mandated for the impact of preferred
dividends in arriving at income available to common stockholders. In addition, the
earnings per share effects associated with the disposal of a business segment,
extraordinary gains or losses, and the cumulative effect of a change in accounting
principle must be presented either on the face of the income statement or notes
thereto.
18. FAIR VALUE DISCLOSURES FOR ALL FINANCIAL INSTRUMENTS (SFAS
107): This GAAP requires disclosures of fair value of Financial Instruments in the
body of the financial statements or in the footnotes.
Financial instrument is defined as cash (including currencies of other countries),
evidence of an ownership interest in another company (e.g., common or preferred
stock), or a contract that both. Thus conventional assets and liabilities (e.g.
accounts and notes receivable, accounts and notes payable, investment inequity
and debt securities, and bonds payable) are deemed to be financial instruments.
The definition also encompasses many derivative contracts, e.g. options, swaps,
caps, and futures
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than in
a liquidation sale. Quoted market prices are best to use, if available. Financial
instruments can be transacted in following types of markets:
1. Exchange markets, for listed stocks, bonds, options, and certain futures
contracts.
2. Dealer markets, e.g., the NASDAQ or other over-the-counter markets, are the
major exchanges for more thinly traded securities. Dealer markets also exist for
commercial loans, asset-backed securities, mortgage-backed securities, and
municipal securities. In most cases, quotations on this market properly reflect
fair value. However, if evidence exists to the contrary, then the company may
opt for another indicator of fair value, such as an internally developed model.
Market quotations for dealer markets are usually in the form of bid and ask
prices. Fair value determination should take into account the size of an issue
and its possible dilutive effect on price of the financial instrument. Note: The
basis used for a price quote should be disclosed.
3. Principal-to-principal markets in principal-to-principal transactions, transactions
occur independently, with no intermediary and basically no public information
available to approximate market price, e.g., an interest rate swap.
4. Brokered markets, in which intermediaries match buyers and sellers but do not
trade for their own accounts, usually provide less reliable information as to
price. The broker is aware of the prices bid and asked by the parties, but each
participant is usually unaware of the other partys price requests. Prices of
completed transactions may be available in some cases. If more than one
quoted price for a financial instrument is available, then use the one in the
most active market. When possible, get more than one quotation when quoted
prices vary widely in the market. The company may want to disclose additional
information about the fair value of a financial instrument, e.g. if the fair value

of long-term debt is below its carrying value. In this case, the company may
want to provide the reasons and whether the debt could be settled at the lower
amount.
For financial institutions, loans receivable may be a major financial instrument. If
market prices are available (e.g., securities backed by residential mortgages may
be a proxy for valuing residential mortgages), then they should be used to arrive at
fair value. If no quoted market price exists for a category of loans, particularly fixed
rate loans, then an approximation may be based on:
1. market prices of similar traded loans (similarity may be in the forms of terms,
interest rates, maturity dates, and credit scoring),
2. current prices for similar loans that the company has originated and sold, or
3. Valuations derived from loan pricing services. Fair value of a loan may be
determined by using the present value of future cash flows, using a risk-adjusted
discount rate.
Disclosure includes the methods and assumptions used to estimate fair value. The
fair value amounts disclosed should be cross-referenced to carrying value amounts
presented in the balance sheet. The disclosures should distinguish between
financial instruments held or issued for trading purposes and other than
trading. Fair values of non-derivative instruments should not be adjusted against
derivative instruments unless netting is permitted as per FASB Interpretation
Number 39 (Offsetting of Amounts Related to Certain Contracts). If it is not
practical to estimate the fair value of a financial instrument, then information
relevant to estimating fair value should be disclosed, including the financial
instruments carrying value, maturity, and interest rate. The reasons why it is not
determinable should also be provided.
19. Hedge Accounting (SFAS 133) : SFAS 133 mandates that All qualifying
financial derivatives have to stated on the balance sheet at their fair value
( marked to market ) and Changes in the fair value of derivatives must be
recognized in the financial statements as part of comprehensive income (not as
part of the income statement).
Changes in value of all other derivatives are marked to market recognized as
income. Currently the instruments covered by Hedge Accounting are Interest rate
Cap floor Collars, Interest ate and currency Swaps, financial Future contracts,
Options to Purchase securities, Swaptions and Commodities and excluded are
financial Guarantees, Forward Contracts with no net settlements, Mortgage Based
Security, Adjustable Rate Loan, and Variable Annuity Contracts.
There are three types of qualified hedges discussed in FASB Statement Number
133: fair value hedges, cash flow hedges, and foreign currency hedges. Simply
stated, a fair value hedge is protection against adverse changes in the value of an
existing asset, liability or unrecognized firm commitment. A cash flow
hedge protects against changes in the value of future cash flowsfor instance
interest payments on fixed rate debt, if the company is concerned about falling
interest rates and the fact that would not be able to renegotiate the terms of the
debt to capitalize on lower rates. A foreign currency hedgeprotects against adverse
movement of exchange rates impacting any foreign currency exposurewhich, for
instance, can involve either fair value or cash flow hedges in foreign currency or a

net investment in a foreign business activity, e.g., concern over the impact that a
devaluation of a foreign currency would have on the companys investment in an
overseas subsidiary. In all of these three hedges, a hedge effectiveness test must
be met in order to achieve hedge accounting.
Foreign Exchange forward contract taken from Bank, to mitigate the risk of
changes in foreign exchange rates do not qualify for Hedge Accounting under SFA
133.
20 Cash Flow statement ( SFAS 95) : A statement of cash flows , prepared in
conformity with GAAP is required to be annexed as part of a full set of financial
statements. The statement should present cash flows from operating, investing,
and financing activities. The statement must be included in both annual ( for 3
financial years) and interim financial statements ( for 2 periods- current and
previous year) . It should include a reconciliation of beginning and ending cash and
cash equivalents and should match with the totals presented in the balance sheet.
Separate disclosure must be made of non cash investing and financing
transactions.
Cash flow statement may be prepared by direct method or indirect method, but it
must
include
a reconciliation
of
net
income
to
cash
flow
from
operations whichever method is deployed.
Under the direct method, the operating section presents gross cash receipts and
gross cash payments from operating activities, with a reconciliation of net income
to cash flow from operations in a separate schedule accompanying the statement
of cash flows. The cash flow from operations derived in this separate schedule
must agree with the cash flow from operations in the
Operating section of the statement of cash flows.
Under the indirect method, gross cash receipts and gross cash payments from
operating activities are not presented. Instead, only the reconciliation of net
income to cash flow from operations may be presented . The reconciliation is done
by adding back non cash expenses to and deducting non cash revenues from net
income. Examples of these adjustments include adding back depreciation and
depletion expense, amortization expense on intangibles, pension expense arising
from a deferred pension liability, bad debts, accrued warranty expense, tax
expense arising from a deferred tax liability, loss on a fixed asset, compensation
expense arising from an employee stock option plan; and deducting the
amortization of deferred revenue, amortization of bond premium, tax expense
arising from a deferred tax asset, the gain on a fixed asset, pension expense
associated with a deferred pension asset, unrealized gains on trading securities,
and income from investments under the equity method.
Irrespective of whether the direct method or the indirect method is used, there
must be separate disclosure of income taxes and interest paid during the year as
supplementary information. The effect of exchange rate change on cash should
also be shown separately as a separate line item to derive the total cash and cash
equivalent. While SFAS 95 prefers Direct Method, most of the Companies prefer
Indirect method due to its simplicity.

21. Segmental reporting ( SFAS 131) : SFAS 131 mandates information about
operating segments and related disclosures about products and services,
geographical areas and major customers. Segmental reporting aids in evaluating a
companys financial statements by revealing growth prospects, including earning
potential, areas of risk, and financial problems. It facilitates the appraisal of both
historical performance and expected future performance.
The amount reported for each segment should be based on what is used by the
Chief operating decision maker in formulating a determination as to how
much resources to assign to a segment and how to appraise the performance of
that segment. The term chief operating decision maker may apply to the chief
executive officer or chief operating officer or to a group of executives. The term
of chief operating decision maker may apply to a function and not necessarily to a
specific person(s).This is a management approach rather than an industry
approach in identifying segments. The segments are based on the companys
organizational structure, revenue sources, nature of activities, existence of
responsible managers, and information presented to the Board
of Directors. Revenues, gains, expenses, losses, and assets should only be
allocated to a segment if the chief operating decision maker considers doing so in
measuring a segments earnings for purposes of making a financial or operating
decision.
The same is true with regard to allocating to segments eliminations and
adjustments applying to the companys general-purpose financial statements. Any
allocation of financial items to a segment should be rationally based. In measuring
a segments earnings or assets, the following should be disclosed for explanatory
purposes:
1. Measurement or valuation basis used
2. Differences in measurements used for the general-purpose financial
statements relative to the financial information of the segment
3. A change in measurement method relative to prior years
4. A symmetrical allocation, meaning an allocation of depreciation or
amortization to a segment without a related allocation to the associated
assets
Segmental information is required in annual financial statements. Some segmental
disclosures are required in interim financial statements. Segmental information is
not required for non-consolidated subsidiaries or investees accounted for under the
equity method. An operating segment is a distinct revenue-producing component
of the business for which internal financial data are produced. Expenses
are Disclosures should be in both dollars and percentages.
A reportable segment is determined by :
1. Grouping by industry line
2. Identifiable products or services
3. Significant segments to the company in the entirety
4. If any one of the following exist, a segment must be reported upon:
5. Revenue, including unaffiliated and inter segment sales or transfers, is 10%
or more of total revenue of all operating segments.

6. Operating profit or loss is 10% or more of the greater, in absolute amount, of

the combined operating profit (or loss) of all industry segments with
operating profits (or losses).
7. Identifiable assets are 10% or more of total assets of all operating segments.
Segments shall represent a significant portion (75% or more) of the entitys total
revenue of all operating segments. The 75% test is applied separately each year. In
deriving 75%, no more than 10 segments should be presented because to do
otherwise would result in too cumbersome and detailed reporting. If more than 10
are identified, similar segments may be combined. For example, if the reportable
segments identified by the materiality tests account for only70% of all industry
segment revenue from unaffiliated customers, one or more additional industry
segments must be included among reportable segments so that at least 75% of all
industry segment revenue is accounted for by the reported segments. Disclosures
are not mandated for 90% enterprises (a company obtaining 90% or more of its
revenues, operating earnings, and total assets from one segment). In essence, the
segment is the business. Dominant industry
segments should be identified. PRINT
The source of segmental revenue should be disclosed with the percent so derived
when 10% percent or more of1. revenue is generated from either a foreign government contract or domestic
contract (as required by FASB Statement Number 30).
2. sales is made to one customer. A group of customers under common control
(e.g., subsidiaries of a parent, federal or local government) is deemed as one
customer (as required by FASB Statement Number 30). The identity of
the customer need not be disclosed.
3. of revenue or assets are in a particular foreign country or similar group of
countries. Similarity might be indicated by proximity, business environment,
interrelationships, and economic and/ or political ties. If foreign activities are in
more than one geographic area, required disclosures should be made for both
each significant individual foreign area and in total for other insignificant areas.
For revenues from foreign operations, the amount of sales to unaffiliated
customers and the amount of intra company sales between geographic areas
should be disclosed. The geographic areas that have been disaggregated should
be identified along with the percentages derived.
The accounting principles used in preparing segmental information should be the
same as those used in preparing the financial statements. However, inter company
transactions (which are eliminated in consolidation) are included for segmental
reporting purposes, including in applying the 10% and 75% rules discussed later.
Segmental information may be provided in the body
of the financial statements, in separate schedules, or in footnotes. Most companies
report segmental data in separate schedules.
Disclosures should be made of how reporting segments were determined (e.g.,
customer class, products, services, geographical areas). And also identifying those
operating segments that have been aggregated
22. Inflation Accounting (SFAS 89) : FASB Statement no 89 titled as Financial
Reporting and Changing Prices permits a company to disclose voluntarily, in its

annual report, inflation data to enable investors and shareholders to assess

inflationary pressure and impact on the company. The GAAP recommends
businesses to present selected summarized financial data based on current costs
and adjusted for inflation (inconstant purchasing power) for a 5 -year period. The
Consumer Price Index for All Urban Consumers may be used.
Inflation information to be disclosed includes sales and operating revenue
expressed in constant purchasing power, income from continuing operations
(including per share amounts) on a current cost basis, cash dividends per share in
constant purchasing power, market price per share restated in constant purchasing
power, purchasing power gain or loss on net monetary items, inflation-adjusted
inventory, restated fixed assets, foreign currency translation based on current cost,
net assets based on current cost, and the Consumer Price Index used. ELP
23. Interim financial reporting ( APB Opinion 28) : Interim reporting are
required to be done by Corporate in between annual Financial statements for a
period less than one year. Each interim period is viewed as an integral part of the
annual period. Interim financial reports may be issued semiannually, quarterly, or
monthly. Typically, interim reports include the operating results of the current
interim period and the cumulative year-to-date figures, or last 12 months to date.
Comparisons are usually made to results of comparable interim periods for the
previous year.
Interim statements do not have to be audited. Each page should be labeled
Unaudited. Interim results should be based on those accounting principles used
in the last years annual report unless a change in accounting has been made
subsequently. Further, accounting policies do not have to be disclosed in interim
reports unless there has been a change in an accounting policy (principle or
estimate).
Income statement information is required in interim reports. However, it is
recommended but not required to present a balance sheet and cash flow
statement at interim dates. If these statements are not reported, the company
must disclose significant changes in liquid assets, working capital, non current
liabilities, and stockholders equity. Extraordinary items, nonrecurring items, and
gain or loss on the disposal of a business segment are recognized in the interim
period in which they occur. Earnings per share determination for interim purposes
is handled in a fashion similar to annual reporting. Materiality should be related to
the full fiscal year. However, an item not disclosed in the annual financial
statement due to immateriality would still be presented in the interim report if it is
material to that interim period.
Minimum disclosure in interim reports is as follows:
1. Revenue, tax expense, extraordinary items, cumulative effect of a change in
accounting principle, and net income
2. Earnings per share
3. Seasonal revenue and costs
4. Material changes in tax expense, including reasons for significant differences
between tax expense and income subject to tax
5. Information on disposal of a business segment
6. Commitments, contingencies, and uncertainties

7. Significant changes in financial position and cash flows

8. Other disclosures peculiar to interim reporting are as follows:
9. Seasonal factors bearing upon interim results. Seasonal companies should
10.
present supplementary information for the current and preceding 12month periods ending at the interim date so that proper evaluation of the
seasonal impact on interim results may be revealed
24. Development stage enterprises ( SFAS 7 , FASBI 7 ) : A development
stage enterprise is one whose operations have not begun or have begun but does
not contribute significant revenue . The expenses incurred during this stage are
called pre operative expenses. A development stage enterprise must use the
same GAAP as any other established company and prepare the financial
statements using GAAP and criteria applicable to an established company.
Following reporting is required for development stage enterprises:
1. In the balance sheet, retained earnings will typically show a deficit. A
descriptive caption would be deficit accumulated in the development stage.
For each equity security, the number of shares issued ,dates of issue and dollar
figures per share must be shown from inception. Besides common or preferred
stock, information must be provided for stock warrants, stock rights, or other
equities. If non cash consideration is received, such consideration must be
specified along with the basis of deriving its value.
2. In the income statement, the total revenue and expenses since inception must
be disclosed separately.
3. In the statement of cash flows, cumulative cash flows from operating,
investing, and financing activities from inception, in addition to current year
amounts, must be shown.
The financial statements must be headed Development Stage Enterprise.
Footnote disclosure is required of the development stage activities and the
proposed lines of business. In the first year when regular operation starts , the
company must disclose that in prior years it was in development stage .If
comparative financial statements are issued, the company must disclose in Form
10-K that in previous years it was in the development stage
Newly issued SOP 98-5 requires that start-up costs must be expensed as incurred.
Start-up costs are commonly referred to as pre- operating expenditures . In some
industries, it was common to defer some of those costs if it could be shown that
the future net operating results would be sufficient to recover these costs. They
would then be expensed when the business opened or over a period not to exceed
one year. Under the new guidance, all such start-up costs, including organization
costs, are to be expensed as incurred.

Comparison

There are significant differences between Indian GAAP and US GAAP. US GAAP stipulate

stringent accounting treatment as well as disclosure norms, whereas their Indian

GAAP in many cases have relaxed requirements ( AS 18,17,AS 3). Similarly, there are
several areas where no Accounting Standard have been issued by ICAI .These
differences lead to wide variations when Financial Results of Indian Companies are
computed under US GAAP and it is found that Profits computed under US GAAP are
generally lower

Some of these major differences between US GAAP and Indian GAAP which give
rise to differences in profit are highlighted hereunder:
1.

Underlying assumptions: Under Indian GAAP, Financial statements are

prepared in accordance with the principle of conservatism which basically means
Anticipate no profits and provide for all possible losses. Under US GAAP
conservatism is not considered, if it leads to deliberate and consistent
understatements.

2.

Prudence vs. rules : The Institute of Chartered Accountants of India

(ICAI) has been structuring Accounting Standards based on the
International Accounting Standards ( IAS) , which employ concepts and
`prudence' as the principle in contrast to the US GAAP, which are "rule
oriented", detailed and complex. It is quite easy for the US accountants to
handle issues that fall within the rules, while the International Accounting
Standards provide a general framework of accounting standards, which
emphasise "substance over form" for accounting. These rules are less
descriptive and their application is based on prudence. US GAAP has thus
issued several Industry specific GAAP , like SFAS 51 ( Cable TV), SFAS 50
(Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc.
3.
Format/ Presentation of financial statements: Under Indian GAAP,
financial statements are prepared in accordance with the presentation
requirements of Schedule VI to the Companies Act, 1956. On the other
hand , financial statements prepared as per US GAAP are not required to be
prepared under any specific format as long as they comply with the
disclosure requirements of US GAAP. Financial statements to be filed with
SEC include
4.

Consolidation of subsidiary companies: Under Indian GAAP (AS 21),

Consolidation of Accounts of subsidiary companies is not mandatory. AS 21
is mandatory if an enterprise presents consolidated financial statements. In
other words, the accounting standard does not mandate an enterprise to
present consolidated financial statements but, if the enterprise presents
consolidated financial statements for complying with the requirements of
any statute or otherwise, it should prepare and present consolidated
financial statements in accordance with AS 21.Thus, the financial income
of any company taken in isolation neither reveals the quantum of business
between the group companies nor does it reveal the true picture of the

Group . Savvy promoters hive off their loss making divisions into separate
subsidiaries, so that financial statement of their Flagship Company looks
attractive .Under US GAAP (SFAS 94),Consolidation of results of Subsidiary
Companies is mandatory , hence eliminating material, inter company
transaction and giving a true picture of the operations and Profitability of
the various majority owned Business of the Group.
5.

Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash

Flow statement in financial statements is mandatory only for companies
whose share are listed on recognized stock exchanges and Certain
enterprises whose turnover for the accounting period exceeds Rs. 50 crore.
Thus , unlisted companies escape the burden of providing cash flow
statements as part of their financial statements. On the other hand, US
GAAP (SFAS 95) mandates furnishing of cash flow statements for 3 years
current year and 2 immediate preceding years irrespective of whether the
company is listed or not .

6.

Investments: Under Indian GAAP (AS 13), Investments are classified as

Current and Long term. These are to be further classified Government or
Trust securities ,Shares, debentures or bonds Investment properties Othersspecifying nature. Investments classified as current investments are to be
carried in the financial statements at the lower of cost and fair value
determined either on an individual investment basis or by category of
investment, but not on an overall (or global) basis. Investments classified
as long term investments are carried in the financial statements at cost.
However, provision for diminution is to be made to recognise a decline,
other than temporary, in the value of the investments, such reduction
being determined and made for each investment individually. Under US
GAAP ( SFAS 115) , Investments are required to be segregated in 3
categories i.e. held to Maturity Security ( Primarily Debt Security) , Trading
Security and Available for sales Security and should be further segregated
as Current or Non current on Individual basis. Debt securities that the
enterprise has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealised gains and losses included in
earnings.
All
Other
securities are
classified
as available-for-sale
securities and reported at fair value, with unrealised gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity

7.

Depreciation: Under the Indian GAAP, depreciation is provided based

on rates prescribed by the Companies Act, 1956. Higher depreciation
provision based on estimated useful life of the assets is permitted, but must
be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation
cannot be provided at a rate lower than prescribed in any circumstance.
Similarly , there is no compulsion to provide depreciation at a higher rate,
even if the actual wear and tear of the equipments is higher than the rates

provided in Companies Act. Thus , an Indian Company can get away with
providing with lesser depreciation , if the same is in compliance to
Companies Act 1956. Contrary to this, under the US GAAP , depreciation
has to be provided over the estimated useful life of the asset, thus making
the Accounting more realistic and providing sufficient funds for replacement
when the asset becomes obsolete and fully worn out.
8.
Foreign currency transactions: Under Indian GAAP(AS11) Forex
transactions ( Monetary items ) are recorded at the rate prevalent on the
transaction date .Year end foreign currency assets and liabilities ( Non
Monetary Items) are re-stated at the closing exchange rates. Exchange rate
differences arising on payments or realizations and restatements at closing
exchange
rates
are
treated
as
Profit
/loss
in the
income
statement. Exchange fluctuations on liabilities incurred for fixed assets
can be capitalized. Under US GAAP (SFAS 52), Gains and losses on foreign
currency transactions are generally included in determining net income for
the period in which exchange rates change unless the transaction hedges a
foreign currency commitment or a net investment in a foreign entity .
Capitalization of exchange fluctuation arising from foreign liabilities
incurred for acquiring fixed assets does not exist. Translation adjustments
are not included in determining net income for the period but are disclosed
and accumulated in a separate component of consolidated equity until sale
or until complete or substantially complete liquidation of the net
investment in the foreign entity takes place . US GAAP also permits use of
Average monthly Exchange rate for Translation of Revenue, expenses and
Cash flow items, whereas under Indian GAAP, the closing exchange rate for
the Transaction date is to be taken for translation purposes.
9.
Expenditure during Construction Period: As per the Indian GAAP
(Guidance note on Treatment of expenditure during construction period' ) ,
all incidental expenditure on Construction of Assets during Project
stage are accumulated and allocated to the cost of asset on completion of
the project. Contrary to this, under the US GAAP (SFAS 7) ,
such expenditure are divided into two heads direct and indirect. While,
Direct expenditure is accumulated and allocated to the cost of asset,
indirect expenditure are charged to revenue.
10. Research and Development expenditure: Indian GAAP ( AS
8) requires research and development expenditure to be charged to profit
and loss account, except equipment and machinery which are capitalized
and depreciated. Under US GAAP ( SFAS 2) , all R&D costs are expenses
except intangible assets purchased from others and Tangible assets that
have alternative future uses which are capitalised and depreciated or
amortised as R&D Expense. Under US GAAP, R&D expenditure incurred on
software development are expensed until technical feasibility is established
( SOP 81.1) . R&D Cost and software development cost incurred under
contractual arrangement are treated as cost of revenue.
11. Revaluation reserve : Under Indian GAAP, if an enterprise needs to
revalue its asset due to increase in cost of replacement and provide higher
charge to provide for such increased cost of replacement, then the Asset
can be revalued upward and the unrealised gain on such revaluation can be
credited to Revaluation Reserve ( Guidance note no 57). The incremental
depreciation arising out of higher book value may be adjusted against the

Revaluation Reserve by transfer to P&L Account. However for window

dressing some promoters misutilise this facility to hoodwink the
shareholders on many occasions. US GAAP does not allow revaluing upward
property, plant and equipment or investment.
12. Long term Debts: Under US GAAP , the current portion of long term
debt is classified as current liability, whereas under the Indian GAAP, there
is no such requirement and hence the interest accrued on such long term
debt in not taken as current liability.
13. Extraordinary items, prior period items and changes in
accounting policies: Under Indian GAAP( AS 5) , extraordinary items,
prior period items and changes in accounting policies are disclosed without
netting off for tax effects . Under US GAAP (SFAS 16) adjustments for tax
effects are required to be made while reporting the Prior period Items.
14.
Goodwill: Under the Indian GAAP goodwill is capitalized and charged to
earnings over 5 to 10 years period. Under US GAAP ( SFAS 142) , Goodwill and
intangible assets that have indefinite useful lives are not amortized ,but they
are tested at least annually for impairment using a two-step process that begins
with an estimation of the fair value of a reporting unit. The first step is a screen
for potential impairment, and the second step measures the amount of
impairment, if any. However, if certain criteria are met, the requirement to test
goodwill for impairment annually can be satisfied without a remeasurement of the
fair value of a reporting unit.
15.
Capital issue expenses: Under the US GAAP, capital issue expenses are
required to be written off when incurred against proceeds of capitals, whereas
under Indian GAAP , capital issue expense can be amortized or written off against
reserves.
16.
Proposed dividend: Under Indian GAAP , dividends declared are accounted
for in the year to which they relate. For example, if dividend for the FY 19992000 is declared in Sep 2000 , then the corresponding charge is made in 20002001 as below the line item . Contrary to this , under US GAAP dividends are
reduced from the reserves in the year they are declared by the Board. Hence in
this case under US GAAP , it will be charged Profit and loss account of 2000-2001
above the line.
17.
Investments in Associated companies: Under the Indian GAAP( AS
23) , investment in associate companies is initially recorded at Cost using the
Equity method whereby the investment is initially recorded at cost, identifying
any goodwill/capital reserve arising at the time of acquisition. The carrying
amount of the investment is adjusted thereafter for the post acquisition change in
the investors share of net assets of the investee. The consolidated statement of
profit and loss reflects the investors share of the results of operations of the
investee.are carried at cost . Under US GAAP ( SFAS 115) Investments in
Associates are accounted under equity method in Group accounts but would be
held at cost in the Investors own account.
18.
Preoperative expenses: Under Indian GAAP, (Guidance Note 34 - Treatment
of Expenditure during Construction Period), direct Revenue expenditure during
construction period like Preliminary Expenses, Project related expenditure are
allowed to be Capitalised. Further , Indirect revenue expenditure incidental and
related to Construction are also permitted to be capitalised. Other Indirect
revenue expenditure not related to construction, but since they are incurred
during Construction period are treated as deferred revenue expenditure and

classified as Miscellaneous Expenditure in Balance Sheet and written off over a

period of 3 to 5 years. Under US GAAP ( SFAS 7) , the concept of preoperative
expenses itself doesnt exist. SOP 98.5 also madates that all Start up Costs should
be expensed. The enterprise has to prepare its balance sheet and Profit and Loss
Account as if it were a normal running organization. Expenses have to be
charged to revenue and Assets are Capitalised as a normal organization. The
additional disclosure include reporting of cash flow, cumulative revenues and
Expenses since inception. Upon commencement of normal operations, notes to
Statement should disclose that the Company was but is no longer is a
Development stage enterprise. Thus , due to above accounting anomaly,
Accounts prepared under Indian GAAP , contain higher charges to depreciation
which are to be adjusted suitably under US GAAP adjustments for indirect
preoperative expenses and foreign currencies.
19.
Employee benefits: Under Indian GAAP, provision for leave encashment is
accounted based n actuarial valuation. Compensation to employees who opt for
voluntary retirement scheme can be amortized over 60 months. Under US GAAP,
provision for leave encashment is accounted on actual basis. Compensation
towards voluntary retirement scheme is to be charged in the year in which the
employees accept the offer.
20.
Loss on extinguishment of debt: Under Indian GAAP, debt extinguishment
premiums are adjusted against Securities Premium Account. Under US GAAP,
premiums for early extinguishment of debt are expensed as incurred.
The above points of dissimilarities are only indicative and were correct upto till writing
of this article. You may need to refer to authentic text books for latest updates