GAAP

General Accepted Accounting Principles (US and

Indian)

Generally accepted accounting principles (GAAP) are the standard framework of guidelines for financial
accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice.
These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the
preparation of financial statements.
A GAAP standard is issued to prescribe or clarify how an accountant must treat a business event or a situation in the
business environment with regard to its financial statements .
The accountant's purpose is to help communicate the effect of business events and transactions on the financial
position of the entity. There are several stakeholders that have an interest in knowing the financial position of the
entity, as well as how this financial position has changed over time.
One of the stakeholders of a company is the owner - the shareholder. The ownership of shares in a company is
an investment for a shareholder, who demands a return commensurate with the level of uncertainty attached to that
investment. Shareholders need information to estimate the potential return on the capital they have invested, and to
assess whether the company has increased their wealth over a particular period of time. This information helps the
shareholders to decide whether to keep, increase or reduce their investment in the company. Financial accounting
facilitates the preparation of the reports that shareholders use in this decision-making process.
Financial information is also needed by the decision-making individuals who have been given the task of
improving the financial position of the entity, thereby creating wealth for the owners. These individuals consist of the
senior employees, for example, the managers and directors of the company, who are appointed by the shareholders,
and who are responsible for safeguarding the shareholders' investment. The directors and managers use the
financial information provided in financial reports to make financing, investing, operating and dividend decisions, as
well as to evaluate the success of previous decisions in increasing the equity of the company .
The accountant also needs to communicate an entity's financial affairs to other stakeholders such as potential
investors, suppliers, customers, regulators and the Revenue Service of Government. These parties need information
to make certain financial decisions in relation to the entity, such as whether to invest (in the case of the investors),
whether to continue to supply goods on credit (in the case of the suppliers), whether to use the entity as a preferred
supplier
Recognizing, measuring and reporting business events all result in the communication of relevant and reliable
financial information to stakeholders in order to assist them in making their respective decisions. Stakeholders
are prepared to make investment and other decisions about the entity only if they have financial information that they
know reliably represents the entity's financial position and financial performance. In addition, shareholders cannot
evaluate the success of their investments without comparing the entity's financial results with other investment
opportunities. The shareholders therefore require the information about an entity's financial affairs to be reliable,
relevant to their information needs, and in a form that makes it possible to compare their investments in the entity
with other investment opportunities.
It was these needs that resulted in the formulation and implementation of Generally Accepted Accounting
Practice (referred to as GAAP). GAAP consists of a number of practices and principles that govern how the financial
events of a business are recognized, measured and reported.
If an entity's financial reports are prepared in accordance with GAAP standards, then these financial reports will state
this fact. If you refer to the notes of the financial statements, you will normally find that the first notes listed are the
accounting policies of the entity. The accounting policies are the practices and principles that the entity has applied
when it prepared its financial statements.
Look out for the following paragraph:
The principal accounting policies of the company and the disclosures made in the annual financial statements
conforms to Indian Standards of Generally Accepted accounting Practice and comply with International Financial
Reporting Standards. The principal policies are consistent with those applied in the previous year.

This is an example of a statement of compliance with GAAP which is usually included in the financial statements of a
company. When the financial statements of a sole proprietor, trust, close corporation or partnership are prepared in
accordance with GAAP, they should state the fact in a similar way.
Major differences between US GAAP and Indian GAAP
Revaluation reserve
Extraordinary items, prior period items and changes in accounting policies
Goodwill
Capital issue expenses
Preoperative expenses
Employee benefits
Loss on extinguishment of debt

Underlying assumptions

1.
o
o
o
o
o
o

In Indian GAAP financial statements are prepared in accordance with the principal of conservatism
Which means that Anticipate no profits and provide for all possible losses
Whereas under US GAAP conservatism is not considered Revenue is recognized as and when it is
earned or realised or realizable
Example :
Generally, organizations provides provision for bad debts regarding account receivables but provision for
gain on account of non-collection of money from us by creditors will not be provided
Provision for discount on debtors and provision for discount on creditors

2. Format/ Presentation of financial statements

o
o
o

In Indian GAAP, financial statements are prepared in accordance with the presentation requirements of
Schedule VI to the companies Act, 2013
Where as in US GAAP financial statements are not required to be prepared under any specific format as
long as they comply with the disclosure requirements of US GAAP
There is no prescribed presentation requirement.

3. Cash flow statement

o
o
o

Indian GAAP mandates cash flow statement only for listed companies and other companies whose turn
over for the accounting period exceeds Rs.50 crore.
Thus, unlisted companies escapes the burden of providing cash flow statements as part of their financial
statements.
Where as in US GAAP every company whether it is listed or not is required to prepare cash flow
statement for 3 years Current year and 2 immediately preceding years

4. Depreciation Accounting
o
o
o
o
o
o
o
o
5.

In India depreciation is provided based on the rates prescribed in Schedule XIV of Companies Act, 2013.
However the rates prescribed in the schedule are the minimum rates and the company has the option to
provide depreciation higher than that rate.
Where as in US GAAP depreciation is provided over the use life of the asset and there are no specific
rates mentioned there in.
Example: If the cost of the plant & machinery is 1, 00,000$ (Scrap -10,000$) and estimated use life of the
asset is 10years.
Depreciation = (1, 00,000-10,000) / 10 = 9,000$
Change in Depreciation Method:
If a company wants to change its method of depreciation, then as per Indian GAAP retrospective recomputation of depreciation is made and any excess or deficit arising on such re-computation is required
to be adjusted in the period in which such change is effected
Where as in US GAAP the effect of change in method of depreciation is to be given prospectively

Long term Debts

o
o
o
o

Under US GAAP current portion of long term debt is classified as current liability
In Indian GAAP there is no such requirement with regards to principal portion of long term debt.
When comes to interest portion of long term debt the treatment depends upon the situation1) Interest accrued but not due- In this situation the interest is shown under long term loan by adding the
same to respective LT loan.
2) Interest accrued and due for payment- In this situation the o/s interest is shown as current liability.

6. Consolidation of subsidiary accounts

o
o

Under Indian GAAP consolidation of subsidiary companies is not mandatory. But if the company want to
present its consolidated financial statements to the users it must follow AS-21
Where as in US GAAP preparation of consolidated financial statements are mandatory .

7. Investments
o Under Indian GAAP, investments are classified as Current Investment
Long term Investment and
Investment Property
Where as in US GAAP , investments are classified as Held to maturity
Trading security and
Available for sale and these are further segregated as current or non-current
investments on individual basis
8. Foreign Currency transactions
o
o

9.

In US GAAP translation difference is taken to comprehensive income.

Where as in Indian GAAP, separate treatment was prescribed for integral and non-integral
operations.
Integral Operations: Exchange difference arising on the translation of the financial
statement of integral foreign operation should be charged to profit and loss account.
Non-integral Operations: Resulting exchange difference should be accumulated in a
foreign currency translation reserve.

Expenditure during construction period

o
o
o
o

Under Indian GAAP all incidental expenditure on construction of assets during project stage are
accumulated and allocated to the cost of the asset on completion of the project.
Whereas per US GAAP , 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.
Example: portion of attributable supervisors salary

10. Research and development expenditure

o
o

In Indian GAAP, R&D expenditure is charged to P&L except equipment and machinery which are to
be capitalized and depreciated.
In US GAAP all R&D costs are expenses except intangible assets purchased from others and
Tangible assets that have alternative future uses

11. Revaluation Reserve

o In Indian GAAP, an enterprise can revalue its assets and the unrealized gain is transferred to
Revaluation reserve .
o The incremental depreciation arising out of higher book value may be adjusted against the
Revaluation Reserve
o Whereas US GAAP does not allow revaluing its assets.
12. Extraordinary items, prior period items and changes in accounting policies3
o

In Indian GAAP, extraordinary items, prior period items and changes in accounting policies are
disclosed without netting off for tax effects.
Whereas per US GAAP, adjustments for tax effects are required to be made while reporting the prior
period items.

13. Good will

o
o

In Indian GAAP, goodwill is capitalized and charged to earnings over 5 to 10 years period.
Where as in US GAAP, goodwill and intangible assets that have indefinite useful lives are not
amortized, but they are tested at least annually for impairment .

14. Capital issue expenses

o
o

In Indian GAAP, capital issue expenses are amortized over a period of time.
Where as in US GAAP, capital issue expenses are required to be written off as when incurred
against proceeds of capital.

15. Preoperative expenses

o
o
o
o

In Indian GAAP, direct revenue expenditure during construction period like preliminary expenses,
project related expenditure are allowed to be capitalized.
Further, indirect revenue expenditure incidental and related to construction are also permitted to be
capitalized.
Other indirect revenue expenditure not related to construction, but incurred during construction
period are treated as deferred revenue expenditure and classified as miscellaneous expenditure in
b/s and written off over a period of 3 to 5 years.
Where as in US GAAP the concept of preoperative expenses itself doesnt exist. All the startup costs
should be expensed.

16. . Employee benefits

o

When comes to employee benefits in Indian GAAP Provision for leave encashment is accounted based on actuarial valuation
Compensation for VRS is amortized over 60months
Where as in US GAAP Leave encashment is accounted on actual basis
VRS is charged in the year in which the employees accept the offer

17. Loss on extinguishment of debt

o
o

In Indian GAAP, debt extinguishment premiums are adjusted against securities premium account.
Where as in US GAAP, premium for early extinguishment of debts are expensed as incurred.

The International Financial Reporting Standards (IFRS)

The International Accounting Standards Board is responsible for the formation and implementation of
international accounting standards. It publishes accounting standards referred to as International
Financial Reporting Standards (IFRS).
The IASB consists of 14 individuals from auditing, academic and business backgrounds. It began
operations in 2001 when it took over from the International Accounting Standards Committee (IASC).This
previous committee had already done significant work in the development of international accounting
standards and had produced a number of accounting standards referred to as International Accounting
Standards (IASs).The IASB has adopted these standards, therefore international standards consist of both
IFRSs and IASs, and both form part of GAAP. Each standard has either 'IFRS' or IAS' as a prefix. The
reason for the two numbering systems (IFRSs and IASs) is that the newly-formed body wanted to identify
standards that it was largely responsible for (IFRSs) from those standards based on the principles
developed by the previous body (IASs). But the term IFRS' is usually used to refer collectively to
standards with an IFRS number and to those with an IAS number.

In addition to the IASB's standards, the International Financial Reporting Interpretations

Committee (IFRIC) issues interpretation guidelines (previously the body was known as the Standards
Interpretation Committee (SIC)). The IFRIC reviews both newly-identified financial reporting issues not
specifically addressed in IFRSs and issues where unsatisfactory or conflicting interpretations have
developed. The IFRIC applies a principle-based approach in providing interpretive guidance with the view
to reach consensus on the appropriate treatment of certain aspects of specific IFRSs. The interpretations
issued by the IFRIC are called IFRIC 1, IFRIC2, and the like, and those issued by SIC are called SIC1,
SIC2, and the like.

The current status of IFRS

These international standards have been accepted by the majority of countries, including the United
Kingdom, Australia, New Zealand and South Africa with the major breakthrough when these standards
were adopted by listed companies in the European Union (EU) since the beginning of January 2005. The
IASB issued a specific standard, IFRS1, to cater for the first-time adoption of the international standards.
This standard contains specific concessions affecting the take-on of the international standards at the date
of transition.
However, the term 'international' is actually misleading, as the world's largest economy, the United States
of America (US), has not played a significant role in the development of these standards. The US standards
are developed by their own standard-setter, known as the Financial Accounting Standards
Board ('FASB'). There is a major conceptual difference between the US standards and the international
standards. While the international standards were largely based on principles, the US standards were based
on a complex and rigorous set of rules.
After the various large corporate collapses in the US, the US standard-setters became more involved with
the international standard-setting process. In 2002 an agreement was reached between the IASB and the
FASB to work together to remove differences between international standards and US standards, with the
aim of creating one set of truly global standards. The aim is that these standards will be consistent,
comprehensive, and based on clear principles which fairly reflect the economic reality of transactions, and
that they will result in understandable and timely financial reports. This process is known as
the convergence process. The IASB and FASB have, since the agreement, developed a number of
accounting standards, with many more to come. Although complete convergence between the IFRS and US
standards is not expected, sufficient progress has been made that foreign entities are no longer required to
prepare the reconciliation of their IFRS-calculated results to the US equivalent. This was a complex
requirement and it is now easier for foreign entities to list in the United States.

US GAAP v/s IFRS

The International Financial Reporting Standards (IFRS) - the accounting standard used in more than 110
countries - has some Similarities and some differences with the U.S. Generally Accepted Accounting
Principles (GAAP).
At the conceptually level, IFRS is considered more of a "principles based" accounting standard in contrast
to U.S. GAAP which is considered more "rules based." By being more "principles based", IFRS, arguably,
represents and captures the economics of a transaction better than U.S. GAAP.

Similarities: There are many similarities in US GAAP and IFRS guidance on financial statement
presentation.

Under both sets of standards, the components of a complete set of financial statements include:

Statement of financial position,

Statement of profit and loss (i.e., income statement) and

Statement of comprehensive income (either a single continuous statement or two consecutive

statements)

Statement of cash flows and accompanying notes to the financial statements.

Both standards also require the changes in shareholders equity to be presented. However, US GAAP
allows the changes in shareholders equity to be presented in the notes to the financial statements while
IFRS requires the changes in shareholders equity to be presented as a separate statement.
Further, both require that the financial statements be prepared on the accrual basis of accounting (with the
exception of the cash flow statement) except for rare circumstances.
Both sets of standards have similar concepts regarding materiality and consistency that entities have to
consider in preparing their financial statements. Differences between the two sets of standards tend to arise
in the level of specific guidance provided.

Differences: Some of differences between the two accounting frameworks are highlighted below:
1. Intangibles:

The treatment of acquired intangible assets helps illustrate why IFRS is considered more "principles
based." Acquired intangible assets under U.S. GAAP are recognized at fair value, while under
IFRS, it is only recognized if the asset will have a future economic benefit and has measured
reliability. Intangible assets are things like R&D and advertising costs.

2. Inventory Costs:
Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed.
Under U.S. GAAP, either LIFO or first-in, first-out (FIFO) inventory estimates can be used. The
move to a single method of inventory costing could lead to enhanced comparability between
countries, and remove the need for analysts to adjust LIFO inventories in their comparison analysis.
3. Write Downs:
Under IFRS, if inventory is written down, the write down can be reversed in future periods if
specific criteria are met. Under U.S. GAAP, once inventory has been written down, any reversal is
prohibited
4. Layout of balance sheet and income statement:

No general requirement within US GAAP to prepare the balance sheet and income statement in
accordance with a specific layout; however, public companies must follow the detailed
requirements in Regulation S-X.
IFRS does not prescribe a standard layout, but includes a list of minimum line items. These
minimum line items are less prescriptive than the requirements in Regulation S-X.

5. Balance sheet classification of deferred tax assets and liabilities:

Under US GAAP Current or non-current classification, generally based on the nature of the related
asset or liability, is required. Under IFRS all amounts classified as non-current in the balance sheet

INDIAN GAAP
Indian Accounting Standards are a set of accounting standards notified by the Ministry of Corporate
Affairs which are converged with International Financial Reporting Standards (IFRS). These accounting
standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
Now India will have two sets of accounting standards viz. existing accounting standards under Companies
(Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards (Ind AS). The Ind
AS are named and numbered in the same way as the corresponding IFRS.
NACAS (National Advisory Committee on Accounting Standards (NACAS) is a body set up under section 210A of the Companies Act,
1956) recommend these standards to the Ministry of Corporate Affairs. The Ministry of Corporate Affairs
has to spell out the accounting standards applicable for companies in India. As on date the Ministry of
Corporate Affairs notified 35 Indian Accounting Standards(Ind AS).This shall be applied to the
companies of financial year 2015-16 voluntarily and from 2016-17 on a mandatory basis.

CONCEPTS & CONVENTIONS

The Accounting Concepts and Accounting Conventions have been developed over the years from
experience, reason, usage and necessity and are generally accepted for accounting of transactions
and Preparation of Financial Statements.
Accounting Concepts are the necessary assumptions, conditions or postulates upon which the accounting
is based. They are developed to facilitate communication of the accounting and financial information to all
the readers of the Financial Statements, so that all readers interpret the statements in the same
meaning and context.
The Business Entity Concept
The business entity concept provides that the accounting for a business or organization be kept separate
from the personal affairs of its owner, or from any other business or organization. This means that the
owner of a business should not place any personal assets on the business balance sheet. The balance sheet
of the business must reflect the financial position of the business alone. Also, when transactions of the
business are recorded, any personal expenditures of the owner are charged to the owner and are not allowed
to affect the operating results of the business.
The Continuing Concern Concept
The continuing concern concept assumes that a business will continue to operate, unless it is known that
such is not the case. The values of the assets belonging to a business that is alive and well are
straightforward. For example, a supply of envelopes with the company's name printed on them would be
valued at their cost. This would not be the case if the company were going out of business. In that case, the
envelopes would be difficult to sell because the company's name is on them. When a company is going out

of business, the values of the assets usually suffer because they have to be sold under unfavorable
circumstances. The values of such assets often cannot be determined until they are actually sold.
The Period Concept

The time period concept provides that accounting take place over specific time periods known as fiscal
periods. These fiscal periods are of equal length, and are used when measuring the financial progress of a
business.
The Revenue Recognition Concept

The revenue recognition convention provides that revenue be taken into the accounts (recognized) at the
time the transaction is completed. Usually, this just means recording revenue when the bill for it is sent to
the customer. If it is a cash transaction, the revenue is recorded when the sale is completed and the cash
received.
It is not always quite so simple. Think of the building of a large project such as a dam. It takes a
construction company a number of years to complete such a project. The company does not wait until the
project is entirely completed before it sends its bill. Periodically, it bills for the amount of work completed
and receives payments as the work progresses. Revenue is taken into the accounts on this periodic basis.
It is important to take revenue into the accounts properly. If this is not done, the earnings statements of the
company will be incorrect and the readers of the financial statement misinformed.
The Matching Concept

The matching principle is an extension of the revenue recognition convention. The matching principle
states that each expense item related to revenue earned must be recorded in the same accounting period as
the revenue it helped to earn. If this is not done, the financial statements will not measure the results of
operations fairly.
The Cost Principle

The cost principle states that the accounting for purchases must be at their cost price. This is the figure that
appears on the source document for the transaction in almost all cases. There is no place for guesswork or
wishful thinking when accounting for purchases.
The value recorded in the accounts for an asset is not changed until later if the market value of the asset
changes. It would take an entirely new transaction based on new objective evidence to change the original
value of an asset.
There are times when the above type of objective evidence is not available. For example, a building could
be received as a gift. In such a case, the transaction would be recorded at fair market value which must be
determined by some independent means.
Realization Concept

According to this concept, revenue should be accounted for only when it is actually realised or it
has become certain that the revenue will be realised. This signifies that revenue should be recognized only
when the services are rendered or the sale is effected. However, in order to recognize revenue, actual

receipt of cash is not necessary. What is important is that the organization should be legally entitled to
receive the amount for the services rendered or the sale effected.
Accrual Concept

Under the cash system of accounting, the revenues and expenses are recorded only if they are actually
received or paid in cash, irrespective of the accounting period to which they belong. But under the accrual
concept, occurrence of claims and obligations in respect of incomes or expenditures, assets or
liabilities based on happening of any event, passage of time, rendering of services, fulfillment (partially or
fully) of contracts, diminution in values, etc., are recorded even though actual receipts or payments of
money may not have taken place. In respect of an accounting period, the outstanding expenses and the
prepaid expenses and similarly the income receivable and the income
received in advance are shown separately in the books of accounts under the accrual method.
ACCOUNTING CONVENTIONS
Convention of Disclosure

The term disclosure implies that there must be a sufficient revelation of information which is of material
interest to owners, creditors, lenders, investors, citizen and other stakeholders.
The accounts and the financial statements of an entity should disclose full and fair information to
the beneficiaries in order to enable them to form a correct opinion on the performance of such entity, which
in turn would allow them to take correct decisions. For example, the Accounting Principles that have been
followed for preparation of the Financial Statements should be disclosed along with the Financial
Statements for proper understanding and interpretation of the same.
The Consistency Convention

The consistency principle requires accountants to apply the same methods and procedures from period to
period. When they change a method from one period to another they must explain the change clearly on the
financial statements. The readers of financial statements have the right to assume that consistency has been
applied if there is no statement to the contrary.
The consistency principle prevents people from changing methods for the sole purpose of manipulating
figures on the financial statements.
The Materiality Convention

The materiality principle requires accountants to use generally accepted accounting principles except when
to do so would be expensive or difficult, and where it makes no real difference if the rules are ignored. If a
rule is temporarily ignored, the net income of the company must not be significantly affected, nor should
the reader's ability to judge the financial statements be impaired.
The Full Disclosure Convention

The full disclosure principle states that any and all information that affects the full understanding of a
company's financial statements must be include with the financial statements. Some items may not affect
the ledger accounts directly. These would be included in the form of accompanying notes. Examples of
such items are outstanding lawsuits, tax disputes, and company takeovers.