Generally Accepted Generally Accepted Accounting Principles Accounting Principles

(GAAP) and the (GAAP) and the Accounting EnvironmentAccounting Environment

The Development of Financial The Development of Financial Accounting and Reporting StandardsAccounting and Reporting Standards

Concepts, principles, andprocedures weredeveloped to meet theneeds of external users (GAAP).

IntroductionIntroductionFinancial accounting information must be Financial accounting information must be assembled and reported objectively.assembled and reported objectively.

Third-parties who must rely on such Third-parties who must rely on such information have a right to be assured that information have a right to be assured that the data are free from bias and the data are free from bias and inconsistency, whether deliberate or not. inconsistency, whether deliberate or not.

For this reason, financial accounting relies For this reason, financial accounting relies on certain standards or guides that are on certain standards or guides that are called "Generally Accepted Accounting called "Generally Accepted Accounting Principles" (GAAP).Principles" (GAAP).

IntroductionIntroduction

Principles derive from tradition, such as Principles derive from tradition, such as the concept of matching. the concept of matching.

In any report of financial statements (audit, In any report of financial statements (audit, compilation, review, etc.), the compilation, review, etc.), the preparer/auditor must indicate to the preparer/auditor must indicate to the reader whether or not the information reader whether or not the information contained within the statements complies contained within the statements complies with GAAP.with GAAP.

The profession has developed GAAP that The profession has developed GAAP that present present fairlyfairly, , clearlyclearly and and completelycompletely the the financial operations of the enterprise.financial operations of the enterprise.

GAAP consist of GAAP consist of authoritative authoritative pronouncementspronouncements issued by certain issued by certain accounting bodies.accounting bodies.

Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)

What’s GAAP?What’s GAAP?

The set of The set of conceptsconcepts, , conventionsconventions,, rules rules and and procedures procedures necessary to define accepted necessary to define accepted accounting practices at a particular time is accounting practices at a particular time is referred as Generally Accepted Accounting referred as Generally Accepted Accounting Principles (GAAP).Principles (GAAP).

GAAP represents functional positions that have GAAP represents functional positions that have been agreed upon.been agreed upon.

Basic Accounting ConceptsBasic Accounting ConceptsBusiness entity conceptBusiness entity concept

Money measurement conceptMoney measurement concept

Historical cost conceptHistorical cost concept

Revenue realisation concept.Revenue realisation concept.

Accounting periodAccounting period

MatchingMatching

Going concern Going concern

AccrualAccrual

ConservativenessConservativeness

Methods of AccountingMethods of Accounting

Accruals or mercantile basisAccruals or mercantile basis

Cash basisCash basis

Hybrid systemHybrid system

What’s GAAP?What’s GAAP?The corporate accounts and financial The corporate accounts and financial statements are prepared and presented on the statements are prepared and presented on the basis of GAAP. The accounts are prepared basis of GAAP. The accounts are prepared and presented on the basis of:and presented on the basis of:

1.1. Conceptual Framework of financial statementsConceptual Framework of financial statements

2.2. Accounting PrinciplesAccounting Principles

3.3. Accounting Standards formulated by the ICAIAccounting Standards formulated by the ICAI

4.4. Requirements of regulatory bodies like the Requirements of regulatory bodies like the SEBI, RBISEBI, RBI

5.5. Requirements of the Income Tax ActRequirements of the Income Tax Act

Accounting Principles & Accounting Principles & PoliciesPolicies

Imagine that you are a Imagine that you are a business owner and you business owner and you take copies of your financial take copies of your financial records (‘books’) to four records (‘books’) to four different accountants. You different accountants. You ask each one to calculate ask each one to calculate your profit for the year. A your profit for the year. A fortnight later they provide fortnight later they provide you with their answers.you with their answers.

““.. based on cash in your bank .. based on cash in your bank at end December compared to at end December compared to prior year, you pretty much prior year, you pretty much break even in 2005.”break even in 2005.”

Accounting Principles & Accounting Principles & PoliciesPolicies

“.. by the time I have written off all your old inventory and overdue receivables and provided for my fee, you incurred a significant loss (Rs.xxx).”

“an interesting year 2009 ..

how much would you like

your profit to be?”

“.. after re-valuing all inventory at future purchase price and, assuming a successful outcome to ongoing litigation, you have a healthy profit of Rs.xxx.”

Need for guidance & consistency.

Level of “judgement”.Level of “judgement”.

Consistency between time periods.Consistency between time periods.

Comparability between companies.Comparability between companies.

Reliability of financial information.Reliability of financial information.

Risk of financial controls/ surprises. Risk of financial controls/ surprises.

Need for Accounting StandardsNeed for Accounting Standards

ISSUESISSUES

Accounting StandardsAccounting Standards““Accounting standards codify the generally accepted Accounting standards codify the generally accepted accounting principles. accounting principles. They lay down the norms of accounting policies They lay down the norms of accounting policies and practices by way of codes or guidelines to direct and practices by way of codes or guidelines to direct as to how the items appearing in the financial as to how the items appearing in the financial statements should be dealt with in the books of statements should be dealt with in the books of accounts and shown in the annual reports.accounts and shown in the annual reports. They present the general principles to be put to They present the general principles to be put to application using professional judgement. They bring application using professional judgement. They bring about uniformity of assumptions, rules and policies about uniformity of assumptions, rules and policies adopted in financial reporting and thus ensure adopted in financial reporting and thus ensure consistency and comparability.consistency and comparability.

Need to Develop StandardsNeed to Develop Standards

Various users need financial information

Various users need financial information

The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash FlowsNote Disclosure

Financial StatementsBalance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash FlowsNote Disclosure

Generally Generally Accepted Accepted Accounting Accounting Principles (GAAP)Principles (GAAP)

Generally Generally Accepted Accepted Accounting Accounting Principles (GAAP)Principles (GAAP)

FASB’s Standard-Setting FASB’s Standard-Setting ProcessProcess

Identification of problem.Identification of problem. The task force.The task force. Research and analysis.Research and analysis. Discussion memorandum.Discussion memorandum. Public response.Public response. Exposure draft.Exposure draft. Public response.Public response. Statement issued.Statement issued.

Identification of problem.Identification of problem. The task force.The task force. Research and analysis.Research and analysis. Discussion memorandum.Discussion memorandum. Public response.Public response. Exposure draft.Exposure draft. Public response.Public response. Statement issued.Statement issued.

Accounting StandardsAccounting StandardsInstitute of Chartered Accountants of India is is empowered for issuance of Accounting empowered for issuance of Accounting Standard in India. Standard in India.

So far So far ICAI has issued 31 Accounting has issued 31 Accounting Standards and AS-32 is under preparation.Standards and AS-32 is under preparation.

CBDT is also empowered to issue AS for CBDT is also empowered to issue AS for appropriate accounting method for taxation. appropriate accounting method for taxation.

Plethora of GAAPsPlethora of GAAPs

US GAAPUS GAAP

UK GAAPUK GAAP

Indian GAAPIndian GAAP

Country specific accounting standardsCountry specific accounting standards

BURNING ISSUEBURNING ISSUE

HARMONISATION OF ACCOUNTING HARMONISATION OF ACCOUNTING STANDARDS OF VARIOUS STANDARDS OF VARIOUS

COUNTRIES/ ECONOMIC REGIONSCOUNTRIES/ ECONOMIC REGIONS

WHYWHYGlobalisation – opening of economies/ tariff barriersGlobalisation – opening of economies/ tariff barriers

GLOCAL companies/ MNCsGLOCAL companies/ MNCs

Access to international capital marketsAccess to international capital markets

Global listings/ overseas operationsGlobal listings/ overseas operations

Need for global accounting fraternity to Need for global accounting fraternity to communicate in one language, without communicate in one language, without

having to acquire newer skill sets having to acquire newer skill sets

STRUCTURE - IGAAPSTRUCTURE - IGAAP

Accounting Standards are issued by the ASB of ICAIAccounting Standards are issued by the ASB of ICAI

31 Accounting Standards so far – Effective 3031 Accounting Standards so far – Effective 30

Other governing statutes – Companies Act/ SEBI Other governing statutes – Companies Act/ SEBI guidelines/ Govt circularsguidelines/ Govt circulars

Broadly – IGAAP is close to IFRSBroadly – IGAAP is close to IFRS

STRUCTURE - USGAAPSTRUCTURE - USGAAP

FASB – designated body to issue accounting FASB – designated body to issue accounting standards (FAS) in the private sectorstandards (FAS) in the private sector

Recognised by SEC/ AICPARecognised by SEC/ AICPA

Various other bodies/ pronouncements/ hierarchy Various other bodies/ pronouncements/ hierarchy also existalso exist

Separate Accounting Standard Board for Govt. Separate Accounting Standard Board for Govt. companies (GASB)companies (GASB)

STRUCTURE - IFRSSTRUCTURE - IFRSInternational Financial Reporting Standards (IFRS) are International Financial Reporting Standards (IFRS) are issued by IASB from 2001 onwardsissued by IASB from 2001 onwards

Uptill 2000 – International Accounting Standards Uptill 2000 – International Accounting Standards Committee (IASC) would issue IAS.Committee (IASC) would issue IAS.

IASB adopted all the 41 IAS from 2001 onwards.IASB adopted all the 41 IAS from 2001 onwards.

EU has made it mandatory for all the listed companies on EU has made it mandatory for all the listed companies on a European Stock exchange to use IFRS by 2005.a European Stock exchange to use IFRS by 2005.

Non compliance of IFRS may lead to delistingNon compliance of IFRS may lead to delisting

Various Countries are in the process of aligning their Various Countries are in the process of aligning their Accounting Standards to IFRSAccounting Standards to IFRS

Steps towards harmonisation of USGAAP/ IFRS have Steps towards harmonisation of USGAAP/ IFRS have been taken.been taken.

VISIONVISION

GLOBALGLOBAL

ACCOUNTING ACCOUNTING

MARKET MARKET

PLACEPLACE

Institutions/Accounting Bodies that Institutions/Accounting Bodies that influence Indian GAAPinfluence Indian GAAP

Dept. to Company

Affairs

International Accounting Standard

Board

InternationalFederation ofAccountants

Securities &ExchangeBoard of

India

IndianGAAP

Reserve Bank ofIndia

Institute ofChartered

Accountant ofIndia

Income TaxAuthorities

ComptrollerAnd AuditorGeneral of

India

International Organisations:International Organisations:International Accounting Standards International Accounting Standards

Board (IASB)Board (IASB)

Successor to International Accounting Successor to International Accounting Standard Committee (IASC)Standard Committee (IASC)Develops set of AS that will be acceptable Develops set of AS that will be acceptable worldwideworldwideUp to January 1, 2004, IASB has issued 41 Up to January 1, 2004, IASB has issued 41 International Financial Reporting Standards International Financial Reporting Standards or International Accounting Standardsor International Accounting StandardsThe IASB consists of 14 members (12 full-The IASB consists of 14 members (12 full-time & 2 part-time) time & 2 part-time)

International Accounting StandardsInternational Accounting StandardsBoard (IASB)Board (IASB)

Established in 1973 to narrow the Established in 1973 to narrow the range of differences in accounting range of differences in accounting standards.standards.

Increase in international trade has Increase in international trade has motivated the IASB to attempt to motivated the IASB to attempt to eliminate alternative accounting eliminate alternative accounting treatmentstreatments..

IASB contd…IASB contd…The members are appointed by the Trustees The members are appointed by the Trustees of International Accounting Standards of International Accounting Standards Committee FoundationCommittee Foundation

All companies in the union have to comply All companies in the union have to comply with the IASB’s Standards as per with the IASB’s Standards as per announcement by the European Union w.e.f. announcement by the European Union w.e.f. January 1, 2005January 1, 2005

The ICAI has committed to formulate national The ICAI has committed to formulate national accounting standards in tune with the IASB,s accounting standards in tune with the IASB,s standard as far as possiblestandard as far as possible

International Federation of International Federation of Accountants (IFA)Accountants (IFA)

Is primarily concerned with bringing international Is primarily concerned with bringing international harmony in matters such as education, ethics harmony in matters such as education, ethics and auditing practicesand auditing practices

International Organisation of Securities International Organisation of Securities Commissions (IOSC) and the United States Commissions (IOSC) and the United States Securities and Exchange Commission (USSEC) Securities and Exchange Commission (USSEC) are associations of securities regulatorsare associations of securities regulators

Plays an important role in improving accounting Plays an important role in improving accounting and disclosure regulation in securities market and disclosure regulation in securities market

THE ENDTHE END