What are the major difference between US GAAP & Indian GAAP.?
Where US GAAP is exactly & highly differenciated from Indian
GAAP..?

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What are the major difference between US GAAP & Indian GAAP.? Where US GAAP is exactly & hi..

Answer / sankar

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 Others-specifying
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 1999-2000 is
declared in Sep 2000 , then the corresponding charge is
made in  2000-2001 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
investor’s share of net assets of the investee. The
consolidated statement of profit and loss reflects the
investor’s 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
Investor’s 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 doesn’t 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.

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What are the major difference between US GAAP & Indian GAAP.? Where US GAAP is exactly & hi..

Answer / sankar

MAJOR DIFFERENCES:

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---revenue recognized when
earned or when it is realized or realizable.

2. 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.

3. 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 .

4. Depreciation: Under the Indian GAAP, depreciation is
provided based on rates prescribed by the Companies Act,
1956. US GAAP , depreciation has to be provided over the
estimated useful life of the asset,

5. 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.

6. Consolidation of subsidiary accounts: Under the Indian
GAAP, consolidation of accounts of subsidiary companies is
not mandatory. Under US GAAP (SFAS 94),Consolidation of
results of Subsidiary Companies is mandatory.

7.Investments: Under Indian GAAP (AS 13), Investments are
classified as current and long term. 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.

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