ASSIGNMENT NO.

Accounting For Management

Submitted to: Ms. Swati

Submitted By: Shweta Bhardwaj MBA I C

Definition of GAAP (Generally Accepted Accounting Principles) :

Authoritative rules, practices, and conventions meant to provide both broad guidelines and detailed procedures for preparing financial statements and handling specific accounting situations is known as GAAP. Generally Accepted Accounting Principles (GAAP) provide objective standards for judging and comparing financial data and its presentation, and limit the directors' freedom in showing an unrealistic picture through creative accounting. An auditor must certify that the provisions of GAAP have been followed in reporting an organization's financial data in order it to be accepted by investors, lenders, and tax authorities Definition of IFRS (International Financial Reporting Standards):

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.Currently, over 100 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. GAAP is used in India as Indian GAAP and also used in USA as US GAAP. Because, Indian accounting standards are made by ICAI on the basis of International accounting standards. So, except few confusion, almost same rules are used both Indian GAAP and US GAAP. Is IFRS that Different from U.S. GAAP?

The U.S. is moving toward IFRS. For many years, countries developed their own accounting standards. They were rules-based, principle-based, business-oriented, taxoriented in one word, they were all different. With globalization, the need to harmonize these standards was not only obvious but necessary. By the end of the 90s, the two predominant standards were the U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). And, both standard setters, IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board), initiated a convergence project even before IFRS was actually adopted by many countries.

Since 1999, the FASB( Financial Accounting Standards Board) has undertaken six initiatives in order for the GAAP to converge with IFRS: 1. Joint projects conducted with the IASB (Conceptual Framework Project, Business Combination Project, Revenue Recognition Project, Financial Statements Presentation), 2. Short-term convergence project, 3. Liaison IASB member on site at FASB offices, 4. FASB monitoring of IASB projects, 5. Convergence Project and 6. Explicit consideration of convergence potential in all Board agenda decision.

Differences Between IFRS and U.S. GAAP: While this is not a comprehensive list of differences that exist, these examples provide a flavor of impacts on the financial statements and therefore on the conduct of businesses.

Consolidation IFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS. Statement of Income Under IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income. Inventory Under IFRS, LIFO (a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold) cannot be used while under U.S. GAAP, companies have the choice between LIFO and FIFO (is a common method for recording the value of inventory). Earning-per-Share Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under U.S. GAAP the computation averages the individual interim period incremental shares. Development costs These costs can be capitalized under IFRS if certain criteria are met, while it is considered as expenses under U.S. GAAP.

Why Switch to IFRS from GAAP? ( Need for Change): Some of those factors are: Improvements in the Accounting Standards, Education and training of IFRSs in the U.S, and the Accountability and funding of the International Accounting Standards Committee Foundation (Journal). First of all, We do believe the United States should switch over to IFRS.

Why We believe that the United States should switch to international financial reporting standards is because of three important reasons: These reasons include: International Financial Reporting Standards makes it easier to compare, it is internationally understood, and it helps multinational businesses to stay upto-date and competitive in the globalization of markets. The first reason why there is disagreement for the switch to IFRS is that the standards introduce uncertainty in the evaluation of financial standards. It raises uncertainty because international financial reporting standards permit managers to exercise their own judgment when deciding what to report in their financial statements (Albrecht). This could lead to possible errors in statements which can cause shareholders, investors, and the general public not to have as much belief in the financial statements. IFRS provides consistency throughout the world on how to read and understand financial statements. If every country uses different financial standards to compare statements, I believe that would cause even more uncertainty because not everyone is going to know how to read and understand another financial statement with different standards, which leads to disbelief in those statements. Secondly, some people dislike the switch because unlike GAAP, there isnt much enforcement with IFRS. Unlike GAAP, which has several organizations such as the Securities and Exchange Commission that watches over its accounting rules, IFRS does not. There isnt a global organization such as the SEC that watches over the international standards (Albrecht). This could cause a problem for fraudulent financial statements which leads back to uncertainty with those statements. Various parts of the world will be playing by different rules and there will never be enough consistency (Albrecht). Lastly, a disadvantage for the United States switching to international financial reporting standards is that it is hard to compare financial statements. As stated at IFRS.com, many countries that claim to be converting to international standards may never get to 100 percent compliance.

Do we need IFRS in India? Yes, IFRS is needed in India because Indian Companies are listed on overseas stock exchange and have to prepare accounts with respect to GAAP followed in respective countries. Foreign companies having subsidiary in India have to prepare there accounts in order to meet overseas reporting. FDI and FIIs are more comfortable with one global accounting language which can be understood globally.

Applicability of IFRS for Indian concerns: Currently IFRS has been made applicable from the reporting year 2011 (or 2011-12, as the case may be) by Ministry of Corporate Affairs for the following: Listed companies Bank, Insurance companies, mutual funds and Financial Institutions Turnover in preceding year exceed INR 1 Billion Borrowing in preceding year exceed INR 250 Million

Impact of IFRS implementation: There are several areas where impact of IFRS exists for entities such as presentation of accounts, accounting policies and procedures, language of legal document, the way the entity will look at its business model and conduct business. At the transition stage itself company has to give careful thought and planning for its accounting policy and procedure because it in turn will affect financial position of company and its operations. Challenges faced by companies in IFRS Implementation: IFRS is itself a moving target with changes being done continually There are not many trained resources for IFRS Also IFRS training in an organization will be huge task Not many people are aware and have understanding of IFRS

It is better for the corporate to start as early as possible the implementation of IFRS and come up with IFRS roadmap because Government is not looking forward to extend the date of 2011. Ultimately the onus will be on management to comply with the requirement and the auditors will only have to comment on whether the management has properly compiled with or not. It has limitations because it's general & different industries & businesses might have different accounting needs. And it doesn't always reflect the economic reality. Here's an example right out of the news: As Per GAAP companies must value securities (like mortgage-backed securities) at market value. There's no market for them right now so we've seen huge write-downs, and some are down to 20% of face value. Yet even with some mortgage defaults many of them still have significant cash flow and still have an intrinsic value far higher than the face value.

The limitations of IFRS : The key limitations when reporting under IFRS relating to intangible assets and goodwill are:

Some intangible assets will be stated at their historic valuations, and some intangible asset values will be after charges for amortisation and impairment. Values of goodwill and intangible assets are stated at historic amounts and not revalued. Goodwill and intangible assets which have not been acquired will not be shown. In revaluing assets there is the question where such values overlap, as they may be double counted when valued separately (such as brand and customer relationship values). None of the accounts reviewed refer to this. IFRS is sometimes confused with IAS (International Accounting Standards), which are older standards that IFRS has replaced.

Advantages and Disadvantages of GAAP:

GAAP allows you to provide standard way of accounting that way others can look at your data and make sense of your bookeeping and judge how well your business is being run.the downside....anyone that understands GAAP can look at your data and make sense of your bookeeping and judge how well your business is being run. Boundaries are what you make of them . if you faithfully keep accurate records of expenses, receivables, timely changes in inventory then everything is working fine. If you choose to "not look at your last months inventory sheet" in an effort to push expenses into next year....then you have a problem....policies and procedures are what separates you from the real matter.

It has limitations because it's general & different industries & businesses might have different accounting needs. And it doesn't always reflect the economic reality. Here's an example right out of the news. As Per GAAP, companies must value securities (like mortgage-backed securities) at market value. There's no market for them right now so we've seen huge write-downs, and some are down to 20% of face value. Yet even with some mortgage defaults many of them still have significant cash flow and still have an intrinsic value far higher than the face value. Concluding Remarks: My personal view is if IFRS is completely adopted in India most of the companies financial statement will show lower profits than what have been under Indian GAAP. There may be the question in mind of layman stakeholder that how can the profits of a company change drastically by following different GAAPs but this is not necessarily due to a faulty reporting system adopted by the companies but because of inherent IFRS GAAP differences.