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Objectives of Financial
reporting
Useful to present to potential investors and creditors
and other users in making rational investment, credit,
and other financial decisions
Helpful to present to potential investors and creditors
and other users in assessing the amounts, timing, and
uncertainty of prospective cash receipts about
economic resources, the claims to those resources,
and the changes in them
Helpful for making financial decisions
Helpful in making long-term decisions
Helpful in improving the performance of the business
Useful in maintaining records
Concept of Accounting
Standard
A principle that guides and standardizes accounting
practices.
The Generally Accepted Accounting Principles (GAAP)
are a group of accounting standards that are widely
accepted as appropriate to the field of accounting.
Accounting standards are necessary so that financial
statements are meaningful across a wide variety of
businesses; otherwise, the accounting rules of different
companies would make comparative analysis almost
impossible.
An accounting standard is a
guideline for financial accounting,
such as how a firm prepares and
presents its business income and
expense, assets and liabilities. The
Generally Accepted Accounting
Principles is comprised of a large
group of individual accounting
standards.
GAAP for UK
Since 2005 listed groups in the UK have been required to prepare their
consolidated financial statements in accordance withInternational
Financial Reporting Standards (IFRSs). Almost all other groups and
companies have a choice.
They can choose to follow IFRSs or UK GAAP. Small companies (as
defined by the Companies Act 2006) have an additional option of
following the Financial Reporting Standard for Smaller Entities(FRSSE).
But, for periods beginning on or after 1 January 2015, three new
Financial Reporting Standards (FRS 100,101and102) will come into
force, bringing with them a number of new options for all UK entities
and groups.
Although these new standards are not yet mandatorily effective, they
have all been published andare available for early adoption,
something which a number of companies have taking advantage of.
Even for those not early-adopting, the transition date to the new
standards (being the beginning of the comparative period) will occur
during 2014, so theimpact of transition and on financial reporting is
somethingthat all companies should already be considering.
FRS 100
It sets out a proposed framework
that would apply to all UK entities
preparing financial statements that
are intended to give a true and fair
view other than where an entity is
required or chooses to prepare its
financial statements in accordance
with IFRSs or the FRSSE
FRS 101
FRS 101 is a proposed reduced
disclosure framework for qualifying
entities preparing their financial
statements in accordance with IFRSs
FRS 102
contains the text of a comprehensive
proposed accounting standard based
upon the International Financial
Reporting Standard for Small and
Medium-sized Entities, this would
replace current UK GAAP
FRS 103
In addition to the above three standards,
theFinancial Reporting Council(FRC)
issued another standard,FRS
103Insurance Contractsin March 2014.
FRS 103 contains specific accounting
requirements for that have insurance
contracts (including reinsurance
contracts) and are applying FRS 102 The
Financial Reporting Standard applicable in
the UK and Republic of Ireland.
Small company
Achieves maximum any two criteria
Aggregate turnover 6.5m.
Aggregate balance sheet total 3.26m.
Aggregate number of employees 50.
Tangible fixed
lives, residual
Tangible fixed
lives, residual
Accounting Framework
Historical cost
IFRS:
Historical cost, but intangible assets, property plant and
equipment (PPE) and investment property may be
revalued. Derivatives, biological assets and most
securities must be revalued.
Indian GAAP:
Historical cost, but fixed assets, other than intangibles,
may be revalued.
Income Statements
IFRS
Does not prescribe a particular format. However, expenditure must
be presented in one of two formats (function or nature). Certain
items must be presented on the face of the income statement.
Indian GAAP
The Indian Companies Act does not prescribe a particular format.
The Company law and accounting standards however, prescribes
certain disclosure norms for income and expenditures. For certain
industries, industry specific laws specify formats.
Reporting currency
IFRS:
Requires the measurement of profit using the functional
currency. Entities may, however, present financial statements
in a different currency.
Indian GAAP:
Schedule VI to the Companies Act, 1956 specifies Indian
Rupees as the reporting currency.
Non-consolidation of subsidiaries
Dissimilar activities or temporary
control are not a justification for nonconsolidation.
Only if acquired and held for resale
or there are severe long-term
restrictions to transfer funds to the
parent.
Business combinations
All business combinations are acquisitions.
No comprehensive accounting standard on business
combinations. All business combinations are
acquisition; however, required use of pooling of
interests method in certain amalgamations [when all
the specified conditions are met].
To summarize: On consolidation, for an entity acquired and
held as an investment: treated as acquisition.
On amalgamation of an entity, either uniting of interests or
acquisition.
On business acquisition (i.e. assets and liabilities only)
treated as acquisition.
Depreciation
Allocated on a systematic basis to each
accounting period over the useful life
of the asset.
Similar to IFRS, except where the
useful life is shorter than that
envisaged under the Companies Act or
the relevant statute, the depreciation
is computed by applying a higher rate.
Convertible debt
Account for convertible debt on split
basis, allocating proceeds between
equity and debt
Convertible debt is recognised as a
liability based on legal form without
any split.
Functional currency
Currency of primary economic
environment in which entity
operates.
Does not define functional currency.
Depreciation
Allocated on a systematic basis to each
accounting period over the useful life of the
asset.
Depreciation is provided based on the
useful lives of assets or the minimum rates
prescribed by the Indian Companies Act,
whichever is higher. Asset lives are not
prescribed by the Companies Act, but can
be derived from the depreciation rates.
Capitalisation of borrowing
costs
Permitted, but not required for
qualifying assets.
Compulsory when relates to the
construction of certain assets.
Leasehold Land
Disclosed as prepaid assets and
accounting treatment is similar to
operating leases.
Disclosed as a part of fixed assets.
Investments
Investments:
IFRS:
Depends on the classification of investment if held to maturity or
loan or receivable, then carry at amortised cost, otherwise at fair
value.
Unrealised gains/losses on fair value through profit or loss
classification (including trading securities) recognised in the income
statement and on available-for-sale investments recognised in
equity.**
Indian GAAP:
Carry long-term investments at cost (with provision for other than
temporary diminution in value). Current investments carried at lower
of cost or fair value determined on individual basis or by category of
investment but not on overall (or global) basis. Specific guidance
exists for banking industry.
IFRS:
Measure derivatives and hedge instrument at fair value. Recognise
the changes in fair value in the income statement, except for
effective cash flow hedges, where the changes are deferred in
equity until effect of the underlying transaction is recognised in
the income statement.
Gains / losses on hedge instrument used to hedge forecast
transaction, included in the cost of asset/liability (basis
adjustment).
Indian GAAP:
No comprehensive guidelines currently. Accounting treatment for
forward contracts and equity index and equity stock futures and
option is prescribed. Guidance prescribed for banking companies.
US GAAP
GAAP Setters
United States Securities and Exchange
Commission(SEC)
American Institute of Certified Public
Accountants(AICPA)
Financial Accounting Standards
Board(FASB)
Government Accounting Standard Board
SEC
The SEC was created as a result of
theGreat Depression. 1929
The SEC encouraged the establishment of
private standard-setting bodies through
theAICPAand later theFASB, believing
that the private sector had the proper
knowledge, resources, and talents. The
SEC works closely with various private
organizations setting GAAP, but does not
set GAAP itself.
AICPA
In 1939, urged by the SEC, the AICPA appointed
theCommittee on Accounting Procedure(CAP).
During the years 1939 to 1959 CAP issued 51 Accounting
Research Bulletins that dealt with a variety of timely
accounting problems.
However, this problem-by-problem approach failed to develop
the much needed structured body of accounting principles.
In 1959, the AICPA created theAccounting Principles
Board(APB), whose mission it was to develop an overall
conceptual framework.
It issued 31 opinionsand was dissolved in 1973 for lack of
productivity and failure to act promptly.
After the creation of theFASB, the AICPA established
theAccounting Standards Executive Committee(AcSEC).
It publishes:
Audit and Accounting Guidelines, which
summarizes the accounting practices of specific
industries (e.g. casinos, colleges, airlines, etc.) and
provides specific guidance on matters not
addressed by FASB or GASB.
Statements of Position, which provides guidance
on financial reporting topics until the FASB or GASB
sets standards on the issue.
Practice Bulletins, which indicate the AcSEC's
views on narrow financial reporting issues not
considered by the FASB or the GASB.
FASB
1973, Wheat Committee, replaced APB Composed of three organisations
The Financial Accounting Foundation (FAF,
it selects members of the FASB, funds and
oversees their activities)
The Financial Accounting Standards
Advisory Council (FASAC),
The major operating organization in this
structure the Financial Accounting
Standards Board (FASB).
GASB
Created in 1984, the GASB addresses state and local
government reporting issues. Its structure is similar to that
of the FASB's.
Assumptions
Business Entity
Going Concern
Monetary Unit
principle:
Time-period
principle
Principles
Historical
costprinciple
Revenue
Recognition
Matching
Full Disclosure
Constraints
Objectivity
Materiality
Consistency
Conservatism
Statement No.
Obligations
Statement No.
Statement No.
Statement No.
Arrangements
47 Disclosure of Long-Term
52 Foreign Currency Translation
57 Related Party Disclosures
68 Research and Development
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