Indian company should comply with Indian GAAP, the Companies Act and Industry specific regulatory requirements . Additionally listed companies should comply with the rules and regulations and financial interpretations of SEBI.
The law requires entities to disclose whether the financial statements comply with applicable accounting standards and to give details of non compliances. There is a presumption that compliance with accounting standards is necessary to give a “ True and Fair View”.
One year of comparatives is required for all numerical information in the financial statements with limited exceptions and disclosures.
Preparation and Presentation:
Financial Statements are presented on a single entity parent company (stand alone) basis. It is not mandatory to prepare consolidated financial statements but must use the consolidation standards if prepared. Pursuant to the listing agreements with stock exchanges, Public listed companies present consolidated financial statements along with standalone financial statements.
Components of Financial Statements Required Required Required Notes to the Financial Statements Required Required Required Accounting Policy Required Required Required Fund flow Statement Required Required Required Statement of changes in shareholder’s equity Required Required Required Income Statements Required Required Required Balance Sheet IFRS US GAAP Indian GAAP Components
Accounting Standard do not prescribe any format of balance sheet. The Companies Act prescribes a format and requires presentation of the following items on the face of balance sheet:
Sources of Funds :- Share Capital, Reserves and Surplus, Secured Loans, Unsecured Loans, Minority Interest.
Application of Funds :- Fixed assets, Investments, Current Assets, Loans and Advances (Inventories, Sundry debtors, Cash and Bank balances, Other Current Assets) less Current Liabilities and Provisions, Miscellaneous expenditure.
Presented as total assets balancing to total liabilities and shareholder’s equity . Items are presented in decreasing order of liquidity . Public entities should follow specific SEC guidance.
Current and non-current assets, and current and non-current liabilities are to be presented separately except when a liquidity presentation provides more relevant and reliable information.
Assets : PPE, investment property, intangible assets, financial assets, investment accounted for using equity method, biological assets, inventories, trade and other receivables, tax assets, and cash and cash equivalents.
Equity and liabilities : issued share capital and other components of shareholder’s equity, financial liabilities, provisions, tax liabilities, trade and other payables, and minority interests (presented within equity).
Accounting standards and the Companies Act prescribe disclosure norms for certain income and expenditure items. Expenses are presented by either function or nature. Other industry regulations prescribe industry-specific format of income statement.
Presented either as
A single-step format where all expenses are classified by function and are deducted from total income to give income before tax : or
A multi-step format where cost of sales is deducted from sales to show gross profit, and other income and expenses are then presented to give income before tax.
Expenses presented by either function or nature . Portion of profit and loss attributable to the minority interest and to the parent entity is separately disclosed. Disclosure of expenses by nature is required in footnotes if functional presentation is used on income statement.
Items presented are revenue, finance costs, share of after-tax results of associates and joint ventures accounted for using equity method, tax expenses, post-tax gain or loss attributable to the results and remeasurement of discontinued operations and net profit or loss for the period.
No separate statement is required. Changes in shareholder’s equity are disclosed in separate schedules of ‘Share capital’ and ‘Reserves and surplus’
Same to IFRS , except that US GAAP does not have a Statement of Recognized Income and Expense (SoRIE), and SEC rules require further disclosure of certain items in notes.
It is presented as a primary statement unless a SoRIE is presented. Supplemental equity information is presented in notes when SoRIE is presented. It should show capital transactions with owners, the movement in accumulated profit and a reconciliation of all other components of equity . Certain items are permitted to be disclosed in notes rather than in primary statement.
Inflow & outflow of ”cash & Cash equivalent” are reported in fund flow statement. It can be prepared by two ways: Direct or indirect method . Direct method (Cash flow is derived from aggregating cash receipts & payments associated with operating activities) , Indirect method (Cash flow is derived from adjusting net income from transaction of non cash in nature such as depreciation ).However only indirect method is prescribed for listed enterprises & direct for insurance companies.
It is required for all enterprises whose turnover exceeds Rs 500 Million or having borrowing over Rs. 100 million at any point of time during accounting period.
The cumulative amount of change is recognized & disclosed in the income statement in the period of change. Certain new standards require adjustment of the cumulative amount of the change for opening retained earnings.
Impact of change in depreciation method is determined under the new method & is recorded in the period of change , whereas on revision of asset life, the unamortized depreciable amount is charged over the revised remaining life.
US GAAP :
The cumulative amount of change is recognized & changed in the income statement of period of change .
Retrospective adjustment are required in some of the cases like : method of accounting for inventory valuation, depreciation in rail industry ,construction contracts & adoption of full cost method in extractive industry.
Inflows resulting in an increase in equity (Other than increase through the contribution from equity holders)
Activities undertaken as part of business
Related activities engaged in
- Furtherance of
- Incidental to
- Arising from
Criteria for Revenue Recognition CONDITION Can the revenue be recognized TIMING When will we record revenues? MEASUREMENT How much will we record? CRITERIA FOR REVENUE RECOGNITION
Criteria for Revenue Recognition : Goods Property in goods transferred to buyer for a price Or All significant risks and rewards of ownership transferred to buyer & seller retains no effective control over goods No significant uncertainty regarding consideration PERFORMANCE UNCERTAINTY
Criteria for Revenue Recognition : Services RECOGNITION OF REVENUE INCOME COMPLETED SERVICE METHOD PROPORTIONATE SERVICE METHOD Recognize revenue when the sole or final act takes place and the service becomes chargeable Recognize revenue by reference to performance of each act – on the basis of contract value / associate cost / no. of acts No Uncertainty
Alternate Standards: A Comparison Vendor’s price fixed or determinable Stage of completion of transaction can be measured Delivery has occurred or services have been rendered Seller retains neither management nor control , and transfer of risks and rewards of ownership to buyer Vendor’s price is fixed or determinable Revenue and costs (including future costs) can be measured reliably Collectibity is reasonably assured Probable that economic benefit will flow to entity US GAAP Indian GAAP / IFRS
Does not define or require determination of functional currency. Assumes an entity normally uses the currency of the country in which it is domiciled in recording its transaction.
Emphasizes the primary economic environment in determining an entity’s functional currency. It has no hierarchy of indicators. There is greater focus on the cash flows rather than the currency that influences the pricing.
Currency of the primary economic environment in which entity operates. Management should use judgment to determine functional currency if indicators are not obvious.
INDIAN GAAP, US GAAP & IFRS have similar requirements regarding the translation of transactions by an individual entity, as follows:
- Translation is at exchange rate in operation on date of transaction .
- Monetary assets and liabilities denominated in foreign currency are translated at the closing rate .
- Non-monetary foreign currency assets and liabilities are translated at the appropriate historical rate .
- Non-monetary items denominated in a foreign currency and carried at fair value are reported using the exchange rate that existed when the fair value was determined - Income statement accounts are translated using historical rates of exchange at the date of transaction or an average rate as a practical alternative, provided the exchange rate does not fluctuate significantly. - Exchange gains and losses arising from an entity’s own foreign currency transaction are reported as part of the profit or loss for the year. TRANSLATION – The Individual Entity contd..
TRANSLATION – Consolidated Financial Statements When translating financial statements into a different presentation currency IFRS, US GAAP and INDIAN GAAP require the assets and liabilities to be translated using the closing rate . Amounts in the income statements are translated using the average rate for the accounting period if the exchange rates do not fluctuate significantly . IFRS and INDIAN GAAP are silent on the translation of equity accounts historical rates are used under US GAAP.
Translation differences in equity are separately tracked and the cumulative amounts disclosed. The appropriate amount of cumulative translation difference relating to the entity is transferred to the income statement on disposal of a foreign operation and included in the gain or loss on sale . The cumulative translation difference may be released through income statement, for a partial disposal on a pro rata basis relative to the portion disposed. The proportionate share of the related cumulative translation difference is included in the gain or loss . The payment of dividend out of pre-acquisition profits constitutes a return of the investment and is regarded as a partial disposal.
Tracking of Translation Differences in Equity contd..
Similar to Indian GAAP, however, gains and losses are transferred to the income statement only upon sale or complete or substantially complete liquidation of the investment.
It assumes an entity normally uses the currency of the country in which it is domiciled in presenting its financial statements. If a different currency is used, requires disclosure of the reason for using a different currency.
Assets and liabilities are translated at the exchange rate at the balance sheet date when financial statements are presented in a currency other than the functional currency. Income statement items are translated ate the exchange rate at the date of the transaction or are permitted to use average rates if the exchange rates do not fluctuate significantly.
Similar to IFRS; historical rates are used in equity .
No specific guidance for foreign currency translation
Hyperinflation is indicated by characteristic of the economic environment of a country. These characteristic include a) general population’s attitude towards local currency b) prices linked to a price index c) cumulative inflation rate over three years is approaching or exceeds 100%
No specific guidance for functional currency translation
Functional currency use that currency for measurement of transactions. Financial statement for current & prior period are remeasured at the measurement unit current at the balance sheet date in order to present current purchasing power
Does not generally permit inflation - adjusted financial statements . The use of reporting currency ( US dollar ) as the functional currency is required
No specific guidance for presentation currency translation
Results & financial position of those entities whose functional currency is the currency of a hyper inflationary economy are translated into a different presentation currency using following procedure:
All item including comparatives are translated at the date of most recent balance sheet
When amount are translated into currency of a non inflationary economy, comparative amounts are those that were presented as current year amounts in the relevant prior - year financial statement
Not applicable , because the currency of a hyperinflationary economy is not used for measuring its transactions in the hyperinflationary economy