Presentation on Differences between IFRS, US GAAP and Indian GAAP

1
Presentation on Differences between IFRS, US GAAP
and Indian GAAP
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Session 1 Topics covered
in the Session

• Shareholders Equity
• Cash Flow Statements
• Foreign Currency Translations
• Consolidation
• Accounting for Subsidiaries including
  consolidation of Variable Interest Entities
  (VIEs) under US GAAP and Special Purpose Entities
  (SPEs) under IFRS
• Accounting for Associates
• Accounting for Joint Ventures
• Questions

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Shareholders Equity IFRS

• Recognition and Classification
• Equity Instrument
• If the instrument does not contain an obligation
  to transfer economic resources
• Are non redeemable preference shares equity? Yes,
  if
• Non redeemable preference shares or redeemable
  solely at the option of issuer and
• where distributions are at the discretion of
  issuer
• Are derivatives on own equity shares equity?
• Only if they result in the delivery of a fixed
  amount of cash, or other financial asset for a
  fixed number of an entitys own equity
  instruments
• Purchase of own shares
• Repurchase shown as deduction from equity
• Profit / loss on sale Change in equity
• Dividend on ordinary equity shares
• Presented as a deduction in the statement of
  changes in shareholders equity
• Dividends are accounted in the year when proposed.

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Shareholders Equity US
GAAP

• Recognition and Classification
• Similar to IFRS
• Additionally shareholder's equity analyzed
  between shareholders equity and other equity
• Purchase of own shares
• Repurchased for retiring stock, excess of cost
  over par value may be
• Charged entirely to retained earnings or
• allocated between retained earnings and
  additional paid-in-capital (APIC) or
• charged entirely to APIC
• When stock repurchased for purposes other than
  retiring stock, the cost of acquired stock may be
• shown separately as a deduction from equity or
• treated the same as retired stock
• Dividend on ordinary equity shares
• Presented as a deduction in the statement of
  changes in shareholders equity
• Dividends are accounted in the year when
  declared..

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Shareholders Equity Indian
GAAP

• Recognition and Classification
• Equity Instrument
• If the instrument is not a preference share
• A preference share is one which carries
  preferential right to be paid a fixed amount or
  an amount calculated at a fixed rate and/ or
  carries a preferential right to be repaid on a
  winding up or repayment of capital.
• Purchase of own shares
• Entity may purchase its own shares provided it is
  in consonance with the complex legal requirements
  stipulated in the Companies Act.
• Also, such shares are required to be cancelled,
  i.e. cannot be kept in treasury.
• Dividend on ordinary equity shares
• Presented as a appropriation of profits
• Dividends are accounted in the year when proposed.

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Shareholders Equity
Statement of changes in shareholders equity

• Indian GAAP 2 years
• Share capital and reserves are disclosed by way
  of a schedule
• IFRS 2 years
• Primary statement
• Shows capital transactions with owners, movement
  in accumulated profits and reconciliation of
  equity
• Other Comprehensive Income may be shown as a
  part of it
• US GAAP 3 years
• May be shown as a part of notes to accounts
• Shows capital transactions with owners,
  movement in accumulated profits and
  reconciliation of equity
• Other Comprehensive Income may be shown as a
  part of it

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Shareholders Equity
Statement of changes in shareholders equity
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Cash Flows Statement Major
Differences
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Cash Flows Statement
Classification of specific items
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Foreign Currency Translation
Translation of transactions The individual
entity
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Foreign Currency Translation
Other Differences
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Consolidation Definitions -
Subsidiaries

• Indian GAAP
• Based on controlling interest, control directly
  or indirectly through subsidiary (ies), by the
  virtue of holding the majority of voting shares
  or control over the board of directors.
• IFRS
• Based on voting control or power to govern.
• The existence of currently exercisable potential
  voting rights is also taken into consideration.
  SPEs also need to be consolidated.
• US GAAP
• Controlling interest through majority ownership
  of voting shares or by contract.
• Consolidate variable interest entities (VIEs) in
  which a parent does not have voting control but
  absorbs the majority of losses or returns.

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Consolidation Exclusions from
Consolidation - Subsidiaries

• Indian GAAP
• If there are severe long-term restrictions on
  transfer of funds to the parent or
• the subsidiary is acquired and held for re-sale
  i.e. temporary control.
• US GAAP
• A majority owned subsidiary shall not be
  consolidated if control does not rest with the
  majority owner, for example
• if the subsidiary is in legal reorganization or
  in bankruptcy or
• operates under foreign exchange restrictions,
  controls, or
• other governmentally imposed uncertainties so
  severe that
• they cast significant doubt on the parent's
  ability to control the subsidiary.

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Consolidation Exclusions from
Consolidation Subsidiaries - IFRS
DISPOSAL
LONG TERM RESTRICTION
MATERIALITY
DISSIMILAR ACTIVITIES
No exclusion Severe long term restrictions apply
to the Subsidiary, which significantly impair Ss
ability to transfer funds to P (i.e. liquidation)
No exclusion applies (but IAS apply only to
material items)
No exclusion because Ss business activities are
dissimilar from those of the rest of the group
No exclusion S was bought and is being held
solely for the purpose of resale.
Do not exclude 2 or more subsidiaries who
together are material
Excluded from consolidation only for annual
periods ending up to December 31, 2004
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Consolidation Exclusions from
Consolidation Subsidiaries - IFRS

• Under IFRS, a parent may avoid consolidation if
• the parent is a wholly owned subsidiary or a
  partially owned subsidiary of another entity and
  its other owners, including those not entitled to
  vote, have been informed about and do not object
  to the parent not preparing consolidated
  financial statements
• the parent is neither listed nor it is in the
  process of listing
• the ultimate or any intermediate parent of the
  parent produces IFRS compliant consolidated
  financial statements
• Recent Changes
• Temporary control (unless the intended period of
  holding is less than12 months) is not a
  justification for non consolidation.
• Severe long term restrictions to transfer funds
  to the parent are not a justification for non
  consolidation.
• Equity compensation plans need to be consolidated
  for annual periods beginning on or after
  January1, 2005.

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Consolidation Employee
Benefit Funds
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Consolidation Determining
Variable Interest Entities
Step 1 Determine if FIN 46 applies to the
reporting enterprise. Step 1A Is the
counterparty an entity? Step 1B Is the entity
eligible for a scope exception? Step 1C Does the
reporting enterprise have a variable interest in
the entity?
Step 2 Determine if the entity is a VIE. Step
2A Identify the equity investment risk Step 2B
Determine if the equity at risk has any of the 5
characteristics of a VIE. (Section VI)
Characteristic 1 Insufficient equity investment
at risk Characteristic 2 Equity lacks
decision-making rights Characteristic 3 Equity
with non-substantive voting rights Characteristic
4 Lacking the obligation to absorb expected
losses Characteristic 5 Lacking the right to
receive expected residual returns
Step 5 Determine if a reconsideration event has
occurred which could change the status of a VIE.
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Consolidation Determining
Variable Interest Entities
Step 3 Determine which enterprise is the primary
beneficiary Step 3A Identify all other
enterprises that hold variable interests in the
VIE. Step 3B Combine all variable interest with
the variable interests that are held by related
parties. Step 3C Identify the primary
beneficiary of a VIE. Step 3D Determine which
member of the related party group (if any) should
consolidate by identifying the party that is most
closely associated with the VIE.
Step 6 Determine if a reconsideration event has
occurred which could change the status of the
primary beneficiary of a VIE. Also, consider if
disclosures are required for a significant
variable interest.
Step 4 Consolidate and disclose the entity.
Step 4A Determine the initial measurement and
accounting for the consolidation of the entity.
Step 4B Perform accounting after the initial
consolidation Step 4C Prepare appropriate
disclosures.
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Consolidation Variable Interest
Entities - US GAAP
Consolidation
Question?
Primary
Yes
Yes
VIE?
Consolidate
Beneficiary?
No
Majority voting rights owned?
Yes
Traditional
Control
Model
No
No consolidation
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Consolidation Variable Interest
Entities - US GAAP
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Consolidation Determining
Variable Interest Entities
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Consolidation Special
Purpose Entities - IFRS
Activities of the SPE are being conducted on
behalf of the entity according to its own
specific business needs
CIRCUMSTANCES INDICATING THAT AN ENTITY CONTROLS
AN SPE AN SPE SHOULD BE TREATED AS A SUBSIDIARY
Rights to obtain the majority of the benefits of
the SPE and therefore the risks incident to the
activities of the SPE
Majority of the residual or ownership risks
related to the SPE or its assets retained by the
controlling entity
Decision-making powers to obtain the majority of
the benefits of the activities of the SPE are
controlled by the enterprise directly or through
an autopilot mechanism
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Consolidation Associates -
Definition

• Associate
• An enterprise in which the investor has
  significant influence and which is neither a
  subsidiary nor a joint venture of the investor.
• Significant Influence
• The power to participate in the financial and
  operating policy decisions of the investee but is
  not control or joint control over those policies.
  
• Significant influence is presumed to exist If an
  investor holds, directly or indirectly (eg.
  through subsidiaries), 20 per cent or more of the
  voting power of the investee unless it can be
  clearly demonstrated that this is not the case.
• Should Potential equity shares be taken into
  consideration for determining the 20 threshold?
• Under IFRS (IAS 28) Yes.
• US GAAP (APB18) and Indian GAAP (ASI 18) - No .

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Consolidation Accounting for
Investments in Associates
US GAAP Equity Method
Discontinue using equity method only 3 possible
circumstances
The associate has to be consolidated
The percentage of voting stock in the investee
falls below 20
Investor loses its ability to exercise
significant influence
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Consolidation Accounting for Investments
in Associates
IFRS - IAS 27 (revised)
Investment is held exclusively with a view to
disposal in next 12 months
Apply IAS 39 Account for investments as
Financial assets
Use equity method in consolidated accounts except
when
Associate operates under severe long term
restrictions
Applicable only till December 31, 2004 under
IAS.
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Consolidation Exceptions to use of Equity
Method - IFRS
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Consolidation Exceptions to use of Equity
Method Indian GAAP
In case the associate is not consolidated, it
should be accounted for as an investment under AS
13.
Near Future means a period not exceeding 12
months unless a longer period can be justified on
the basis of facts and circumstances.
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Consolidation Joint Ventures -
Definition

• US GAAP defines a Joint Venture as
• an arrangement whereby two or more parties (the
  venturers) jointly control a specific business
  undertaking and contribute resources towards its
  accomplishment.
• life of the joint venture is limited to that of
  the undertaking which may be of short or
  long-term duration depending on the
  circumstances.
• relationship between the venturers is governed by
  an agreement (usually in writing) which
  establishes joint control
• none of the individual venturers is in a position
  to unilaterally control the venture
• This feature of joint control distinguishes
  investments in joint ventures from investments in
  other enterprises where control of decisions is
  related to the proportion of voting interest held.

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Consolidation Joint Ventures -
Definition

• IAS 31 (Revised) under IFRS and AS 27 under
  Indian GAAP
• A joint venture is a contractual arrangement
  whereby two or more parties undertake an economic
  activity that is subject to joint control.
• Joint Control
• the contractually agreed sharing of control over
  an economic activity
• Control
• the power to govern the financial and operating
  policies of an economic entity so as to obtain
  benefits from it.
• The contractual agreement
• distinguishes interests with Joint Control from
  those where the investor has a significant
  influence
• ensures no single venturer is in a position to
  exert unilateral control

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Consolidation Joint Ventures Accounting
US GAAP
Proportionate consolidation is rarely used unless
it is established industry practice
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Consolidation Joint Ventures -
Accounting
IFRS and Indian GAAP Accounting driven by
form of the Joint Venture
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Consolidation Jointly Controlled Entities
- Accounting
IAS 31 allows but does not recommend this
method because proportionate consolidation better
reflects the substance and economic reality of
the Joint Venture
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Consolidation Jointly controlled
Operations / Assets - Accounting
Similar accounting treatment under IFRS and
Indian GAAP
Jointly Controlled Operations
Jointly Controlled Assets

• Recognize -
• its share of the jointly controlled assets and
  jointly incurred liabilities
• any liabilities that it has incurred
• any income from the sale or use of its share of
  the output of the joint venture, together with
  its share of any expenses incurred by the joint
  venture
• any expenses that it has incurred in respect of
  its interest in the joint venture

• Recognize
• the assets that it controls and the liabilities
  that it incurs
• the expenses that it incurs and its share of the
  income that it earns from the sale of goods or
  services by the joint venture.

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Consolidation Jointly Controlled
Entities - Exceptions

• IFRS
• Exceptions to accounting under IAS 31 (revised)
  similar to the exceptions to equity accounting
  under IAS 27 (revised).
• Investments covered under exceptions to be
  classified as held for trading and accounted for
  in accordance with IAS 39.
• Indian GAAP
• Exception to using proportionate consolidation
• an interest in a jointly controlled entity
  which is acquired and held exclusively with a
  view to its subsequent disposal in the near
  future and
• an interest in a jointly controlled entity
  which operates under severe long-term
  restrictions that significantly impair its
  ability to transfer funds to the venturer
• Investment to be accounted for under AS 13
  Investments in case of exceptions

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Consolidation Fair
Value Vs. Book Value Accounting
Consolidation Goodwill IFRS 1st time
consolidation Tested for mandatorly at
Fair Value impairment annually Cannot be
amortized US GAAP 1st time consolidation Teste
d for mandatorly at Fair Value impairment
annually Cannot be amortized Indian
GAAP Generally Can be amortized at Book
Value
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Session 2 Topics in this
Session

• Business Combinations
• Intangible Assets
• Capitalization of borrowing costs
• Impairment of asset
• Questions

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Business Combinations Types of
Business Combinations
Combining entity obtains control over the other.
The acquirer is easily identified.
The shareholders of the combining entities join
in substantially equal arrangements to share
control. It is not possible to identify the
acquirer.
Group reorganization can arise from transactions
among entities that operate under common control
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Business Combinations Scope and
definitions
Definition of a business combination US GAAP
Acquisition of net assets that constitute a
business or controlling equity interests of
entities. Prohibits Pooling of Interest. IFRS Bri
nging together of separate entities or operations
into one reporting entity. Prohibits Pooling of
Interest. Indian GAAP If the combination
satisfies the specified conditions, it is an
amalgamation in the form of a merger (Pooling of
Interest Method), else an amalgamation in the
nature or purchase.

• Scope Exceptions
• US GAAP
• Common control transactions and Joint Ventures
• Not for profit organizations
• IFRS
• Common control transactions and formation of
  joint ventures
• Acquisition of minority interest
• Entities brought together by contract
• Indian GAAP
• Purchase by one company of the whole of the
  shares or assets of one company by other company,
  without the acquired company being dissolved

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Business Combinations Purchase
Consideration
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Business Combinations Purchase
Consideration
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Business Combinations Purchase
Consideration
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Intangible Assets Initial Recognition
and Measurement

• What is an intangible asset?
• Non monetary asset
• Without physical substance
• Controlled by the entity and held for use either
• in the production or supply of goods or services
  or
• for rental to others or
• for administration purposes
• May be purchased or internally generated
• When to initially recognize?
• future economic benefits attributable to the
  asset are probable
• the cost of the asset can be measured reliably
• Initial Measurement at
• Fair Value

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Intangible Assets Internally Generated
Intangible Assets
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Intangible Assets Revaluation, Amortization
and Impairment
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Borrowing Costs Accounting
Treatment
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Borrowing Costs
Measurement
General Funds
Specific Funds
Notional Funds
Use weighted average cost of borrowings
Use actual costs
No capitalisation
Can include income on investment of funds
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Impairment of Assets
Differences
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Session 3 Topics in this
Session

• Deferred Taxes
• Earnings Per Share
• Discontinued Operations
• Provisions and contingencies
• Operating and Financial Review
• Questions

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Deferred Tax
General Consideration
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Deferred Tax
Specific Application
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Deferred Tax Specific
Application
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Deferred Tax Recognition, Measurement
and Presentation
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Deferred Tax Business
Combination
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Earnings Per Share Basic EPS
Net profit or loss attributable to ordinary
shareholders

Basic EPS calculation
Weighted average number of ordinary shares
outstanding
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Earnings Per Share Basic
EPS Change in the number of shares
Change in number of ordinary shares
e.g. rights issue
Multiply shares outstanding for all periods prior
to rights issue by
Adjust shares outstanding as if event occurred at
beginning of earliest period presented
Change in resources?
YES
No
e.g. capitalisation or bonus issue/share split
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Earnings Per Share Diluted EPS
Interest of convertible debt
Income and expenses resulting from conversions
Dividends of convertible preference shares
Basic EPS numerator adjusted for post tax effect
of dilutive potential ordinary shares

Diluted EPS
Basic EPS numerator plus weighted average of
ordinary shares which would be issued on
conversion of dilutive potential ordinary shares
Assume conversion at beginning of period or date
of issue of potential share during period
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Earnings Per Share Dilutive /
Anti - Dilutive

• Net profit from
• ordinary operations after
• deducting preference dividends
• excluding discontinuing operations, extraordinary
  items
• effect of changes on accounting policies and
  correction of fundamental errors

Effect on net profit per share from continuing
ordinary operations?
Decrease
Increase
Dilutive
Anti - dilutive
Consider in sequence from most to least dilutive
Ignore
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Discontinued Operations
Definitions

• IFRS
• Component that the entity, pursuant to a single
  plan, is disposing of substantially in its
  entirety disposing of piecemeal or terminating
  through abandonment
• represents a separate major line of business or
  geographical area of operations and
• can be distinguished operationally and for
  financial reporting purposes
• US GAAP
• Component that is clearly distinguishable
  operationally and for financial reporting
• can be a reporting segment, operating segment,
  reporting unit, subsidiary or asset grouping.
• Indian GAAP
• Separate major component that represents a single
  major line of business or geographical area of
  operations and
• that can be distinguished operationally and for
  financial reporting purposes

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Discontinued Operations Differences

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Discontinued Operations
Differences
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Provision and Contingencies
Provisions

• IFRS and IGAAP
• Recognize provisions only when
• The entity has a present obligation to transfer
  economic benefits as a result of past events
• It is probable that such a transfer will be
  required to settle the obligation and
• A reliable estimate of the amount of the
  obligation can be made.
• US GAAP
• Liabilities are probable future sacrifices of
  economic benefits arising from present
  obligations of a particular entity to transfer
  assets or provide services to other entities in
  the future as a result of past transactions or
  events.

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Provision and Contingencies
Measurement of Provisions
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Provision and Contingencies
Restructuring Provisions
IGAAP Provision to be made only if the general
recognition criterion is met as against the
constructive obligation criterion under IFRS.

• IFRS
• Programme which materially changes scope of
  business
• Following two conditions need to be met to be
  recorded as provision
• Detailed plan identifying key features of
  programme and its implementation must exist at
  balance sheet
• Must be valid expectation that business will
  undergo restructuring
• Can only include direct expenses associated with
  restructuring programme cannot relate to ongoing
  operation of business

• US GAAP
• Similar to IFRS
• Measurement
• at the fair value
• Recognition
• in the period in which it is incurred
• Reassessment
• Every reporting date
• Use interest allocation approach to measure
  subsequent changes in fair value

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Provision and Contingencies
Contingent Assets and Liabilities
Contingent Liabilities - Not recognized unless
the outflow is virtually certain - Disclosed
unless the probability of outflow is
remote - Requires accrual for loss contingency
if it is probable that there is a present
obligation resulting from a past event and an
outflow of resources is probable. - Similar
to IFRS - Present obligations not covered.
Contingent
Assets IFRS - Not recognized unless the income
is virtually certain US GAAP - Similar to
IFRS, but the threshold for insurance
recoveries is lower. - Recovery to be
probable as against virtually certain in
IFRS IGAAP - Similar to IFRS - Less
disclosures
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Operating and Financial Review
IFRS

• IFRS encourages but does not mandate the
  inclusion of an operating and financial review
  (OFR) outside the financial statements of public
  and large private companies.
• By contrast, an entity filing with the SEC is
  required to include a management discussion and
  analysis section in addition to the financial
  statements.
• An Indian entity is also required to make certain
  disclosures under the Companies Act and SEBI
  requirements

• IFRS Encourages the following to be included
• The main features of operating performance for
  the current period of review
• The dynamics of the businesschanges in the
  business environment, the reaction of the
  business to them and their effect on performance
• The policy for investment in the current period
  to maintain and enhance performance in future
  periods and
• The sources of funding, gearing policy and
  strategies for managing risks

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Operating and Financial Review
US GAAP

• The MDA focuses mainly on liquidity, capital
  resources and results of operations addressing
  the three-year period covered by the financial
  statements and includes among other things
• An explanation of material changes in the
  financial statement balances, focusing on each
  relevant reportable segment if the revenues,
  profits and cash needs of these are
  disproportionate
• The general economic and industry conditions,
  including known prospective information
• Infrequent events or transactions and
• The likely impact in future periods of recently
  issued accounting standards not yet implemented
  by the entity.
• Foreign companies listed in the USA must also
  discuss pertinent governmental, fiscal, monetary
  or political policies that may affect them or
  their US investors. They must also provide an
  explanation of the main differences between local
  accounting and US GAAP.

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Operating and Financial Review
Indian GAAP

• The Companies Act requires the Board of Directors
  report to be included. Contents have been
  specifically prescribed under the Act and
  generally include
• The state of companys affairs
• The amount proposed to be carried to reserves
• The amount recommended to be paid by way of
  dividend
• Material changes and commitments affecting the
  financial position of the company, which occurred
  between the balance sheet date and the date of
  report
• Conservation of energy, technology absorption,
  foreign-exchange earnings and outgo
• The changes that have occurred in the nature of
  the companys business, its subsidiaries or in
  the classes of business in which the company has
  an interest.
• The MDA report forming part of annual reports of
  listed companies should include discussion on
  topics like industry structure and developments,
  opportunities and threats, internal control,
  segment-wise or productwise performance and
  risks and concerns.

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