GAAP

&
ACCOUNTING STANDARDS
UNIT-1

By: ACS Rakesh Sharma

Assistant Professor
School of Business
Sharda University
 UNIT-A – Syllabus
• Introduction to Corporate Financial Reporting
• Generally Accepted Accounting Principles in
India.
• Accounting Standards (AS) – Applicability,
Interpretation, Scope and Compliance.
• International Financial Reporting Standards.
• Competitive Intelligence, Communication of
Strategy, Result Analysis.
• Relative view of AS vs. Ind AS vs. IFRS
Introduction to Corporate Financial
Reporting
 Concept & Meaning of Corporate
Financial Reporting
• Financial Reporting involves the disclosure of financial
information to management and public at large about
the performance of the company over a period of time.
• These are issued quarterly or annually.
• Financial Reporting is different from Management
Reporting, which is financial information disclosed to
people within the boundaries of the company, for
decision-making.
Concept & Meaning of Corporate Financial
Reporting
• Financial Reporting is a mechanism of providing
information about an entity’s-
• Financial Performance- Income Statement
• Financial Position- Balance Sheet
• Changes in Financial Position- Cash Flow Statement
• To the varied users: ( L+ I+ C )= Lenders , Investors,
Creditors.
• For the purpose of taking informed Economic
decisions.
 Purpose of Financial Reporting

• It serves two primary purposes-

• Helps the management to engage in effective decision-making
concerning the objectives and strategies of the company.
• Data disclosed helps the management to know the company’s
strengths and weaknesses as well as the overall financial health.
• It provides vital information about the company’s health to the
stakeholders, i.e., the shareholders, potential investors,
consumers, suppliers, creditors and government regulators.
• It ensures that the company is being operated properly.
 Users of Financial Reports - Internal
USERS OF FINANCIAL REPORTS- These may be categorised into
Internal Users as well as External Users.
INTERNAL USERS-
• Owners- They contribute capital to the firm and thus are exposed to
maximum risk. Naturally, they are interested In knowing the profit or
loss suffered by the business besides the safety of their capital.
• Management- To arrive at informed decisions such as determination of
selling price, cost controls, investments, etc.
• Employees and workers- They are entitled for bonus at the year end,
that is linked to the profit earned.
 Users of Financial Reports- External

EXTERNAL USERS-

• Banks and Financial Institutions- They provide loans to business. Naturally,

they want to know about its performance, to ensure safety and recovery of
loan.
• Investors and Potential Investors- Investment involves risk and also they do
not have direct control over the affairs of business. Hence, they rely on
accounting information and evaluate how safe is their investment.
• Creditors- They satisfy themselves about the creditworthiness of the firm as
it owes money to them.
• Researchers- For research work.
• Government and its authorities- To compile national income accounts and
other information to take policy decisions. Also, these statements help the
government to asses correct tax dues.
• Public- As the business makes large contribution to society in many ways, eg,
employment, etc.
GAAP & ACCOUNTING STANDARDS
 Introduction to GAAP

• Accounting is the language of business.

• The primary function of the discipline of accounting is to
provide financial information to the users of the financial
statements.
• For this purpose, it is required to record the transactions
entered into by a concern during an accounting period in
different books of accounts.
• However, different organizations may practice it in different
ways. Thus, to ensure uniformity among different entities
and to ensure consistency over a period of time, a
framework has been developed over the time period.
• This framework is referred to as ‘Generally Accepted
Accounting Principles’ (GAAP).
 Introduction to GAAP
• Indian GAAP is nothing but a set of accounting standards that
every company operating in India has to follow when reporting
its financial results.
• Generally Acceptable Accounting principles differ for each
country as they incorporate policies and procedures that have to
be followed for financial disclosures as per the standards set in
each country.
• The Institute of Chartered Accountants of India (ICAI),
Ministry of Corporate Affairs (MCA) are the bodies in India
that have set the Accounting standards(Indian Accounting
Standards) that need to be followed while financial reporting,
So Indian Accounting Standards are termed as Indian GAAP.
 Meaning of GAAP
• Generally Accepted Accounting Principles (GAAP) refers to
accounting policies and procedures that are widely used in practice.
• It incorporates the body of principles that governs the accounting for
financial transactions underlying the preparation of a set of financial
statements.
• GAAP are the common set of accounting principles, standards and
procedures that are used by accountants to prepare the financial
statements. They are derived from practice, and on being useful get
accepted into the accounting system.
• These principles are developed by the professional accounting
bodies of different countries of the world, with the aim of attaining
uniformity in accounting practiced by the entities of the respective
countries.
• As such different GAAP have developed in different countries of the
world
 Principles of GAAP
GAAP includes principles on:
• Recognition: It deals with the items should be recognized
in the financial statements (e.g. assets, liabilities,
revenues, and expenses).
• Measurement: It determines the amounts should be
reported for each of the elements included in financial
statements.
• Presentation: It states regarding the line items, subtotals
and totals should be displayed in the financial statements
and how might items be aggregated within the financial
statements.
• Disclosure: It states about the specific information that is
most important to the users of the financial statements.
 Accounting Principles
ACCOUNTING PRINCIPLES
• Accounting Principle is the ‘grammar’ of accounting
language.
• It refers to those rules of action which are universally
adopted by the accountants for recording accounting
transactions.
• They act as the guidelines for recording and reporting
transactions. These have evolved out of assumptions made
and conventions followed in accounting.
• These provide explanations to the current accounting
practices.
• Accounting Principles can be classified into two categories:
(a) Accounting Concepts; and (b) Accounting Conventions.
 Accounting Concepts
ACCOUNTING CONCEPTS
• Accounting Concepts refers to the assumptions on the
basis of which the transactions are recorded in the books
of accounts and financial statements are drafted.
• They are perceived, presumed and accepted in accounting
to provide a unifying structure and internal logic to the
accounting process.
• They are also referred to as Accounting Postulates.
• These are the necessary assumptions and ideas which are
fundamental to accounting practice. These are the ideas
which have been accepted universally.
• E.g. Entity concept, Going concern concept, Money
measurement concept etc
 Accounting Conventions
ACCOUNTING CONVENTIONS
• Accounting conventions are the traditions or customs that
are observed by the accountants for preparation of
financial statements.
• They have evolved out the different accounting practices
followed by different entities over a period of time. They
have been developed over a period of time by the
accountants by usage and practice.
• E.g. convention of conservatism, convention of
consistency, convention of materiality etc.
Difference between Concepts and Conventions

• It should be noted that the terms

‘Concepts’ and ‘Conventions’ are usually
used interchangeably.
• However, the basic difference between
them is that ‘Concepts’ are primarily
concerned with maintenance of books of
accounts, while ‘Conventions’ are applied
for preparation of financial statements.
 NEED FOR GAAP FOR FINANCIAL
REPORTING
• The accounting standards developed and established by the
standard-setting bodies determine how those financial
statements are prepared.
• The standards are known collectively as Generally
Accepted Accounting Principles or GAAP.
• GAAP is based on established concepts, objectives,
standards and conventions that have evolved over time to
guide how financial statements are prepared and
presented.
• GAAP is set with the objective of providing information
that is useful to investors, lenders, or others that provide or
may potentially provide resources to a profit-seeking
concern or not-for-profit organization.
 NEED FOR GAAP FOR FINANCIAL
REPORTING
• Investors, lenders, and other users of financial information rely on
financial reporting based on GAAP to make decisions about how to
allocate their capital and to help financial markets operate as efficiently as
possible.
• While establishing GAAP, the standard setting bodies are mainly
concerned about the end users of financial statements.
• End users include people like investors, banks, lenders who use third
party financial statements to evaluate business decisions.
• GAAP’s primary intent is not to help businesses. It is intended to help
the end users.
• All of the objectives that MCA and the prior accounting standard setting
body(ICAI) wanted to accomplish can be simplified to one main
objective: to make financial statements universally
understandable and usable for all of their users.
 REGULATORY BODIES IN INDIA

• The Ministry of Corporate Affairs (MCA): MCA

is an Indian Govt. Ministry.
• The Ministry is primarily concerned with
administration of the Companies Act 2013, the
Companies Act 1956, the Limited Liability
Partnership Act, 2008 & other allied Acts and
rules & regulations framed there-under mainly
for regulating the functioning of the corporate
sector in accordance with law.
• It is responsible mainly for regulation of Indian
enterprises in Industrial and Services sector.
 The Institute of Chartered Accountants of
India (ICAI)
• The Institute of Chartered Accountants of India (ICAI):ICAI is the
national professional accounting body of India.
• It was enacted by the Parliament (acting as the provisional Parliament
of India) to regulate the profession of Chartered Accountancy in
India.
• It recommends the accounting standards to be followed by
companies in India to The National Financial Reporting Authority
(NFRA) and sets the accounting standards to be followed by other
types of organizations.
• ICAI is solely responsible for setting the auditing and assurance
standards to be followed in the audit of financial statements in India.
• It also issues other technical standards like Standards on Internal
Audit (SIA), Corporate Affairs Standards (CAS) etc. to be followed by
practicing Chartered Accountants.
• It works closely with the Government of India, Reserve Bank of India
and the Securities and Exchange Board of India in formulating and
enforcing such standards.
 Securities Exchange Board of India
• SEBI: Securities Exchange Board of India (SEBI) was set up in 1988 to
regulate the functions of securities market. SEBI promotes orderly and
healthy development in the stock market but initially SEBI was not able to
exercise complete control over the stock market transactions.
• It was left as a watch dog to observe the activities but was found
ineffective in regulating and controlling them. As a result in May 1992,
SEBI was granted legal status.
• SEBI is a body corporate having a separate legal existence and perpetual
succession. The SEBI has been entrusted with both the regulatory and
developmental functions.
• The SEBI plays a pivotal role in the capital market. They protect the
investors so that there is a steady flow of savings into the Capital Market.
They ensures the fair practices by the issuers of securities, namely,
companies so that they can raise resources at least cost.
• They help in the promotion of efficient services by brokers, merchant
bankers and other intermediaries so that they become competitive and
professional.
 COMPONENTS OF FINANCIAL
STATEMENTS [SCHEDULE III]
• Financial reporting is the language that
communicates information about the financial
condition and operational results of a company
(public or private), not-for-profit organization,
or state or local government.
• A financial statement (or financial report) is a
formal record of the financial activities and
position of an entity.
 COMPONENTS OF FINANCIAL
STATEMENTS [SCHEDULE III]
• Balance Sheet: It is also referred to as a statement of
financial position, reports on a company’s assets,
liabilities, and owners’ equity at a given point in time.
• Income Statement: It is also known as a statement of
comprehensive income, statement of revenue &
expense, P&L or profit and loss report, reports on a
company’s income, expenses, and profits over a period
of time.
• A profit and loss statement provides information on
the operation of the enterprise. These include sales and
the various expenses incurred during the stated period.
 COMPONENTS OF FINANCIAL
STATEMENTS [SCHEDULE III]
• Statement of changes in Equity: It is also
known as equity statement or statement of
retained earnings, reports on the changes in
equity of the company during the stated
period.
• Cash Flow Statement: A cash flow statement
reports on a company’s cash flow activities,
particularly its operating, investing and
financing activities.
 COMPONENTS OF FINANCIAL
STATEMENTS [SCHEDULE III]
• Notes to accounts: The notes are an integral part of these financial
statements. It warns users that failure to read the notes (or
footnotes) to the financial statements will result in an incomplete
picture of the company’s financial health.
• Notes provide supplemental information about the financial
condition of a company without which the financial statements
cannot be fully understood.
• There are three basic types of notes –
• notes related to the descriptions of the accounting rules applied
in the company’s statements;
• Notes related to additional detail about a line on the financial
statements; and
• Notes related to additional financial disclosures about items not
listed on the statements themselves.
 FUNDAMENTAL ACCOUNTING
ASSUMPTIONS
• Transactions are recorded in the books of accounts on
the basis of certain assumptions.
• Every entity is mandatorily required to follow these
three fundamental accounting assumptions.
• In other words, the entity does not have any choice
with regard to the fact whether these assumptions
should be followed or not.
 FUNDAMENTAL ACCOUNTING ASSUMPTIONS

• Going Concern: The enterprise is normally viewed as a

going concern, that is, as continuing in operation for the
foreseeable future.
• It is assumed that the enterprise has either the intention or
the necessity of liquidation or of curtailing materially the
scale of the operations .
• Consistency: It is assumed that accounting policies are
consistent from one period to another.
• Accrual: Revenues and costs are accrued, that is,
recognized as they are earned or incurred (and not as
money is received or paid) and recorded in the financial
statements of the periods to which they relate.
• (The considerations affecting the process of matching
costs with revenues under the accrual assumption are not
dealt within this Statement.)
USER OF ACCOUNTING INFORMATION

• Accounting Information refers to the

information generated by the accounting system
of an entity relating to a particular accounting
period.
• They disclose the operating results, and financial
position of the entity.
• It acts as a mirror of the financial performance
of a concern.
USER OF ACCOUNTING INFORMATION

• The Framework discusses objective of financial

statements, qualitative characteristics that
determine the usefulness of information
contained in the financial statements, definition,
recognition and measurement of the elements
from which financial statements are constructed
and concepts of capital and capital maintenance.
Accounting Standards
 Accounting Standards

• Indian Accounting Standards Accounting standard

put together provides a framework of norms as to
recognition, measurement and disclosure on the
part of all enterprises that follow them to ensure
comparability and depiction of true and fair view
of the Financial Statements.
• High quality accounting standards are a
prerequisite and important for a sound Capital
Market System.
• The surge in the cross-border capital raising and
Investment transactions demands formulation of
high quality international accounting standard for
financial reporting worldwide.
 Accounting Standards

• The various factors that have led to difference in

accounting practices comprise widely of the
culture, traditions, economic development,
economic growth mode, inflation, legal system etc.
• The diversity demands unification to the extent
possible to develop Generally Accepted
Accounting Practices (GAAP).
• Indian GAAP comprises of a set of pronouncement
issued by various regulatory authorities mostly in
consultation with the ICAI.
 Accounting Standards

• The accounting Standard i.e. Indian GAAP is

supplemented by Guidance notes, Interpretation,
General Clarification and/or revision from time to
time.
• The Accounting Standard will apply to “General
Purpose Financial statement” e.g. Balance Sheet,
Profit & Loss A/c, Statement, Schedules and Notes
forming Integral part, issued for use by the
Shareholders, Members, Creditors, Employees, and
Public at large.
• AS are intended or items, which are considered
material. AS to apply prospectively unless
otherwise intended.
 Companies (Accounting Standards) Rules,
2006.
• As per Section 133 of Companies Act, 2013, the
Central Government may prescribed the standards
of accounting or any addendum thereto, as
recommended by the Institute of Chartered
Accountants of India, constituted under Section 3
of the Chartered Accountants Act, 1949, in notified
the rules named “Companies (Accounting
Standards) Rules, 2006.
 Criteria for classification of companies under
the Companies (Accounting Standards) Rules,
2006
Small and Medium-Sized Company (SMC) as defined in
Clause 2(f) of the Companies (Accounting Standards) Rules,
2006: (f)
“Small and Medium Sized Company” (SMC) means, a
company
(i) whose equity or debt securities are not listed or are not in
the process of listing on any stock exchange, whether in
India or outside India;
(ii) which is not a bank, financial institution or an insurance
company;
(iii) whose turnover (excluding other income) does not exceed
rupees fifty crore in the immediately preceding accounting
year; (iv) which does not have borrowings (including public deposits)
in excess of rupees ten crore at any time during the
immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company
which is not a small and medium-sized company.
Applicability of Accounting Standard
• A three tier classification has been
framed to ensure compliance of
accounting standards for reporting
enterprises
• Level-I
• Level- II
• Level-III
 Level-I - Entities
• Enterprises whose equity or debt securities are
listed whether in India or outside India.
• Enterprises which are in the process of listing their
equity or debt securities as evidenced by the Board
resolution in this regard.
• Banks including co-operative banks.
• Financial institutions .
• Enterprises carrying insurance business.
• Enterprises whose turnover exceeds ` 50 crores .
• Enterprises having borrowings in excess of ` 10
crores at any time during the accounting period.
• Holding companies and subsidiaries of enterprises
falling under any one of the categories mentioned
above
 Level-II - Entities
• Enterprises whose turnover exceeds `
40 lakhs but does not exceed ` 50
crores.
• Enterprises having borrowings in
excess of ` 1 crore but not in excess of `
10 crores at any time during the
accounting period.
• Holding companies and subsidiaries
of enterprise falling under any one of
the categories mentioned above.
 Level-III - Entities
• Non-corporate entities which are
not covered under Level I and
Level II are considered as Level III
entities.
Advantages of Accounting Standards
• It provides the accountancy profession with useful
working rules.
• 2. It assists in improving quality of work
performed by accountant.
• 3. It strengthens the accountant’s resistance against
the pressure from directors to use accounting
policy which may be suspect in that situation in
which they perform their work.
• 4. It ensures the various users of financial
statements to get complete crystal information on
more consistent basis from period to period.
• 5. It helps the users compare the financial
statements of two or more organizations engaged
in same type of business operation.
 Disadvantages of Accounting
Standards
• Users are likely to think that said
statements prepared using accounting
standard are infallible.
• 2. They have been derived from social
pressures which may reduced freedom.

• 3. The working rules may be rigid or

bureaucratic to some user of financial
statement.
• 4. The more standards there are, the more
costly the financial statements are to
 AS-1: DISCLOSURE OF ACCOUNTING
POLICIES
• This standard deals with disclosure of significant
accounting policies followed in the preparation
and presentation of the financial statements and is
mandatory in nature.
• The accounting policies refer to the specific
accounting principles adopted by the enterprise.
Proper disclosure would ensure meaningful
comparison both inter/intra enterprise and also
enable the users to properly appreciate the
financial statements. Financial statements are
intended to present a fair reflection of the financial
position financial performance and cash flows of
an enterprise.
 AS-1: DISCLOSURE OF ACCOUNTING
POLICIES
• Areas involving different accounting policies by
different enterprises are
• Methods of depreciation, depletion and amortization
• Treatment of expenditure during construction
• Treatment of foreign currency conversion/translation,
Valuation of inventories
• Treatment of intangible assets
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts Valuation
of fixed assets
• Treatment of contingent liabilities
 Changes in the Accounting policies

• Changes in Accounting Policies: Any change in the

accounting policies which has a material effect in
the current period or which is reasonably expected
to have a material effect in the later period should
be disclosed.
• In the case of a change in accounting policies,
having material effect in the current period, the
amount by which any item in the financial
statements, is affected by such change should also
be disclosed to the extent as ascertainable,
otherwise the fact that the effect is not (wholly or
partially) ascertainable, should be disclosed
 AS-2 : Valuation of Inventories

• This Standard should be applied in accounting for

inventories other than: (a) work in progress arising
under construction contracts, including directly
relatedservice contracts (b) work in progress
arising in the ordinary course of business of service
providers; (c) shares, debentures and other
financial instruments held as stock-in-trade; and
(d) producers’ inventories of livestock, agricultural
and forest products, andmineral oils, ores and
gases to the extent that they are measured at
netrealisable value in accordance with well-
established practices in those industries.
 AS-2 : Definition of Inventory

• Definition Inventories are assets:

• (a) held for sale in the ordinary course of business;
(b) in the process of production for such sale;
• (c) in the form of materials or supplies to be
consumed in the production process or in the
rendering of services.
• Disclosure The financial statements should
disclose: (a) the accounting policies adopted in
measuring inventories, including the cost formula
used; and (b) the total carrying amount of
inventories and its classification appropriate to the
enterprise
• Refer AS-3 Cash flow Statement as per the
class discussions.
AS- 6 –Accounting for Depreciation
• AS – 6 APPLICABILITY Deals with depreciation
accounting and applies to all depreciable
assets except:
• Forest, plantations & natural resources
• Wasting assets
• Expenditure on R&D
• Goodwill & other intangible assets
• Live stock
• DEPRECIATION - DEFINITION- measure of
wearing out, consumption or other loss of
value of a depreciable asset arising from use,
effluxion of time or obsolescence through
technology and market changes.
• Significant role in determining and presenting
the financial position and results of operations
of a company.
• Charged in each accounting period
• Depreciation is an important and admissible item
of expense in computing taxable income. It,
therefore, plays a key role in decision making
process and accordingly, a company has to follow
such depreciation policy which helps run its
business effectively and efficiently.
• Method of depreciation is consistently applied to
provide comparability of results of the operations
of the enterprise.
• The standard provides that the depreciable amount of a depreciable asset
should be allocated on a systematic basis to each accounting period during
the useful life of the asset. The depreciation method once selected should
be applied consistently from period to period.

• The useful lives of major depreciable assets or classes of depreciable

assets may be reviewed periodically.
• Where there is a revision of the estimated useful life of an asset, the
unamortised depreciable amount should be charged over the revised
remaining useful life.

• Where the depreciable assets are revalued, the provisions for depreciation
should be based on the revalued amount. Revaluation of assets makes the
depreciation charge more meaningful. if any depreciable asset is disposed
of or destroyed, the net surplus or deficiency should be disclosed
separately.
• The standard also requires disclosure in the
financial statements of the method of
depreciation used and the historical cost of
the assets. The toal amount of depreciation
for each class of assets, the related
accumulated depreciation, the depreciation
rates or the useful lives of the assets where
these are different from those specified in the
statute governing the enterprise are also
required to be disclosed.
 Practice Questions
• What do you understand by GAAP? What role does it play in effective Financial Reporting?
• What is the significance of GAAP in Financial Reporting by a Corporate ?
• What do you understand by Notes to Accounts ? What purpose does it serves?
• Explain the concept of Inventories as per the AS- 2 Valuation of Inventories ?
• Comment " Accounting Standards are applicable to all businesses irrespective of its form,activity , whether profit or non-
profit ?
• Differentiate between FIFO and LIFO Method of Inventory Valuation ?
• Mention the types of Enterprises who falls under the category of LEVEL II enterprises ?
• What are the advantages of Accounting Standards ?
• Show with the help of an example why Depreciation is a non- cash expense and its adjustment while preparing a Cash Flow
Statement ?
• What do you understand by the Cash flow from Operating Activities and mention atleast 6 items under this head ?
• Differentiate between the concept of Appropriation of Profits and Charge on Profits with the help of examples ?
• What are Non-Cash Expenses ? Whether they are considered while preparing Cash Flow Statements?
• What do you understand by General Purpose Financial Statements ?
• What are fundamental Accounting Assumptions ? Differentiate between Accounting concepts and Conventions?
• Explain Accounting Standards related to Disclosure of Accounting policies ?
• What purpose does Accounting standards serves in the Financial Reporting?
• How the Valuation of Inventories should be done as per AS- 2 Valuation of Inventories ?
• what are the factors governing the selection and application of accounting policies adopted by a Company?
• Explain the concept of Materiality in relation to the disclosure of Accounting poilicies by AS-1?
• What do you understand by Standalone and Consolidated Financial Statements ?
• Oriental Bank of Commerce, received a gross `4,500 crores demand deposits from customers and customers withdrawn
`4,000 crores of demand deposits during the financial year 2014-15. How would you classify such cash flows?