GAAP
- Generally Accepted Accounting Principles are a set of accounting rules, standards, procedures, etc. that companies must follow while preparing their financial statements.
- They set the criteria for preparing, presenting, and reporting financial statements.
- They help standardize financial reports across companies, making them easier to read and compare.
- It improves consistency, transparency, and comparability across companies’ financial statements.
- All public companies in the US have to follow GAAP.
- They are issued and revised by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB)
Important US GAAP Principles Indian Accountants Should Know
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Accrual Concept- According to this principle, revenue or expenses are recorded when they are incurred, not when the cash is received
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Matching Principle- Expenses have to be matched with the correlating revenues in the same period
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Conservatism- Always account for probable loss in any case and make provisions for the same, and in case of profit, record only when received; always report the lowest possible profit in case of uncertainty
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Full Disclosure-All the relevant information related to accounts needs to be disclosed in notes to accounts and footnotes.
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Materiality-Only record relevant information, and irrelevant information that has little to no power to influence user decisions should be ignored.
Practical US GAAP Areas Indian Accountants Should Learn
- Revenue Recognition- GAAP has set out rules regarding how to recognize revenue from contracts.
- Leases-It states that companies should record and report their leases in their balance sheet.
- Impairment of Assets- It sets out rules about how and when to reduce the value of assets when the market value falls.
- Stock Based Consumption-Accounting for employee stock options.
- Financial Instruments- It is about how to measure and disclose investments and loans.
Other Accounting Standards
| Standard | Information |
|---|---|
| IFRS | They are globally accepted accounting standards to ensure transparent, comparable financial reporting across 140 countries. |
| Ind AS | Accounting standards under the Companies Act that align with IFRS, incorporating India-specific modifications |
If Indian Accounting Standards are based on IFRS, which is also a globally accepted standard, then why do Indian Accountants have to learn about GAAP?
- US-based companies with subsidiaries in India use GAAP.
- Companies that are listed on the American exchange use this system as well.
- More opportunities in Big4s, KPOs, and Global Capability Centres, as these companies have operations based in the US as well, so learning GAAP provides an advantage.
Key Differences between IFRS/Ind AS and US GAAP
| Item | Explanation |
|---|---|
| Basis | US GAAP is more rule based where as the other two are general guideline (principle) based. |
| Inventory | LIFO (last in first out) is only allowed under US GAAP |
| Development cost | They are expensed as incurred, unlike in Ind AS/IFRS where it can be capitalized when certain criteria are met. |
| Impairment Reversal | Not allowed under US GAAP, whereas it is allowed under Ind AS(except goodwill) |
| Leases | Operating leases are treated differently under US GAAP |
Conclusion
- Knowledge about GAAP is an addition rather than a replacement for IFRS or Ind AS
- US GAAP is widely used in many international businesses, so for Indians to be able to work with global companies, learning about GAAP is necessary.
- Accountants in India should be aware of the differences between these systems so that they can report accurately and their scope of work doesn’t get limited because they don’t know certain US GAAP rules.