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US Accounting

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US Accounting

The Financial Accounting regulations Board (FASB) and the Governmental Accounting Standards Board (GASB) produce and regularly update a collection of accounting rules, regulations, and procedures known as generally accepted accounting principles (GAAP). Across all US industries, these guidelines guarantee uniformity, precision, and openness in financial reporting. GAAP, which is also frequently used in government accounting, must be followed by public corporations when creating their financial accounts. GAAP blends commonly used techniques for recording and reporting financial information with authoritative standards established by policy boards. It addresses materiality, balance sheet classification, and revenue recognition.

In order to enable investors to evaluate and derive valuable information from financial statements, GAAP's primary goal is to guarantee that a company's financial statements are comprehensive, consistent, and comparable. Additionally, it makes it easier to compare financial data from various businesses.

GAAP offers a uniform framework in contrast to pro forma accounting, which is a non-GAAP approach. International financial reporting standards (IFRS), which are utilized in 168 jurisdictions worldwide, are the comparable norm on a global scale.

Definition of GAAP

The foundation for more complex and thorough accounting regulations, standards, and other industry-specific accounting procedures is provided by generally accepted accounting principles, or GAAP. The Financial Accounting Standards Board (FASB), for instance, bases its own accounting standards on these ideas. GAAP therefore includes:

i) Fundamental accounting rules and concepts.
ii) The nation's leading accounting authority typically issues accounting standards.
iii) Industry-specific accounting procedures are used to accommodate for atypical situations.

In India, the Institute of Chartered Accountants of India's (ICAI) accounting standards and the laws outlined in the relevant acts serve as the foundation for the preparation of financial statements (for instance, all companies are required to adhere to Schedule III to the Companies Act, 2013). To aid in the accounting process and offer clarification, the ICAI occasionally publishes guidance notes on a range of subjects. The fundamental accounting concepts are presumed to be uniformly adhered to, even though they might not be explicitly included in the accounting standards and associated legislation.

Accounting Standards as per GAAP

1.Principle for Business entity

Every business entity should be regarded as an entity distinct from its owners, according to the business entity assumption. Consequently, all financial transactions ought to be differentiated in this way as well. This idea is particularly crucial when documenting a solo proprietor's financial dealings. Financial transactions pertaining to the business and those pertaining to the proprietor individually must be separated when the entrepreneur owns the whole company, including all of its assets and liabilities.

2.Monetary value

All business financial transactions should be able to be expressed in a monetary unit (for instance, Indian Rupees); otherwise, they shouldn't be included into the company's books of accounts.

3.Accounting Period

According to this idea, a business's accounting procedure must be finished within a specific time frame, typically a financial period or a calendar year. As a result, the financial statements issued for a given accounting period will include all transactions related to that period.

4.Principle of Going Concern

The company is presumed to be a going concern, meaning it will carry on for an indefinite period of time. This assumption is crucial because, should the company go through a liquidation soon, it would need to restate its assets and liabilities to reflect its actual financial situation by reflecting the actual amount that could be realized or payable, as applicable.

5.Principle of Historical cost

 When an organization purchases specific assets or economic resources, the amount of money actually paid to purchase those assets or resources is recorded on the day of the transaction, regardless of whether the purchase was made ten years ago or the day before. As a result, regardless of the accounting period, the value of the remaining asset would remain constant. Unless mandated by legislation or an accounting standard, the asset's market value is not taken into consideration.

6.Principle of full disclosure

 An accounting entry might not be able to supply all of the necessary information about the transaction on its alone. Therefore, in order to help the investor or user make decisions, the full disclosure principle mandates that the entity reveal every relevant financial information. This is accomplished at the transactional level by adequately documenting each transaction, and at the financial statement level by including notes to the accounts.

7.Matching concept

 According to this theory, the actual profit for a certain period can only be displayed when the revenue and expenses for that period are matched.

8.Accrual basis of accounting

According to this idea, all income and expenses must be documented as soon as they are really incurred rather than after money or its equivalent has been received or spent. Regardless of the associated cash flow, the generation of income and the incurrence of expenses are significant.

9.Principle of consistency

Regarding a sequence of transactions, a company may choose to adhere to a specific accounting procedure. To make it easier to compare the outcomes of two periods, such accounting practices must be adhered to consistently throughout the ensuing accounting periods. An entity may decide to depreciate its tangible fixed assets using the straight-line technique, for instance. Even in the upcoming years, this approach must be regularly used.

10.Principle of Materiality

This accounting principle permits an organization to ignore another principle if its outcome has no bearing on the choices made by the financial statement user. If a particular error or omission has no bearing on the financial accounts, it may also be disregarded. For instance, the matching principle mandates that the business recognize the cost of a fixed asset purchase across the item's useful life.

11. Principle of conservatism

Two equally acceptable methods of accounting for a given transaction may arise in a variety of scenarios during the accounting process. It may even be necessary to decide whether to record a transaction or not. A conservative strategy ought to be used in this case. This implies that all possible revenue or gains should not be recorded until they are actually earned or received, but all expected costs or losses must be taken into consideration when accounting for a specific transaction. This explains why a provision is made for costs such as bad debts, but no accompanying documentation is offered for a rise in an asset's realizable value.

Difference between GAAP and IFRS

i) A popular worldwide substitute for GAAP is the International Accounting Standards Board's (IASB) International financial reporting standards (IFRS).
ii) The way inventory is handled is one of the main distinctions between GAAP and IFRS. Last-in, first-out (LIFO) inventory accounting is prohibited by IFRS regulations, however it is allowed under GAAP. The weighted average-cost and first-in, first-out (FIFO) approaches are supported by both systems.
iii) The FASB and IASB have been working to harmonize GAAP and IFRS since 2002.The SEC's 2007 decision to permit foreign corporations with U.S. registrations to employ IFRS without reconciling to GAAP marked a significant milestone. This was a significant accomplishment since it removed the need that foreign corporations listed on American stock markets submit financial statements that adhered to GAAP.
iv) Even in the United States, foreign standards like IFRS are becoming more popular as worldwide businesses and markets grow. In its financial filings, almost every S&P 500 company discloses at least one non-GAAP metric. Several non-GAAP metrics are widely used, as seen by the fact that 29% of S&P 500 companies report EBITDA or adjusted EBITDA, 77% report adjusted earnings, and 77% utilize adjusted EPS (earnings per share).

  • FAQ
1. What is GAAP?

Financial statements are prepared using a set of accounting standards and concepts known as GAAP. It offers a uniform framework for financial reporting, guaranteeing financial statements' comparability, uniformity, and transparency.

India has switched to Indian Accounting Standards (Ind AS), which are mainly in line with International Financial Reporting Standards (IFRS), from Indian GAAP, which was before based on a local framework. Large enterprises and listed firms were required to make this shift in order to improve comparability with international financial procedures.

Before Indian AS was adopted, Indian GAAP was the previous accounting standard used by Indian businesses. The purpose of Ind AS, a collection of accounting standards that converge with IFRS, is to align Indian accounting rules with international standards. According to regulatory regulations, Ind AS is applicable to listed firms, unlisted companies with a specific revenue threshold, and specific other companies.

i) The main organization in charge of establishing accounting standards in India is the Institute of Chartered Accountants of India (ICAI).
ii) Accounting standards are also implemented and enforced by the Ministry of Corporate Affairs (MCA).

Setting the bar for accounting procedures and guaranteeing adherence through direction and instruction fall under the purview of ICAI. Before Ind AS was introduced, the Accounting Standards (AS), which they issue, served as the foundation for Indian GAAP.

A phased rollout of the switch to Ind AS began in 2016. Large unlisted corporations and listed companies were covered by the first phase, while other entities were covered by the second.

No, listed companies are required to have Ind AS.
i) Unlisted companies which meet a certain income, net worth, or loan threshold.
ii) Companies that have more than Rs. 250 crores in net worth must also abide by the rules.
iii) Unless their size or listing status requires them to adopt Indian GAAP, such smaller organizations may continue to use the Accounting Standards (AS), which are a component of Indian GAAP.

i) Fair value measurement: When it comes to financial reporting, the emphasis is on fair value rather than historical cost.
ii) Ind AS provides more thorough and precise guidelines for the timing of revenue recognition.
iii) Leases: Previously excluded from GAAP, the notion of capitalizing leases is introduced in Ind AS 116.
iv)Financial instruments: Ind AS substantially complies with IFRS 9 and other IFRS rules for financial instruments.

With a few exceptions brought forth by regional factors and real-world uses in India, Ind AS and IFRS are fairly similar. For instance, because to laws and regulatory frameworks unique to India, some advice varies slightly and Ind AS has particular specific criteria for tax treatment.

Legal repercussions, harm to one's reputation, or sanctions from the Securities and Exchange Board of India (SEBI) or the Ministry of Corporate Affairs could arise from noncompliance with GAAP or Ind AS. It may also affect the company's financial situation and investor confidence.