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Daimler Benz - a healthy profit
making company according to German Standards, just
before its ADR issue, realized that it was making
losses under US GAAP.
Infosys, Reliance, ICICI, SBI also
followed the list with similar fate.
Very often we find that a company
that made profits as per the governing accounting
standards is loss making from the standpoint of
US GAAP. Questions that arise in the mind of an
investor are:
Whether the company in question
is a profit making company or a loss making one?
Is there money inside the wallet of the company
or whether the runners of the company are just making
a fool of the investors by enjoying hard money that
they put in the stocks of the company?
In order to understand these radical
changes it is essential to examine the differences
in Indian and US Accounting practices.
How
US GAAP is Different from Indian GAAP:
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Prior
Period Items prior period adjustments can go
directly to retained earnings and do not affect
income statement of the current period.
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No
upward revaluation of property, plant and equipment
or investment permissible.
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Indirect
expenditure on construction is charged to revenue.
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Issues
relating to specialized industries such as oil
and gas and other extractive industries are
addressed for depreciation accounting. Such
treatment is absent under the Indian GAAP.
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Concept
of capitalization of exchange fluctuation, arising
from foreign liabilities incurred for acquiring
fixed assets, does not exist.
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Completed
contract method permissible for accounting for
construction contracts, in certain circumstances,
permissible under US GAAP.
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Capital
issue expenses are required to be written off
when incurred against proceeds of capitals.
In India, capital issue expense can be amortized
or written off against reserves.
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Development
cost is expensed as incurred.
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Financial
statements are not required to be prepared under
any specific format as long as they comply with
the disclosure requirements of US accounting
standards.
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Borrowing
Costs need not be capitalized where the benefit
in terms of information about enterprise resources
and earnings does not justify the additional
accounting and administrative costs involved
in providing the information.
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Goodwill
requires satisfying the test of impairment.
Under Indian GAAP, the same needs to be written
off, generally over a period of 5 years.
WHY
US GAAP?
That
brings one to a significant question, if profits
are lower under US GAAP, why are Indian companies
making a beeline to publish accounts under US GAAP:
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The
most significant reason is the decision to raise
capital abroad. For instance, MTNL, VSNL, IOC,
Modi Rubber, Kotak Mahindra, IDBI, Larson &
Toubro and many more, are contracting big international
accounting firms to publish the reconciliation
of their accounts with US GAAP, as a prelude to
floating their GDR issue.
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Then there are companies listed in the NYSE or
NASDAQ, such as Infosys, ICICI, etc. To get listed
on NYSE or NASDAQ, an Indian company either needs
to publish accounts under US GAAP, or expressly
publish the reconciliation with Indian GAAP and
the US GAAP in its financial statements.
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Besides, accounting as per US GAAP enhances company
profile and reputation. In a financial environment
where the investor is getting increasingly cautious
and aware, the companies have begun to understand
that the investor will not even touch a company
whose balance sheet is even remotely grey. US
GAAP, in this situation, gets that unmistakable
stamp of high quality, and makes the company an
attractive investment proposition.
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The stricter disclosure norms do ensure greater
transparency and enhanced credibility in the capital
market. To woo the international investor, thus,
US GAAP is almost a must. With most Indian companies
heading towards the western financial markets,
therefore, accounting as per US GAAP, has become
an essential ritual.
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To enable global mergers and acquisitions.
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