The Hindu Business Line : <I>Gaps in GAAP </I>

One of the many signs of globalisation is the adoption of international standards for accounting. "Companies are implementing IFRS, US GAAP, inter alia, to meet international investors' expectation, permit benchmarking of their performance with global competitors, have internal consistency in their operations across the globe," notes the preface of `Similarities and Differences' from PricewaterhouseCoopers (www.pwc.com).

The latest edition of the book provides a comparison of IFRS (International Financial Reporting Standards), the US GAAP (Generally Accepted Accounting Principles) and the Indian GAAP.

One of the first differences among the standards is in the presentation of financial statements. While IFRS requires consolidated basis, the Indian position is skewed in favour of single-entity parent company basis, though "pursuant to the listing agreement with stock exchanges, public listed companies present consolidated financial statements along with their standalone financial statements."

To non-accountants it may strike as odd that accounting standards do not prescribe any particular format of balance-sheet. Closer home, the Companies Act lays down the format, but in the IFRS regime, "management may use judgment regarding the form of presentation in many areas."

There is no comprehensive accounting standard (AS) on business combinations, states PwC. A gap in Indian GAAP, we may say. In India, all business combinations are acquisitions, while "IFRS 3 excludes from its scope business combinations involving entities under common control, formation of joint ventures, business combinations involving mutual entities and business combinations by contract alone."

The chapter on `revenue recognition' has a section on `barter transactions', in which `two companies enter into a non-cash transaction to exchange goods or services'. Revenue may be recognised on the exchange of dissimilar goods and services if the amount of revenue can be measured reliably, says IFRS. "The transaction is measured at the fair value."

Barter may be one of the ancient forms of business deals, but the ICAI (Institute of Chartered Accountants of India) does not seem to have any specific guidance for the purpose.

There is some insight, though, in a Guidance Note on `Accounting for Dot-Com Companies'. It says, "Revenue from barter transactions should be recognised only when the fair values of similar transactions are readily determinable from the entity's history."

Another chapter titled `Derivatives and hedging' highlights that there is no comprehensive guidance in India for the recognition and measurement of derivatives. Available guidance is on forward exchange contracts, equity index future/options, and equity stock options.

In contrast, both IFRS and US GAAP have detailed guidance on hedge accounting. "Both frameworks require documentation of the entity's risk management objectives and how the effectiveness of the hedge will be assessed."

It may be a matter of time before Indian standards fall in sync with the international standards.

Recommended addition to the professional's bookshelf.

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