Comparison between Indian GAAP and US GAAP
Both big and small enterprises engage in the process of accounting. Most governments all over the world set guidelines have engaged in setting guidelines of how businesses should undertake their book keeping chores. Most of these guidelines are the same in most countries although there may be slight differences from country to country. Generally Accepted Accounting Principles (GAAP) refers to these basic guidelines that set the procedures for preparation and presentation of financial statements. This includes recording transactions and preparation of annual final books of accounts. All these transaction should be kept while keeping in mind the existing laws governing presenting of financial accounts. Both Indian and US GAAP are set under the same basic guidelines but they differ to a small extent. The article outlines some of the areas of difference.
Institute of Chartered Accountants of India (ICAI) is responsible for setting the guidelines that all business enterprises have to adhere to while presenting their financial statements. Among these are 32 basic guidelines that have not been accepted by most people in the accounting profession in India. The International Accounting Standards Committee (IASC) was established in 1973 and has encountered a lot of challenges in harmonizing India’s standards to those of the world but major progress has been made in the last few years.
All the accounting rules are based on the major assumption that asks that the companies should ‘Provide for all losses and anticipate no profits’
US GAAP are a set of rules and guidelines that companies are required to follow are when preparing financial statements by all companies and individuals in the United States. The US government has left to the professional working in the area of accounting to come up with the rules that will govern them in their accounting. However, the government intervenes with corrections whenever required. Statements issued by the Financial Accounting Standards Board (FASB) are accepted by all accounting professionals as rules and norms by all accountants in the country. These direction are however different from those issued by International Financial Reporting Standards (IFRS).
Dissimilarities between Indian and US GAAP
Despite the changes that India’s accounting standards have undergone, there still are a lot of differences between these and those in force in the US. These weaknesses in India’s accounting standards have often been used by MNC operating in India to escape tax liabilities by reporting less profit than they make. The major differences are:
- Presentation of financial statements – the format of the accounts is defined by Indian GAPP, as set out under the VI schedule of the companies Act, 1956. In USA, these take no specific format.
- Indian GAAP says that the Cash Flow statement is a mandatory end of year statement only for those companies listed in stock exchanges. All companies in USA are required by US GAAP to make a stamen of cash flows.
- the Companies Act of 1956 sets out the depreciation rate that are to be adopted to depreciate assets while depreciation of assets under US GAAP is dependent on the asset’s useful life.
- In US long term debt is a current liability but under Indian GAPP, there is no such requirement. Interest accrued on long term debt is consequently not taken as current liability.