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Unit 3: Introduction to US-GAAP

4. Consolidation of subsidiary companies: Under Indian GAAP (AS 21), Consolidation of Notes
Accounts of subsidiary companies is not mandatory. AS 21 is mandatory if an enterprise
presents consolidated financial statements. In other words, the accounting standard does
not mandate an enterprise to present consolidated financial statements but, if the enterprise
presents consolidated financial statements for complying with the requirements of any
statute or otherwise, it should prepare and present consolidated financial statements in
accordance with AS 21.Thus, the financial income of any company taken in isolation
neither reveals the quantum of business between the group companies nor does it reveal
the true picture of the Group. Savvy promoters hive off their loss making divisions into
separate subsidiaries, so that financial statement of their Flagship Company looks attractive
.Under US GAAP (SFAS 94), Consolidation of results of Subsidiary Companies is mandatory,
hence eliminating material, inter company transaction and giving a true picture of the
operations and profitability of the various majority owned Business of the Group.
5. Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash Flow statement in
financial statements is mandatory only for companies whose share are listed on recognized
stock exchanges and Certain enterprises whose turnover for the accounting period exceeds
50 crores. Thus, unlisted companies escape the burden of providing cash flow statements
as part of their financial statements. On the other hand, US GAAP (SFAS 95) mandates
furnishing of cash flow statements for 3 years – current year and 2 immediate preceding
years irrespective of whether the company is listed or not.
6. Investments: Under Indian GAAP (AS 13), Investments are classified as current and long
term. These are to be further classified Government or Trust securities, Shares, debentures
or bonds Investment properties others-specifying nature. Investments classified as current
investments are to be carried in the financial statements at the lower of cost and fair value
determined either on an individual investment basis or by category of investment, but
not on an overall (or global) basis. Investments classified as long term investments are
carried in the financial statements at cost. However, provision for diminution is to be
made to recognise a decline, other than temporary, in the value of the investments, such
reduction being determined and made for each investment individually. Under US GAAP
(SFAS 115), Investments are required to be segregated in 3 categories i.e. held to Maturity
Security (Primarily Debt Security), Trading Security and Available for sales Security and
should be further segregated as Current or Non-current on Individual basis. Debt securities
that the enterprise has the positive intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealised gains and losses
included in earnings. All Other securities are classified as available-for-sale securities and
reported at fair value, with unrealised gains and losses excluded from earnings and
reported in a separate component of shareholders’ equity.

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Caution There are three major parties that are involved in the standard setting where U.S
companies must abide by.

7. Depreciation: Under the Indian GAAP, depreciation is provided based on rates prescribed
by the Companies Act, 1956. Higher depreciation provision based on estimated useful life
of the assets is permitted, but must be disclosed in Notes to Accounts. (Guidance note no
49). Depreciation cannot be provided at a rate lower than prescribed in any circumstance.
Similarly, there is no compulsion to provide depreciation at a higher rate, even if the
actual wear and tear of the equipments is higher than the rates provided in Companies
Act. Thus, an Indian Company can get away with providing with lesser depreciation, if the

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