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Unit 3: Introduction to US-GAAP

14. Goodwill: Under the Indian GAAP goodwill is capitalized and charged to earnings over 5 Notes
to 10 years period. Under US GAAP (SFAS 142), Goodwill and intangible assets that have
indefinite useful lives are not amortized, but they are tested at least annually for impairment
using a two-step process that begins with an estimation of the fair value of a reporting
unit. The first step is a screen for potential impairment, and the second step measures the
amount of impairment, if any. However, if certain criteria are met, the requirement to test
goodwill for impairment annually can be satisfied without a remeasurement of the fair
value of a reporting unit.
15. Capital issue expenses: Under the US GAAP, capital issue expenses are required to be
written off when incurred against proceeds of capitals, whereas under Indian GAAP,
capital issue expense can be amortized or written off against reserves.

16. Proposed dividend: Under Indian GAAP, dividends declared are accounted for in the year
to which they relate.

Example: If dividend for the FY 1999-2000 is declared in Sep 2000, then the corresponding
charge is made in 2000-2001 as below the line item. Contrary to this, under US GAAP dividends
are reduced from the reserves in the year they are declared by the Board. Hence in this case
under US GAAP, it will be charged Profit and loss account of 2000-2001 above the line.

17. Investments in Associated companies: Under the Indian GAAP (AS 23), investment in
associate companies is initially recorded at Cost using the Equity method whereby the
investment is initially recorded at cost, identifying any goodwill/capital reserve arising
at the time of acquisition. The carrying amount of the investment is adjusted thereafter for
the post acquisition change in the investor’s share of net assets of the investee. The
consolidated statement of profit and loss reflects the investor’s share of the results of
operations of the investee is carried at cost. Under US GAAP (SFAS 115) Investments in
Associates are accounted under equity method in Group accounts but would be held at
cost in the Investor’s own account.
18. Preoperative expenses: Under Indian GAAP, (Guidance Note 34 - Treatment of Expenditure
during Construction Period), direct Revenue expenditure during construction period like
Preliminary Expenses, Project related expenditure are allowed to be Capitalised. Further,
Indirect revenue expenditure incidental and related to Construction is also permitted to
be capitalised. Other Indirect revenue expenditure not related to construction, but since
they are incurred during Construction period are treated as deferred revenue expenditure
and classified as Miscellaneous Expenditure in Balance Sheet and written off over a period
of 3 to 5 years. Under US GAAP (SFAS 7), the concept of preoperative expenses itself
doesn’t exist. SOP 98.5 also mandates that all Start up Costs should be expensed. The
enterprise has to prepare its balance sheet and Profit and Loss Account as if it were a
normal running organization. Expenses have to be charged to revenue and Assets are
capitalised as a normal organization. The additional disclosures include reporting of cash
flow, cumulative revenues and Expenses since inception. Upon commencement of normal
operations, notes to Statement should disclose that the Company was but is no longer is a
Development stage enterprise. Thus, due to above accounting anomaly, Accounts prepared
under Indian GAAP, contain higher charges to depreciation which are to be adjusted
suitably under US GAAP adjustments for indirect preoperative expenses and foreign
currencies.
19. Employee benefits: Under Indian GAAP, provision for leave encashment is accounted
based n actuarial valuation. Compensation to employees who opt for voluntary retirement
scheme can be amortized over 60 months. Under US GAAP, provision for leave encashment
is accounted on actual basis. Compensation towards voluntary retirement scheme is to be
charged in the year in which the employees accept the offer.

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