As the accounting standards and practices significantly vary in all the different parts of the world; there was a need for a uniform accounting standard applicable to global businesses. IND AS, IFRS, and US GAAP can be considered as attempts in this direction. Check out this post to know some of the biggest differences in these accounting standards.
With businesses going global, it was getting increasingly difficult for them to follow the accounting practices of every region. For instance, the process of something as simple as accounting valuation was done in a significantly different manner in different parts of the world.Read more: What are the commonly used defences against a drug crime case?
FASB (Financial Accounting Standard Board) was established in 1973 for developing and implementing GAAP (Generally Accepted Accounting Principle) for businesses in the USA. In 2001, IASB (International Accounting Standard Board) was established to replace IASC (International Accounting Standards Committee) and develop IFRS (International Financial Reporting Standards), which had some differences as compared to US GAAP.
In 2015, the MCA (Ministry of Corporate Affairs) issued Ind AS (Indian Accounting Standard), a uniform accounting standard for businesses in India. Ind AS again has some differences when compared to IFRS and is often known as a converged version of IFRS.
What should a multinational company know about the differences in these accounting standards? Take a look at three of the biggest differences-
1. Preparing the First Financial Statement
After adopting one of the three accounting standards, the preparation of the first financial statement is different under Ind AS and IFRS. A business is required to comply with all the standards mentioned under Ind AS at the time of preparing their first financial statement.
But with IFRS, businesses have to apply the mandatory exceptions and can also apply optional exceptions under IFRS 1. The US GAAP is similar to Ind AS in this regard as it also requires full compliance with no mandatory or optional exceptions.
2. Classifying Statement of Financial Position Items
With Ind AS, all the items of financial position statement should be current or non-current. IFRS is mostly similar to Ind AS in this regard, but a business needs to present its assets and liabilities based on liquidity if the liquidity-based presentation offers more relevant and reliable information.
Under US GAAP too, entities are generally required to classify every item on its financial position statement as current or non-current.
3. Presenting Operating Cash Flows
Another crucial difference that abundantly impacts business valuation is how these accounting standards allow the presentation of operating cash flows. Businesses in India are allowed to present their operating cash flows by using direct or indirect methods, with the exception of listed businesses.
It is mandatory for listed businesses only to use the indirect method of presenting operating cash flows. Also, unlisted entities using the direct method are not required to reconcile their net income to their net cash flows.Read more: Why Stock Market News is important
IFRS offers listed and unlisted businesses the option to present their cash flows using direct and indirect methods. US GAAP is similar to IFRS but requires entities using the direct method to reconcile net income to their net cash flows.
Adopting Ind AS, IFRS, and US GAAP
Apart from the differences listed above, there are several other significant differences in these accounting standards. Every business must understand these differences as they significantly impact how a business manages its accounting processes.
Most companies in India generally rely on professional business advisory services to help them with matters related to business valuation or adopting these accounting standards. Their expertise in these accounting standards makes it easier for businesses to measure and identify the total value of their assets in line with the applicable standards.