There are main accounting systems: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). GAAP is used principally in the United States, although the Security and Exchange Commission is looking to switch to IFRS by 2015, the system used in the European Union and many other countries. Many countries have their own accounting systems, although most conform to one main system or the other as they work to keep their markets modern. Generally Accepted Accounting Principles (GAAP)
In order to maintain uniformity and consistency in accounting records, certain rules or principles have been developed which are generally accepted by the accounting profession. These rules are called by different names such as principles, concepts, conventions, postulates, assumptions and modifying principles. The term principle has been defined by AICPA as A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice. The word generally means in a general manner, i.e. pertaining to many persons or cases or occasions. Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements. For example, one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid. This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users. The Generally Accepted Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals. However, the principles of accounting are not static in nature. These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users.
These principles are also referred as concepts and conventions. The term concept refers to the necessary assumptions and ideas which are fundamental to accounting practice, and the term convention connotes customs or traditions as a guide to the preparation of accounting statements. In practice, the same rules or guidelines have been described by one author as a concept, by another as a postulate and still by another as convention. This at times becomes confusing to the learners. Instead of going into the semantics of these terms, it is important to concentrate on the practicability of their usage. From the practicability view point, it is observed that the various terms such as principles, postulates, conventions, modifying principles, assumptions, etc. are used inter-changeably and are referred to as Basic Accounting Concepts.
All accounting systems follow double-entry practices that categorize transactions as revenue or expenses, assets or liabilities. The two primary accounting systems have a few differences between them that may affect the results. U.S. GAAP GAAP are set by the Financial Accounting Standards Board (FASB, often pronounced as fazz-bee), an organization of accountants, financial analysts, and regulators who draw up accounting practices to meet ongoing changes in the markets. Every time some new issue comes up, the FASB studies the problem, develops a proposed accounting procedure, and sends it for review and comment to different users of financial statements, including corporations and analysts. Comparing GAAP and International Financial Reporting Standards The IFRS were established in 2001 and adopted by the European Union in 2005. The hope is that all the worlds businesses will move to these standards to help investors and financiers all over the world better understand the financial situation of companies they invest in, do business with, or extend credit to. Also, a standard system is an incentive for newly capitalist nations, especially China, to develop accounting that meets world standards. The philosophy behind IFRS is similar to GAAP, but there are some key differences, as shown in the following table: Few of these differences are likely to cause major changes in any companys reported results; a company with great results under GAAP wont look terrible under IFRS, unless it got those results with an extraordinary item, which is an event that doesnt occur on a regular basis such as a merger or a corporate restructuring. And because extraordinary items are disclosed, someone looking at the financial statements would be able to make the adjustment easily.
India's commitment to convergence with International Financial Reporting Standards ("IFRS") moved a step closer with the publication of 35 Indian IFRS standards ("Ind-AS") by the Ministry for Corporate Affairs (MCA) in late February 2011. However, Ind-AS are different from IFRS in several important areas. All companies are likely to be affected by changes in respect of first-time adoption and presentation: a high level summary to IND-AS can be found here . A detailed guide to Ind-AS is forthcoming. Furthermore, the respective bodies need to decide whether interpretations on leasing and infrastructure would be ultimately included in Ind-AS, and how companies reporting under Ind-AS will be taxed. Therefore it seems likely that the MCA Roadmap published in January 2010 would be replaced with a new timeline. Companies can use the additional time to embed Ind-AS fully in their systems, train finance teams in the new standards, and prepare fully for the change to ensure a full transition. Companies may also like to consider converting the finance systems fully to IASB IFRS so that, if required, financial information can be presented under both IASB IFRS and Ind-AS. Areas such as revenue recognition, financial instruments and fixed asset accounting will present practical challenges for companies making the change to Ind-AS. Conversion to Ind-AS or IFRS entails more than merely changing accounting policies, and companies will need to carefully assess the readiness of their financial reporting systems and the potential business impact before making the change. India's conversion to Ind-AS will not be a hassle-free job, as Ind-AS is significantly different from the current Indian GAAP. The MCA recently issued a revised Schedule VI to the Companies Act, 1956, to lay down a new format for preparation and presentation of financial statements by Indian companies. The drive for global accounting procedures: As India zooms toward implementing the International Financial Reporting Standards, the automotive industry may feel the heat. Read our analysis on the implications of IFRS on the Indian auto industry. Indian banks prepare for IFRS: The application of IFRS is on the horizon. When adopted the Indian banking sector is likely to feel the heat. How does the banking industry in India deal with the changing standards and its implications on the industry is crucial . Changes in accounting policy IFRS: Changes in accounting policy are applied retrospectively. Comparatives are restated and the effect of period(s) not presented is adjusted against opening retained earnings of the earliest year presented. Policy changes made on the adoption of a new standard are made in accordance with that standards transitional provisions. Indian GAAP: The cumulative amount of the change is included in the income statement for the period in which the change is made except as specified in certain standards (transitional provision) where the change during the transition period resulting from adoption of the standard has to be adjusted against opening retained earnings and the impact disclosed. Where a change in accounting policy has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such an amount is not ascertainable this fact should be indicated. Other Changes in these three relate to : 1. Functional and presentation currency 2. Consolidation 3. Business combinations 4. Goodwill 5. Acquired and internally generated intangible assets 6. Property, plant and equipment 7. Recognition and measurement of financial instruments 8. Measurement of derivative instruments and hedging activities 9. Disclosure of Notional 10. Impairment of financial assets 11. Liabilities and equity 12. Provisions for liabilities and charges 13. Pension obligations 14. Deferred taxation 15. Interest income and expense