GAAP

Accounting is the language of business.

It records the business transactions and communicates the

result of the business.

To make the language understandable to all the groups

interested in accounting, it should be based on certain
uniform, scientifically and universally accepted principles.
AICPA termed such principle as, ‘Generally Accepted
Accounting Principles’ (GAAP).
AICPA was started in 1887, now has more that 4,30,000
members
 GAAP

The accounting principles are classified into two

categories such as Accounting Concepts and Accounting
Conventions.

Accounting Concepts are the assumptions or ideas or

conditions upon which the science of accounting is based.
These are essential to prepare the financial statements

The term “Conventions” denotes customs or traditions

or usage which guide the accountant for the preparation
of accounting statements. These are also known as
doctrine.
 GAAP

ACCOUNTING PRINCIPLES

Accounting Concepts Accounting Conventions

• 1. Business Entity Concept 1. Convention of full disclosure

• 2. Money Measurement Concept 2. Convention of Consistency
• 3. Going Concern Concept 3. Convention of Materiality
• 4. Cost Concept 4. Convention of Conservatism
• 5. Dual Aspect Concept
• 6. Accounting Period Concept
• 7. Revenue Realization Concept
• 8. Matching Concept
• 9. Objective Evidence Concept
• 10. Accrual concept.
 INTERNATIONAL ACCOUNTING STANDARDS (IAS)

In parallel with the US GAAP, UK developed

International Accounting Standards.
• International Accounting Standards (IAS) were
the first international accounting standards that
were issued by the International Accounting
Standards Committee (IASC), formed in 1973.
• The goal of IAS was to make it easier to
compare businesses around the world,
increase transparency and trust in financial
reporting, and foster global trade and
investment.
 INTERNATIONAL ACCOUNTING STANDARDS (IAS)

• Globally comparable accounting standards

promote transparency, accountability, and
efficiency in financial markets around the world.
• This enables investors and other market
participants to make informed economic
decisions about investment opportunities and
risks and improves capital allocation.
• Universal standards also significantly reduce
reporting and regulatory costs, especially for
companies with international operations and
subsidiaries in multiple countries.
 IAS
 There has been significant progress towards developing a single
set of high-quality global accounting standards since the IASC
was replaced by the IASB
 International Accounting Standards (IAS) are older accounting
standards issued by the International Accounting Standards
Board (IASB), an independent international standard-setting
body based in London.
 The IAS were replaced in 2001 by International Financial
Reporting Standards (IFRS).
 The U.S. accounting standards body has been collaborating with
the Financial Accounting Standards Board since 2002 to improve
and converge American accounting principles (GAAP) and IFRS
 Currently, the United States, Japan, and China are the only major
capital markets without an IFRS mandate
 NEED FOR IFRS

Eventhough, US-GAAP and UK-IAS were

already in practice, a number of accounting
scandals occurred in the last two decades.
Billions of dollars were lost as a result of
these financial disasters, which destroyed
companies and ruined peoples’ lives.
This necessitated a single set of high-quality
global accounting standards, resulted in
IFRS.
 NEED FOR IFRS

Let us have a glance over the top accounting scandals.

1. Waste Management Scandal (1998)
• Waste Management Inc. is a publicly-traded US waste
management company. In 1998, the company’s new
CEO, A Maurice Meyers, and his management team
discovered that the company had reported over $1.7
billion in fake earnings.
• The Securities and Exchange Commission (SEC) found
the company’s owner and former CEO, Dean L Buntrock,
guilty, along with several other top executives. In addition,
the SEC fined Waste Management’s auditors, Arthur
Andersen, over $7 million. Waste Management eventually
settled a shareholder class-action suit for $457 million.
 NEED FOR IFRS

2. Enron Scandal (2001)

• Enron Corporation was a US energy, commodities,
and services company based out of Houston, Texas.
• It was discovered in 2001 that the company had been
using accounting loopholes to hide billions of
dollars of bad debt, while simultaneously inflating
the company’s earnings.
• The scandal resulted in shareholders losing over $74
billion as Enron’s share price collapsed from around
$90.75 in the mid of 2001 to under $0.26 in
November 2001. About 20,000 employees had lost
their jobs
 NEED FOR IFRS

2. Enron Scandal (2001)

Enron employed an accounting method known as mark-to-market
(MTM) accounting. Under MTM accounting, assets can be
recorded on a company’s balance sheet at their fair market value
(as opposed to their book values). With MTM, companies can also
list their profits as projections, rather than actual numbers. In the
case, the actual cash flows that resulted from their assets were
substantially less than the cash flows that they initially reported to
the Securities and Exchange Commission (SEC) under the MTM
method.
In an attempt to hide the losses, Enron set up a number of special shell
corporations known as Special Purpose Entities (SPEs). The
majority of the SPEs were private corporations that only existed on
paper. The losses were reported under more traditional cost
accounting methods and not consolidated with the accounts of Enron.
 NEED FOR IFRS
3. WorldCom Scandal (2002)
• WorldCom was an American telecommunications company
based out of Ashburn, Virginia. In 2002, just a year after the
Enron scandal, it was discovered that WorldCom had inflated
its assets by almost $11 billion, making it by far one of the
largest accounting scandals ever.
• The company had underreported line costs by capitalizing
instead of expensing them and had inflated its revenues by
making false entries. The scandal first came to light when the
company’s internal audit department found almost $3.8 billion
in fraudulent accounts. The company’s CEO, Bernie Ebbers,
was sentenced to 25 years in prison for fraud, conspiracy, and
filing false documents. The scandal resulted in over 30,000 job
losses and over $180 billion in losses by investors.
 NEED FOR IFRS
4. Tyco Scandal (2002)
• Tyco International was an American blue-chip security systems
company based out of Princeton, New Jersey. In 2002, it was
discovered that CEO, Dennis Kozlowski, and CFO, Mark Swartz,
had stolen over $150 million from the company and had inflated
the company’s earnings by over $500 million in their reports.
• Kozlowski and Swartz had siphoned off money using unapproved
loans and stock sales.
• The scandal was discovered when the SEC and the office of the
District Attorney of Manhattan carried out investigations related to
certain questionable accounting practices by the company. Kozlowski
and Swartz were both sentenced to 8 to 25 years in prison. A class-
action suit forced them to pay $2.92 billion to investors.
 NEED FOR IFRS

5. HealthSouth Scandal (2003)

HealthSouth Corporation is a top US publicly traded

healthcare company based out of Birmingham,
Alabama. In 2003, it was discovered that the company
had inflated earnings by over $1.8 billion.
The SEC had previously been investigating HealthSouth’s
CEO, Richard Scrushy, after he sold $75 million in
stock a day before the company posted a huge loss.
Although charged, Scrushy was acquitted of all 36
counts of accounting fraud. However, he was found
guilty of bribing then Alabama Governor, Don
Siegelman, and was sentenced to seven years in prison.
 NEED FOR IFRS

6. Freddie Mac Scandal (2003)

The Federal Home Loan Mortgage Corporation, also
known as Freddie Mac, is a US federally-backed
mortgage financing giant based out of Fairfax County,
Virginia. In 2003, it was discovered that Freddie Mac
had misstated over $5 billion in earnings.
COO David Glenn, CEO Leland Brendsel, former CFO
Vaughn Clarke, and former Senior Vice Presidents
Robert Dean and Nazir Dossani had intentionally
overstated earnings in the company’s books. The scandal
came to light due to an SEC investigation into Freddie
Mac’s accounting practices. Glenn, Clarke, and Brendsel
were all fired and the company was fined $125 million.
 NEED FOR IFRS
7. American International Group (AIG) Scandal (2005)
• American International Group (AIG) is a US multinational
insurance firm with over 88 million customers across 130
countries. In 2005, CEO Hank Greenberg was found guilty of
stock price manipulation. The SEC’s investigation into
Greenberg revealed a massive accounting fraud of almost $4
billion.
• It was found that the company had booked loans as revenue in
its books and forced clients to use insurers with whom the
company had pre-existing payoff agreements. The company
had also asked stock traders to inflate the company’s share
price. AIG was forced to pay a $1.64 billion fine to the SEC.
The company also paid $115 million to a pension fund in
Louisiana and $725 million to three pension funds in Ohio.
 NEED FOR IFRS
8. Lehman Brothers Scandal (2008)
• Lehman Brothers was a global financial services firm
based out of New York City, New York. It was one of the
largest investment banks in the United States. During the
2008 financial crisis, it was discovered that the company
had hidden over $50 billion in loans. These loans had
been disguised as sales using accounting loopholes.
• According to an SEC investigation, the company had sold
toxic assets to banks in the Cayman Islands on a short-term
basis. It was understood that Lehman Brothers would buy
back these assets. This gave the impression that the company
had $50 billion more in cash and $50 billion less in toxic
assets. In the aftermath of the scandal, Lehman Brothers
went bankrupt.
 NEED FOR IFRS

9. Bernie Madoff Scandal (2008)

• Bernie Madoff is a former American stockbroker
who ran Bernard L. Madoff Investment
Securities LLC. After the 2008 financial crisis, it
was discovered that Madoff had tricked investors
out of over $64.8 billion.
• Madoff, his accountant, David Friehling, and
second in command, Frank DiPascalli, were all
convicted of the charges filed against them. The
former stockbroker received a prison sentence of
150 years and was also ordered to pay $170 billion
in restitution.
 NEED FOR IFRS
10. Satyam Scandal (2009)
• Satyam Computer Services was an Indian IT services and
back-office accounting firm based out of Hyderabad, India.
In 2009, it was discovered that the company had inflated
revenue by $1.5 billion, marking one of the largest
accounting scandals.
• An investigation by India’s Central Bureau of Investigation
revealed that Founder and Chairman, Ramalinga Raju, had
falsified revenues, margins, and cash balances.
• During the investigation, Raju admitted to the fraud in a letter
to the company’s board of directors. Although Raju and his
brother were charged with breach of trust, conspiracy, fraud,
and falsification of records, they were released when the
Central Bureau of Investigation failed to file charges on time.
 IFRS

Moving Toward New Global Accounting Standards

• As of 2018, 144 jurisdictions required the use of IFRS
for all or most publicly listed companies, and a further 12
jurisdictions permit its use. As of 2020 more than 150
jurisdictions use IFRS.
• The United States is exploring adopting international
accounting standards. Since 2002, America's accounting-
standards body, the Financial Accounting Standards
Board (FASB) and the IASB have collaborated on a
project to improve and converge the U.S. generally
accepted accounting principles (GAAP) and IFRS.
• IFRS is thought to be a more principles-based accounting
system, while GAAP is more rules-based.
 IFRS
• International Accounting Standards (IAS) are
now renamed as International Financial
Reporting Standards (IFRS), and are gaining
acceptance worldwide.
• In the last few years, the international
accounting standard-setting process has been
able to claim a number of successes in
achieving greater recognition and use of IFRS.
 IFRS
• A major breakthrough came in 2002 when the European
Union (EU) adopted legislation that requires listed
companies in Europe to apply IFRS in their consolidated
financial statements.

• The legislation came into effect in 2005 and applies to

more than 8,000 companies in 30 countries, including
countries such as France, Germany, Italy, Spain, and the
United Kingdom.
• The adoption of IFRS in Europe means that IFRS has
replaced national accounting standards and requirements
as the basis for preparing and presenting group financial
statements for listed companies in Europe.
 IFRS

• Outside Europe, many other countries also have been

moving to IFRS. IFRS had become mandatory in
many countries in Africa, Asia, and Latin America.
• In addition, countries such as Australia, Hong Kong,
New Zealand, Philippines, and Singapore had adopted
national accounting standards that mirror IFRS.
• According to one estimate, about 80 countries
required their listed companies to apply IFRS in
preparing and presenting financial statements in 2008.
• Many other countries permit companies to apply
IFRS.
 IFRS
• Countries that have Adopted IFRS
• Countries in which some or all companies are required to
apply IFRS or IFRS-based standards are listed below.
• Africa:
• Botswana, Egypt, Ghana, Kenya, Malawi, Mauritius,
Mozambique, Namibia, South
• Africa, Tanzania
• Americas:
• Bahamas, Barbados, Brazil (2010), Canada (2011), Chile
(2009), Costa Rica, Dominican
• Republic, Ecuador, Guatemala, Guyana, Haiti, Honduras,
Jamaica, Nicaragua, Panama,
• Peru, Trinidad and Tobago, Uruguay, Venezuela
 IFRS
Countries that have Adopted IFRS
• Asia:
• Armenia, Bahrain, Bangladesh, Georgia, Hong Kong, India (2011), Israel, Jordan,
• Kazakhstan, Kuwait, Kyrgyzstan, Lebanon, Nepal, Oman, Philippines, Qatar,
Singapore,
• South Korea (2011), Sri Lanka (2011), Tajikistan, United Arab Emirates
• Europe:
• Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus,
Czech
• Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Iceland,
• Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta,
• Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russia, Serbia,
Slovakia,
• Slovenia, Spain, Sweden, Turkey, Ukraine, United Kingdom
• Oceania:
• Australia, Fiji, New Zealand, Papua New Guinea
 IFRS
• The adoption of standards that require high-quality,
transparent, and comparable information is welcomed by
investors, creditors, financial analysts, and other users of
financial statements.
• Without common standards, it is difficult to compare
financial information prepared by entities located in
different parts of the world.
• In an increasingly global economy, the use of a single set
of high-quality accounting standards facilitates investment
and other economic decisions across borders, increases
market efficiency, and reduces the cost of raising capital.
• IFRS are increasingly becoming the set of globally
accepted accounting standards that meet the needs of the
world’s increasingly integrated global capital markets.
 IFRS
Abbreviations
• ARC Accounting Regulatory Commission
• ASAF Accounting Standards Advisory Forum
• DP Discussion Paper
• EC European Commission
• ED Exposure Draft
• EFRAG European Financial Reporting Advisory
Group
 IFRS
Abbreviations
• GAAP Generally Accepted Accounting Principles
• IAS International Accounting Standard
• IASB International Accounting Standards Board
• IASC International Accounting Standards
Committee (predecessor to the IASB)
• IFRIC Interpretation issued by the IFRS
Interpretations Committee
• IFRS International Financial Reporting Standard
 IFRS
Abbreviations
• IFRS Standards All Standards and Interpretations issued
by the IASB (i.e. the set comprising every IFRS, IAS, IFRIC
and SIC)
• PIR Post-implementation Review
• SEC US Securities and Exchange Commission
• SIC Interpretation issued by the Standing Interpretations
Committee of the IASC
• SMEs Small and Medium-sized Entities
• XBRL Extensible Business Reporting Language
• XML Extensible Markup Language