SUMMARY OF IMPORTANT US
US GAAP (Generally Accepted Accounting Principle)
is the new mantra for Accounting and Corporate Finance Professionals world over . Globalisation and access to Global Capital
and securities market has enhanced the need to assimilate the principles of US GAAP into national Accounting Standards. To get listed on NYSE or NASDAQ and float GDR , an Indian company
either needs to publish accounts under US GAAP or expressly publish the reconciliation of its Financial Results with US GAAP. Further many foreign companies whose shares are listed on US Stock Exchanges,
require that their Indian Subsidiaries or Associates, should prepare separate sets of Accounts under US GAAP for ease of consolidation.
Some of Indian Companies who have launched GDR/ ADR are Bajaj Auto, Dr Reddy’s Lab, HDFC Bank, Hindalco, ICICI Bank,
Infosys, ITC, L&T, MTNL, Ranbaxy Labs, Reliance, Satyam Computers, SBI, VSNL and WIRPO and required to follow US GAAP
1. Financial statements: Under US GAAP , the Financial statements include the following::
v Consolidated Balance Sheet (showing comparatives for 2 years)
v Consolidate statement of Income (showing comparatives for 3 years)
v Consolidated statement of Stock holders’ Equity and comprehensive Incomes
(showing comparatives for 3 years)
v Consolidated statement of Cash flow (showing comparatives for 3 years)
v Summary of Significant Accounting Policies as required by APB 22
v Forward looking statement as per section 27A of the Securities Act , 1933
and Section 21E of Securities Act , 1934
v Certification by CEO as well as CFO as required u/s 302 of Sarbanes Oxley
Act , 2002 in Annual Report ( 20-F) and also in quarterly report ( 6 K)
v Certification by CEO as well
as CFO as required u/s 906 of Sarbanes Oxley Act , 2002 in Annual Report ( 20-F) . and also in quarterly report ( 6 K)
The Presentation of items in Balance sheet moves from current to Non Current for Assets as well as
Liabilities. The Consolidated statement of Income has to show comparatives for 3 years and also has to contain EPS data ( Basic and/or Diluted EPS) as applicable
on the face of said statement. The consolidated statement of Stock holders’ Equity and comprehensive Incomes contains
aggregation of Par Value of Common stock along with Additional paid in capital Comprehensive Income, Accumulated Comprehensive
Income, deferred Stock compensation and retained earnings . The consolidated
statement of cash flow prepared in accordance with SFAS 95 contains break up of cash from Operating, Financing and Investing
2. Compliance for Indian Companies: Indian Companies which issue ADR ( American Depository Receipt) or GDR (Global Depository Receipt)
and listed on NASDAQ or NYSE, have to submit Quarterly (6-K) and Annual Report (
20-F) with Securities Exchange Commission , Washington EC in accordance with Rule 13a –16 or rule 15d-16 of Securities
Exchange Act, 1934.
There is no organization like Registrar of Companies (ROC) in US , hence unlisted
companies do not have any file their financial statements with any bodies except Auditing from CPA and filing the statements
with IRS as per Internal revenue Code for taxation purposes.
The Sarbanes Oxley Act 2002 requires
that in the Annual Report in form 20-F , the issuing company has to include a statement of Compliance signed by its CEO and its CFO under Section 302 of the Act .Similarly
section 906 of the Said Act requires that CEO and CFO should file similar compliance for quarterly statement in form 6-K
3. Disclosure of Accounting Policies : APB Opinion Number 22 provides
guidelines for disclosure of accounting policies. Accounting policies include accounting principles and its application in the preparation of financial statements, A
company’s major accounting policies should be disclosed in the first footnote or in a section called “Summary
of Significant Accounting Policies,” before the footnotes.
Examples of accounting policies to be disclosed includes revenue recognition, Investments, Fixed Assets,
Goodwill & intangible Assets, Foreign currency translation, Derivative Instruments, Stock Based Compensation, Retiral
Revenue Recognition: The GAAP for revenue recognition applies to Sales of Good as well as services. Revenue Recognition: According to SFAC Number 5, revenue
is generally recognized when
realized or realizable, and
ü It has been earned.
There are four points of revenue
(at time of sale of merchandise or rendering of service)
completion of production
On a cash
Revenue from service transactions
is recognized based upon performance. Performance may either be based upon the passing of time or may involve a single action
or a series of actions. The following four methods should be used to recognize revenue from service transactions:
specific performance method should be used when performance involves a single action and revenue is recognized when that action is completed.
For example, a CPA is retained to prepare a tax return. Revenue is recognized when the single action of preparing the tax
return is completed.
proportional performance method is used when performance involves a series of actions. If the transaction involves an unspecified number of actions over a given period of time, an equal amount
of revenue should be recognized at fixed intervals. The use of the straight-line method is recommended unless another method
is deemed to be more
Appropriate. If the transaction involves
number of similar or essentially similar actions, an equal amount of revenue should be recognized when each
action is performed. If the transaction involves a specified number of dissimilar
or unique actions,
completed performance method should be used to recognize revenue when completing the final action is so critical that the entire transaction would
be considered incomplete without it.
collection method is
used to recognize revenue when there is significant uncertainty regarding the collection of revenue.
should not be recognized until cash is collected. The matching principle requires that expenses be matched to revenues .In
other words, revenues should be recognized in the same period as their associated expenses. If expenses are expected to be
recovered from future revenues, then those expenses should be deferred.
major categories of costs result from service transactions: Initial direct costs are incurred to negotiate and obtain a service agreement. They include costs such as
commissions, credit investigation, processing fees, legal fees, etc. They do not include indirect costs such as rent and other
case of Sale of Goods, revenue is recognized, when delivery has happened, property in good has passed from Seller to Buyer
and there is no chance of Return of good sold or any claim
with buy Back agreements: No sale is recognized when a company sells a product in one accounting period and agrees to buy it back in the next
accounting period at a set price which includes not only the cost of inventory but also related holding costs. While the legal
title may transfer in such a transaction, the economic substance of the transaction is to leave the risk with the seller,
and hence no sale is recognized
Sales where right of return exists: When a company
experiences a high rate of return, it may be necessary to delay reporting sales until the right of return has substantially
expired. The right of return may either be specified in a contract or it may be a customary business practice involving “guaranteed
sales” or consignments. Three methods are generally used to record sales when the right of return exists. First, the
company may decide not to record any sale until the right of return has substantially expired. Second, the company may record
the sale and estimated future returns. Finally, the company may record the sale and account for returns as they occur. According
to FASB Statement No. 48, Revenue Recognition When Right of Return Exists, the company may recognize
revenue at the time of sale only if all of the following six conditions
are satisfied: 1. The price is fixed or determinable at the date of sale.2. The obligation of the buyer to pay the seller is not contingent on resale of
the product, or the buyer has paid the seller.3. Theft or other damage to
the product would not affect the buyer’s obligation to the seller.4. The
product being acquired by the buyer for resale has economic substance apart from that provided by the seller.5. Seller does not have significant future obligations to assist directly in the resale of the product
by the buyer. 6. Future returns can be reasonably estimated.
Software Revenue recognition: The contract with Customers can either be on fixed price, fixed timeframe or time and material basis.
from fixed price and fixed time frame contract should be recognized on percentage of completion method. (SOP 81-1) The input
method may be used to measure progress towards completion as there is a direct correlation between input and output
from time and material contracts should be recognized as the related services are performed and revenue from end of last billing
till balance sheet date is recognized an unearned revenue
v Maintenance revenue should be recognized over the period of
maintenance contract .In case fixed warranty on telephone support is provided
then the cost associated with such warranties shall be accrued at the time such revenue are recognized and included as cost
v License fee revenue (SOP 97-2) should be recognized when persuasive
evidence of an agreement exists, delivery has occurred, license fee is fixed and determinable and collection of fee is probable.
Arrangement to deliver SW products have 3 elements license, implementation and Annual Technical Services ( ATS)
v Advances and deposits received should be recorded as client
deposit until all conditions for revenue recognition as stated above are met.
5. Current Assets: Promulgated GAAP for current assets is provided in the American Institute
of CPAs’ Accounting Principles Board’s Accounting Research Bulletin Number 43, chapter 3A. Current assets have
a life of one year or the normal operating cycle of the business, whichever is
greater. The accounting policies and any restrictions on current assets must be disclosed.
Inventory : The accounting, reporting,
and disclosures associated with inventory are provided by various authoritative pronouncements, including Accounting Research
Bulletin Number 43, chapter 4 (Inventory Pricing), FASB Interpretation
Number 1 (Accounting Changes Related to the Cost of Inventory), and Emerging Issues Task Force Consensus Summary Number
86–46 (Uniform Capitalization Rules for Inventory under The Tax Reform Act of 1986). Inventories consist of merchandise
to be sold for a retailer. Inventories for a manufacturing company include raw materials, work-in-process (partially completed
goods), finished goods, operating supplies, and ordinary maintenance parts. Inventories are presented under current assets.
However, if inventory consists of slow-moving items or excessive amounts that will not be sold within the normal operating
cycle of the business, such excess amounts should be classified as non current assets. Inventory includes direct and indirect
costs associated with preparing inventory for sale or use. Therefore, the cost of inventory to a retail store includes the
purchase price, taxes paid, delivery charges, storage, and insurance. A manufacturer includes in its cost of inventory the
direct materials (including the purchase price and freight-in), direct labor, and factory overhead (including factory utilities,
rent, and insurance). Inventory may be valued at the lower of cost or market value. The value of inventory may decrease because
of being out-of-date, deteriorated, or
damaged or because of price-level changes.
Specialized inventory methods also exist including retail, retail lower of cost
or market, retail LIFO, and dollar value LIFO.
Footnote disclosure for inventory includes the valuation basis method, inventory
categorization by major type, unusual losses, and inventory pledged or collateralized.
FASB Statement Number 49 (Accounting
for Product Financing Arrangements) states that a financing arrangement may be entered into for the sale and repurchase
of inventory. Such an arrangement is reported as a borrowing, not a sale. In many situations, the product is kept on the company’s
(sponsor’s) premises. In addition, a sponsor may guarantee the debt of the other company. Typically, most of the financed
product is ultimately used or sold by the sponsor. However, in some instances, minimal amounts of the product may be sold
by the financing entity to other parties. The company that provides financing to the sponsor is typically a creditor, non
business entity, or trust. In a few cases, the financing entity may have been set up solely to furnish financing to the sponsor.
The sponsor should footnote the terms of the product financing arrangement.
6. Fixed assets: GAAP for the accounting, reporting, and disclosures associated with
fixed assets are included in the American Institute of CPAs’ Accounting Principles Board Opinion Number 6 dealing with
depreciation, Accounting Principles Board Opinion Number 12, paragraphs 4 and 5 (Disclosure of Depreciable Assets and Depreciation),
American Institute of CPAs’ Accounting Research Bulletin Number 43,
chapter 9A (Depreciation and High Costs), and Emerging Issues Task Force Consensus Summary Number 89–11 (Allocation
Price to Assets to be sold).
Fixed Assets are to be stated
at cost of acquisition less accumulated depreciation. Depreciation is provided based on estimated useful lives of the assets
and no depreciation rate are provided in US GAAP. Cost of improvements that substantially extend the useful lives of assets
can be capitalized. Repairs and maintenance expenses are to be charged to revenue when incurred. In case of sale or disposal
of an asset, the cost and related accumulated depreciation are removed from consolidated financial statement.
Revaluation: US GAAP prohibits upward revaluations except for a discovery
on a natural resource, in a business combination accounted for under the purchase method, or in a quasi reorganization. If
a natural resource is discovered on land, such as oil or coal, the appraised value is charged to the land account and then
depleted using the units of production method.
Self-constructed assets are recorded at the incremental or direct costs
to build (material,
labor, and variable overhead) assuming idle capacity. Fixed overhead is excluded
unless it increases because of the construction effort. However, self-constructed assets should not be recorded at an amount
in excess of the outside cost.
A donated fixed asset should be recorded at its fair market value by debiting fixed assets
and crediting contribution revenue4A FASB Statement Number 116 (Accounting for Contributions Received and Contributions
Made). The Donor should recognize an expense for the fair market value of the donated asset. The difference between the
book value and fair market value
of the donated asset represents
a gain or loss.
fair market value is not determinable and the present value (discounted) of expected future cash flows is used, then the assets
should be grouped at the lowest level at which the cash flows are separately identifiable. Reasonable and supportable assumptions
and projections should be used to make the best estimate. All evidence pertinent to impairment of assets should be considered.
Evidence which is objectively verifiable should be given more weight.
6 A Capitalization of Interest cost Interest on Funds borrowed
for Asset Purchased (SFAS 34) : SFAS 34
provides that interest on borrowed funds should be is expensed. However, where
borrowing is made for purchase of assets , the interest on borrowings is deferred
to the asset account and amortized if a) it pertains to self-made assets for the company’s own use b) Assets for sale
or lease built as discrete, individual projects. An example is real estate development. If land is being prepared for a specific
use in the company, the cost of buying the land meets the test for capitalized interest. c) Asset is bought for the entity’s own use by agreements requiring a down payment and/or process payments d)
Assets is received due to gift or grant in which donor restrictions exist .
Interest should not be capitalized in case a) Assets
in use or ready for use b) Assets are manufactured in large quantity or on a
continual basis c) Asset is not in use and not being prepared for use .
is based on the average accumulated expenditures for that asset. The interest rate used is generally based on the Interest
rate on the specific borrowing . Interest capitalization begins when the asset is being made ready for use in terms of construction or when administrative and technical activities
before construction are taking place. The capitalization period ends when the asset is substantially finished and ready for
7. ACCOUNTING FOR INVESTMENTS ( SFAS 115 -Accounting for Certain Investments in Debt and Equity Securities): SFAS
115 sets forth the accounting and financial reporting Requirements for investments
in equity securities with determinable fair Market value and for all investments in debt securities. FASB 115 applies to preferred stock and common stock (if ownership is below 20% or if ownership exceeds
20% but effective control [significant influence] is lacking). The statement is not applicable
to investments under the equity method, consolidated subsidiaries, specialized industries such as brokers and dealers, or
not-for-profits. Nonprofit entities are governed by FASB 124, which requires fair value reporting for all investment categories,
including held to maturity.
Equity and debt
securities are broken down into 3 classes i.e. Trading securities Available-for-sale securities and Held-to-maturity securities
based on factors such as management intent considering past history of investments, subsequent events after the balance sheet
date, and the nature and objective of the investment.
Trading securities –This includes equity, debt securities, Mortgage-backed securities
held mainly to sell in short term (usually 3months or less) and there in active trading to earn short-term profits Trading securities are recorded
in the balance sheet under current assets at fair market value. Realised
gains and losses are treated as Income in income statement. Unrealized (holding) gains and losses on trading securities are presented separately in the income statement.
Fair market value is based on stock or bond quotation un listed exchanges or in the over-the-counter market or if price is
unavailable, other valuation methods may be used, including present value of future cash flows, fundamental analysis, matrix
pricing, and Option-adjusted spread models. Market value is compared to cost
on a total portfolio basis.
Available-for-sale securities may include equity and
debt securities which are not held for short-term profits, nor are they to be held to maturity. Therefore, they are in between
trading and held-to-maturity classifications. Available-for-sale securities are presented in the balance sheet as either current
assets or non current assets at fair market value. They
listed as non current assets. However, if the intent is to hold
for less than one year, they are current assets.
Market value is compared to cost
on a total portfolio basis. The Unrealized (holding) gains and losses during the period is presented in the Statement of Comprehensive Income as Other comprehensive Income. Cumulative effects is included as
a separate item in the stockholders’ equity section as “accumulated
other comprehensive loss or gain.”
Held-to-maturity securities can only be debt securities (principally bonds)
because they have maturity dates and the intent is to hold to maturity. Held-to-maturity are presented under noncurrent assets securities
in the balance sheet
cost. However, those
held-to-maturity securities maturing within one year are presented under current
The classification of these
investment must be reviewed annually and transfers should be accounted for at fair market value. The fair value becomes the
Dividend and interest earned
on investments are realized income and should be included in Income statement as other Income
information should be disclosed about investments
portfolio market value.
used to determine cost (e.g., FIFO, average cost, specific identification) in computing the realized gain or loss on sale
(holding) gains and losses for trading and available-for-sale securities
for selling or transferring securities
and losses from transferring available-for-sale securities to trading included in the income statement
value and cost by major equity security
8. Investment in Associate Companies : Where an Individual or a Company 20% of more of voting common
stock of another entity , the accounting , reporting, and disclosures shall be done as per equity method as per GAAP enunciated
in APB Opinion Number 18
Under this method,
the investor treats the investment as if it were a consolidated subsidiary and includes its proportionate share in the profit
or loss profit as part of carrying value of investments. For example, say ABC limited holds 30% in XYZ Limited at an initial
cost of US$ 1,000,000 and has significant control, over XYZ Limited. If XYZ’s annual Profit is US$ 200,000 and
dividend declared is US$ 50,000 . The carrying value of investment shall be 1,000,000+30% of 200,000- 30% of 50,000 ( 1,000,000+60,000-15,000=US$
APB Opinion no
18 also provides that a) cost of Investments to include brokerage charges b) No adjustment for temporary declines, but in
case of permanent decline, loss is debited and the value of investment is reduced c) Share in profit is determined afar subtracting
Cumulative preferred dividend, whether declared or not d)
The equity method
is to be used if :
owns between 20
and 50% of the investee’s
voting common stock.
owns less than 20% of the investee’s voting common stock but has effective control (significant influence).
owns in excess of 50% of the investee’s voting common stock, but a negating factor exists, preventing consolidation.
is a joint venture. A joint venture is an entity that is owned, operated, and jointly managed by a common group of investors.
Other accounting aspects exist.
Significant influence may be indicated
by a number of factors, including substantial inter company transactions, exchanges of executives between investor and investee,
investor’s significant input in the investee’s decision-making process, investor’s representation on the
investee’s Board of directors, investee’s dependence on investor (e.g., operational, technological, or financial support), and substantial ownership of
the investee by investor relative to other widely disbursed shareholder interests. Under FASB Interpretation Number 35, if
there is a standstill agreement stipulating that either the investor has relinquished major rights as a stockholder or that
significant influence does not exist, it may indicate that the equity method is not appropriate. Interpretation Number 35
also may preclude the equity method if the investor attempts unsuccessfully to obtaining representation on the investee’s
board of directors.
The equity method
basically uses the consolidation approach to results of investee’s accounts by eliminating inter company profits and
losses. Such profits and losses are eliminated by reducing the investment balance
and the equity earnings in investee for the investor’s share of the unrealized inter company profits and losses. Investee
capital transactions affecting the investor are treated as in consolidation. The investee is treated as if it were a consolidated
If the investor’s share
of the investee’s losses exceeds the carrying value of the investment account, the equity method should be discontinued
at the zero amount. Thereafter, the investor should not record additional losses unless it has guaranteed the investee’s
debts or is otherwise committed to provide additional financial support to the investee, or immediate
profitability is forthcoming. If the investee later shows net income, the investor can reinstate using the equity method only
after its share of profit equals the share of unrecorded losses when the equity method was suspended.
If ownership falls below
20%, or if the investor loses effective control over the investee, the investor should stop recording the investee’s
earnings. The equity method is discontinued, but the balance in the investment account is retained. The investors will then
follow SFAS for regular investment . If the investor increases its ownership in the investee to 20% or more (e.g., 30%), the
equity method should be used for current and future years. The effect of using the equity method instead of the market value
method on previous years at the old percentage (e.g., 10%) should be recognized as a retroactive adjustment to retained earnings
and other affected accounts (e.g., investment in investee).The retroactive adjustment on the investment, earnings, and retained
earnings should be applied in a similar way as a step-by- step acquisition of a subsidiary.
If the investor sells the
investee’s stock, a realized gain or loss is recognized for the difference between the selling price and carrying value
of the investment in investee account at the time of sale. The realized gain or loss appears in the investor’s income
must disclose the following information in the footnotes, in separate schedules, or parenthetically:
that the equity method is being used
of investee along with percent owned
market price of investee’s stock
subsequent events between the date and issuance of the financial statements
for not using the equity method even though the investor owned 20% or more of the investee’s common stock
why the equity method was used even though the investor owned less than 20% of the investee’s common stock
financial information as to assets, liabilities, and earnings of significant investments in unconsolidated subsidiaries
realized and unrealized gains and losses applying to the subsidiary’s portfolio taking place between the dates of the
financial statements of the parent and subsidiary
Thus , we find
that there are 3 treatment for Investments:
investment upto 20% and no control- SFAS 115
between 20% to 50% with significant control - SFAS , APB 18
Investment > 50% and majority
control- SFAS 94
9. Consolidation : SFAS 94 mandates that the Financial statement of all Subsidiary should be
Consolidated when the parent owns more than 50% of the voting common stock of the subsidiary , to report as one economic unit the financial position and operating performance of a parent and its majority-owned
A consolidation is negated, even if
more than 50% of voting common stock is owned by the parent, in the following cases: Parent is not in actual control of subsidiary,
such as when the subsidiary is in receivership (arising from bankruptcy or receivership) or in a politically unstable foreign
region. When control is temporary, consolidation is negated. Significant foreign exchange restrictions may be a negating factor.
Parent has sold or agreed to sell the
subsidiary shortly after year-end. In this case, the subsidiary is a temporary investment.
The results of acquired business in which company owns more than 50% of voting rights should be included in consolidated
financial statements Inter-company balances and transactions should be eliminated
10. Business Combination/Mergers and Amalgamation
(SFAS 141): (Other Ref APB Opinion No 16 (Business Combinations),
Accounting Interpretations of APB Opinion Number 16, FASB Interpretation Number 4 (Applicability of FASB Statement Number
2 to Business Combinations Accounted for by the Purchase Method), FASB Statement Number 38 (Accounting for Pre acquisition
Contingencies of Purchased Enterprises), and FASB Technical Bulletin 85–5 (Issues Relating to Accounting for Business Combinations).
business combination takes place when two or more entities combine to form a single company. A business combination occurs
before the consolidation process. Business combinations are accounted for
under either the pooling-of-interests method or the purchase method.
Pooling of interest Method: Applied used when the acquirer issues its voting common stock
for 90% or more of the voting common stock of the Acquiree, and all of the 12 criteria as stated in are met . Hence, business
combinations are accounted for under purchase method . A pooling of interests
presumes that for accounting purposes both
Companies were always combined. No purchase or sale is assumed to have occurred. In other words, stockholders of the
combining companies become stockholders in the combined company. In this method, Net assets of
the acquired business are carried forward at book value. No assets or liabilities are added or withdrawn by the acquirer or
acquired. Retained earnings and paid-in-capital of the acquired business are brought forth at book value. While total stockholders’
equity does not change, the equity components do change. Any necessary adjustments are made to paid-in-capital .If paid-in-capital
is inadequate to absorb the difference; retained earnings would be reduced for the balance. A deficit in retained earnings
for a combining company is retained in the combined entity. Net income
of the acquired company is carried forth for the entire year regardless of the acquisition date. Expenses of the pooling are charged against earnings immediately. A gain or loss from disposing of a major
part of the assets of the acquired business (e.g., duplicate warehouse) within two years after combination is treated as an
extraordinary item (net of tax).
Purchase Method: an application of the cost principle in that assets acquired are recorded at the price paid (which
is their fair market value), fair values of other assets distributed, or fair values of the liabilities incurred. This gives
rise to a new basis for the net assets acquired. Under the purchase method, none of the equity accounts of the acquired business
appears on the acquirer’s records or on the consolidated financial statements. In effect, ownership interests of the
acquired company’s stockholders are not continued after the combination.
11. Goodwill & Intangible Assets (
SFAS 142 ) : Goodwill represents cost of acquired business in excess of the fair value of identifiable tangible and intangible
net assets purchased. Goodwill should be tested for impairment on an annual basis relying on a number of factors including
operational results, business plans and future cash flow. Goodwill should also be tested between annual tests, if there is
an extraordinary event that is more likely than not to reduce to fair value of Goodwill.
Recoverability of goodwill should be
tested using a two-step process. The first step involves comparison of fair value of the entity with the carrying value and
the excess of book value over the fair value is recorded as impairment loss. If the carrying value is excess then the second
step is followed. Under the second step the fair value and book value (carrying value) of goodwill itself is tested. The excess
of book value over the fair value is recorded as impairment loss
12. REPORTING COMPREHENSIVE INCOME ( SFAS 130) : SFAS No 130 requires companies to report comprehensive income and its components in a complete set of
financial statements (including investment companies, but not non profit entities). Comprehensive income refers to the change
in equity (net asset) arising from either transactions or other occurrences with non owners. Investments and withdrawals by
owners are excluded Comprehensive income consists of two components: net income and other comprehensive
income which includes: Foreign currency items, including translation gains and losses, gains and losses on foreign currency
transactions designated as hedges of net investment in a foreign entity Holding losses or gains on available-for-sale securities
, excess of additional pension liability over unamortized (unrecognized) prior service cost , Changes in market value of a
futures contract that is a hedge of an asset reported as fair values
There are 3 options of reporting other comprehensive income and its components as follows:1. Below
the net income figure in the income statement, or 2. In a separate statement
of comprehensive income starting with net income. FASB Statement Number 130 encourages
reporting under options 1 and 2 .The 3rd option is in a statement of changes in equity as long as such statement
is presented as a primary financial statement. Options 1 and 2 are termed
income-statement-type formats, while option 3 is termed a statement-of-changes-in-equity format.
In the stockholder’s equity
section in Balance Sheet, accumulated other comprehensive income is presented as one amount for all items or listed for each
component separately. The elements of other comprehensive income for the year may be presented on either a net of tax basis
or on a before tax basis, with one amount for the tax effect of all the items of other comprehensive income.
A reclassification adjustment
may be needed so as not to double count items reported in net income for the current year which have also been taken into account as part of other comprehensive income in a prior year. An example is the realized gain on an available-for-sale
security sold in the current year when an unrealized (holding) gain was also included in other
in a prior year. Besides an available-for-sale security, reclassification adjustments may apply to foreign currency translation.
However, reclassification adjustments do not apply to the account “excess of additional pension liability over unamortized
prior service cost” (minimum pension liability adjustment).The reclassification adjustment associated with
translation only applies to translation gains and losses realized from the sale or liquidation of an investment in a foreign
entity. The presentation of reclassification adjustments may be shown with other comprehensive income or in a footnote. The
may be presented
on a gross or net basis (except the minimum pension liability adjustment must be shown on a net basis).
13. Research and Development Costs ( SFAS
2) : Research is defined as testing to search for a new product,
service, technique, or process. Research may also be undertaken to improve already existing products or services. Development
is defined as translating the research into a design for a new product or process and also encompass improvements made to
existing products or processes.
SFAS 2 (Accounting for Research and
requires the expensing of research and development costs as incurred. Equipment, facilities, materials, and intangibles (e.g.,
patents) bought that have alternative future benefit in R&D activities are capitalized. Any resulting depreciation or
amortization expense on such assets is presented as an R&D expense. R. &D costs are presented separately within income
from continuing operations. When research is performed under contract for a fee from a third party, a receivable is charged.
When there is no future alternative use, the costs must be immediately expensed. R&D costs include employee salaries directly
tied to R&D efforts, and directly allocable indirect costs for R&D efforts. If a group of assets is bought, proper
allocation should be made to those applicable to R&D activities. As per FASB Interpretation Number 4 (Applicability
of FASB Statement Number 2 to Business Combinations Accounted for by the Purchase Method), in a business combination accounted
for under the purchase method, acquired R&D assets should be based on their fair market value. If payments are made to
others to undertake R&D efforts on the company’s behalf, R&D expense is charged. FASB Statement Number 2 is
not applicable to the extractive (e.g., mining) or regulated industries.
14. Impairment of Long Lived Assets ( FASB Statement Number 121 -Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) - A long-lived
asset is deemed impaired if the total (undiscounted) estimated cash flows from using it are less than the book value of the
asset. Future cash flows applicable to environmental exist costs that
have been accrued for the asset should not be included in determining the undiscounted anticipated future cash flows in applying
the asset impairment test.
determining if asset impairment exists, the asset’s book value should include any associated goodwill. An impairment may be due to such reasons as
ü A major change in how the asset is used
ü A decline in the market value of the fixed asset
ü Excess construction costs relative to estimated amounts
this recoverability test for asset impairment is met, an impairment loss must be calculated as the excess of the asset’s
book value over its fair market value. Fair value is the amount at which the asset could be bought or sold between willing
parties; fair value is not determined by the value of an asset in a forced or liquidation sale. SFAS 121 , para 7 identifies
three methods for determining fair value:
v Market price quoted in an active market
v Estimate based on prices of similar assets
v Estimate based on valuation techniques, including discounted cash flows and other asset-specific
models, such as options pricing model, fundamental analysis, etc.
fair market value is not determinable and the present value (discounted) of expected future cash flows is used, then the assets
should be grouped at the lowest level at which the cash flows are separately identifiable. Reasonable and supportable assumptions
and projections should be used to make the best estimate. All evidence pertinent to impairment of assets should be considered.
Evidence which is objectively verifiable should be given more weight.
impairment loss is charged against earnings with a similar reduction in the recorded value of the impaired fixed asset. If
there is any related goodwill, it should be eliminated before reducing the carrying value of the fixed asset. After impairment,
the reduced carrying value becomes the new cost basis for the fixed asset. Thus, the fixed asset once impaired cannot be written
up for a later recovery in market value. In other words, the impairment loss cannot be restored. Depreciation is based on
the new cost basis. If an impaired asset is intended to be disposed of rather
than kept in service, the impaired asset should be recorded at the lower of cost or net realizable value.
Loss due to impairment of assets
held for use is recognized as a component of income from continuing operations before taxes (1) in the income statement of
for-profit entities, and (2) in the statement of activities for nonprofit entities.
The disclosure requirements for impaired assets held
for use are as follows :Complete description of the impaired assets, including the events that resulted in the impairment
; The amount of loss due to impairment and how the fair value of impaired asset was determined ; The location in the income statement or statement of activities where the impairment loss is situated (e.g., an individual
caption, parenthetical disclosure, or caption where the loss is aggregated ; The business segments, if any, that were affected
by loss impairment an impaired asset is to be disposed rather than held for use; the impaired asset is reported at the lower
of cost or net realizable value (fair value less cost to sell).The costs to sell an impaired asset include such costs as broker’s
commission and transfer fees. Insurance, security services, utility expenses, and other costs to protect or maintain the asset
are generally not considered costs to sell for determining the net realizable value. The present value of costs to sell may used when the fair value of the asset is
determined using discounted cash flows and the sale is expected to occur after one year. When the asset will be disposed shortly,
the net realizable value is a better indicator of the cash flows that one can expected to receive from the impaired asset.
Assets held for disposal are not depreciated. Conceptually, these assets are more like inventory, since they are expected
to be sold shortly. Assets held for disposal are revalued at the lower of cost or net realizable value during each period
that they are reported. These assets maybe written up or down in future periods as long as the write-up is not greater than
the carrying amount of the asset before the impairment. Such losses or gains are reported as a component of income from continuing
15. Loan Impairment FASB Statement Number 114, Accounting by Creditors for Impairment
of a Loan, is the primary authoritative guideline for recognizing impaired loans . A loan is a contractual right to receive
cash either on demand or at a fixed or determinable date. Loans include accounts receivable and notes only if their term is
longer than one year. If it is probable (likely to occur) that some or all of the principal or interest will not be collected,
then the loan is considered impaired. Any loss on an impaired loan should be recognized immediately by debiting bad debt expense
and crediting the valuation allowance. Creditors may exercise their judgment and use their normal review procedures in determining
the probability of collection. If
a loan is considered impaired, the loss is the difference between the investment in loan and the present value of the future
cash flows discounted at the loan’s effective interest rate. The investment in loan will generally be the principal
and the accrued interest. Future cash flows should be determined using reasonable and supportable assumptions and projections.
The discount rate will generally be the effective interest used at the time the loan was originally made. As a practical matter,
the loan’s value may be determined using the market price of the loan, if available. The loan’s value may also
be determined using the fair value of the collateral, less estimated costs to sell, if the loan is collateralized and the
collateral is expected to be the sole source of repayment.
16. Stock Options/ ESOP ( SFAS 123,148)
: Under US GAAP stock option plans may be accounted for by either the “intrinsic value” method
or the “fair value” method. SFAS 123 encourages adoption of the fair value method and will
become mandatory from 1.4.2006
Intrinsic Method : In this method, compensation expense is recorded
on the date of grant only if current market price ( CMP ) of underlying stock exceeds option exercise price . The difference
between CMP and Exercise price (total compensation expense) is allocated over the vesting ( the time between the date of grant
and the vesting date or compensatory or service period) . The intrinsic method is so termed because the computation is not
based on data derived from external circumstances. If an employee chooses not to exercise a stock option, previously recognized
compensation expense is not negated or adjusted.
Fair Value method: Under this method,
Compensation expense is taken as equivalent to fair value of options at the grant date which
is computed by using an option-pricing model that considers several factors. Compensation expense is recognized over
the period between the date of grant and the vesting date, in a manner similar to the intrinsic value method.
A popular option pricing model is Black- Scholes Model which computes the present
value of hypothetical instruments. Assumptions include freely trading of Options,
and the total return rate (considering the change in price plus dividends) may be determined based on a continuous compounding
over the life of the option. Under SFAS 123, the life of the option is the anticipated time period until the option is exercised
rather than the contractual term The Black-Scholes model was formulated based
on European-style options exercisable only at expiration. However, most employee stock options are American-style and are
exercisable at any time during the life of the option once vesting has occurred. The Black-Scholes model uses the volatility
anticipated for the option’s life.
Example 1: On January 1, 2005, ABC Limited granted stock options
to its senior executives to
100,000 shares of U$ 5 par value common stock at an exercise price of $20 per share exercisable any time after December 31, 2009. The current market price of the
stock is $30.
the Black-Scholes option price model, fair value of the option plan is estimated as $800,000.
hence the fair value i.e. US$ 800,000 will be deemed as compensation expense and will be recognized evenly over this
Grant of stock option
Date of Grant—January
No entry is to be made
on date of Grant
December 31, 2005
Compensation Expense($800,000/4) 200,000
December 31, 2006–2008
Compensation Expense ($800,000/4)
All Stock options are
exercised by the employees at the beginning of the exercise period
Cash ($20 [exercise price]
´ 100,000 shares) 2,000,000
Common stock ($ 5 ´ 100,000
Paid-in-capital in excess
( Paid-in-capital in excess of par is
the balancing figure and is, of course a stockholders’ equity account) T
If the stock options were
not exercised because the market price did not exceed the exercise price during the exercise period,
Paid-in-capital from expired
If an employee forfeits
a stock option because he or she leaves the employer and fails to satisfy the service requirement, then the recorded compensation
expense and paid-in-capital stock option should be adjusted (as a change in accounting estimate) to account for the forfeiture.
SFAS 148 require
that Provisions of SFAS 123 shall be transitory in nature and companies may continue to use intrinsic value method for Stock
Options. However ,SFAS 148 requires that companies should disclose the effect on net income and earning per share , if Fair
value method was used. In case of Infosys Limited ( FY ended March, 2005) which deploys Intrinsic method of Accounting,
disclosure as per SFAS 148 led to a further loss of US$ 57 Million
17. EARNINGS PER SHARE ( SFAS 128) : All public companies ( excluding Non public entities ) are required to state earnings per share (EPS) on the face of the income statement, either
basic or basic and diluted EPS depending on simple or complex capital
structure, if the capital structure is complex (it includes potentially dilutive securities), then presentation of both basic
and diluted earnings per share is mandated.
Basic EPS is derived by dividing the
net income (less declared preferred dividends on non cumulative preferred stock) available to common stockholders by the weighted
average number of common shares outstanding. On the other hand, if the preferred stock is cumulative, then the dividends are
subtracted even if they are not declared in the current year. The weighted-average number of common shares outstanding is
determined by multiplying the number of shares issued and outstanding for any time period by a fraction, the numerator being
the Basic earnings per share and diluted
earnings per share (if required) for income from continuing operations and net income must be disclosed on the face of the
income statement. In addition, the earnings per share effects associated with the disposal of a business segment, extraordinary
gains or losses, and the cumulative effect of a change in accounting principle must be presented either on the face of the
income statement or notes thereto.
Diluted EPS: In case of convertible securities, if converted method is used whereby it is assumed that the dilutive
convertible security is converted into common stock at the beginning of the period or date of issue, if later. Interest expense(net of tax) , Any dividend on convertible preferred stock on must be
added back to net income to result in an adjusted net income Correspondingly, the number of common shares the convertible securities are convertible into (or their
weighted-average effect if conversion to common stock actually took place during the year) must also be added to the weighted-average
outstanding common shares in the denominator.
In the case of dilutive
stock options, stock warrants, or their equivalent, the treasury stock method is used. Under this approach, there is a presumption
that the option or warrant was exercised at the beginning of the period, or date of grant, if later. The assumed proceeds
received from the
exercise of the
option or warrant are assumed to be used to buy treasury stock at the average market price for the period. However, exercise
is presumed to occur only if the average market price of the underlying shares during the period is greater than the exercise
price of the option or warrant.
reconciliation is required of the numerators and denominators for basic and diluted earnings per share. Disclosure is also
mandated for the impact of preferred dividends in arriving at income available to common stockholders. In addition, the earnings per share effects associated with the disposal
of a business segment, extraordinary gains or losses, and the cumulative effect of a change in accounting principle must be
presented either on the face of the income statement or notes thereto.
18. FAIR VALUE DISCLOSURES FOR ALL FINANCIAL
INSTRUMENTS (SFAS 107): This GAAP requires disclosures of fair value of Financial Instruments in the body of the financial
statements or in the footnotes.
Financial instrument is defined as cash (including currencies of other countries), evidence of an ownership
interest in another company (e.g., common or preferred stock), or a contract that both. Thus conventional assets and liabilities
(e.g. accounts and notes receivable, accounts and notes payable, investment inequity and debt securities, and bonds payable)
are deemed to be financial instruments. The definition also encompasses many derivative contracts, e.g. options, swaps, caps,
The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a liquidation sale. Quoted market prices are best to use, if available. Financial instruments can be transacted in following types of markets:
v Exchange markets, for listed stocks, bonds, options, and certain futures contracts.
v Dealer markets, e.g., the NASDAQ or other over-the-counter markets, are the major exchanges
for more thinly traded securities. Dealer markets also exist for commercial loans, asset-backed securities, mortgage-backed
securities, and municipal securities. In most cases, quotations on this market properly reflect fair value. However, if evidence
exists to the contrary, then the company may opt for another indicator of fair value, such as an internally developed model.
Market quotations for dealer markets are usually in the form of bid and ask prices. Fair value determination should take into
account the size of an issue and its possible dilutive effect on price of the financial instrument. Note: The basis used for
a price quote should be disclosed.
v Principal-to-principal markets in principal-to-principal transactions, transactions occur independently, with no intermediary
and basically no public information available to approximate market price, e.g., an interest rate swap.
v Brokered markets, in which intermediaries match buyers and sellers but do not trade for their own accounts, usually provide less
reliable information as to price. The broker is aware of the prices bid and asked by the parties, but each participant is
usually unaware of the other party’s price requests. Prices of completed transactions may be available in some cases.
If more than one quoted price for a financial instrument is available, then use the one in the most active market. When possible,
get more than one quotation when quoted prices vary widely in the market. The company may want to disclose additional information
about the fair value of a financial instrument, e.g. if the fair value of long-term debt is below its carrying value. In this
case, the company may want to provide the reasons and whether the debt could be settled at the lower amount.
For financial institutions, loans receivable
may be a major financial instrument. If market prices are available (e.g., securities backed by residential mortgages may
be a proxy for valuing residential mortgages), then they should be used to arrive at fair value. If no quoted market price
exists for a category of loans, particularly fixed
rate loans, then an approximation may be based on:1. market prices of similar traded loans (similarity may be in the forms
of terms, interest rates, maturity dates, and credit scoring),2. current prices for similar loans that the company has originated
and sold, or3. Valuations derived from loan pricing services. Fair value of a loan may be determined by using the present
value of future cash flows, using a risk-adjusted discount rate.
the methods and assumptions used to estimate fair value. The fair value amounts disclosed should be cross-referenced to carrying
value amounts presented in the balance sheet. The disclosures should distinguish between financial instruments held or issued
for trading purposes and other than trading. Fair values of non-derivative instruments
should not be adjusted against derivative instruments unless netting is permitted as per FASB Interpretation Number 39 (Offsetting
of Amounts Related to Certain Contracts). If it is not practical to estimate
the fair value of a financial instrument, then information relevant to estimating fair value should be disclosed, including
the financial instrument’s carrying value, maturity, and interest rate. The reasons why
it is not determinable should also be provided.
19. Hedge Accounting (SFAS 133) : SFAS 133 mandates that All qualifying financial derivatives have to stated on the balance
sheet at their fair value ( marked to market ) and Changes in the fair value
of derivatives must be recognized in the financial statements as part of comprehensive income (not as part of the income statement).
Changes in value of all other derivatives
are marked to market recognized as income. Currently the instruments covered by Hedge Accounting are Interest rate Cap floor Collars, Interest ate and currency
Swaps, financial Future contracts, Options to Purchase securities, Swaptions and Commodities and excluded are financial Guarantees,
Forward Contracts with no net settlements, Mortgage Based Security, Adjustable Rate Loan, and Variable Annuity Contracts.
There are three
types of qualified hedges discussed in FASB Statement Number 133: fair value hedges, cash flow hedges, and foreign currency
hedges. Simply stated, a fair value hedge is protection against adverse changes in the value of an existing asset,
liability or unrecognized firm commitment. A cash flow hedge protects against changes in the value of future cash flows—for
instance interest payments on fixed rate debt, if the company is concerned about falling interest rates and the fact that
would not be able to renegotiate the terms of the debt to capitalize on lower rates. A foreign currency hedge protects
against adverse movement of exchange rates impacting any foreign currency exposure—which, for instance, can involve
either fair value or cash flow hedges in foreign currency or a net investment in a foreign business activity, e.g., concern
over the impact that a devaluation of a foreign currency would have on the company’s investment in an overseas subsidiary.
In all of these three hedges, a hedge effectiveness test must be met in order to achieve hedge accounting.
Foreign Exchange forward contract taken from Bank, to mitigate the risk of changes in foreign
exchange rates do not qualify for Hedge Accounting under SFA 133.
20 Cash Flow statement ( SFAS 95) : A statement of cash flows , prepared in conformity
with GAAP is required to be annexed as part of a full set of financial statements. The statement
should present cash flows from operating, investing, and financing activities. The statement must be included in both
annual ( for 3 financial years) and interim financial statements ( for 2 periods- current and previous year) . It should include a reconciliation of beginning and ending cash and cash equivalents and should match with the totals
presented in the balance sheet. Separate disclosure must be made of non cash investing and financing transactions.
Cash flow statement
may be prepared by direct method or indirect method, but it must include a reconciliation
of net income to cash flow from operations whichever method is deployed.
Under the direct method, the operating section presents
gross cash receipts and gross cash payments from operating activities, with a reconciliation of net income to cash flow from
operations in a separate schedule accompanying the statement of cash flows. The cash flow from operations derived in this
separate schedule must agree with the cash flow from operations in the
of the statement of cash flows.
Under the indirect method, gross cash receipts and gross cash
payments from operating activities are not presented. Instead, only the reconciliation of net income to cash flow from operations
may be presented . The reconciliation is done by adding back non cash expenses to and deducting non cash revenues from net
income. Examples of these adjustments include adding back depreciation and depletion expense, amortization expense on intangibles,
pension expense arising from a deferred pension liability, bad debts, accrued warranty expense, tax
expense arising from a deferred tax liability, loss on a fixed asset, compensation expense arising from an employee stock option plan; and deducting
the amortization of deferred revenue, amortization of bond premium, tax expense arising from a deferred tax asset, the gain on
a fixed asset, pension expense associated with a deferred pension asset, unrealized gains on trading securities, and
income from investments under the equity method.
Irrespective of whether
the direct method or the indirect method is used, there must be separate disclosure of income taxes and interest paid during
the year as supplementary information. The effect of exchange rate change on cash should also be shown separately as a separate
line item to derive the total cash and cash equivalent. While SFAS 95 prefers Direct Method, most of the Companies prefer
Indirect method due to its simplicity.
21. Segmental reporting ( SFAS 131) : SFAS 131 mandates information about operating segments and related disclosures about
products and services, geographical areas and major customers. Segmental reporting
aids in evaluating a company’s financial statements by revealing growth prospects, including earning potential, areas
of risk, and financial problems. It facilitates the appraisal of both historical performance and expected future performance.
The amount reported for each segment
should be based on what is used by the “Chief operating decision maker” in formulating a determination as to how
much resources to assign to a segment and how to appraise the performance of
that segment. The term chief operating decision maker may apply to the chief executive officer or chief operating officer or to a group of executives. The term of chief operating decision maker may apply to a function and not necessarily
to a specific person(s).This is a management approach rather than an industry approach in identifying segments. The segments
are based on the company’s organizational structure, revenue sources, nature of activities, existence of responsible
managers, and information presented to the Board
of Directors. Revenues, gains, expenses,
losses, and assets should only be allocated to a segment if the chief operating decision maker considers doing so in measuring
a segment’s earnings for purposes of making a financial or operating
The same is true with regard
to allocating to segments eliminations and adjustments applying to the company’s general-purpose financial statements.
Any allocation of financial items to a segment should be rationally based. In measuring a segment’s earnings or assets,
the following should be disclosed for explanatory purposes:
or valuation basis used
in measurements used for the general-purpose financial statements relative to the financial information of the segment
in measurement method relative to prior years
allocation, meaning an allocation of depreciation or amortization to a segment without a related allocation to the associated
Segmental information is required
in annual financial statements. Some segmental disclosures are required in interim financial statements. Segmental information
is not required for non-consolidated subsidiaries or investees accounted for under the equity method. An operating segment is a distinct revenue-producing component of the business for which internal financial
data are produced. Expenses are Disclosures
should be in both dollars and percentages.
A reportable segment is determined
by industry line
products or services
segments to the company in the entirety
one of the following exist, a segment must be reported upon:
o Revenue, including unaffiliated and inter segment sales or transfers, is 10% or more
of total revenue of all operating segments.
o Operating profit or loss is 10% or more of the greater, in absolute amount, of the combined
operating profit (or loss) of all industry segments with operating profits (or losses).
o Identifiable assets are 10% or more of total assets of all operating segments.
represent a significant portion (75% or more) of the entity’s total revenue of all operating segments. The 75% test
is applied separately each year. In deriving 75%, no more than 10 segments should be presented because to do otherwise would
result in too cumbersome and detailed reporting. If more than 10 are identified, similar segments may be combined. For example,
if the reportable segments identified by the materiality tests account for only70% of all industry segment revenue from unaffiliated
customers, one or more additional industry segments must be included among reportable segments so that at least 75% of all
industry segment revenue is accounted for by the reported segments. Disclosures are not mandated for 90% enterprises (a company
obtaining 90% or more of its revenues, operating earnings, and total assets from one segment). In essence, the segment is
the business. Dominant industry
segments should be identified. PRINT
The source of segmental
revenue should be disclosed with the percent so derived when 10% percent or more of-
revenue is generated from either a foreign government contract or domestic contract
(as required by FASB Statement Number 30).
sales is made to one customer. A group of customers under common control (e.g., subsidiaries
of a parent, federal or local government) is deemed as one customer (as required by FASB Statement Number 30). The identity of the customer need not be disclosed.
or assets are in a particular foreign country or similar group of countries. Similarity might be indicated by proximity, business environment, interrelationships, and economic
and/ or political ties. If foreign activities are in more than one geographic area, required disclosures should be made for
area and in total for other insignificant areas. For revenues from foreign operations, the amount of sales to unaffiliated customers and the amount of intra
company sales between geographic areas should be disclosed. The geographic areas that have been disaggregated should be identified
along with the percentages derived.
accounting principles used in preparing segmental information should be the same as those used in preparing the financial
statements. However, inter company transactions (which are eliminated in consolidation) are included for segmental reporting
purposes, including in applying the 10% and 75% rules discussed later. Segmental information may be provided in the body
of the financial statements,
in separate schedules, or in footnotes. Most companies report segmental data in separate schedules.
Disclosures should be made
of how reporting segments were determined (e.g., customer class, products, services, geographical areas). And also identifying
those operating segments that have been aggregated
22. Inflation Accounting (SFAS 89)
: FASB Statement
no 89 titled as Financial
Reporting and Changing Prices permits a company to disclose voluntarily, in its annual report, inflation data to enable investors and shareholders
to assess inflationary pressure and impact on the company. The GAAP recommends
businesses to present selected summarized financial data based on current costs and adjusted for inflation (inconstant purchasing
power) for a 5 -year period. The Consumer Price Index for All Urban Consumers may be used.
Inflation information to be disclosed
includes sales and operating revenue expressed in constant purchasing power, income from continuing operations (including
per share amounts) on a current cost basis, cash dividends per share in constant purchasing power, market price per share
restated in constant purchasing power, purchasing power gain or loss on net monetary items, inflation-adjusted inventory,
restated fixed assets, foreign currency translation based on current cost, net assets based on current cost, and the Consumer
Price Index used. ELP
23. Interim financial reporting ( APB
Opinion 28) : Interim
reporting are required to be done by Corporate in between annual Financial statements
for a period less than one year. Each interim period is viewed as an integral part of the annual period. Interim financial
reports may be issued semiannually, quarterly, or monthly. Typically, interim
reports include the operating results of the current interim period and the cumulative year-to-date figures, or last 12 months
to date. Comparisons are usually made to results of comparable interim periods for the previous year.
Interim statements do not have to be audited. Each page should be labeled “Unaudited.” Interim
results should be based on those accounting principles used in the last year’s annual report unless a change in accounting
has been made subsequently. Further, accounting policies do not have to be disclosed in interim reports unless there has been
a change in an accounting policy (principle or estimate).
information is required in interim reports. However, it is recommended but not required to present a balance sheet and cash
flow statement at interim dates. If these statements are not reported, the company must disclose significant changes in liquid
assets, working capital, non current liabilities, and stockholders’ equity. Extraordinary items, nonrecurring items,
and gain or loss on the disposal of a business segment are recognized in the interim period in which they occur. Earnings
per share determination for interim purposes is handled in a fashion similar to annual reporting. Materiality should be related
to the full fiscal year. However, an item not disclosed in the annual financial statement due to immateriality would still
be presented in the interim report if it is material to that interim period.
Minimum disclosure in interim reports
is as follows:
v Revenue, tax expense, extraordinary items, cumulative effect of a change in
accounting principle, and net income
v Earnings per share
v Seasonal revenue and costs
v Material changes in tax expense, including reasons for significant differences
between tax expense and income subject to tax
v Information on disposal of a business segment
v Commitments, contingencies, and uncertainties
v Significant changes in financial position and cash flows
peculiar to interim reporting are as follows:
v Seasonal factors bearing upon interim results. Seasonal companies should
information for the current and preceding 12-month periods ending at the interim date so that proper evaluation of the seasonal
impact on interim results may be revealed
24. Development stage enterprises (
SFAS 7 , FASBI 7 ) : A development stage enterprise is one whose operations have not begun or have begun
but does not contribute significant revenue . The expenses incurred during this stage are called pre operative expenses. A development stage enterprise must use the same GAAP as any other established
company and prepare the financial statements using GAAP and criteria applicable
to an established company.
Following reporting is required for development stage enterprises:
balance sheet, retained earnings will typically show a deficit. A descriptive
caption would be “deficit accumulated in the development stage.”
For each equity security, the number of shares issued ,dates of issue and dollar figures per share must be shown from inception.
Besides common or preferred stock, information
must be provided for stock warrants, stock rights, or other equities. If non cash consideration is received, such consideration
must be specified along with the basis of deriving its value.
income statement, the total revenue and expenses since inception must be disclosed separately.
statement of cash flows, cumulative cash flows from operating, investing, and financing activities from inception, in addition
to current year amounts, must be shown.
The financial statements
must be headed “Development Stage Enterprise.” Footnote disclosure is required of the development stage activities
and the proposed lines of business. In the first year when regular operation starts , the company must disclose that in prior years it was in development stage .If comparative financial statements are issued,
the company must disclose in Form 10-K
that in previous years it was in the development stage
Newly issued SOP 98-5 requires
that start-up costs must be expensed as incurred. Start-up costs are commonly referred to as pre- operating expenditures .
In some industries, it was common to defer some of those costs if it could be shown that the future net operating results
would be sufficient to recover these costs. They would then be expensed when the business opened or over a period not to exceed
one year. Under the new guidance, all such start-up costs, including organization costs, are to be expensed as incurred.