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US GAAP- Quick Learning module

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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 Accounting/reconciliation.



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 Activities


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 benefits etc.   



4. 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

       it is realized or realizable, and

       It has been earned.


There are four points of revenue recognition:


       Realization (at time of sale of merchandise or rendering of service)

       At the completion of production

       During production

       On a cash basis


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:


       The 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.

       The 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 a specified 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, 

       The 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.

       The collection method is used to recognize revenue when there is significant uncertainty regarding the collection of revenue.


       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.


 Three 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 administrative costs.


In 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


v      Sales 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

v      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.


v      Revenue 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

v      Revenue 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 of revenue.

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 of Purchase

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.


If 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 .


Interest capitalization 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 use. 




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 are often 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 at amortized cost. However, those held-to-maturity securities  maturing within one year are presented under current assets .


The classification of these investment must be reviewed annually and transfers should be accounted for at fair market value. The fair value becomes the new basis


Dividend and interest earned on investments are realized income and should be included in Income statement as other Income


The following information should be disclosed about investments 

v      Valuation basis used

v      Total portfolio market value.

v      Method used to determine cost (e.g., FIFO, average cost, specific identification) in computing the realized gain or loss on sale of securities

v      Unrealized (holding) gains and losses for trading and available-for-sale securities

v      Reasons for selling or transferring securities

v      Gains and losses from transferring available-for-sale securities to trading included in the income statement

v      Market 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$ 1,045,000)


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 :


v      An investor owns between 20 and 50% of the investee’s voting common stock.

v      The investor owns less than 20% of the investee’s voting common stock but has effective control (significant influence).

v      The investor owns in excess of 50% of the investee’s voting common stock, but a negating factor exists, preventing consolidation. 

v      There 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 subsidiary. 


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 statement.


The investor must disclose the following information in the footnotes, in separate schedules, or parenthetically:

v      Statement that the equity method is being used

v      Identification of investee along with percent owned

v      Quoted market price of investee’s stock

v      Investor’s accounting policies

v      Significant subsequent events between the date and issuance of the financial statements

v      Reason for not using the equity method even though the investor owned 20% or more of the investee’s common stock

v      Reason why the equity method was used even though the investor owned less than 20% of the investee’s common stock

v      Summarized financial information as to assets, liabilities, and earnings of significant investments in unconsolidated subsidiaries

v      Significant 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:


v      Normal investment upto 20% and no control-   SFAS 115

v      Investment 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 subsidiaries. 


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).


A 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

comprehensive income 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

foreign exchange 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 reclassification adjustment

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 Development Costs) 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.


In determining if asset impairment exists, the asset’s book value should include any associated goodwill.  An impairment may be due to such reasons as


       A major change in how the asset is used

       A decline in the market value of the fixed asset

       Excess construction costs relative to estimated amounts


 If 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.


If 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.


An 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 operations.


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

purchase 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.


Under 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 period (20005-2009).



Journal Entries

Grant of stock option plan 

Date of Grant—January 1, 2005

No entry is to be made on date of Grant


December 31, 2005

Compensation Expense($800,000/4)  200,000

Paid-in-capital stock options                                200,000


December 31, 2006–2008

Compensation Expense ($800,000/4) 200,000

Paid-in-capital stock options                                200,000


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

Paid-in-capital stock options                                  800,000


Common stock ($ 5 100,000 shares)                      500,000

Paid-in-capital in excess of par                              2,300,000


( 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 stock options                     800,000

Paid-in-capital from expired stock options               800,000




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.


 A 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, and futures


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. 


Disclosure includes 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

Operating section 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 decision.


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:

v      Measurement or valuation basis used

v      Differences in measurements used for the general-purpose financial statements relative to the financial information of the segment

v      A change in measurement method relative to prior years

v      A symmetrical allocation, meaning an allocation of depreciation or amortization to a segment without a related allocation to the associated assets


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 :

v      Grouping by industry line

v      Identifiable products or services

v      Significant segments to the company in the entirety

v      If any 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.


Segments shall 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-

v       revenue is generated from either a foreign government contract or domestic contract (as required by FASB Statement Number 30).

v       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.

v      of revenue 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 both—each significant individual foreign 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.

 The 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).


Income statement 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

Other disclosures peculiar to interim reporting are as follows:

v      Seasonal factors bearing upon interim results. Seasonal companies should

v      present supplementary 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:


v      In the 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.

v      In the income statement, the total revenue and expenses since inception must be disclosed separately.

v      In the 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.



@ Copyright -Sanjoy Banka, FCA,FCS ( Calcutta, India)