Accounting for marketing managers

GAAP
Generally Accepted Accounting Principles (GAAP) is a term used to refer to the standard
framework of guidelines for financial accounting used in any given jurisdiction which are
generally known as Accounting Standards. GAAP includes the standards, conventions, and
rules accountants follow in recording and summarizing transactions, and in the preparation of
financial statements.

The basic principles underlying GAAP accounting are set forth below.

When preparing financial statements prepared using GAAP, most American corporations and
other business entities use the many rules of how to report business transactions based upon the
various GAAP rules. This provides for consistency in the reporting of companies and businesses
so that financial analysts, banks, shareholders and the SEC can have all reporting companies
preparing their financial statements using the same rules and reporting procedures. The rules and
procedures for reporting under GAAP are complex and have developed over a long period of
time. Currently there are more than 150 "pronouncements" as to how to account for different
types of transactions, ranging from how to report regular income from the sale of goods, and its
related inventory values, to accounting for incentive stock option distributions. By using
consistent principles, all companies reporting under GAAP report these transactions on their
financial statements in a consistent manner.

The various rules and pronouncements come from the Financial Accounting Standards Board
(FASB) which is a no-profit organization that the accounting profession has created to
promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion
requires. The more recent pronouncements come as Statements of the Financial Accounting
Board (SFAS). Changes in the GAAP rules can carry tremendous impact upon American
business.

Financial Accounting is information that must be assembled and reported objectively. Third-
parties who must rely on such information have a right to be assured that the data are free from
bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on
certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP).

Basic Concepts of GAAP

To achieve basic objectives and implement fundamental qualities GAAP has four basic
assumptions, basic principles, and four basic constraints.

Assumptions

 Business Entity: assumes that the business is separate from its owners or other
businesses. Revenue and expense should be kept separate from personal expenses.

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 Going Concern: assumes that the business will be in operation indefinitely. This
validates the methods of asset capitalization, depreciation, and amortization. Only when
liquidation is certain this assumption is not applicable.
 Monetary Unit principle: assumes a stable currency is going to be the unit of record.
The FASB accepts the nominal value of the US Dollar as the monetary unit of record
unadjusted for inflation.
 The Time-period principle implies that the economic activities of an enterprise can be
divided into artificial time periods.

Principles derive from tradition, such as the concept of matching.

 Principle of regularity: Regularity can be defined as conformity to enforced rules and

laws.

 Principle of consistency: This principle states that when a business has once fixed a
method for the accounting treatment of an item, it will enter all similar items that follow
in exactly the same way.

 Principle of sincerity: According to this principle, the accounting unit should reflect in
good faith the reality of the company's financial status.

 Principle of the permanence of methods: This principle aims at allowing the coherence
and comparison of the financial information published by the company.

 Principle of non-compensation: One should show the full details of the financial
information and not seek to compensate a debt with an asset, revenue with an expense,
etc.

 Principle of prudence: This principle aims at showing the reality "as is": one should not
try to make things look prettier than they are. Typically, revenue should be recorded only
when it is certain and a provision should be entered for an expense which is probable.

 Principle of continuity: When stating financial information, one should assume that the
business will not be interrupted. This principle mitigates the principle of prudence: assets
do not have to be accounted at their disposable value, but it is accepted that they are at
their historical value

 Principle of periodicity: Each accounting entry should be allocated to a given period,

and split accordingly if it covers several periods. If a client pre-pays a subscription (or
lease, etc.), the given revenue should be split to the entire time-span and not counted for
entirely on the date of the transaction.

 Principle of Full Disclosure/Materiality: All information and values pertaining to the

financial position of a business must be disclosed in the records.

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 Principle of Utmost Good Faith: All the information regarding to the firm should be
disclosed to the insurer before the insurance policy is taken.

Constraints

 Objectivity principle: the company financial statements provided by the accountants

should be based on objective evidence.
 Materiality principle: the significance of an item should be considered when it is
reported. An item is considered significant when it would affect the decision of a
reasonable individual.
 Consistency principle: It means that the company uses the same accounting principles
and methods from year to year.
 Prudence principle: when choosing between two solutions, the one that will be least
likely to overstate assets and income should be picked.

Accounting Standards

Accounting Standards in India are issued By the Institute of Chartered Accountant of India
(ICAI). At present there are 30 Accounting Standards issued by ICAI.

Objective of Accounting Standards

Objective of Accounting Standards is to standarize the diverse accounting policies and practices
with a view to eliminate to the extent possible the non-comparability of financial statements and
the reliability to the financial statements.

Accounting Standards Issued by the Institute of Chatered Accountants of India are as

below:

 Disclosure of accounting policies:

 Valuation Of Inventories:
 Cash Flow Statements
 Contingencies and events Occurring after the Balance sheet Date
 Net Profit or loss For the period, Prior period items and Changes in accounting Policies.
 Depreciation accounting.
 Construction Contracts.
 Revenue Recognition.
 Accounting For Fixed Assets.
 The Effect of Changes In Foreign Exchange Rates.
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 Accounting For Government Grants.

 Accounting For Investments.
 Accounting For Amalgamation.
 Employee Benefits.
 Borrowing Cost.
 Segment Reporting.
 Related Party Disclosures.
 Accounting For Leases.
 Earning Per Share.
 Consolidated Financial Statement.
 Accounting For Taxes on Income.
 Accounting for Investment in associates in Consolidated Financial Statement.
 Discontinuing Operation.
 Interim Financial Reporting.
 Intangible assets.
 Financial Reporting on Interest in joint Ventures.
 Impairment Of assets.
 Provisions, Contingent, liabilities and Contingent assets.
 Financial instrument.
 Financial Instrument: presentation.
 Financial Instruments, Disclosures and Limited revision to accounting standards.

Cash Flow Statements: Cash flow statement is additional information to user of financial
statement. This statement exhibits the flow of incoming and outgoing cash. This statement
assesses the ability of the enterprise to generate cash and to utilize the cash. This statement is one
of the tools for assessing the liquidity and solvency of the enterprise.

Depreciation Accounting : It is a measure of wearing out, consumption or other loss of value of

a depreciable asset arising from use, passage of time. Depreciation is nothing but distribution of
total cost of asset over its useful life.

Revenue Recognition : The standard explains as to when the revenue should be recognized in
profit and loss account and also states the circumstances in which revenue recognition can be
postponed. Revenue means gross inflow of cash, receivable or other consideration arising in the
course of ordinary activities of an enterprise such as:- The sale of goods, Rendering of Services,

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and Use of enterprises resources by other yeilding interest, dividend and royalties. In other
words, revenue is a charge made to customers / clients for goods supplied and services rendered.
Accounting for Fixed Assets : It is an asset, which is:- Held with intention of being used for the
purpose of producing or providing goods and services. Not held for sale in the normal course of
business. Expected to be used for more than one accounting period.
Accounting for Investments : It is the assets held for earning income by way of dividend,
interest and rentals, for capital appreciation or for other benefits.

Intangible Assets : An Intangible Asset is an Identifiable non-monetary Asset without physical

substance held for use in the production or supplying of goods or services for rentals to others or
for administrative purpose

Provisions, Contingent Liabilities And Contingent Assets : Objective of this standard is to

prescribe the accounting for Provisions, Contingent Liabilitites, Contingent Assets, Provision for
restructuring cost.
Provision: It is a liability, which can be measured only by using a substantial degree of
estimation.
Liability: A liability is present obligation of the enterprise arising from past events the settlement
of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits.

Differences between US GAAP and Indian GAAP

Some of these major differences between US GAAP and Indian GAAP which give rise
differences in profit are highlighted hereunder:

 Underlying assumptions: Under Indian GAAP, Financial statements are

prepared in accordance with the principle of conservatism which basically means
“Anticipate no profits and provide for all possible losses”. Under US GAAP
conservatism is not considered, if it leads to deliberate and consistent
understatements.
 Format/ Presentation of financial statements: Under Indian GAAP, financial
statements are prepared in accordance with the presentation requirements of
Schedule VI to the Companies Act, 1956. On the other hand , financial statements
prepared as per US GAAP are not required to be prepared under any specific
format as long as they comply with the disclosure requirements of US GAAP.
Financial statements to be filed with SEC include
 Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash Flow
statement in financial statements is mandatory only for companies whose share
are listed on recognized stock exchanges and Certain enterprises whose turnover
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for the accounting period exceeds Rs. 50 crore. Thus , unlisted companies escape
the burden of providing cash flow statements as part of their financial statements.
On the other hand, US GAAP (SFAS 95) mandates furnishing of cash flow
statements for 3 years – current year and 2 immediate preceding years
irrespective of whether the company is listed or not .
 Long term Debts: Under US GAAP , the current portion of long term debt is
classified as current liability, whereas under the Indian GAAP, there is no such
requirement and hence the interest accrued on such long term debt in not taken as
current liability.
 Extraordinary items, prior period items and changes in accounting policies:
Under Indian GAAP( AS 5) , extraordinary items, prior period items and changes
in accounting policies are disclosed without netting off for tax effects . Under US
GAAP (SFAS 16) adjustments for tax effects are required to be made while
reporting the Prior period Items.
 Capital issue expenses: Under the US GAAP, capital issue expenses are required to be
written off when incurred against proceeds of capitals, whereas under Indian GAAP
capital issue expense can be amortized or written off against reserves.
 Proposed dividend: Under Indian GAAP , dividends declared are accounted for in the
year to which they relate. For example, if dividend for the FY 1999-2000 is declared in
Sep 2000 , then the corresponding charge is made in 2000-2001 as below the line item
Contrary to this , under US GAAP dividends are reduced from the reserves in the year
they are declared by the Board. Hence in this case under US GAAP , it will be charged
Profit and loss account of 2000-2001 above the line.
 Employee benefits: Under Indian GAAP, provision for leave encashment is accounted
based n actuarial valuation. Compensation to employees who opt for voluntary
retirement scheme can be amortized over 60 months. Under US GAAP, provision for
leave encashment is accounted on actual basis. Compensation towards voluntary
retirement scheme is to be charged in the year in which the employees accept the offer.
 Loss on extinguishment of debt: Under Indian GAAP, debt extinguishment premiums
are adjusted against Securities Premium Account. Under US GAAP, premiums for early
extinguishment of debt are expensed as incurred.

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