GAAP Choices in India

2012-14

GAAP Choices in India (Automobile, IT and Steel Industries)

Term 1 Financial Reporting and Analysis.

Submitted by: Group 5 Section F PGDM 2012-2014

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Table of Contents

Abstract Objective Literature Review Methodology Sectorial Information Analysis Key Findings Automobile IT Steel Conclusion Bibliography/References Appendices

03 04 05 06 07 10

11 12 16 19 20

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Abstract

Indian GAAP (Generally Accepted Accounting Principles), which encompasses accounting assumptions, conventions and accounting standards issued by ICAI & notified by MCA, provides a broad framework and many accounting choices to companies to prepare financial statements in pursuant to Companies Act, 1956. There are different accounting policies adopted by companies while preparing financial statements based on nature of business practices in that particular industry. Also within a particular industry, companies follow different accounting policies guided by that companys specific needs and sometimes to provide a fairer picture of status of company. This study analyses three sectors viz. Automobiles, ITeS and Steel were chosen which represents Consumer goods, Services & derived goods through financial statements of representative companies of each sector and intends to find out the different choices in accounting policies adopted by companies. This study concludes with the prevalent accounting practices/choices and exceptions in each industry.

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Objective

The present study intends to find out current choices available for different industries and in a particular industry the choices exercised by different players and its effect on the financial statements.

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Literature Review

There is no relevant literature/research paper available on present topic of study. However one paper that deals with the subject matter but research domain is different i.e. Non-profit accounting. Detail is given below. Gaps in GAAP: Issues in Nonprofit Accounting and Reporting in India Shailesh Gandhi

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Methodology

Three sectors viz. Automobile, ITes and Steel were chosen which represents Consumer goods, services & derived goods. In each sector, 3-4 companies comprising 70-80 % of market share and representative of that sector were chosen. Annual reports of last three years; FY 2009-10, FY 2010-11 and FY 2011-12, were taken to have a contemporary approach for study. For present study, the part of annual report covering Statement of significant accounting policies, schedules and notes to account (of Stand-alone financial statements) was referred.

Comparison of companies within sector for FY 2011-12 and comparison of each company over a period of last three years was done. Based on above comparison, similarities and differences pertaining to the accounting policies adopted by companies in each sector and consistency in financial reporting of each company across three years has been identified.

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Sector Information

Automobile Sector: Representative companies based on market share are: Maruti Suzuki Ltd. Tata Motors Ltd. Ashok Leyland

Passenger Automobiles (Market Share)

44.70%

42.50%

Maruti Suzuki Ltd. Tata Motors Ltd. Others

12.80%

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Commercial Automobiles (Market Share)

21.50% Tata Motor Ltd. 52.90% 25.60% Ashok Leyland Others

Information Technology: Representative companies based on market share: Infosys Tata Consultancy Services Wipro Cognizant

IT Companies (Market Share)

29%

25%

Infosys Tata Consultancy Services Wipro

13% 15%

18%

Cognizant Others

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Steel Sector: Representative companies based on market share: SAIL Tata Steel Jindal Steel

Steel Industry (Market Share)

19% 36% 20% 25%

SAIL Tata Steel Jindal Steel Others

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Analysis The analysis of each sector has been done using a two-pronged approach. 1. Comparison of accounting policies for different accounting heads among representative companies. 2. Comparison of accounting policies followed by each company over a period of 3 years covering from 2009-2012. The accounting policies as stated in Statement of significant accounting polices and Notes & schedules to statements has been taken verbatim and been put vis--vis for intra-sectorial comparison. There are instances where not all companies have stated the followed policy for a transaction/item explicitly covered under a particular head. For example- explanation for Net Realization in case of Inventories. Using similar procedure, analysis has been done for each company for last 3 years. Detailed analysis is given in Appendices.

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Automobile Sector
S. No. Accounting Head Prevalent Choice 1) Straight Line Method as per rates given in Sch. XIV of companies Act 1956 Exception 1) Certain Items like Pattern & Dies, Data Processing Systems, & Softwares have varied useful life. 2) Apart from these, P&M, Furniture & Fittings and vehicles have different rates/useful lives. 1) Borrowing cost incurred in relation to acquisition of asset. 2) Royalty payment in relation to technical know-how. R&D costs 1) Tools & M/c spares recognition 2) WIP recognition method 1) Exchange difference for borrowing attributable to acquisition of depreciable assets 2)Exchange difference settlement of Long term monetary assets 1) Fair value of investments in mutual funds

Depreciation/Amortization

1) Cost of acquisition net of depreciation/amortization is used. 2 Fixed Assets 2) Assets on finance lease are recognized at lower of fair value at inception and present value of min. lease payments. 1) Inventories are valued at the lower of cost and net realizable value. 3 Inventories 2) Moving Weighted Average method for consumables/raw material 1) Transactions in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. 2) Foreign currency monetary assets and liabilities are translated at year end exchange rates. 1) Current investments are stated at lower of cost and fair value. 5 Investments 2) Long term investments are stated at cost less other than temporary diminution in value, if any. Disclosure regarding items to be taken under Provision & Contingent Liabilities is provided 1) Defined Benefit & Defined Contribution Plans Business Segment as primary Segment

Foreign Currency Transaction

6 7 8

Provision & Contingent Liabilities Employee Benefits Business Segments

Ashok Leyland does not disclose policy regarding it. 1) Unfunded defined Benefit Plan Termination Benefits 1) Geographical Segment Reporting

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IT Sector

S.No.

Accounting Head

Prevalent Choice 1) Fixed assets are stated at cost, less accumulated depreciation and impairment if any. 2) Direct costs are capitalized until fixed assets are ready to use.

Exception 1) TCS: Fixed assets excludes assets less than or equal to 50000, which are not capitalized, except when part of larger investment program. 2) Wipro: Borrowing cost directly attributable to the construction or production of qualifying assets is capitalized as part of the cost. 1) Wipro: No disclosure regarding this policy.

Fixed assets

Provisions and contingent liabilities

1) Disclosure of contingent liabilities is made when there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. 2) If likelihood of outflow of resources is remote than no provision or disclosure is made.

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GAAP Choices in India S.No. Accounting Head Prevalent Choice 1) Fixed assets are depreciated on straight line method over the useful lives of the assets. 2) Short term or low cost assets are depreciated over a period of one year from the date of acquisition. Depreciation / Amortization 3) Intangible assets are amortized over their respective estimated useful lives on straight line basis. 4) Leasehold assets/improvements are written off over the lower of the remaining primary period of lease or the life of asset.

2012-14 Exception 1) TCS: a) Few fixed assets such as freehold buildings or vehicles depreciate on written down value method. b) Fixed assets purchased for specific projects depreciate over the period of project. 2) Wipro: Depreciation rates as specified in schedule XIV of companies act or on estimated useful life which higher than that in schedule XIV.

Goodwill

1) Goodwill is not amortized instead it is tested for impairment. 1) Monetary assets and liabilities are translated at exchange rate in effect at the date of balance sheet. 2) Revenue and transaction are translated at exchange rate prevalent at date of transaction. 1) Infosys: Non-monetary assets or liabilities measured at: a) if fair value than translated at exchange rate prevalent when fair value is determined. b) If historical cost than translated at exchange rate in effect on date of transaction. 2) Cognizant: Nonmonetary assets are measured at historical exchange rates.

Foreign Currency

3) The difference between the rate at which foreign currency transactions are accounted and the rate at which they are realized is recognized in the statement of profit and loss.

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S.No.

Accounting Head

Prevalent Choice 1) Current investment is valued at lower of cost and fair value. 2) Long term investments are stated at cost less provisions other than temporary decline in value.

Investments

Exception 1) Cognizant: a) Available for sale securities and trading securities are reported at fair value with any unrealized gain or loss related to fair value recorded in income or loss. b) Time deposits with financial institutions are valued at cost, which approximates fair value.

1) Taxes are computed after considering Minimum alternate taxes (MAT) which gives rises to future economic benefits in form adjustment of future tax liabilities. 2) MAT is considered as an asset if there is convincing evidence that the Group will pay normal taxes after the tax holiday period. 3) Deferred taxes are recorded for time difference being the difference between profits considered for income tax and considered for financial statement. 4) The effect on deferred income tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.

Income Tax

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GAAP Choices in India S.No. Accounting Head Prevalent Choice 1) Company's obligation in respect of the gratuity plan is determined using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. 2) Actuarial gains and losses are recognized in the statement of profit and loss for the period in which they occur. 3) Under provident fund plan, employee and employer makes an equal monthly contribution to the plan. 8 Retirement benefits 4) A portion of the contribution is made to the provident fund trust managed by the company and remaining is made to the Government's provident fund. 5) The expected cost of accumulation compensated absences is determined by actuarial valuation based on the additional amount expected to be paid as a result of the unused entitlement that has accumulated at the balance sheet date.

2012-14 Exception

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Steel Industry

S.no.

Accounting Head

Prevalent Choice 1) Fixed assets are valued at cost less depreciation. 2) Costs include cost of acquisitions or construction and other attributable costs of bringing the asset to its working condition. 1) Claims against the Company pending appellate/judicial decisions 2) Other claims against the Company not acknowledged as debt 3) Disputed income tax/service tax/other demand on joint venture company for which company may be contingently liable under the joint venture agreement 4) Guarantees/Counter-guarantees given to banks on behalf of a subsidiary company. 5) Bills drawn on customers and discounted with banks. 1) Depreciation is provided on straight line method as specified in Schedule XIV to the Companies Act, 1956. 2) Classification of plant and machinery into continuous and noncontinuous is made on the basis of technical opinion and depreciation provided accordingly.

Fixed assets

Exception 1) SAIL: Land gifted by state governments, which is stated at notional/nominal value with corresponding credit to capital reserve.

Provisions and contingent liabilities

1) Tata Steel - Asset value up to 25,000 is fully depreciated in the year of acquisition. 2) Intangible Assets are amortised on straight-line method over the expected duration of benefits not exceeding ten years.

Depreciation / Amortisation

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GAAP Choices in India S.no. Accounting Head Prevalent Choice 1) The difference between the cost of investment in the associates and the Company's share of net assets at the time of acquisition of share in the associates is identified in the financial statements as Goodwill or Capital Reserve as the case may be. 1) Monetary foreign currency assets and liabilities are translated at the year-end exchange rates and resultant gains/losses are recognized in the profit & loss account for the year. 5 Foreign Currency 2) Foreign Currency Transactions (FCT) and forward exchange contracts used to hedge FCT are initially recognized at the spot rate on the date of the transaction/ contract. 1) Long-term investments are carried at cost. Provision is made when, in the opinion of the management, diminution in the value of investment is other than temporary in nature. Current investments are carried at the lower of cost or market/fair value. 1) Indian Companies: Provision for current tax is made considering various allowances and benefits available to the Company under the provisions of the Income Tax Act, 1961.

2012-14 Exception

Goodwill

NA

1) Jindal - exchange differences are dealt with in the profit & loss account over the life of the contract except those relating to fixed assets in which case they are capitalized with the cost of respective fixed assets.

Investments

Income Tax

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GAAP Choices in India S.no. Accounting Head Prevalent Choice 1) Raw materials, stores & spares and finished/semifinished products (including process scrap) are valued at lower of cost and net realizable value of the respective plants/units. 2) Finished and semi-finished products produced and purchased by the Company are carried at lower of cost and net realizable value.

2012-14 Exception 1) Tata Steel & SAIL- Necessary provision is made and charged to revenue in case of identified obsolete and non-moving items.

Inventories

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Conclusion

In Automobile Sector, there are varied choices exercised by companies for accounting heads like depreciation, Employee benefits, fixed assets etc. One major factor related to disclosure of accounting policies is quality of reporting. While some companies have elaborately stated the policies exercised, others have many gaps to cover. Over the years companies have shown consistent accounting policies. In some cases there is difference but reason for that difference has been given for.

In IT sector, accounting policies for various accounting heads were found to be standardized. Only few exceptions were found regarding the reporting of low cost and short term fixed assets, depreciation rates, foreign currency translation of non-monetary asset and reporting of investments. Over the period of three years companys accounting policies found to be consistent.

In Steel industry, accounting policies for various accounting heads were found to be standardized for the 3 companies. Some exceptions were noted in the reporting of fixed assets, depreciation and amortization rates, foreign currency translation of non-monetary asset and reporting of inventories. Over the period of three years companys accounting policies found to be consistent.

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REFERENCES AND BIBLIOGRAPHY

AS01-Disclosure of Accounting Policies AS02-Valuation of Inventories AS06-Depreciation Accounting AS10-Accounting for Fixed Assets AS11-Effect of changes in Forex rates AS13-Accounting for Investments AS15-Employee Benefits AS16-Borowing Costs AS17-Segment Reporting AS19-Leases AS23-Accounting for Taxes on Income AS26-Intangible Assets AS28-Impairment of Assets AS29-Provisions,Contigent Liabilities & Contingent Assets Annual reports of Tata Motors ltd., Ashok Leyland, Maruti Suzuki India Ltd. for FY 2009-10 , FY 2010-11, FY 2011-12 Annual reports of Infosys, Tata Consultancy Services, Wipro and Cognizant for FY 2009-10 , FY 2010-11, FY 2011-12 Annual reports of SAIL , Jindal Steel and Tata Steel for FY 2009-10, FY 2010-11, FY 2011-12 www.crisilresearch.com Accounting Standards and Corporate Accounting Practices ( VOL I) T.P. Ghosh

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Appendices

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