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Transitioning from Indian Accounting Standards to US GAAP : a practical approach

Shashwat Kaushik

November 7, 2024

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This article has been written by Mohini Raval pursuing an Executive Certificate Course in US Accounting and Bookkeeping from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

There are various reasons that necessitate Indian companies to transition from Indian Accounting Standards (Ind AS) to the United States Generally Accepted Accounting Principles (US GAAP). These reasons include companies seeking to raise capital in the United States, regulatory compliances, global expansion, legal and contractual requirements, mergers and acquisitions, etc. Let us understand the article topic in detail, covering these reasons, the key differences between India AS and US GAAP, challenges faced during the transition, strategies for ensuring a seamless conversion, and the benefits of such transitioning.

Understanding India AS and US GAAP

First, let us understand the meaning of the above terminologies and their background:

Ind AS

Indian Accounting Standards (Ind AS) are a comprehensive set of accounting principles and guidelines adopted by Indian companies and non-banking financial companies (NBFCs) to regulate and standardise their financial statement preparation and reporting practices. The primary objective of Ind AS is to enhance transparency, accuracy, and comparability of financial information across different entities in India and facilitate seamless integration with global financial markets.

Ind AS is largely harmonised with International Financial Reporting Standards (IFRS), which are widely accepted as the benchmark for high-quality financial reporting worldwide. However, there are certain carve-ins and carve-outs in Ind AS that are specific to the Indian business environment and regulatory framework. These modifications aim to address unique accounting challenges faced by Indian companies while maintaining alignment with the core principles of IFRS.

Ind AS was constituted by the Ministry of Corporate Affairs (MCA), Government of India, and notified in 2015 as an optional framework for early adoption. Subsequently, in 2016, the MCA mandated the compulsory adoption of Ind AS for listed companies and NBFCs with a net worth of 500 crore rupees or more. This move was aimed at enhancing the credibility and reliability of financial statements and boosting investor confidence in the Indian capital markets.

The adoption of Ind AS has several benefits for Indian companies. It enables them to align their financial reporting practices with international standards, making it easier for investors, analysts, and other stakeholders to understand and compare their financial performance with global peers. Furthermore, Ind AS promotes convergence with global accounting principles, facilitating cross-border transactions, capital raising, and foreign direct investment.

To ensure effective implementation and compliance with Ind AS, the Institute of Chartered Accountants of India (ICAI) has played a pivotal role. ICAI has developed detailed guidance notes, training programs, and certification courses to equip accountants and auditors with the necessary knowledge and skills to apply Ind AS in practice. Additionally, the National Financial Reporting Authority (NFRA), established by the MCA, oversees the enforcement of Ind AS and investigates any potential violations.

Overall, Ind AS has significantly improved the quality and consistency of financial reporting in India, contributing to greater transparency, investor protection, and global comparability. It has also supported India’s integration into the global financial ecosystem, enhancing its attractiveness as an investment destination and fostering economic growth.

US GAAP

Generally accepted accounting principles (US GAAP) are the standard accounting rules followed in the United States for the preparation, presentation, and reporting of financial statements. US GAAP is a comprehensive set of rules and guidelines that provide a framework for accountants to ensure that financial statements are accurate, transparent, and consistent.

The history of US GAAP dates back to 1939 when the American Institute of Certified Public Accountants (AICPA) established the Committee on Accounting Procedures (CAP). The CAP was responsible for developing and issuing accounting principles and procedures. In 1973, the Financial Accounting Standards Board (FASB) was formed to take over the responsibility for establishing and improving accounting principles in the United States.

US GAAP is applicable to a wide range of entities, including:

Public companies that are regulated by the Securities and Exchange Commission (SEC)
Private companies
Non-profit organisations
Foreign companies listed on the U.S. stock exchange
Government entities

US GAAP is important because it provides a common set of rules and guidelines for preparing financial statements. This helps to ensure that financial statements are accurate, transparent, and consistent, which makes it easier for investors, creditors, and other stakeholders to understand and compare the financial performance of different companies.

US GAAP is constantly evolving to reflect changes in the business environment and accounting practices. This process is overseen by the Financial Accounting Standards Board (FASB), which is responsible for issuing new accounting standards and amending existing standards.

US GAAP is an important part of the U.S. financial reporting system. It helps to ensure that financial statements are accurate, transparent, and consistent, which is essential for the efficient functioning of capital markets.

Exploring the need: transitioning from India AS to US GAAP

Below listed are a few reasons for transitioning from India AS to US GAAP:

Global expansion and access to capital market

The US is the largest capital market in the world. Access to such a larger market can lead to economies of scale, cost-effective production, and greater market access. Therefore, it is beneficial for companies to expand their business globally. As of March 2024, the New York Stock Exchange, located in the United States, is ranked as the largest stock exchange in the world, with an equity market capitalisation of over 28 trillion U.S. dollars. Hence, companies expanding globally or listing on US stock exchanges often need to adopt US GAAP to comply with regulatory requirements.

Cross-border operations or dual reporting

Indian companies having subsidiaries or operations in the United States must prepare financial statements in compliance with US GAAP to ensure consistency and comparability globally. Transitioning to US GAAP helps to streamline reporting processes and reduces complexities and costs associated with maintaining dual accounting systems.

Investor’s expectations and confidence

US GAAP is rule-based and strict; it ensures consistency and transparency and requires detailed disclosures. This results in enhancing credibility and building trust amongst the investors and financial institutions. Companies following US GAAP are often considered reliable and trustworthy.

Mergers and acquisition

In the case of mergers and acquisitions involving US companies and investors, financial statements prepared under US GAAP facilitate a standardised and clearer basis for due diligence and valuation. Following uniform accounting standards post-acquisition results in the ease of integration and consolidation process.

Key differences between India AS and US GAAP

Conceptual difference

Ind AS is more principle-based and is mostly aligned with IFRS. It focuses on fair value and substance over form, requiring professional judgement.

US GAAP is rule-based, and it emphasises more on detailed disclosures, rules, stringent guidelines, and provides industry-specific guidelines.

Hierarchy and nomenclature

The Ind AS standard begins with “Ind AS” adhering to the framework set by the Institute of Chartered Accountants of India (ICAI).

US GAAP standards begin with “ASC” (Accounting standards codification), structured under the Financial Accounting Standards Boards (FASB).

Financial statements, presentations, and disclosures

Ind AS	US GAAP
A financial statement consists of a balance sheet, a statement of profit and loss, a statement of changes in equity, a statement of cash flows, and notes to financial statements.	Financial statement consists of Balance sheet, Income statement, statement of comprehensive income, statement of changes in stockholder’s equity, statement of cash flows,
Notes to financial statements provide additional details and context for the numbers in financial statements, including significant accounting policies and other explanatory information.	Notes to financial statements provide detailed explanations and additional information to support figures in the financial statements.
Balance sheets are presented in the order of liquidity.Assets are listed first, followed by liabilities and then shareholder’s equity.It emphasises separation between current and non-current items more explicitly.Mandatory clear presentation of the classification within equity such as reserves and surplus.	Balance sheets are presented in the order of liquidity.Assets are listed first, followed by liabilities and then shareholder’s equity.Current assets and liabilities are separated from non-current items.
Uses terminology asEquity share capital and other equity	Uses terminology asCommon stock and retained earnings

Recognition and measurement

Revaluation Model

US GAAP predominantly uses historical cost measurement basis. Fair value measurement is used in certain cases, such as financial instruments and impairment testing.

Ind As allows for revaluation of Property Plant & Equipment (PPE). It also follows fair value measurement adoption for property plant & equipment (PPE), biological assets, financial instruments, share-based payments, etc.

Inventory valuation

Ind AS 2 permits FIFO and the weighted average cost method but does not allow the LIFO method.

US GAAP (ASC 330) permits FIFO, weighted average cost, and LIFO methods.

Deferred income tax

Under Ind AS 12, deferred tax assets and liabilities are classified as non-current. Whereas under US GAAP (ASC 740), assets and liabilities are classified as either current or non-current based on the classification of the related asset or liability.

Revenue recognition

US GAAP (ASC 606) and Ind AS 115 both follow a 5-step model for revenue recognition. However, US GAAP follows a detailed approach with specific criteria, such as whether delivery has occurred or services have been rendered and the collectability of the consideration is reasonably assured. Whereas Ind AS follows substance over form, it considers the transfer of risk and rewards for revenue recognition.

Financial instruments

Ind As 109, instruments are classified as either fair value through profit or loss, fair value through other comprehensive income, or as amortised cost. The classification depends upon the business model for management of such instruments and their contractual cash flow characteristics.

US GAAP ASC 320/ASC 815 uses different criteria for classification and measurement for different financial instruments.

ASC 320: Investments—Debt and Equity Securities: This topic focuses on the accounting and reporting treatment by an entity for investments in debt and equity securities.

ASC 815 (Derivatives and Hedging): This refers to the accounting to be followed by the derivative instruments and hedging activities in terms of fair value and hedge accounting requirements.

Impairment

US GAAP (ASC 350 & 360) provides for a 2-step impairment test process:

1. Recoverability test

2. Fair value test.

Ind As 36 follows a one step impairment test process.

Practical steps to ensure smooth transition

Identify the purpose

The first step is to determine why transitioning from India AS to US GAAP is necessary. For instance, if the reason for the transition is due to an Indian subsidiary operating in the US, then we need to conduct a thorough assessment of subsidiary financial statements in order to align accounting policies with US GAAP and prepare the consolidated financial statements for stakeholders as per US GAAP.

Analysis

Conduct a detailed analysis comparing accounting policies between Ind AS and US GAAP, identifying the key differences and areas needing adjustment. For instance, under US GAAP, revaluation of Property Plant & Equipment (PPE) is not permitted. Therefore, during the transition from Ind AS to US GAAP, if any of the PPE was revalued under Ind AS, it needs to be adjusted and restated at historical cost.

Seek a consultant or expert’s advice

Hire a consultant having extensive knowledge in US GAAP and Indian AS transitions, certified with practical experience, in order to ensure smooth and effective transitioning under the expert’s guidance.

Systems and processes

Check whether any internal control needs to be implemented, whether ERP systems need to be upgraded, or whether a new system needs to be implemented in order to ensure accuracy, consistency, and effective application of US GAAP.

Training & education

Conduct hands-on workshops to train and educate the finance and accounting team on ERP systems or accounting software emphasising US GAAP standards with practical examples and post-training support for application and adjustment challenges.

Financial reporting

Restate prior period financial statements to conform with US GAAP and ensure all the disclosures are made as per US GAAP. Make necessary adjustments and prepare a reconciliation for differences between Ind AS and US GAAP.

Documentation and continuous monitoring

Maintain detailed documentation for all adjustments made, including the rationale behind those adjustments. Conduct periodic reviews to determine whether training is conducted properly or not and whether employees and management are adhering to the provisions and complying with the US GAAP provisions.

Challenges faced during transition

Complexity of US GAAP: US GAAP is a complex accounting framework that requires detailed disclosures, contains complex guidelines, and is rule-based. This complexity can make it difficult for companies to understand and implement US GAAP, especially for those that are not familiar with the framework.
Costly compliance: Compliance with US GAAP can be costly due to its rigid nature, detailed disclosure requirements, and industry-specific standards. This cost can include the implementation of new systems or the upgrading of ERP systems, as well as the hiring of expert consultants for guidance.
Frequent updates and amendments: US GAAP is subject to frequent updates and amendments by the Financial Accounting Standards Board (FASB). This requires companies to be alert of changes and adjust their reporting practices accordingly, which can be time-consuming and costly.
Employee resistance: Employees may feel threatened towards job security due to concerns about coping up with the technical and practical advancements required by US GAAP. This resistance can make it difficult for companies to implement US GAAP successfully.

In addition to these challenges, companies may also face the following issues during the transition to US GAAP:

Lack of resources: Companies may not have the necessary resources, such as time, personnel, and expertise, to implement US GAAP effectively.
Cultural differences: Companies that are headquartered outside of the United States may find it difficult to adapt to the cultural differences associated with US GAAP.
Legal and regulatory issues: Companies may need to address legal and regulatory issues, such as tax implications, when transitioning to US GAAP.

Benefits of adopting US GAAP

Enhanced comparability and analysis: Adopting US GAAP provides a standardised framework for financial reporting, making it easier for investors and stakeholders to compare the financial statements of different companies within the United States. This comparability facilitates comprehensive analysis, allowing investors to make informed decisions based on consistent and reliable information.
Transparency and reliability: US GAAP emphasises transparency and reliability in financial reporting. By adhering to this framework, companies can ensure that their financial statements accurately reflect their financial position and performance. This transparency builds trust among investors, creditors, and other stakeholders, encouraging confidence in the company’s financial reporting practices.
Comprehensive guidance: US GAAP offers comprehensive guidance on various financial activities and accounting issues, including complex transactions. This guidance helps companies to consistently and accurately account for their financial activities, ensuring that their financial statements are prepared in accordance with established accounting principles. It also minimises the risk of misinterpretation and promotes consistent application of accounting treatments.
Global Influence: US GAAP is widely recognised and followed by many multinational corporations across the globe. Its influence extends beyond the United States, making it a preferred framework for financial reporting in various countries. Adopting US GAAP allows companies to align their financial reporting practices with international standards, enhancing their credibility and facilitating cross-border transactions and investments.

Case study: Transition from India AS to US GAAP: revenue recognition

Company overview

ABC Ltd. is a leading software development company operating mainly in software subscription business models and development IT consulting services and software products, which is based in India but is known for its global operations and customers. The company is among the companies that are listed on the Bombay Stock Exchange (BSE) and apart from this, it also has a proven position in the North American and European markets.

Background

The accounting method used by ABC Ltd. for reporting has always been Ind AS. After developing strategies that will pave the way for them to be on par with the global reporting requirements and be able to attract global investors, the company chooses to bring about the change through the transition to US Generally Accepted Accounting Principles (US GAAP).

Revenue recognition challenges

It was the result of the need to transfer from India AS to US GAAP that made ABC Ltd. to be heavily hit by revenue recognition the most. Under the Indian Accounting Standards (Ind AS), revenue is usually recognised through a method that calculates the percentage of the completion of the long-term contracts. US GAAP, however, sets more rigid criteria for revenue recognition over time, which might require the company to prepare more detailed information about the underlying projects and contracts to make sure they are in compliance with the relevant US GAAP standards. Previously, we have been using the method of revenue recognition specified for the revenue generated from the sale of contracts written in Ind AS, and it will be the same as before. Under the terms of the contracts, the work has been done using the method of percentage of completion, a method customarily applied. However, with respect to the same project terms, the allocation of the profits and losses at each stage of the project was going to be handled differently if US GAAP reporting was applied. Provisions for detailed checks and contracts with potential risks of noncompliance were the differences between the two methods, Ind AS and US GAAP.

Implementation strategy and outcome

One of the things the ABC Ltd. finance and accounting team did was to analyse how both the new and old revenue recognition frameworks are put into practice in light of the Indian Accounting Standards (Ind AS) and the International Financial Reporting requirements (US GAAP). The contracts were identified where, under U.S. GAAP, technical changes were required and those changes were made. An additional audit by financial experts was held and required in order to ascertain the accuracy of the provisions and the compliance with the principles put out by the US GAAP standardisation body.

The final story is that ABC Ltd. achieved its goal of moving the US revenue recognition practices to the new standard, which increased clarity and comparability observed in the financial sector. In addition, this alignment was more than just making sure they were compliant with not only the laws but also being on the international level. This way of doing business was reinforced by investor confidence and the new markets were entered successfully.

This is a good case of a company such as ABC Ltd. having to get through the labyrinth of revenue recognition during the transfer from Ind AS to the US GAAP, showing the importance of the deal with the strategic plan and the technical skills; it was a success in the financial report conversion.

Conclusion

This transition from Ind AS to US GAAP is, therefore, quite complex and requires in-depth knowledge about the dissimilarities between both standards. In that respect, companies may, however, effectively manage this transition by placing major emphasis on key areas of difference: revenue recognition, lease accounting, and changes in the reporting of financial instruments. Steps for compliance checking, training, and updating of related financial systems are therefore very important. It may not be impossible for companies to plan and execute the transition in a manner so that the financial statement can be presented both with Ind AS and under US GAAP.