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July 2008

Gaps in GAAP – Consolidation of Foreign Subsidiaries

By Dolphy D’Souza, Chartered Accountant
Reading Time 3 mins

Accounting Standards

Consider the following query and response.

Query :

Parent Limited (P), India, has a subsidiary S Limited,
Singapore. During the year, S Limited acquires a subsidiary — SS Limited, UK.
The GAAP followed by each of these companies are :

P Indian GAAP

S Singapore GAAP


SS Limited uses the corridor approach for accounting pension
plans in its financial statements and the same is used by S Limited for
consolidation without any adjustments. S Ltd. computes goodwill on consolidation
as per Singapore GAAP based on fair value of net assets of SS on the date of
acquisition. For the CFS — consolidated financial statements — of P under Indian
GAAP — can net assets of SS be recorded at fair value ? Also, can the financial
statements of SS Limited be incorporated without any adjustments to pension
obligation ?

Response :

Paragraph 3 of AS-21 states that “In the preparation of CFS,
other accounting standards also apply in the same manner as they apply to the
separate financial statements.” Thus it may be noted that in the CFS, though
AS-21 permits different accounting policies they nevertheless have to be those
that are acceptable under Indian GAAP. Indian GAAP does not allow corridor
approach under AS-15 (Revised), nor can goodwill be determined using fair value.
Therefore CFS will have to be redrawn as per Indian GAAP policies. In CFS of P,
acquisition of SS will be recorded at book value and goodwill determined
accordingly. Further, all actuarial gains and losses will be accounted for and
deferral using corridor approach will not be permitted.

Moral of the story :

Wide disparities in accounting standards across borders
create unnecessary burden on preparer’s besides creating confusion in the minds
of users of financial statements. Some of us are familiar with conservative
accounting under German GAAP. Despite that, in 1993, under German GAAP
Daimler-Benz reported a profit of 168 million Deutsche Marks, but under US GAAP
for the same period, the company reported a loss of almost a billion Deutsche
Marks, largely caused by pension blues. To the user of financial statements, a
company that makes profit under Indian GAAP and loss under IFRS or vice versa
is clearly not a comprehensible situation.

It may be noted that IFRS are already adopted in the UK and
Singapore. Had India been on IFRS, Indian CFOs will not have to struggle with
multiple reports. Elimination of multiple reports is just one of the advantages
of converging to a global standard like IFRS. The ICAI’s announcement to
converge to IFRS by 2011 (actually 2010, since comparatives under IFRS would be
required) is a step in the right direction. However, lot of work to converge to
IFRS is still pending including obtaining regulatory amendments for the same and
providing clarity on income-tax issues. These milestones need to be achieved on
a war footing; otherwise the whole convergence exercise could get trapped in a
hopeless tangle.

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