Cos go for GAAP accounting

MUMBAI, MAY 22: The latest fad among Indian corporates is to clean up the balance sheets and bring them in line with the international tr...

MUMBAI, MAY 22: The latest fad among Indian corporates is to clean up the balance sheets and bring them in line with the international trend. A growing number of Indian corporates are now opting for the US GAAP (Generally Accepted Accounting Practices) accounting system keeping in mind an imminent listing on the American stock exchanges to raise funds.

Reliance Industries, ICICI and Infosys are some of those blue chips which have already prepared their balance sheets in accordance with the US GAAP accounting system. At least 50 other top corporates are set to follow suit in the next one or two years. While many software companies have already gone for GAAP accounting, now even cement and chemical companies are planning to opt for this system. While investing in Indian shares, many foreign investors prefer companies which have gone for GAAP accounting system. “Under the GAAP system, a company will have to reveal many more things as rules are very stringent,” said an official of an auditing firm.

AnilAmbani, Managing Director of Reliance Industries on the need to go for US GAAP system recently told newsmen that “Reliance Industries has been in forefront in various innovations which call for increased disclosures and in accordance with the international practices. The US GAAP accounting system helps us in creating a good image among the foreign investors”. As a matter of fact, GAAP system is essential for listing the shares on prestigious US bourses like the New York Stock Exchange and NASDAQ.

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Many Indian corporates like Ranbaxy, Infosys and Hindustan Lever have said that they will go for the US GAAP as foreign investors are increasingly asking for annual accounts in the GAAP format. “There is a vast difference between the Indian accounting system and US GAAP. Our system hides more information which could make or break a corporate in a long run,” says a Indian corporate analyst. In fact, Infosys is already giving separate annexure in its annual reports as per the GAAP accounting system. So asReliance and ICICI.

Analysts see this as a good development as several hundreds of companies fail to even finalise their accounts in India every year. More than 50 per cent of 3,000 small companies which had entered the capital market in the 1993-96 period are now going abegging on the stock markets.

GAAP is not restricted to corporates alone. Bankers too feel the need for US GAAP accounting system in the banking sector is extremely necessary as various international bodies have called for progress in accounting and disclosure practices for Indian banks’ lending business and related credit risk. The Basle Committee of Banking Supervision has provided guidance to banking supervisors on recognition and measurement of loans, establishment of loan loss provisions, credit risk disclosures and related matters.

The prescribed standards for accounting system have been implemented or being implemented in a large number of countries. The US GAAP accounting system will help the Indian banks and financialinstitutions to give more details on their rising non-performing assets (NPAs). The shareholders of these banks and FIs will also be able to get a better picture of the financial health of these companies.

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According to ICICI managing director and CEO K V Kamath – who has taken a lead over other FIs on disclosures – the alignment of Indian accounting practices should be in line with international accounting standards like US GAAP and IAS over an 12-18 months timeframe as accounting and disclosure practices are essential to ensure the enhanced transparency needed to facilitate the effective supervision and market discipline of banks and financial institutions.

“The GAAP system of accounting conducted by KPMG will help the foreign institutional investors and GDR holders to get a better picture of the institution,” said an ICICI official. Thousands of companies – around 7,000 companies are listed on the BSE – will find difficult to follow the GAAP system. As a fund manager put it, these companies preferthe traditional Indian method where fund diversion and manipulation of accounts is the order of the day.