Companies across the world, while reporting the financial statement abide by the specific accounting regulations of their country of business. For example, companies that have business activities in India have to adopt the Indian Accounting Standard (abbreviated as Ind-AS) while reporting the financial statement, similarly, the Generally Accepted Accounting Principles (GAAP)’ of the US are implemented by the companies in the United States. Therefore, if Indian-based companies plan to do business in the USA, they must abide by specific accounting regulations in the US, and report financial statements in US GAAP standards. This compels Indian-based companies doing business in the US to prepare one more financial statement to suit US rules and vice versa in the case of US companies doing business in India. The International Financial Reporting Standards (IFRS) is the globally accepted accounting standard that’s used in many countries so that multinational companies can do hassle-free international business in those countries. India has not adopted IFRS Standards for reporting by domestic companies and is yet to formally commit to adopting IFRS Standards. However, the presentation and components of financial statements of Indian Accounting Standards (Ind AS) are based on and substantially converged with IFRS Standards. Ind-AS will be applied in a phased manner from April 1, 2016, beginning with companies whose net worth is equal to or exceeding Rs.500 crore. The listed companies and others with net worth equal to or over Rs.250 crore shall abide by implementing Ind AS from April 1, 2017. Banks and insurance companies are required to comply with Ind AS beginning from 1 April 2018.
Although in India statutory reporting IFRS/US GAAP standards are not allowed they remain increasingly relevant to many Indian business houses.
Let us study here the difference between IFRS and GAAP standards.
| Methodology used for | GAAP | IFRS |
| Exceptions or interpretation | All transactions must abide by a specific set of rules | Different interpretations are possible based on overall patterns and principles. |
| Presentation of Income statements | Extraordinary or unusual items are separated and such items are shown below the net income portion of the income statement. | Extraordinary or unusual items are included in the income statement and not segregated. |
| Classification of Liabilities | In the balance sheet, liabilities are classified as current liabilities (payment due within 12 months) and non-current liabilities. | No separation of current liabilities in the balance sheet. |
| Valuation of assets | Value of the assets arrived on cost model (i.e. historical value of the assets minus accumulated depreciation). | Value of the assets arrived on fair current market value minus accumulated depreciation and losses on account of damage/s. |
| Valuation of Intangible assets | Recognized only at fair market value. | Value assessed at future economic value |
| Inventory estimation | Companies are allowed to use the Last In First Out (LIFO) method | The LIFO method is not allowed |
| Inventory write-down | The value of the assets cannot be reversed when the market value of the asset increases. | The Value of the assets can be reversed when the market value of the asset increases. |
| Development costs | Development expenses must be shown as expenses of the year and the same is not allowed for capitalization. | A company’s development costs can be capitalized on meeting specified criteria and thus it allows companies to report further depreciation leverage on fixed assets |
Conclusion: The main difference between GAAP and IFRS transfer pricing is that GAAP is rule-based, while IFRS is principle-based.
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