Infosys, ICICI profits down under US GAAP norms

Infosys, ICICI profits down under US GAAP norms
ENS ECONOMIC BUREAU

JULY 15: The application of US generally accepted accounting principles (GAAP) has had a mixed impact on the bottomlines of Indian companies. While HCL Infosystems and Hughes Software's balance sheets look much healthier, Infosys Technologies and ICICI's profits have taken a beating.

Infosys Technologies' net profit under US GAAP comes to $61.34 million (Rs 273 crore), which is nearly 10 per cent (Rs 29 crore) lower than its $67.77 million (Rs 301 crore) net profit under the Indian GAAP for the year ended March 2000.

In ICICI's case, its $167.40 million (Rs 745 crore) net profit as per US GAAP is 25 per cent (Rs 256 crore) lower than its net profit of $225 million (Rs 1001 crore) during the year ended March 1999.

However, the picture is completely different in the case of HCL Infosystems and Hughes Software who are already following the stringent accounting policies which has boosted their bottomlines when profit is calculated as per US GAAP norms.

HCL's net profit of Rs 34.92 crore as per Indian GAAP vaults to Rs 57.14 crore when calculated under the US GAAP for the year ended June 1999 as a result of adjustments on account of accrued income on lease, depreciation and extended warranty income. Similarly, Hughes Software's profit of Rs 17.81 crore as per Indian GAAP is much lower when compared to its profit of Rs 23.53 crore under US GAAP for the year ended March 1999.

Infosys' profits were down under US GAAP on account of deferred tax liability of $0.08 million, provision for retirement benefits to employees ($0.74 million) and employee stock-based compensation ($0.51 million). Similarly, ICICI's profits slipped under US GAPP norms because of provision on account of allowance for credit losses, amortisation of fees, deferred tax adjustments, preference dividend payment and inter-company elimination.

These are the findings of a study done by the Centre for Accounting Research and Education, a research body promoted by the All India Chartered Accountants Society.

Accounting treatment under US accounting practices is stringent as compared to Indian accounting standards. Material differences exist between the financial statements prepared according to Indian and the US GAAP. Material differences arise due to provision for deferred taxes, accounting for stock-based compensation (ESOP) and valuation of short-term investments, which are market to market and adjusted against retained earnings.

"Major differences occur on account of consolidation of accounts of subsidiaries, which is currently not followed under the Indian GAAP. As a result, the impact of subsidiaries which are making losses is not reflected in the accounts under the Indian GAAP," Centre for Accounting Research and Education's vice-chairman Vinod Rustagi told the Financial Express.

"There is a need to provide for deferred taxes, amortisation of deferred stock compensation, consolidation of accounts and provision for diminution in the value of current investments so as to present a true and fair picture of the company," he said.

Experts feel that with more and more corporates looking for a listing on US bourses, sooner or later, they will have to follow the US accounting policies to reflect the actual financial picture. This would result in a scaling down of the profits as shown under the Indian GAAP.

A company has to accept all the principles under the US GAAP before being eligible for listing at any of the US stock exchanges. Non-US companies with registered securities in the US may issue financial statements under US GAAP or another comprehensive basis of accounting principles provided reconciliation to the US GAAP is provided in the note to accounts.