The world according to GAAP

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The Securities Exchange Commission, which is the US equivalent of SEBI, has a voluntary programme. US-listed companies can opt for XBRL (Extensible Business Research Language) formats to report financial results. XBRL is a "mark-up" language and every entry can be tagged and linked for easy search/analysis.

Imagine the power of an accounting format where every individual entry, in theory, may be tagged, commented, searched and manipulated.

Companies with over $1 trillion in market cap (including Infosys) have already joined the XBRL programme. If the SEC is happy and expands the concept, XBRL will become completely mainstream "" if $1trillion worth of Wall-Street market cap is not considered sufficient endorsement of the format.

Work is on to integrate XBRL to directly process enterprise data from ERP systems "" it is already integrated with spreadsheets and word processors. Financial formats are rigid; that makes it easier.

Error rates in XBRL-generated financial statements are less since calculations require minimal hand-entry. It's easier to prepare and audit XBRL reports; the program itself can flag unusual accounting through "spell-check" tags.

XBRL may dramatically reduce the time required to prepare error-free financial statements. It also reduces headaches for MNCs. XBRL-programs can incorporate conversion formats for different practices.

Of course, a program cannot perform due-diligence. So auditors and accountants needn't worry about redundancy. But GAAP differences provide interesting insights. No GAAP is foolproof "" the Enrons and DSQs happen everywhere. But it is more difficult to fudge consistently across two GAAPs.

Differences in income recognition, disclosure and provisioning are starkly highlighted. When the Chrysler-Benz merger happened, the German auto company's German book profits turned into book losses under US GAAP.

Thus far, most Indian companies listed abroad are big MNCs or MNC aspirants. Their balance-sheets are clean and they have reasonable probity. Even so, a comparison of SEC filings with Indian statements offers food for thought.

In banking for instance, there are differences in NPA and profit recognition. This was useful when the ICICI-ICICI Bank merger occurred. Even in revenue recognition and in amortisation and expensing norms, there may be differences. And the nitty-gritty of ESOP expensing and provisioning of derivative positions is also different.

There is a new trend of smaller India companies listing in Europe and the US. Singapore, Hong-Kong, Shanghai and Tokyo could become exchanges of choice for Indian companies in the future as Far Eastern trade grows. Many companies of varying size could end up listing in India and overseas simultaneously. That would perforce, compel reporting under different GAAPs.

Multi-statements will arguably always yield more information than any single statement. A savvy investor can compare cash-flows. There shouldn't be a difference in CF under different GAAPs and insights would arise on a case-by-case basis.

The next logical step after freely-permitted overseas listings would be to allow Indians to trade anywhere India-incorporated companies are permitted to list. Free arbitrage and market-action would provide benchmarks for valuations of multi-listed businesses.

But much of the dissent in the Tarapore Committee recommendations arose on this key issue of controlling Indian remittances abroad into financial assets. And, as always, the GoI will err on the side of conservatism.