If you thought I am going to give you a lecture on the basics of GAAP principles, then I am sorry to disappoint you. What, in fact, I would like to share with you is the dilemma, we as ordinary investors face these days when we come across a company's financials - one prepared in accordance with the Indian GAAP and another in accordance with the US GAAP. Some times it looks quite surprising when we find that a company which made profits as per the Indian accounting standards, is a loss making company from the standpoint of US GAAP. Who can forget the classic case of Daimler Benz which was a healthy profit making company according to German Standards, but just before its ADR issue realized that it was making losses under US GAAP. Isn't it really perplexing? Now the question arises in the mind of a layman like you and me is what the hell all this is. Is the company in question a profit making company or a loss making one? Is there money inside the wallet of the company or these guys are just making a fool of me by enjoying my hard money that I put in the stocks of their company?
It's true that the accounting jargon is giving enough heartburn for ordinary investors to cope with. But what is the root problem is not the availability of such kind of divergent but detailed information, but the ignorance and, in fact, the lack of investor education initiatives on behalf of the companies as well as the regulatory bodies. In such a scenario, it's the right time for us, the naive investors, to start with such initiatives before we actually get lost in the maze of information that is pouring on our desk day and night - courtesy Internet and Satellite TV.
Definitely you as an investor need to understand a little bit of these things. The most important thing to look at while analyzing a company's performance is to look at the provisions on account of items like ESOPs (Employee Stock Option Schemes) costs, deferred taxes, important write-offs on account of bad investments, doubtful trade receivables etc., made by the companies in their annual, half yearly or quarterly results. You may remember this month on January 9, 2001, Infosys declared its quarterly results, wherein the management had provided for stock option costs and written off some amounts for its investments in a dotcom company. Recently in Wipro's quarterly results too you would find that under US GAAP accounting, the company had written off some of the bad investments and had provided for deferred taxes. Therefore, if you read the management's discussion and analysis part of the result reports of the companies carefully, you would not only learn many useful things but also emerge as a street smart and well-informed investor. So, make it a habit to read between the lines.
generally accepted accounting principles U.S.
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