advance accounting theory
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Accounting Standards Harmonization of Accounting Standards,GAAP Accounting concept,human resource accountingENVIRONMENTAL ACCOUNTINGTRANSCRIPT
GAAP
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Committee on Accounting Procedure (CAP). The first serious attempt to create formalized generally accepted accounting principles began in 1930, primarily as a consequence of the stock market crash of 1929 and the widespread perception that an absence of uniform and stringent financial reporting requirements had contributed to the rampant stock market speculation of the preceding decade that culminated with that crash. Generally Accepted Accounting Principles (GAAP) is a term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as Accounting
Standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statementThe various rules and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. The more recent pronouncements come as Statements of the Financial Accounting Board (SFAS). Changes in the GAAP rules can carry tremendous impact upon American business. For example, when FASB stopped requiring banks to mark their assets (loans) to the lower of cost or market (i.e. value of a foreclosed home loan), the effect on a bank's "net worth" as defined by GAAP can change dramatically.
Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.
Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. Principle of consistency: This principle states that when a business has once fixed a method for
the accounting treatment of an item, it will enter all similar items that follow in exactly the same way.
Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc.
Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.
Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value
Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.
Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.
Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.
GAAP In order to maintain uniformity and consistency in accounting records throughout the world, certain rules and principles have been developed which are generally accepted by the accounting profession. These rules/ principles are called by different names such as principles, concepts,
conventions, postulates, assumptions. These rules/principles are judged on their general acceptability rather than universal acceptability. Hence, theyare popularly called Generally Accepted Accounting Principles (GAAP).The term “generally accepted” means that these principles must have support, that generally comes from the professional accounting bodies. Thus, Generally Accepted Accounting Principles (GAAP) refer to the rules or guidelines adopted for recording and reporting of business transactions of financial statements. These principles have evolved over a long period. of time on the basis of past experiences, usages or customs, etc. Theseprinciples are also referred as concepts and conventions, which have alreadybeen discussed.Many countries use or are converging on the INTERNATIONAL financial reporting standreds (IFRS), established and maintained by the INTERNATIONAL accounting standard board .(IASB) In some countries, local accounting principles are applied for regular companies but listed or large companies must conforms to IFRS, so statutory reporting is comparable internationally, across jurisdictions.
Accounting convention
(1) Relevance
The convention of relevance emphasizes the fact that only such information should be made available by accounting as is relevant and useful for achieving its objectives. For example, business is interested in knowing as to what has been total labor cost? It is not interested in knowing how much employees spend and what they save.
(2) Objectivity
The convention of objectivity emphasizes that accounting information should be measured and expressed by the standards which are commonly acceptable. For example, stock of goods lying unsold at the end of the year should be valued as its cost price not at a higher price even if it is likely to be sold at higher price in future. Reason is that no one can be sure about the price which will prevail in future.
(3) Feasibility
The convention of feasibility emphasizes that the time, labor and cost of analyzing accounting information should be compared vis-à-vis benefit arising out of it. For example, the cost of 'oiling and greasing' the machinery is so small that its break-up per unit produced will be meaningless and will amount to wastage of labor and time of the accounting staff.
Accounting concept
Accounting concept refers to the basic assumptions and rules andprinciples which work as the basis of recording of business transactions
and preparing accounts.
The main objective is to maintain uniformity and consistency in accountingrecords. These concepts constitute the very basis of accounting. All theconcepts have been developed over the years from experience and thus theyare universally accepted rules. Following are the various accountingconcepts that have been discussed in the following sections :
1. Business entity concept2. Money measurement concept3. Going concern concept4. Accounting period concept5. Accounting cost concept6. Duality aspect concept7. Realisation concept8. Accrual concept9. Matching concept
Business entity conceptThis concept assumes that, for accounting purposes, the business enterpriseand its owners are two separate independent entities. Thus, the business andpersonal transactions of its owner are separate. For example, when theowner invests money in the business, it is recorded as liability of thebusiness to the owner. Similarly, when the owner takes away from thebusiness cash/goods for his/her personal use, it is not treated as businessexpense.
Money measurement concept This concept assumes that all business transactions must be in terms ofmoney, that is in the currency of a country. In our country such transactionsare in terms of rupees.Thus, as per the money measurement concept, transactions which can beexpressed in terms of money are recorded in the books of accounts. Forexample, sale of goods worth Rs.200000, purchase of raw materials. For example, sincerity, loyality, honesty of employees are not recorded in books of accounts because these cannot be measured in terms of money although they do affect the profits and losses of the business concern.Going concern conceptThis concept states that a business firm will continue to carry on its activitiesfor an indefinite period of time. Simply stated, it means that every businessentity has continuity of life. Thus, it will not be dissolved in the near future.This is an important assumption of accounting, as it provides a basis forshowing the value of assets in the balance sheet; For example, a companypurchases a plant and machinery of Rs.100000 and its life span is 10 years.According to this concept every year some amount will be shown asexpenses and the balance amount as an asset.Accounting period concept All the transactions are recorded in the books of accounts on the assumptionthat profits on these transactions are to be ascertained for a specified period.This is known as accounting period concept. Thus, this concept requires
that a balance sheet and profit and loss account should be prepared at regularintervals. This is necessary for different purposes like, calculation of profit,ascertaining financical position, tax computation etc.Further, this concept assumes that, indefinite life of business is divided intoparts. These parts are known as Accounting Period. It may be of one year,six months, three months, one month, etc. But usually one year is taken asone accounting period which may be a calender year or a financial year.Accounting cost concept Accounting cost concept states that all assets are recorded in the books ofaccounts at their purchase price, which includes cost of acquisition,transportation and installation and not at its market price. It means that fixedassets like building, plant and machinery, furniture, etc are recorded in thebooks of accounts at a price paid for them. For example, a machine waspurchased by XYZ Limited for Rs.500000, for manufacturing shoes. Anamount of Rs.1,000 were spent on transporting the machine to the factorysite. In addition, Rs.2000 were spent on its installation. The total amountat which the machine will be recorded in the books of accounts would bethe sum of all these items i.e. Rs.503000.Duality aspect conceptDual aspect is the foundation or basic principle of accounting. It providesthe very basis of recording business transactions in the books of accounts.This concept assumes that every transaction has a dual effect, i.e. it affectstwo accounts in their respective opposite sides. Therefore, the transactionshould be recorded at two places. It means, both the aspects of thetransaction must be recorded in the books of accounts. For example, goodspurchased for cash has two aspects which are (i) Giving of cash(ii) Receiving of goods. These two aspects are to be recorded.Thus, the duality concept is commonly expressed in terms of fundamentalaccounting equation :Assets = Liabilities + CapitalRealisation conceptThis concept states that revenue from any business transaction should beincluded in the accounting records only when it is realised. The termrealisation means creation of legal right to receive money. Selling goodsis realisation, receiving order is not.In other words, it can be said that :Revenue is said to have been realised when cash has been receivedor right to receive cash on the sale of goods or services or both hasbeen created.
Accrual conceptThe meaning of accrual is something that becomes due especially an amountof money that is yet to be paid or received at the end of the accountingperiod. It means that revenues are recognised when they become receivable.Though cash is received or not received and the expenses are recognisedwhen they become payable though cash is paid or not paid. Both transactionswill be recorded in the accounting period to which they relate. Therefore,
the accrual concept makes a distinction between the accrual receipt of cashand the right to receive cash as regards revenue and actual payment of cashand obligation to pay cash as regards expenses.Matching concept
The matching concept states that the revenue and the expenses incurred toearn the revenues must belong to the same accounting period. So once therevenue is realised, the next step is to allocate it to the relevant accountingperiod. This can be done with the help of accrual concept. (Revenue Rs.3150-Expenses Rs.2900) This comparison has resulted inprofit of Rs.250. If the revenue is more than the expenses, it is called profit.If the expenses are more than revenue it is called loss
Accounting Standards Accounting Standards are the defined accounting policies issued by Government or expert institute. These standards are issued to bring harmonization in follow up of accounting policies. The paradigm shift in the economic environment in India during last few years has led toincreasing attention being devoted to accounting standards as a means towards ensuring potentand transparent financial reporting by corporate. Further, cross-border raising of huge amountof capital has also generated considerable interest in the generally accepted accountingprinciples in advanced countries such as USA. Initiatives taken by International OrganisationSecurities Commission (IOSCO) towards propagating International Accounting Standards(IASs)/ International Financial Reporting Standards (IFRSs), issued by the InternationalAccounting Standards Board (IASB), as the uniform language of business to protect theinterests of international investors have brought into focus the IASs/ IFRSs.The Institute of Chartered Accountants of India, being a premier accounting body in the country,took upon itself the leadership role by establishing Accounting Standards Board, more thantwenty five years ago, to fall in line with the international and national expectations. Today,accounting standards in India have come a long way.Presently, Institute of Chartered Accountants of India has issued 30 Accounting Standards as listed.Accounting Standards are formulated with a view to harmonise different accounting policies andpractices in use in a country. The objective of Accounting Standards is, therefore, to reduce theaccounting alternatives in the preparation of financial statements within the bounds of rationality,thereby ensuring comparability of financial statements of different enterprises with a view toprovide meaningful information to various users of financial statements to enable them to makeinformed economic decisions.The Companies Act, 1956, as well as many other statutes in India require that the financialstatements of an enterprise should give a true and fair view of its financial position and workingresults. This requirement is implicit even in the absence of a specific statutory provision to thiseffect. The Accounting Standards are issued with a view to describe the accounting principlesand the methods of applying these principles in the preparation and presentation of financialstatements so that they give a true and fair view. The Accounting Standards not only prescribeappropriate accounting treatment of complex business transactions but also foster greatertransparency and market discipline. Accounting Standards also helps the regulatory agencies inbenchmarking the accounting accuracy. Recognising the need for international harmonisation of accounting standards, in 1973, theInternational Accounting Standards Committee (IASC) was established. It may be mentioned
here that the IASC has been reconstituted as the International Accounting Standards Board(IASB)Accounting Standards-setting in IndiaThe Institute of Chartered Accountants of India (ICAI) being a member body of the IASC,constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view toharmonise the diverse accounting policies and practices in use in India. After the avowedadoption of liberalisation and globalisation as the corner stones of Indian economic policies inearly ‘90s, and the growing concern about the need of effective corporate governance of late,the Accounting Standards have increasingly assumed importance.While formulating accounting standards, the ASB takes into consideration the applicable laws,customs, usages and business environment prevailing in the country. The ASB also gives dueconsideration to International Financial Reporting Standards (IFRSs)/ International AccountingStandards (IASs) issued by IASB and tries to integrate them, to the extent possible, in the lightof conditions and practices prevailing in India.Composition of the Accounting Standards BoardThe composition of the ASB is broad-based with a view to ensuring participation of all interestgroupsin the standard-setting process. These interest-groups include industry, representativesof various departments of government and regulatory authorities, financial institutions andacademic and professional bodies. Industry is represented on the ASB by their apex levelassociations, viz., Associated Chambers of Commerce & Industry (ASSOCHAM), Confederationof Indian Industries (CII) and Federation of Indian Chambers of Commerce and Industry(FICCI). As regards government departments and regulatory authorities, Reserve Bank ofIndia, Ministry of Company Affairs, Comptroller & Auditor General of India, Controller General ofAccounts and Central Board of Excise and Customs are represented on the ASB. Besides theseinterest-groups, representatives of academic and professional institutions such as Universities,Indian Institutes of Management, Institute of Cost and Works Accountants of India and Instituteof Company Secretaries of India are also represented on the ASB. Apart from these interestgroups,certain elected members of the Central Council of ICAI are also on the ASB.Accounting Standards issued by the ICAI have legal recognition through the Companies Act,1956, whereby every company is required to comply with the Accounting Standards and thestatutory auditors of every company are required to report whether the Accounting Standardshave been complied with or not. Also, the Insurance Regulatory and Development Authority(IRDA) (Preparation of Financial Statements and Auditor’s Report of Insurance Companies)Regulations, 2000 requires insurance companies to follow the Accounting Standards issued bythe ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of Indiaalso require compliance with the Accounting Standards issued by the ICAI from time to time. Section 211 of the Companies Act, 1956, deals with the form and contents of balance sheet andprofit and loss account. The Companies (Amendment) Act, 1999 has inserted new sub-sections3A, 3B and 3C to Section 211, with a view to ensure that the financial statements are prepared [email protected]
in accordance with the Accounting Standards. The new sub-sections as inserted are reproducedbelow:Section 211 (3A): ‘ Every profit and loss account and balance sheet of the company shallcomply with the accounting standards’Section 211 (3B): ‘ Where the profit and loss account and the balance sheet of the company donot comply with the accounting standards, such companies shall disclose in its profit and loss
account and balance sheet, the following, namely:-a) the deviation from the accounting standards;b) the reasons for such deviation; andc) the financial effect, if any, arising due to such deviation’Section 211 (3C): ‘For the purposes of this section, the expression “accounting standards”means the standards of accounting recommended by the Institute of Chartered Accountants ofIndia, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may beprescribed by the Central Government in consultation with the National Advisory Committee onAccounting Standards established under sub- section (1) of section 210A: AS 01. Disclosure of Accounting Policies AS 02. Valuation of Inventories AS 03. Cash Flow Statements AS 04. Contingencies and Events Occurring After the Balance Sheet Date AS 05. Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies AS 06. Depreciation Accounting AS 07. Construction Contracts AS 08. Accounting for Research and Development (Not Applicable now) AS 09. Revenue Recognition
Procedure for Issuing Accounting Standards Accounting Standard Board (ASB) determines the broad areas in which Accounting Standards
need to be formulated. In the preparation of AS, ASB is assisted by Study Groups. ASB also holds discussions with representative of Government, Public Sector Undertakings,
Industry and other organizations (ICSI/ICWAI) for ascertaining their views. An exposure draft of the proposed standard is prepared and issued for comments by members
of ICAI and the public at large. After taking into consideration the comments received, the draft of the proposed standard will
be finalized by ASB and submitted to the council of the Institute. The council of the Institute will consider the final draft of the proposed Standard and If found
necessary, modify the same in consultation with ASB. The AS on the relevant subject will then be issued under the authority of the council
ACCOUNTING STANDARDS - 01 DISCLOSURE OF ACCOUNTING POLICY
Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.
All significant accounting policies should be disclosed. Such disclosure form part of financial statements. All disclosures should be made at one place.
Specific disclosure for the adoption of fundamental accounting assumptions is not required.
Disclosure of accounting policies cannot remedy a wrong or inappropriate treatment of the item in the accounts.
Any change in accounting policies which has a material effect in the current period or which is reasonably expected to have material effect in later periods should be disclosed. In the case of a change in accounting policies, which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, the fact should be indicated. Fundamental Accounting Assumption: (GCA): 1] Going Concern 2] Consistency 3] Accrual Major considerations governing the selection of accounting policies: 1] Prudence 2] Substance over form (Logic over Law) 3] Materiality The following are examples of the areas in which different accounting policies may be adopted by different enterprises:
Methods of depreciation Methods of translation of foreign currency Valuation of inventories Valuation of investments Treatment of retirement benefits Treatment of contingent liabilities etc.
ACCOUNTING STANDARDS - 02 VALUATION OF INVENTORY
Inventories are assets: held for sale in ordinary course of business; in the process of production fro such sale (WIP); in the form of materials or supplies to be consumed in the production process or in the rendering of services. However, this standard does not apply to the valuation of following inventories: (a) WIP arising under construction contract (Refer AS – 7); (b) WIP arising in the ordinary course of business of service providers; (c) Shares, debentures and other financial instruments held as stock in trade; and (d) Producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realizable value in accordance with well established practices in those industries.
Inventories should be valued at the lower of cost and net realizable value. The cost of inventories should comprise a) All costs of purchase b) Costs of conversion c) Other costs incurred in bringing the inventories to their present location and condition. The costs of purchase consist of a) The purchase price b) Duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities like CENVAT credit) c) Freight inwards and other expenditure directly attributable to the acquisition.
Trade discounts (but not cash discounts), rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. The costs of conversion include direct costs and systematic allocation of fixed and variable production overhead. Allocation of fixed overheads is based on the normal capacity of the production facilities. Normal capacity is the production, expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Under Recovery: Unallocated overheads are recognized as an expense in the period in which they are incurred. Example: Normal capacity = 20000 units Production = 18000 units Sales = 16000 units Closing Stock = 2000 units Fixed Overheads = Rs. 60000/- Then, Recovery rate = Rs60000/20000 = Rs 3 per unit Fixed Overheads will be bifurcated into three parts: Cost of Sales : 16000 x 3 = 48000 Closing Stock : 2000 x 3 = 6000 Under Recovery : Rs. 6000 (to be charged to P/L) (Apparently it seems that fixed cost element in closing stock should be 60000/18000*2000 =Rs 6666.67. but this is wrong as per AS-2) Over Recovery: In period of high production, the amount of fixed production overheads is allocated to each unit of production is decreased so that inventories. Example: Normal capacity = 20000 units Production = 25000 units Sales = 23000 units Closing Stock = 2000 units Fixed Overheads = Rs 60000/- Than, Recovery Rate = Rs 60000/20000 = Rs 3 per unit But, Revised Recovery Rate = Rs 60000/25000 = Rs. 2.40 per unit Cost of Sales : 23000 x 2.4 = Rs. 55200 Closing Stock : 2000 x 2.4 = Rs. 4800 Joint or by products: In case of joint or by products, the costs incurred up to the stage of split off should be allocated on a rational and consistent basis. The basis of allocation may be sale value at split off point or sale value at the completion of production. In case of the by products of negligible value or wastes, valuation may be taken at net realizable value. The cost of main product is then joint cost minus net realizable value of by product or waste. The other costs are also included in the cost of inventory to the extent they contribute in bringing the inventory to its present location and condition. Interest and other borrowing costs are usually not included in cost of inventory. However, AS-16 recommends the areas where borrowing costs are taken as cost of inventory. Certain costs are strictly not taken as cost of inventory. (a) Abnormal amounts of wasted materials, labour, or other production costs; (b) Storage costs, unless those costs are necessary in the production process prior to a further
production stage; [email protected]
(c) Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and (d) Selling and Distribution costs.
Cost Formula: Specific identification method for determining cost of inventories
Specific identification method means directly linking the cost with specific item of inventories. This method has application in following conditions:
In case of purchase of item specifically segregated for specific project and is not ordinarily interchangeable.
In case of goods of services produced and segregated for specific project. Where Specific Identification method is not applicable
The cost of inventories is valued by the following methods; FIFO ( First In First Out) Method Weighted Average Cost
[email protected] of inventories in certain conditions: The following methods may be used for convenience if the results approximate actual cost. Standard Cost: It takes into account normal level of consumption of material and supplies, labour, efficiency and capacity utilization. It must be regularly reviewed taking into consideration the current condition. Retail Method: Normally applicable for retail trade. Cost of inventory is determined by reducing the gross margin from the sale value of inventory. Net Realisable Value: NRV means the estimated selling price in ordinary course of business, at the time of valuation, less estimated cost of completion and estimated cost necessary to make the sale. Comparison between net realizable value and cost of inventory The comparison between cost and net realizable value should be made on item-by-item basis. (In some cases, group of items-by-group of item basis) For Example: Cost NRV Inventory Value as per AS-2 Item A 100 90 90 Item B 100 115 100 Total 200 205 200 190 Raw Material Valuation If the finished goods, to which raw material is applied, is sold at profit, RAW MATERIAL is valued at cost irrespective of its NRV level being lower to its costs.
ACCOUNTING STANDARDS - 03 CASH FLOW STATEMENT
Definitions: Cash comprises cash on hand and cash at bank. (Demand Deposits with bank) Cash Equivalents are
Short Term Highly Liquid Investments (Maturity around 3 months)
Subject to insignificant risk of changes in value.
Cash Flows are inflows and outflows of cash and cash equivalents. Cash Flow Statement represents the cash flows during the specified period by operating, investing and financing activities. Operating Activities are the principal revenue-producing activities of the enterprise and other activities that are not investing activities and financing activities. Example: 1] Cash receipts from sales of goods/services 2] Cash receipts from royalties, fees and other revenue items 3] Cash payments for salaries, wages and rent 4] Cash payment to suppliers for goods 5] Cash payments or refunds of Income Tax unless they can be specifically identified with financing or investing activities 6] Cash receipts and payments to future contracts, forward contracts when the contracts are held for trading purposes. Cash from operating activities can be disclosed either by DIRECT METHOD OR BY INDIRECT METHOD. Investing Activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Example: 1] Cash payments/receipts to acquire/sale of fixed assets including intangible assets 2] Cash payments to acquire shares or interest in joint ventures (other than the cases where instruments are considered as cash equivalents) 3] Cash advances and loans made to third parties (Loan sanctioned by a financial enterprise is operating activity) 4] Dividends and Interest received 5] Cash flows from acquisitions and disposal of subsidiaries Financing Activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowing of the enterprise. Example: 1] Cash proceeds from issue of shares and debentures 2] Buy back of shares 3] Redemption of Preference shares or debentures 4] Cash repayments of amount borrowed. 5] Dividend and Interest paid An enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities. However, cash flows from following activities may be reported on a net basis.
Cash receipts and payments on behalf of customers
For example: Cash collected on behalf of, and paid over to, the owners of properties. Cash flows from items in which turnover is quick, the amounts are large and the maturities are
short.
For example: Purchase and sale of investments For Financial Enterprise: Cash receipts and payments for the acceptance and repayment of
deposits with a fixed maturity date.
For Financial Enterprise: Deposits placed/withdrawn from other financial enterprises For Financial Enterprise: Cash advances and loans made to customers and the repayment of
those advances and loans. Foreign Currency Cash Flows: Cash flows arising in foreign currency should be recorded in enterprise’ reporting currency applying the exchange conversion rate existing on the date of cash flow. The effect of changes in exchange rates of cash and cash equivalents held in foreign currency should be reported as separate part of the reconciliation of the changes in cash and cash equivalents during the period. Extraordinary Items: These items should be separately shown under respective heads of cash from operating, investing and financing activities. Investing and financing transactions that do not require the use of cash and cash equivalents should be excluded from a cash flow statement. For Example: A] The conversion of debt to equity B] Acquisition of an enterprise by means of issue of shares Other Disclosure: Components of cash and cash equivalents. Reconciliation of closing cash and cash equivalents with items of balance sheet The amount of significant cash and cash equivalent balances held by the enterprise, which are not available for use by it.
ACCOUNTING STANDARDS - 04 CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
Contingency : A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of one or more uncertain future events. Accounting Treatment: If it is likely that a contingency will result in LOSS: It is prudent to provide for that loss in the financial statements. PROFIT: Not recognized as revenue (However, when the realization of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.) The estimates of the outcome and of the financial effect of contingencies are determined a) by the judgment of the management by review of events occurring after the balance sheet date. b) by experience of the enterprise in similar transaction c) by reviewing reports from independent experts. If estimation cannot be made, disclosure is made of the existence and nature of the contingency. Provisions for contingencies are not made in respect of general or unspecified risks. The existence and amount of guarantees and obligations arising from discounted bills of exchange are generally disclosed by way of note even though the possibility of loss is remote. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if: it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and a reasonable estimate of the amount of the resulting loss can be made. If either of aforesaid two conditions is not met, e.g. where a reasonable estimate of the loss is not practicable, the existence of the contingency should be disclosed by way of note unless the possibility of loss is remote. Such disclosure should provide following information: a) The nature of the contingency; b) The uncertainties which may affect the future outcome;
c) An estimate of the financial effect or a statement that such an estimate cannot be made. Events Occurring after the Balance Sheet Date:
[email protected] occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in case of a company, and, by the corresponding approving authority in the case of any other entity. Two types of events can be identifiedAdjusting EventThose, which provide further evidence of conditions that, existed at the balance sheet date Actual adjustments in financial statements are required for adjusting event. Exceptions: 1] Although, not adjusting event, Proposed dividend are adjusted in books of account. 2] Adjustments are required for the events, which occur after balance sheet date that indicates that fundamental accounting assumption of going concern is no longer, appropriate. Non-Adjusting Events: Those, hitch are indicative of conditions that arose subsequent to the balance sheet date. No adjustments are required to be made for such events. But, disclosures should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise. Such disclosure should provide following information:
The nature of the events An estimate of the financial effect, or a statement that such an estimate cannot be made.
ACCOUNTING STANDARDS - 05 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICY
All items of income and expense, which are recognized in a period, should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:
Profit or loss from ordinary activities; and Extraordinary items.
Ordinary Activities are any activities, which are undertaken by an enterprise as part of its business, and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities. When items of income and expenses within profit or loss from ordinary activities are of such size, nature that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed properly. Examples of such circumstances are: (Exceptional Items)
Disposal of items of fixed assets Litigation settlements Legislative changes having retrospective application Disposal of long term investments Reversal of provisions
Extraordinary items are income or expense that arises from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:
Attachment of property of the enterprise; An earthquake
However, claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks. Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived. Prior Period Items: Prior period items are income or expenses that arise in the current period as a result of ERROR or OMMISSIONS in the preparation of the financial statements of one or more prior periods. The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived. Changes in Accounting Policy: Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements. A change in an accounting policy should be made only if the adoption of a different accounting policy is required: a) By statute b) For compliance with an accounting standard c) If it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise. Any change in accounting policy which has a material effect, should be disclosed. Such changes should be disclosed in the statement of profit and loss in a manner that their impact on profit or loss can be perceived. Where the effect of such change is not ascertainable, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. The following are not changes in accounting policies: a) The adoption of an accounting policy for events which differ in substance from previously occurring events e.g. introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement; and b) The adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial. Change in Accounting Estimate: The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was previously for the estimate. For example, the effect of a change in an accounting estimate that was previously included as an extraordinary item is reported as an extraordinary item.
Clarifications: A) Change in accounting estimate does not bring the adjustment within the definitions of an extraordinary item or a prior period item. B) Sometimes, it is difficult to distinguish between a change in an accounting policy and a change in accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosures.
ACCOUNTING STANDARDS - 06 DEPRECIATION ACCOUNTING
Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined. The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. Depreciable assets are assets which [1] are expected to be used during more than one accounting period; and [2] have a limited useful life; and [3] are held by an enterprise for use in the production or supply or for administrative purposes Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost less the estimated residual value. Useful life is the period over which a depreciable asset is expected to be used by the enterprise. The useful life of a depreciable asset is shorter than its physical life. There are two method of depreciation: 1] Straight Line Method (SLM) 2] Written Down Value Method (WDVM) Note: A combination of more than one method may be used. The depreciation method selected should be applied consistently from period to period. The change in method of depreciation should be made only if; The adoption of the new method is required by statute; OR For compliance with an accounting standard; OR If it is considered that change would result in a more appropriate preparation of financial statement; or When there is change in method of depreciation, depreciation should be recalculated in accordance with the new method from the date of the assets coming into use. (i.e. RETROSPECTIVELY) The deficiency or surplus arising from such recomputation should be adjusted in the year of change through profit and loss account. Such change should be treated as a change in accounting policy and its effect should be quantified and disclosed. The useful lives of major depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life, the unamortised depreciable amount should be charged over the revised remaining useful life. (i.e. PROSPECTIVELY) Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. The depreciation on such addition may also be applied at the rate applied to the existing asset. Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of estimate of its own useful life.
Where the historical cost of a depreciable asset has undergone a change due to increase or decrease in the long term liability on account of exchange fluctuations, price adjustments, changes in
duties or similar factors, the depreciation on the revised unamortised depreciable amount should be provided prospectively over the residual useful life of the asset. This accounting standard is not applied on the following items. Forests and plantations Wasting assets Research and development expenditure Goodwill Live stock
Disclosure Requirements
a) The historical cost b) Total depreciation for each class charged during the period c) The related accumulated depreciation d) Depreciation method used (Accounting policy) e) Depreciation rates if they are different from those prescribed by the statute governing the enterprise
ACCOUNTING STANDARDS - 09 REVENUE RECOGNITION
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue Includes: - Proceeds from sale of goods - Proceeds from rendering of services - Interest, royalty and dividends. Sale of goods - Revenue from sales should be recognized when - All significant risks and rewards of ownership have been transferred to the buyer from the seller. - Ultimate reliability of receipt is reasonably certain. Rendering of Services Revenue from service transactions is usually recognized as the service is performed, either by proportionate completion method or by the completed service contract method. Proportionate Completion Method – This is a method of accounting, which recognises revenue in the statement of profit and loss proportionately with degree of completion of services under a contract. Revenue is recognised by reference to the performance of each act. The revenue recognised under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. Completed Service Contract Method – This is a method of accounting, which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. Revenue under this method is recognised on completion or substantial completion of the job. Revenue from Interest: - Recognised on time proportion basis Revenue from Royalties: - Recognised on accrual basis in accordance with the terms of the relevant agreement. Revenue from Dividends: - Recognised when right to receive is established Subsequent Uncertainty In Collection: - When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of services, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
Disclosure: An enterprise should disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. EXAMPLES 1] On sale, buyer takes title and accepts billing but delivery is delayed at buyer’s request - Revenue should be recognised notwithstanding that physical delivery has not been completed. 2] Delivery subject to installations and inspections - Revenue should not be recognised until the customer accepts delivery and installation and inspection are complete. However, when installation process is very simple, revenue should be recognised. For example, Television sale subject to installation. 3] Sale on approval - Revenue should not be recognised until the goods have been formally accepted or time for rejection has elapsed or where no time has been fixed, a reasonable time has elapsed. 4] Sales with the condition of ‘money back if not completely satisfied’ - It may be appropriate to recognize the sale but to make suitable provision for returns based on previous experience. 5] Consignment sales - Revenue should not be recognised until the goods are sold to a third party. 6] Installment sales - Revenue of sale price excluding interest should be recognised on the date of sale. 7] Special order and shipments - Revenue from such sales should be recognized when the goods are identified and ready for delivery. 8] Where seller concurrently agrees to repurchase the same goods at a later date - The sale should not be recognised, as this is a financial arrangement. 9] Subscriptions received for publications - Revenue received or billed should be deferred and recognised either on a straight-line basis over time or where the items delivered vary in value from period to period, revenue should be based on the sales value of the item delivered. 10] Advertisement commission received - It is recognised when the advertisement appears before public. 11] Tuition fees received - Should be recognised over the period of instruction. 12] Entrance and membership fees Entrance fee is generally capitalized If the membership fee permits only membership and all other services or products are paid for separately, the fee should be recognised when received. If the membership fee entitles the member to services or publications to be provided during the year, it should be recognised on a systematic and rational basis having regard to the timing and nature of all services. 13] Sale of show tickets - Revenue should be recognised when the event takes place. 14] Guaranteed sales of agricultural crops - When sale is assured under forward contract or government guarantee, the crops can be recognised at net realizable value although it does not satisfy the criteria of revenue recognition. The above accounting standard is not applicable for:
Revenue arising from construction contracts [email protected]
Revenue arising from hire purchase, lease agreements Revenue arising from Government grants and subsidies
Revenue of Insurance companies arising from insurance contracts Profit or loss on sale of fixed assets Realised or unrealized gains resulting from changes in foreign exchange rates
Harmonization of Accounting Standards
International community has long back recognised the need for moving towards harmonization of the accounting standard across the globe. “Harmonization of accounting standards” can be defined as the continuous process of ensuring that the Generally Accepted Accounting Principles (GAAP) are
formulated, aligned and updated to international [email protected] practices (GAAPs in other countries) with suitable modifications and fine tuning considering the domestic conditions. Why Harmonize Accounting Standards after all?Under this global business scenario, the residents of the business community are in badly need of a common accounting language that should be spoken by all of them across the globe. A financial reporting system of global standard is a pre-requisite for attracting foreign as well as present and prospective investors at home alike that should be achieved through harmonization of accounting standards. Accounting Standards are the policy documents (authoritative statements of best accounting practice) issued by recognized expert accountancy bodies relating to various aspects of measurement, treatment and disclosure of accounting transactions and events.As relate to the codification of Generally Accepted Accounting Principles (GAAP). These are stated to be norms of accounting policies and practices by way of codes or guidelines to direct as to how the items which go to make up the financial statements should be dealt with in accounts and presented in the annual accounts. Accounting standards are being established both at national and international levels. But the variety of accounting standards and principlesamong the nations of the world has been a sustainable problem for the globalize business environment. To overcomethese problems, harmonization of accounting standards has already beenstarted. Accounting harmonization is not an end by itself, but it is a means to an end. The ultimate objective ofharmonizing accounting practices among countries is to foster international comparability of accounts. The mostremarkable phenomenon in the sphere of promoting global harmonization process in accounting is the emergenceof international accounting standards. The International AccountingCommittee (IASC), now International Accounting Standards Board (IASB) was formed on 29th June 1973, with its secretariat and head quarters in London. National standard setting bodies like Financial Accounting Standards Boards (FASB) of USA, Accounting Standards Boards (ASB) of UK, and India generally frame accounting standards in the line of IASC after due consideration of the local laws and
conditions. In India the [email protected]
Accounting Standards Board (ASB) was constituted by the Institute of Chartered Accountants of India (ICAI)on 21st April 1977 with the function of formulating accounting standards.Academicians, regulators and governments have been constantly striving to harmonize (i.e. to bring in line or match) the local/domestic Accounting Standards (AS), also referred to as Generally Accepted Accounting Principles (GAAP), with the International AccountingAccounting standards are solid principles for financial accounting and reportingdeveloped through a structured standard setting process and issued by arecognized standard setting body (an Accounting Standards Board).
Standards (IAS) issued by the UK based International Accounting Standards Board (IASB) (formerly the International Accounting Standards Committee-IASC).The IASB has been trying to harmonize international accounting principles since 1973. Further, the IASB and the International Organization of Securities Commissions (IOSCO) have been jointly working on
harmonization since July 1995, and in May 2000 the [email protected]
IOSCO finished its review of the IAS and recommended usage of certain IAS, supplemented with reconciliation, disclosure and interpretations.Accounting standards spell out how transactions and other events are to berecognized, measured, presented and disclosed in financial statements. Thepurpose of such standards is to meet the needs of users of financial statementsby providing the information considered necessary to make informed decisions
We difine disclosure as the value added statements or additional informationgiven to cover strategic business areas, which are less covered in the accounts.On the other hand, harmonization reduces the differences in accountingpractices across countries ultimately resulting from a set of international normsto be followed worldwide. (Doupnik, et al, 1993)
1.3 FORCES AND PRESSURES FOR ACCOUNTINGHARMONIZATIONThe subject matter “Harmonization of disclosure practices” has been discussed
and will continue to be discussed by different scholars, [email protected] accounting bodies,researchers, governments, and regulatory organizations as long as the needs ofall parties with interests in financial statements are not fully met. In order tomeet the needs of all, efforts have been applied to setting standards that will beinternationally/continentally recognised and applied. The subject has a longhistory from when it was first handled, and has been an essentially politicalprocess with a variety of organizations, both public and private, all of themhaving varying objectives, scope, and powers of enforcement.Different country groups practicing different accounting systems havedistinctive and unique patterns, depending on the history and culture. Ifsecurities markets were to continue to operate in an international perspective,no matter where the parent company is based, then investors and other userswould prefer accounting standards to be harmonized for easy understandingand comparability. Also, since most multinational firms are in the process of
globalization, and because of the free movement of securities and other formsof investments, the integration of markets has brought about some convergenceof accounting practices at the level of consolidated accounts of MultinationalEnterprises (MNEs) listed on cross boarder stock exchange markets
Uniform disclosure, therefore, should establish the possibility for financialinformation to be interpreted by any stakeholder, prospective stakeholders,government and all other interested parties irregardless of location, to makeinformed decision. A wide range of organizations and user groups have calledfor additional and more comparable information. Those who have been inactive support of international standard setting are governments andinternational intergovernmental organizations, trade unions and employees,investors and financial analysts, bankers, lenders, creditors, accountants and
auditors, and the general public. [email protected]
Companies reporting policies and practices are influenced by three majorfactors: their company culture; laws and regulations; and the internationalbusiness environment. The company’s culture stems from the corporation’sobjectives, especially its reporting motives. A company that targets customersadopts a reporting spirit that fills its annual reports with customer orientedinformation. A company that targets investors prepares information to meetinvestors’ needs. The modern corporate annual report has become a major toolfor promotion by large listed companies. “Poorly packaged, statute-drivenaccounts are increasingly being replaced by a professionally designed glossybrochure in which the financial statements seem to play only a supporting role.Photographs, graphs and text are often prominently presented at the front, withthe balance sheet, income statement and notes to the accounts being regulated. The annual report has become part of corporate public relations”(Beattie, et al, 1996). Most multinational enterprises (MNEs) that seek international listing (i.e. to have their securities listed in a foreign stock exchange) adopt a policy that to some extend deviates from national laws. They sometimes prepare two sets of accounts – one using the national and the other in accordance with the international standards.2 In order to reduce the cost of capital, most firms give information even beyond the recommendations of national laws. However, Verrecchia (1999) argues that the compelling evidence indicates more disclosure results to more liquid marketsThe Need for HarmonizationThis harmonization is needed due to the globalization of businesses and services and increase in cross-border investments and borrowings. Some of the benefits of harmonization are as under: It ensures reliable and high quality financial reporting and disclosures. In certain cases, it can prove to be crucial to the economicand financial development of a country● It enables a systematic review and evaluation of the performance of a multinational company having
subsidiaries and associates in various countries wherein each country has its own set of GAAP [email protected]
● It makes the comparison of the performance of a company against its domestic and international peers easier and more meaningful● It adds to the international credibility of a company● It is a precursor for accessing international capital markets which can, in turn, reduce the capital cost and consequently, improve the performance of a company● It provides a level playing field where no country is advantaged or disadvantaged by its GAAP. On these lines, Arthur Levitt, former chairman of the Securities & ExchangeCommission (SEC) of USA, has stated that financial reporting standards that cross national borders are not merely an ideal for a better global marketplace –they are fundamental to its very existence.The Recent Convergence Agreement between the FASB and IASBA crucial landmark was reached in October 2002, when the Financial Accounting Standards Board (FASB) of the USA and the IASB, the world’s most influentialaccounting standards board signed The Norwalk Agreement i.e. Convergence Agreement to create a set of key international standards.The two Boards have agreed on the following matters:● To undertake a short-term project aimed at removing the various differences between US GAAP and International Financial Reporting Standards (IFRS) which include the IAS.● To remove the other differences between the IFRS and US GAAP that will remain at January 1, 2005 through coordination of their future work programs.The adoption and usage of IAS and harmonization of domestic GAAP with IAS will be useful and
[email protected] when the following aspects are dealt with:1.The domestic GAAP and IAS need to be followed and strictly complied by the companies. For ensuring such compliance, it is necessary to establish and put into place an effective and independent legal framework for detecting and penalizing non-compliances, frauds and manipulations.2. In this context, the recent introduction of the process of conducting peer reviews introduced by the Institute of Chartered Accountants of India (ICAI),in line with international norms, is a welcome step.3. Domestic GAAP should be formulated by independent and private professional bodies or associations like in Australia, Canada, UK, USA and India, rather than the government bodies like in France, Germany and Japan4. Managerial compensation and auditor remuneration needs to be competitive and market-based to avoid the possibility of misreporting of financial statements. This is because in most cases, especially in advanced countries, remuneration, bonuses, stock options and other benefits are directly correlated to the success and more importantly, the financial performance of the company.5. With the ongoing globalization and the constant change in which businesses and services are conducted and provided, GAAP need to be updated by countries regularly and also harmonized. But still the harmonization process has a long way to go. Many standard setting bodies and regulators of different nations are ardent protectors of their local standards, they are in no mood to allow their job being taken over by a foreign entity, British Telecom Inc. reported a net profit of £1767 for the year ended 31-3-1994 under the UKGAAP but under the US GAAP reconciliation- the net profit reduced to £1476. Key points is Valuation of Inventories, Depreciation(straight line method(SLM) or Written Down Value (WDV)). we have a couple of strong variants of accounting practices (say, for example, US GAAP, UK GAAP, IAS etc.) over the world existed and practiced simultaneously. These variants are working as threats towards harmonization of accounting practices. The day is not far away when we will observe that accounting world is controlled and guided by a single set of standards giving it a status of legal discipline in true sense. This "harmonization" of accounting standards will help the
world economy in the following ways: by facilitating international transactions and minimizing exchange costs by providing increasingly "perfect" information; by standardizing information to world-wide economic policy-makers; by improving financialmarkets information; and by improving government accountability. ICAI president K. S. Vikamsey (2001) is ofopinion that ‘People who invest overseas naturally want to be able to keep track of the financial health of the securities issuers. Convergence of accounting standards is the only means to achieve this. Only by talking the same language one can understand each other across borders. International Accounting Standards Committee (IASC) as a worldwide standard setter. Further, it was followed by the reformation of IASC to International Accounting Standards Board (IASB) in 2001. Consequently, IAS is now renamed as International Financial Reporting Standards (IFRS), have brought into limelight. almost all countries of the world are interested to follow IAS as theiraccounting standards. USA is the only main country reluctant to adopt it. Kuwait adopted IAS as its national standards. Egypt, Egyptian Accounting standards have prepared to comply with international accounting standards. Canadian Accounting Standard Board (CASB) has also announced its intention to adopt International FinancialReporting Standards (IFRS). Japan remove the differences between Japanese Accounting Standards (JAS) and IFRS. Hong Kong is an important international financial hub, HKICPA has further committed time and resources to support convergence. New Zealand’s Accounting Standards Review Board (ASRB) and
[email protected] Reporting Standards Board (NZ FRSB)have adopted 36 new accounting standards and 12 interpretations in January 2005. Australian Accounting Standards Board (AASB) had issued standards and interpretations that allaccounting standards of Australia that are equivalent to International Financial Reporting Standards (A IFRS) adopted from 2005 in their country. The US is the largest market and it is important for IASC standards to beharmonized with those prevailing there. The US lobby is strong, and they have formed the G4 nations, with the UK,Canada, and Australia (with New Zealand) as the other members. IASC merely enjoys observer status in the meetings of the G4, and cannot vote. Even when the standards are only slightly different, the US accounting body treats them as a big difference, the idea being to show that their standards are the best. However, except US all other members of G4 has adopted the IAS more or less to some extent.
human resource accountingIt is true that worldwide, knowledge has become the key determinant for economic and business success, but Indian companies focus on ‘Return on Investment’ (RoI), with very few concrete steps being taken to track ‘Return on Knowledge’. “Human Resource Accounting (HRA) is basically an information
system that tells management what changes are occurring over time to the human resources of the business. HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organisation,” says P K Gupta. Organisations can actually find out how much they can earn from an individual, as the intellectual assets of a company are often worth three or four times the tangible book value. Necessity of HR: Realizing this, many companies world-over are making HRA as a necessary element on their balance sheets. One of the best examples is of the Denmark Government. The Danish Ministry of Business and Industry has issued a directive that with effect from the trading year 2005, all companies registered in Denmark will be required to include in their annual reports information on customers, processes and human capital. A minimum of five measures for each is required, and comparison with the previous two years must be shown.HR as an asset:The Indian Companies Act does not provide any scope for furnishing any significant information about humanresources in financial statements. But a growing trend towards the measurement and reporting of human resources, partienlarly in the public sector is noticeable during the past few years. BHEL, Cement Corporation of India, ONGC, Engineers India Ltd., National Thermal Power Corporation, Minerals and Metals Trading Corporation, Madras Refineries, Oil India Ltd., Associated Cement Companies. SPIC, Metallurgical and Engineering ConsultantsIndia Ltd., Cochin Refineries Ltd. etc.In India, there are very few companies like BHEL, Infosys and Reliance Industries, which have implemented HRA and some are working on it. Infosys, which started showing human resource as an asset in its balance sheet, has been reaping high market valuations. NIIT has been following a similar method called Economic Value Addition (EVA), which also helps in assessing the real value that an employee can fetch for the company. Basically HRA can be tracked through two methods—cost-based analysis and value-based analysis. The cost-based approach focuses on the cost parameters, which may relate to historical cost, replacement cost, or opportunity cost. The value-based approach suggests that the value of human resources depends upon their capacity to generate revenue. This approach can be further sub-divided into two broad categories: non-monetary and monetary. For valuing human resources,different models have been developed. Some of them are opportunity cost Approach.standard cost Approach currentpurchasing power Approach, Lev and schwartz present value of future earnings Model Flamholtz's stochastic rewards valuation Model etc. Of these, the model suggested by Lev and schwartz have become popular. Under this method, the future earnings of the human resources of the organisation until their retirement is aggregated anddiscounted at the cost of capital to arrive at the present value.HRA can help in creating, is goodwill for a companyHRA also helps in examining expenditure on personAnother aspect working against the acceptance of HRA is the need for extensive research that it entails. Many companies do not want to go into the intricacies of finding the value of their human resources.
ENVIRONMENTAL ACCOUNTING
green GDP. "green accounting", "resource accounting"Responsibility towards environment has become one of the most crucial areas of socialresponsibility. Environmental accounting is an inclusive field of accounting. It provides reportsfor both internal use, generating environmental information to help make management decisions on pricing, controlling overhead and capital budgeting, and external use, disclosing environmental information of interest to the public and to the financial community. Internal use is better termed environmental management accounting. The developing countries like India are facing the twinproblem of protecting the environment and promoting economic development. World Bank officials for 1992
(M. Balachandran 2002) shows the impact of the major problems in terms of cost. They have calculated that damage to environment costs India about Rs. 34,000 cr per year, about 9.5 per cent of gross domestic product. the proper accounting work is done either by the individual firm or by the Government itself, it cannot be determined that both has been fulfilling their responsibilities towards environment or not. Therefore, the needof environmental accountingImpact of business activity on the environment is found in several forms.• Media: air, water, underground pollution. • Targets: drinking water, land and habitat forendangered and threatened species. • Global sites: oceans, atmosphere, land mass.An array of pollutants, including toxic, hazardous and ‘warming’, is accountable to business activities. From this range of environmental impacts, multiple disciplines are needed for analysis of effects, and forintegration into management decisions and accounting reporting.An environmental accounting framework is yet to develop; such a framework would contributestandards for reporting, and standards for accounting.The emphasis of a framework is to provide a general fit over the area regulated:(i) raise awareness of environmental issues; (ii) develop guidelines to assist identification of environmental issues and evaluation and reporting of those issues; (iii) provide education programs acrossdisciplines focused on environmental issues and their accounting treatment and (iv) develop practices of environmental accounting, with recommendations on best practices. A fifth direction is to link teaching
with developments and practices in business. Environmental management accounting (EMA). EMA analyzes environmentally related financial costs and benefits, contributing to recognition of the high and increasing levels of capital and operating expenses, for pollution control equipment, and environmental taxes. Also, possible environmental initiative.Environmental cost accountingAn advanced step of development of environmental accounting is development of environmentalcost accounting (ECA). Cost accounting is defined as use of the accounting record to directly assess costs to products and processes (Lally, 1998). In this approach, costs are accounted for by their specific causes.Environmental cost accounting directly places a cost on every environmental aspect, and determines the cost of all types of related action. Environmental actions include pollution prevention, environmental design and environmental management. Past approaches on environmental impacts were based mainlyon environmental cleanup costs and past product disposal. Another significant contribution of ECA is itslinkage to ISO 14000. Where a company adopts ISO 14000 standards, environmental policy has become a proactive decision of business organizations. INTEGRATING ENVIRONMENTALPOLICY IN BUSINESS STRATEGY.Government directedCommon sense initiatives --Pollution controlTransportation partners-- Use of vehiclesGreen Lights Program---Energy efficiencyWaste Wise Program --RecyclingClimate Wise Program-- Emissions controlUnited Nations Environment Programme (UNEP) and the World BankThe statistical division of the United Nations (UNSTAT) has developed methodologies fora system of Integrated Environmental and Economic Accounting (SEEA), issued as anSNA handbook on Integrated Environmental and Economic Accounting. In many contexts environmentalaccounting is taken to mean the identification and reporting of environment specific cost such as liability
cost [email protected]
and waste disposal costs. They should take account of its most significant external environmental impacts and in effect, to determine what profit level would be left (if any) if they attempted to leave the planet in the same state at the end of the accounting period as it was in the beginning. Environmental responsibilitycenters, Environmental accounting should be a part of management accounting, Environmental indicatorsshould be calculated, Government should make it compulsory for every, A separate statement should be prepared, Prepare list of various elements causing for pollutionForms of Environmental Accounting1. Environmental Management Accounting (EMA): Management accountingwith a particular focus on material and energy flow information and environmental cost information.2. Environmental Financial Accounting (EFA): Financial Accounting witha particular focus on reporting environmental liability costs3. Environmental National Accounting (ENA): National Level Accounting with a particular focus on natural resources stocks & flows, environmental costs & externality costs etc.The scope of Environmental Accounting (hereinafter called as EA) is very wide. It includes corporate level, national & international level.Limitations of E Accounting
EA suffers from various serious limitations as follows:1. There is no standard accounting method. 2. Comparison between two firms or countries is notpossible if method of accounting is different which is quite obvious.3. Input for EA is not easilyavailable because costs and benefits relevant to the environment are not easily measurable4. Many business and the Government organizations even large and well managed ones don’t adequately track the use ofenergy and material or the cost of inefficient materials use, waste management and related issue.5. It mainly considers the cost internal to the company and excludes cost to society.Legal Framework1. Water (Prevention Act.2. The Air (Prevention and Control of Pollution)Act. The Forest (Conservation)Act, 1980.3. Hazardous Waste rules. Indian Fisheries Act, 1987.I.P.C. N CONSTITUTION ACT. A Central Pollution Control Board (CPCB.Accounting Requirementa. A Gazette Notification on Environmental Audit issued by the Ministry ofEnvironment & Forestsin 1992 (amended vide notification GSR 386 (E),dt.22-04-1993), under the Environmental (Protection ) Act, 1986 has made it mandatory for all the industrial units to submit an environmental statement to the concerned State Pollution Control Boards while seeking consent to operate under the relevant environmental norms.Indian Companies Act, 1956 requires to include in Director’s report environmentrelated policies/ problems and annexure showing details of energy consumption/energy conservation..Cost Accounting Record Rules for various industries made by the Central Government also requiredisclosing monetary and quantitative values in Cost Accounting. ConclusionEnvironmental accounting is in preliminary stage in India and whatever shows in the accounts in this regard is more or less compliance of relevant rules and regulation in the Act. Actually, unless common people of India are not made aware towards environmental safety, development of accounting in this regard is a little bit doubtful.