MISS KOMAL KALRA(ASSIST PROF)

CONTEMPRARY ACCOUNTING

BCOMLL.B 5THSEM

Q1) Discuss the meaning and objectives of corporate Reporting. Mention the steps taken in
recent years to improve corporate reporting.

Ans corporate ownership is divorced from management. With a view to ensure that the funds made available by the
shareholders (a majority of whom will not have a say in the day to day management of the business) are properly
utilised by the managers, law has prescribed specific forms in which the financial reports are to be prepared and
presented.

Objectives of Corporate Reporting/Objectives of Financial

Information
Basically, there are three objectives of financial reporting.

1. To give information useful for making investment and credit decisions. Financial reporting should offer information that
can help present and potential investors and creditors to make rational investment and credit decisions. The information
should be in the form that is easy and understandable to those who have some understanding of business and are willing
to study the information carefully.

2. To provide information useful in assessing cash flow prospects. Financial reporting should supply information to help
present and potential investors and creditors appraise the amounts, timing and possible risk of expected cash receipts from
dividends or interest and the proceeds from the sale, redemption or maturity of stocks or loans.

3. To provide information about business resources claims to those resources and changes in them. Financial information
should give information about the company’s assets, liabilities and shareholders equity.

Financial statements are the most important way of periodically presenting to parties outside the business the information that
has been gathered and processed in the accounting system. These financial statements are “general purpose” because most of the
users are outside the business. Because of potential conflict of interest between managers, who must prepare the statements and
the investors or creditors, who invest in or lend money to the business, these statements are often audited by outside accountants
(known as auditors) to increase creditability and reliability.

Objective of General Purpose Financial Reporting identifies the objective of general purpose financial reporting as the disclosure
of information useful to users for making and evaluating decisions about the allocation of scarce resources. When general
purpose financial reports meet this objective they will also be the means by which preparers of such reports discharge their
accountability to those users. The purpose of this Statement is to identify those attributes (hereinafter “qualitative
characteristics”) that financial information should possess if it is to serve the specified objective.

Concept of Disclosure in Relation to Publish Accounts

Section 210 of the Companies Act, 1956 stipulates that the board of directors of every company should submit, before the annual
general meeting of the company, a duly audited profit and loss account and balance sheet. These documents should be placed
before the meeting within six months of the expiry of the financial year. Three copies of the annual reports as approved by the
shareholder are to be filed with the Registrar of Companies within thirty days of the meeting in which they were approved. The
next section, Section 211 lays down that every balance sheet of a company shall be in the form set out in Part I of Schedule VI
attached to the companies act and that every profit and loss account shall comply with the requirements of Part II of the
schedule. All the companies in India are, by force, made to adopt the format. Any deviation from the form prescribed shall be
made only with the specific approval of Central Government. Corporates should, therefore, exercise utmost care in the
preparation and presentation of the financial statements. It may be mentioned that the message conveyed by these statements are
similar to that of non-corporate reports, except for the greater degree of disclosure, which are on the lines of the generally
accepted accounting principles.
 Disclosure Requirements of Balance Sheet
The balance sheet of a company must be in accordance with the proforma given in Schedule VI Part I of the Indian Companies
Act. This is as per section 211 of the Indian Companies Act, 1956. Sub-section 3A, 3B and 3C of section 211 have made it
compulsory that Profit and Loss account and Balance Sheet of a Company are prepared in accordance with Accounting Standards
prescribed by the Central Government in consolation with National Advisory Committee on Accounting standards (NACAS).

The Act has laid down two forms of Balance Sheet. The two forms are generally known as:

1. Horizontal Form

2. Vertical Form
Statutory Contents of Liabilities side of Balance Sheet

There are two types of items shown on the liabilities side of the Balance sheet.
1. The items relating to owners equity and
2. The items relating to borrowers’ capital
The main items relating to owner’s capital: The main item are as follows:

1. Share capital

2. Reserves and surplus

1. Share Capital: It means the share of the owner’s in the company. There are different types of capital.

(a) Authorized Share Capital: This is the amount of capital which the company is authorized to raise from the public.
Generally authorized capital is given in the memorandum of association, popularly known as M/A at the time of
incorporation of the company. There are two types of share capital – (i) Equity share capital, and (ii) Preference share
capital. It is given by way of information in the balance sheet. It is not added to the liabilities of the company, unless
the entire share capital is issued, subscribed, called up and received in full.

(b) Issued Share Capital: It is that part of issued share capital, which is offered for the public to subscribe till the date
of Balance Sheet. Various types of share capital along with classes and face value etc. are given.

(c) Subscribed Capital:

(i) It is that part of issued share capital which is actually, subscribed by the public along with share value called
up.

(ii) Shares, which are issued other than cash for different consideration and issued, as bonus shares must also be
given.

(iii) Shares on which calls are in arrear must also be shown by way of deduction from called up capital.

(iv) Shares which are forfeited on account of non-payment must be shown separately.

(v) If forfeited shares are reissued in full or in part, in case of profit must be transferred to capital reserve
account only.

2. Reserves and Surplus: As per Companies Act, 1956 the following are the
Reserves and Surplus:

(a) Capital Reserves

(b) Capital Redemption Reserve Account

(c) Securities Premium Account

(d) Other Reserves such as – General Reserve, Reserve for depreciation etc.

(e) Surplus – The net-profit, as per profit and loss account, is to be given.

(f) Proposed Addition to Reserves

(g) Sinking Fund

Borrowers Capital Fund: There are the following types of loan capital.
 1. Secured loans: If any security is given by way of a mortgage or charge on all or any of
its property, the loan is termed as secured loan and shown in the following order:

(i) Debentures: Types of debentures, redeemable and non-redeemable.

(ii) Loans and Advances from Banks

(iii) Loans and Advances from subsidiary company

(iv) Other Loans and Advances if any

2. Unsecured loans: If a company borrows loans without giving any security, then such
loans are termed as unsecured loans. Following are:

(i) Fixed deposits

(ii) Loans and Advances from Subsidiaries

(iii) Loans and Advances from the banks

(iv) Loans and Advances from others

3. Current Liabilities and Provisions:

(a) Current Liabilities: Which are payable within one year are shown in this such as

♦ Acceptances

♦ Sundry creditors

Statutory Contents of Assets side of Balance Sheet

1. Fixed Assets: Fixed assets are those assets, which are used for long-term in the business. Different assets are shown
separately at their original cost and addition to and deductions for depreciation provided for. Fixed Assets include

(a) Goodwill

(b) Land and Building

(c) Lease hold

(d) Railway sidings

Plant & Machinery

Investments: Investments are shown after fixed assets. It is necessary to disclose nature and mode of its valuation of every investment.
Market price or cost price, at which investments are valued, must be disclosed. All investments must be shown separately such as Govt.,
shares, debentures, etc.

Current Assets loans and advances:

Current assets are such assets which are likely to be converted into cash within one year from one balance sheet. Such assets are. (1)
Loose tools (2) Stock in trade

Work in progress (4) Sundry debtors (5) Cash and Bank balance
(e) Loans and advances – it includes loans and advances against purchase of goods and
various expenses.

Miscellaneous Expenditure: Expenses not written off– (1) Preliminary Expenses (2) Discount on issue of shares and debentures (3)
Expenses including commission or brokerage on underwriting (4) Interest paid out of capital (5) Other sums.

Profit and Loss Account: If there is any debit balance in profit and loss account, it will be shown on the assets side of the balance
sheet.

Q2)What is the meaning of accounting standard. Write down its process.

Meaning of Accounting Standards
Accounting standard is an authoritative pronouncement of code of practice of the regulatory accountancy body to be
observed and applied in the preparation and presentation of financial statements. World over, professional bodies
of accountants have the authority and the obligation to prescribe “Accounting Standards”. International Accounting
Standards (IASs) are pronounced by the International Accounting Standards Committee (IASC). The IASC was set up in
1973, with headquarters in London (UK).

In India, the Institute of Chartered Accountants of India (ICAI) had established in 1977 the Accounting Standards
Board (ASB). The composition of ASB includes (i) elected (ii) ex-officio and (iii) co-opted members of the Institute,
nominees of RBI, FICCI, Assocham, ICSI, ICWAI and special invitees from UGC, ICWAI, and SEBI, IDBI and IIM.

ASB is entrusted with the responsibility of formulating standards on significant accounting matters, keeping in view
(a) international developments as also (b) legal requirements in India. According to the preface to the Statement on
Accounting Standards issued by the ICAI, Accounting Standards will be issued by the ASB constituted for the purpose
of harmonising the different and diverse accounting policies and practices in use in India and propagating the
Accounting Standards and persuading the concerned enterprise to adopt them in the preparation and presentation of
financial statement.

Accounting Standards Setting in India

The 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 to harmonise the diverse accounting policies and practices in use in India. After
allowing the adoption of liberalisation and globalisation as the corner stones of Indian economic policies in early ‘90s, and the
growing concern about the need of effective corporate governance in case 90s, 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 due consideration to International Financial
Reporting Standards (IFRSs)/International Accounting Standards (IASs) issued by IASB and tries to integrate them, to the extent
possible, in the light of conditions and practices prevailing in India.

Accounting Standards Setting Process

The accounting standard setting, by its very nature, involves reaching an optimal balance of the requirements of financial
information for various interest-groups having a stake in financial reporting. With a view to reach consensus, to the extent
possible, as to the requirements of the relevant interest-groups and thereby bringing about general acceptance of the Accounting
Standards among such groups, considerable research, consultations and discussions with the representatives of the relevant
interest-groups at different stages of standard formulation become necessary. The standard-setting procedure of the ASB, as
briefly outlined below, is designed in such a way so as to ensure such consultation and discussions:

1. Identification of the broad areas by the ASB for formulating the Accounting Standards.

2. Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed Accounting Standards.

3. Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the
basis of deliberations at the ASB.

4. Circulation of the draft, so revised, among the Council members of the ICAI and 12 other specified. Outside bodies such as
Standing Conference of Public Enterprises (SCOPE), Indian Banks’ Association, Confederation of Indian Industry (CII),
Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C& AG), and Department of
Company Affairs, for comments.

5. Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed
Accounting Standard.

6. Finalization of the Exposure Draft of the proposed Accounting Standard on the basis of comments received and discussion
with the representatives of specified outside bodies.

7. Issuance of the Exposure Draft inviting public comments.

8. Consideration of the comments received on the Exposure Draft and finalization of the draft Accounting Standard by the
ASB for submission to the Council of the ICAI for its consideration and approval for issuance.

9. Consideration of the draft Accounting Standard by the Council of the Institute, and if found necessary, modification
of the draft in consultation with the ASB.
10. The Accounting Standard is issued under the authority of the Council
 Q3) what do you mean by inflation accounting write down the drawbacks of historical method
and explain CPP method.
Meaning and Scope
In view of the above, it has been increasingly felt that the accountant will be failing in his duties if he continues to remain
contented with the time honoured and traditional system of accounting by historical cost. He should move with the time and
evolve a suitable system of accounting to deal with the changing price levels.

Price level accounting may, therefore, be defined as that technique of accounting by which the financial statements are restated to
reflect changes in the general price level. Such changes, as stated earlier, may be either inflationary or deflationary. Of course,
inflation has come to stay and, therefore, price level accounting is more concerned with inflationary tendencies

Inflation Accounting
Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost
accounting in the presence of inflation. Inflation accounting is used in countries experiencing high inflation or hyperinflation. For
example, in countries experiencing hyperinflation the International Accounting Standards Board requires corporate financial
statements to be adjusted for changes in purchasing power using a price index.

“Inflation accounting is a system for accounting that purports to record as a built in mechanism of all economic events in terms
of current cost”.

According to author “Inflation accounting is an accounting technique that aims to record business transactions at current values
and to neutralise the impact of changes in the price on the business transaction”.

“Inflation accounting is a system of accounting just like historical accounting. The difference lies in the process of matching cost
against revenue. In historical accounting cost represents ‘historical cost’ whereas in inflation accounting cost represents the cost
prevailing at the date of sale or at the reporting time”.

The distinctive features of inflation accounting are as follows:

• The recording procedure is automatic

• The unit of measurement is not assumed to be stable
• It considers all elements of the financial statements and is not concerned only with fixed assets or closing stock

Realisation principles are not followed rigidly, particularly, when recording long-term loans and fixed assets at the current value

Major Drawbacks of Historical Cost System

Under a historical cost-based system of accounting, inflation leads to two basic problems. First,
many of the historical numbers appearing on financial statements are not economically relevant
because prices have changed since they were incurred.

Second, since the numbers on financial statements represent dollars expended at different points
of time and, in turn, embody different amounts of purchasing power, they are simply not
additive.

Financial statements that are prepared according to the conventional or historical cost accounting
system, therefore, do not reflect current economic realities, in case of historical accounting
system; accounts are prepared without regard to changes in the price levels. The assets are shown
at the values they were purchased less any depreciation on such values. As a matter of fact their
values might have gone up on account of the inflationary tendencies. Similarly, the sales are
recorded at the current market prices while the inventories are recorded at the prices at which
they were purchased. It may be possible that goods sold may comprise those items that might
have been purchased in earlier years when the prices were lower than the current year. Thus,
neither the balance sheet nor the income statement shows the correct operating and financial
position of the business.

“In most countries, primary financial statements are prepared on the historical cost basis of
accounting without regard either to changes in the general level of prices or to increases in
specific prices of assets held, except to the extent that property, plant and equipment and
investments may be revalued.”

Ignoring general price level changes in financial reporting creates distortions in financial
statements such as

• reported profits may exceed the earnings that could be distributed to shareholders without
impairing the company’s ongoing operations
 • the asset values for inventory, equipment and plant do not reflect their economic value to
the business

• future earnings are not easily projected from historical earnings

• the impact of price changes on monetary assets and liabilities is not clear

• future capital needs are difficult to forecast and may lead to increased leverage, which
increases the business’s risk

• when real economic performance is distorted, these distortions lead to social and political
consequences that damage businesses (examples: poor tax policies and public
misconceptions regarding corporate behaviour).

Thus assumption of a stable monetary unit does not hold good in the present times as a result the practical utility of financial
statements gets diminished. Inflation accounting is the technique of such accounting methods as are designed to mirror the
impact of rising prices on economic magnitudes through the adoption of inflation adjusted accounts.

Methods of Accounting for Changing Prices

The following are the key methods of accounting for price level changes:

1. Current Purchasing Power method

2. Current Cost Accounting method

3. Hybrid method
Current Purchasing Power (CPP) Method

Under this method, all items in the financial statements are to be restated for changes in the
general price level.
CIMA Terminology defines current purchasing power accounting as follows:

“Inflation accounting is a method of accounting for inflation in which the values of the non-
monetary items in the historical cost accounts are adjusted using a general price index to show
the change in the general purchasing power of money. The current purchasing power balance
sheet shows the effect of financial capital maintenance”.

The following steps are followed in order to convert the historical cost based financial statements
into the financial statements based on current costs using the current purchasing power method.

• Calculation of Conversion Factor and Mid-Point Conversion Factor

• Calculation of the Gain or Loss on Monetary Items

• Calculation of Cost of Sales and Inventory at Current Prices
• Calculation of Profits
• Construction of Balance Sheet.

Economic profit is wealth created above the capital cost of the investment. EVA prevents
managers from thinking that the cost of capital is free. In other words, a measure of a company’s
financial performance based on the residual wealth calculated by deducting cost of capital from
its operating profit (adjusted for taxes on a cash basis). The formula for calculating EVA is as
follows:

= Net Operating Profit after Taxes (NOPAT) – (Capital * Cost of Capital)

EVA focuses managers on the question, “For any given investment, will the company generate
returns above the cost of capital?” Companies that embrace EVA have bonus compensation
schemes that reward or punish managers for adding value to or subtracting value from the
company. As with any metric, it’s hard to link precise EVA returns to a specific technology
investment. EVA is ideally suited to publicly traded companies, not private companies, because it
deals with the cost of equity for shareholders, as opposed to debt capital.

If a company invests in manufacturing equipment or a warehouse, how much additional profit

will be required to pay for it? Managers are intuitively aware of the importance of value
creation to their businesses.
 Q4) What is the concept of EVA. Write down its approaches.

Concept of EVA
The New York-based financial advisory Stern Stewart and Co. postulated a concept of economic income in 1990 in the name of
‘Economic Value Added’ (EVA). EVA is a modified version of residual income concept. EVA has provided financial discipline in
many US companies, encouraged managers to act like owners and has boosted shareholders returns and the value of their
companies. The company creates shareholder value only if it generates returns in excess of its cost of capital. The excess of returns
over cost of capital is simply termed as Economic Value Added (EVA).

Approaches to Computation of EVA

The pure EVA calculation for the company as a whole is:

Net Operating Profit After Taxes (NOPAT) — Capital Charge (Capital Investment ×
Cost of Capital)

But purely speaking, there is no net operating profit after taxes (NOPAT) arising out of an IT
investment, so the net financial benefits of the IT investment are used as a replacement for
NOPAT.

Adjustments to ‘Net Operating Profit after Tax’

The adjustments suggested for Net Operating Profit after Tax (NOPAT) are as follows:
• The depreciation charge, if excessive, needs adjustments.
• Certain marketing expenses like advertising or sales promotion for a new brand launch are capitalized and amortised
over the period during which benefits will be reaped.

• Goodwill of an acquired business, if written off, is capitalized and adjusted in NOPAT and equity.

• Expenses incurred on employee training will provide benefits over a period, so these expenses are to be capitalized.

• Accounting principles allow companies to write-off research and development expenses, but these expenses may not be
truly revenue in nature. For successful R&D projects, EVA calculations writes back the R&D expenses and amortises them
over a period during which benefits of the successful R&D projects will be reaped. The NOPAT figure calculated from
Profit and Loss account is adjusted by adding back the R&D expenses and capitalizing them in the balance sheet. Only
these R&D expenses that have no future value are charged to the Income statement.

• During periods of rising prices companies save taxes by adopting the LIFO system of inventory valuation. Under the LIFO
method, costs of the recently acquired raw material are charged to the production while the costs of earlier purchases are
accumulated in inventory thereby understanding the inventory and the profits. For calculating EVA the LIFO system of
valuation is changed to FIFO basis, which is a better basis for estimating

current replacement costs. NOPAT and Equity are adjusted for this change from LIFO to FIFO by adding the difference
between the LIFO and FIFO inventory (or LIFO and FIFO cost of goods sold) to the equity and NOPAT. This way the tax
benefits of LIFO are retained.

• Deferred taxes arise due to the difference in timing of recognition of revenues and expenses for financial reporting versus
reporting for tax purposes. It is basically the accumulation of the difference between accounting provision of taxes and the
tax amount actually paid under the head ‘Reserve for deferred taxes’. NOPAT is adjusted for the tax actually paid, instead
of the accounting provisions. The reserves for deferred taxes are added to the equity.

• Operating leases are to be capitalized. The net present value of the lease payments is capitalised.

• Restructuring expenses and such other expenses, which will benefit the firm in the long run, are capitalised and written-
off over a period.

• Other adjustments like adding back the provision for warranty claims, provisions for bad and doubtful debts are also
made. They are accounted for on cash basis. Similarly, other non-cash bookkeeping entries are adjusted and accounted for
on cash basis.

• Provision for gratuity and pension should be recognised and provided for properly.

Adjustment to ‘Capital Employed’

 For calculation of correct EVA, the following adjustments are required to be made for capital employed:
• The capital employed can be calculated through the assets side of the balance sheet or the liability side. From the asset side,
capital employed is the current assets less the non- interest bearing current liabilities, i.e., the net working capital plus and
net fixed assets.

• From the liabilities side, it is the sum of interest bearing debt (short-term as well as long- term) and net worth less and
non-operating assets.

• Use the beginning of the year capital employed for calculating EVA as this was the capital available to the management to
earn the returns and it helps in evaluating capital budgeting decisions.

• It is prudent to use the book value figure in the EVA calculations, as this is the amount that has been entrusted to the
management to employ in the business. The market value of a firm is the investor’s capital and it is not the same as the
firm’s capital. The capital employed that earns operating profits is the book value of net assets and not the market value of a
firm’s stock.

Adjustment to ‘Cost of Capital’

The third element in EVA calculation is the cost of capital, which is the weighted average of the cost of debt, cost of equity capital
and cost of preference capital, if any.
While the cost of debt is the average interest rate paid by the company on its debt, the cost of equity can be found out using the
Capital Asset Pricing Model (CAPM) and the cost of preference shares can be taken as the fixed rate of dividend.

Q5) What is the concept of Social reporting. Write down its need and scope.

Social reporting is reporting on those activities of an organisation that have an impact on society at large and
are not necessarily represented by its traditional financial report.

Aspects included in social reporting include such information disclosed in the annual reports viz., Statement on
Human Resource Accounting, Statement of Value Added Report on Foreign Currency Transactions (revealing the
balance of payments position) and Accounting for Various Social Objectives. Social and ethical accounting, auditing
and reporting is still relatively new in many developing or third world nations, but is gaining acceptance
internationally as the primary demonstration of social accountability.

Meaning and Nature of Social Reporting

The concept of social responsibility extends beyond the provisions embodied in current law. Essentially, it represents
an emerging debate having its roots in political and social theory. While designing the contents to be included in
social reporting, due care should be taken to see that it does not conflict with the shareholders’ interest. Social
reporting presently is being either included in the Annual Reports or finds some reference in the Chairman’s Address
or the Director’s Report. Social reporting format tends to vary from one company to another company as till date no
format has been described by any Act in India.

Social Corporate Reporting in India

In India, the Companies Act 1956 deals with the preparation of balance sheet and profit and loss account. The Act
requires the auditor to make report under Section 227 to members (shareholders) and express an opinion whether
the company’s balance sheet ad profit and loss account exhibit true and fair view of the company’s state of affairs.

Although, this Act has been amended from time to time, no specific provision has been made requiring companies to
provide social responsibility disclosures to their annual reports. The Government of India appointed a Committee
under the chairmanship of Justice Rajinder Sachar to consider and report on the changes that are necessary in the
form and structure of the Act. The Committee (1978) recommended the inclusion of the following, inter alias, in the
directors report:
“Steps taken by the company in various spheres with a view to discharging its social responsibilities towards different
segments of the society, quantifying where possible and in monetary terms. The Board should also reports on the
future plans of the company towards the discharge of its social responsibilities and duties.”

Some Indian companies have made attempts to provide information on their responsibility activities in published
annual reports and/or through separate means of disclosure. Some companies prepare social income statements and
social balance sheets and report them in their published annual reports.

Need of Social Reporting

It has now become important for companies to identify society’s changing needs. Only a project that yields economic
return while satisfying social priorities should be accepted. Thus, the priorities of the society in today’s environment
need to be looked at. In addition to this, there has been an increase in the number of ethical investors who believe
that they should avoid investing in those companies that are believed to be causing social injury or environmental
damage of one type or the other. So social reporting is equally important for both the management and the society.

The following are the key objectives of social reporting:

To identity, measure and report the net social contribution of an individual firm towards society, this includes not only the costs and benefits of
a firm internally but also those arising from external factors affecting the different segments of the society.

To determine whether the individual firm’s strategies and practices are consistent with widely shared social principles of the society.

Scope of Social Reporting

The following are the major aspects that are covered in social reporting:

Community Development: This includes activities benefiting the general public e.g., food programme, community improvement and
financing of health services, etc.

Human Resources: This area includes social performance directed towards the well being of employees. For example, training
programmes, promotion policies and provision for job enrichment, etc.

Environmental Contribution: Activities directed towards alleviating or preventing environmental

deterioration (pollution), i.e., air, water, noise pollution. In addition, efforts made by the organisation in conservation
of scarce resources and disposal of waste, etc., are included.

Product or Service Contribution: This includes product quality, product safety, etc.

Q6) what is HRA? Explain the difference between historical cost approach and replacement cost
approach.

Meaning of HRA

In simple words, human resource accounting is the art of, valuing, recording and presenting systematically the worth
of human resources in the books of account of an organisation. This definition brings out three important aspects of
human resource accounting:

Valuation of human resources.

Recording the valuation in the books of accounts.

Disclosure of the information in the financial statements of the business.

The American Accounting Society Committee on human resource accounting defines it as follows:

“Human resource accounting is the process of identifying and measuring data about human resources and
communicating this information to interested parties.”
Mr. Woodruff Jr. Vice President of R.G. Barry Corporation defines human resources accounting as: “Human resource
accounting is an attempt to identify and report investments made in the human resources of an organisation that are
presently not accounted for in conventional accounting practice. Basically, it is an information system that tells the
management what changes over time are occurring to the human resources of the business.”

The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human
Resource Accounting as “the process of identifying and measuring data about human resources and communicating
this information to interested parties”. HRA, thus, not only involves measurement of all the costs/investments
associated with the recruitment, placement, training and development of employees, but also the quantification of
the economic value of the people in an organisation.

Flamholtz (1971), too has offered a similar definition for HRA. He defines HRA as “the measurement and reporting of
the cost and value of people in organizational resources”.

As far as statutory requirements go, the Companies Act, 1956 does not demand furnishing of HRA related
information in the financial statements of the companies. The Institute of Chartered Accountants of India too, has
not been able to bring any definitive standard or measurement in the reporting of human resources costs. While the
chairmen in their AGMs often make qualitative pronouncements regarding the importance of human resources,
quantitative information about their contribution is rarely recorded or communicated. There are a few organizations,
however, that do recognize the value of their human resources, and furnish the related information in their annual
reports.

Objectives of HRA

The following are the key objectives of HRA:

 To furnish the information for making the decisions at the investors’ and managers’ level
 To evaluate the return on human investment through the results
 To report the worth of human resources to the organization and society

Nature of HRA
Like any accounting exercise, HRA too depends heavily on the availability of relevant and accurate information. HRA is
essentially a tool to facilitate better planning and decision-making based on the information regarding actual HR costs and
organisational returns. The kind of data that needs to be managed systematically depends upon the purpose for which HRA is
being used by an organisation.

Need and Scope of HRA

According to Likert (1971), HRA serves the following purposes in an organisation:

 It furnishes cost/value information for making management decisions about acquiring, allocating, developing, and
maintaining human resources in order to attain cost- effectiveness.
 It allows management personnel to effectively monitor the use of human resources.
 It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or
conserved.
 It helps in the development of management principles by classifying the financial consequences of various practices.

Historical Cost Approach

According to this approach, the actual cost incurred on recruiting, selecting, hiring, training and developing the human resources
of the organisation are capitalised and written off over the expected useful life of the human resources. The historical cost of
human resources in case of this method is thus treated in the same manner as the cost of any other physical asset. Any
expenditure incurred for training or development of the human resources increases the value of human assets like any other
physical asset and is therefore capitalised in a similar manner. Amortization of the human assets is also done in a similar
 manner. In case the human asset expires before the end of the expected service life period, the whole of the amount not written
off is charged against the revenue of the year in which such an event takes place.
Merits of Historical Cost Approach

The method has the following merits:

• The method is simple to understand and easy to work out.

• The method follows the traditional accounting concept of matching cost with revenue.
• The method can provide a basis for valuing a firm’s returns on its investment on human
resources.

Limitations of Historical Cost Approach

The method suffers from the following limitations:

• The method takes into account only a part of acquisition cost of employee. It does not
consider the aggregate value of their potential services.

• It is difficult to estimate the period over which the human resource will provide service to
the organisation. It thus creates problems in determining the amount to be amortized
over the year.

• The value of human assets according to this method goes on decreasing every year due to
amortization. However, in reality, the value of human assets increases over time on
account of people gaining experience.

Replacement Cost Approach

This approach was developed by Rensis Likert and Eric G. Flamholtz. This approach values the
human resources at their present replacement cost. In other words, human resources of an
organisation are to be valued on the basis of the assumption of what it would cost the firm if the
existing human resources need to be replaced with others of equivalent talents and experience.

Merits of Replacement Cost Approach

The method has the following merits:

• The approach incorporates the current value of the firm’s human resources. Thus, the financial statements
prepared according to this approach are more realistic as compared to those prepared under historical cost
approach.

• The method is more representative and logical.

Limitations of Replacement Cost Approach

The method has the following limitations:

• The method is at variance with conventional accounting practice of valuing assets at historical costs.

• It is almost impossible to ascertain correct replacement cost of existing human resources since there can be no
complete replacement for them.

• There is no objective way for determination of replacement cost. Personal prejudices do work. Moreover, there
is no foolproof method for verification of replacement cost.

Q7) what is the recent issue in corporate reporting.

 Segment Reporting
In recent years, many business enterprises have broadened the scope of their activities to encompass different
industries, foreign countries and markets. Due to the growth of diversified business and expansion of firms into
foreign markets, consolidated information becomes non- homogeneous information. Consolidated statements enable
the management to hide information from external reporting. Some segments may be running at a loss, but the
consolidated statements will merely show the average profit figure (and other information) of all the segments taken
together. It is, therefore, necessary that along with consolidated information segment information is also provided to
the users.
 Social Reporting
Social reporting is reporting on those activities of an organisation that have
an impact on society at large and are not necessarily represented by its
traditional financial report.

Aspects included in social reporting include such information disclosed in the

annual reports viz., Statement on Human Resource Accounting, Statement of Value
Added Report on Foreign Currency Transactions (revealing the balance of
payments position) and Accounting for Various Social Objectives.

The concept of social reporting is gaining popularity on account of the following factors:

• Increasing awareness of society regarding the contributions the corporate units are making.

• Providing meaningful means of identifying and rewarding business for social contribution.
• Identifying adverse effects on the environment of the business houses.
• Social reporting improves credibility and reputation of business.
• Transferring cost of social activities to other segments of society.
The concept of social responsibility extends beyond the provisions embodied in
current law. Essentially, it represents an emerging debate having its roots in
political and social theory.

Transfer Pricing

Large business units are usually organised into different divisions for better control. In such a situation, if
one division supplies its finished output as input to other division, there arises a very important issue.
The issue being at which price should be transferring unit transfer its product or service. Such price is
known as transfer price.

Transfer prices are the amounts charged by one segment of an organization for a product or service that
it supplies to another segment of the same organization.

Transfer price in simple words is the price that one sub-unit (segment, department, division and so on)
of an organization charges for a product or service supplied to another subunit of the same organization.
It is different from the normal price in that both divisions are a part of the same organisation and
therefore it is only an internal transfer and not sale. The pricing of these flows is likely to have an impact
on the performance evaluation of the divisions. Setting of transfer pricing policies within the company is
of great significance. The important issue now is at what price should such transfers be made.

Corporate Governance
Corporate governance denotes of voluntary ethical code of business and management of companies. It aims to
maximize the effectiveness and accountability of the brand of directors. Corporate Governance deals with terms,
procedure, practices and implicit rules that determine a company’s ability to take managerial decisions to
maximize long term shareholders value and also to take care of all other shareholders in the enterprise. Cadbury
Committee England and CII in India has framed certain rules for desirable corporate governance. The Companies
in India now have started attempt to voluntary disclose the compliance of such codes.

Good corporate governance relates to systems of supervision and monitoring that maximise long term shareholder
 value of a company, and also addresses the interests of all other stakeholders in the enterprise. Although corporate
governance varies across countries, there is a growing consensus about the need for four key elements. These are:

• Transparency: Transparency means a commitment that the business is managed along transparent
lines.

• Fairness: Fairness to all stakeholders in the company, but especially to minority shareholders.

• Disclosure: Disclosure of all relevant financial and non-financial information in an easily understood
manner.

• Supervision: Supervision of the company’s activities by a professionally competent and independent

board of directors.

Good corporate governance deals with building trust with customers, suppliers, creditors and diverse investors-
trust that the company will be manage properly, will successfully perpetuate its businesses, will protect and
enhance the capital of its investors, and will increase corporate value for its shareholders.

Bajaj Auto has believed in these principles since its inception and has always discharged its fiduciary obligations
towards its shareholders. During the last two years, we have gone further by steadily increasing the levels of
disclosure in our annual reports-disclosures that go beyond the statutes.

We have accelerated the trend this year. For instance, we have checked our corporate governance
performance against the code prepared by the Confederation of Indian Industry (CII, Desirable Corporate
Governance: A code, April 1988)

Human Resource Accounting

The past few decades have witnessed a global transition from manufacturing to service-based
economies. The fundamental difference between the two lies in the very nature of their assets. In the
former, physical assets like plant, machinery, material, etc., are of utmost importance. In contrast, in the
latter, knowledge and attitudes of the employees assume greater significance. For instance, in the case
of an IT firm, the value of its physical assets is negligible when compared with the value of the
knowledge and skills of its personnel. Similarly, in hospitals, academic institutions, consulting firms etc.,
the total worth of the organisation depends mainly on the skills of its employees and the services they
render. Therefore, the success of these organizations is contingent on the quality of their human
resource – their knowledge, skills, competence, motivation and understanding of the organisational
culture.

In knowledge-driven economies therefore, it is imperative that the humans be recognised as an integral

part of the total worth of an organisation. However, in order to estimate and project the worth of human
capital, it is necessary that some method of quantifying the worth of the knowledge, motivation, skills,
and contribution of the human element as well as that of the organisational processes, like recruitment,
selection, training, etc., which are used to build and support these human aspects, is developed. Human
Resource Accounting (HRA) denotes just this process of quantification/measurement of human
resources.