Contemporary Issues in Accounting

Cost Accounting Issues in Contemporary Accounting

9/1/2015

Submitted By

MBA General Section- B

1. Neeraj Kumar 2. Parneet Kaur 3. Prateek Chauhan 4. Ramneet Singh 5. Rupesh Bajwa

I s s u e s i n C o n t e m p o r a r y A c c o u n t i n g P a g e | 1

Table of Contents Accounting Standard (AS) 17 ....................................................................................................................... 2

Segment Reporting ........................................................................................................................................ 2

Inflation Accounting12

Human Resource Accounting20

Price Level Accounting..31

Social Accounting..........36

References.44


Accounting Standard (AS) 17

Segment Reporting

Introduction Segment reporting is the reporting of the operating segments of a company in the disclosures

accompanying its financial statements. Segment reporting is required for publicly-held entities, and

is not required for privately held ones. Segment reporting is intended to give information to investors

and creditors regarding the financial results and position of the most important operating units of a

company, which they can use as the basis for decisions related to the company.

Consolidated financial statements are prepared and presented to disclose the financial information

on all the different segments of a diversified enterprise. It has been reported that financial statements

user groups find segment information more useful and valuable in assessing an enterprise standing,

its past results and future prospects.

Objective

The objective of this Standard is to establish principles for reporting financial information, about the

different types of products and services an enterprise produces and the different geographical areas

in which it operates. Such information helps users of financial statements:

(a) Better understand the performance of the enterprise;

(b) Better assess the risks and returns of the enterprise; and

(c) Make more informed judgments about the enterprise as a whole.

Many enterprises provide groups of products and services or operate in geographical areas that are

subject to differing rates of profitability, opportunities for growth, future prospects, and risks.

Information about different types of products and services of an enterprise and its operations

in different geographical areas - often called segment information - is relevant to assessing the risks

and returns of a diversified or multi-location enterprise but may not be determinable from the

aggregated data. Therefore, reporting of segment information is widely regarded as necessary for

meeting the needs of users of financial statements.


Scope

This statement should be applied in presenting general purpose financial statements.

1. The requirements of this statement are also applicable in the case of consolidated

financial statements.

2. An enterprise should comply with the requirements of this statement fully and not

selectively.

3. If a single financial report contains both consolidated financial statements and separate

financial statements of the parent, segment information need be presented only on the

basis of the parent, segment information need be presented only on the basis of

consolidated financial statements.

4. The following terms are used in this statement with earnings specified.

a) The nature of the products and services.

b) The nature of the production processes.

c) The type of class of customers for the products and services.

d) The methods used to distribute the products or provide the services.

5. The factors in the previous point for identifying business segments and graphical

segments are not listed in any particular order.

6. A single business segment does not include products and services with significantly

differing risks and returns.

7. Similarly, a single geographical segment does not include operations in economic

environments with significantly differing risks and returns.

8. The predominant sources of risks affects how most enterprises are organized and

managed. Therefore, the organizational structure of an enterprise and its internal financial

reporting system are normally the basis for identifying its segments.

9. Segment revenue, segment expense, segment assets and segment liabilities are

determined before intra-enterprise balances and intra-enterprise transactions are

eliminated as part of the process of preparation of enterprise financial statements, except

to the extent that such intra-enterprise balances and transactions are within a single

segment.


Identifying Reportable Segments

Primary And Secondary Segment Reporting Formats

10. The dominant sources and nature of risks and returns of an enterprise should govern

whether its primary segment reporting format will be business segments or geographical

segments. If the risks and returns of an enterprise are affected predominantly by

differences in the product and services it produces, its primary format for reporting

segment should be business segments with secondary information reported geographical.

Similarly if the risks and returns of the enterprise are affected predominantly by the fact it

operates in different countries or other geographical areas, its primary format for

reporting segment information should be geographical segments, with secondary

information reported or groups of related products and services.

11. For most enterprises, the predominant source of risks and returns determines how the

enterprise is organized and managed. Organizational and management structure of an

enterprise and its internal financial reporting system normally provides the best evidence

of the predominantly risks and returns of an enterprise for the purpose of its segment

reporting. Therefore, except in rare circumstances, an enterprise will report segment

information in its financial statements on the same basis at it reports internally to top

management. Its secondary source of risks and returns becomes its secondary segment

reporting format.

12. A matrix presentation-both business segments and geographical segments as primary

segment reporting format with full segments disclosures on each basis-will often provide

useful information if risks and returns of an enterprise are strongly affected both by

difference in the products and services it produces and by differences in the

geographical areas in which it operates.

Business And Geographical Segments

13. Business and geographical segments of an enterprise for external reporting purposes

should be those organizational units for which information is reported to the board of

directors and to the chief executive officer for the purpose of evaluating the units

performance and for making decisions about the future allocations or resources, except as

provided.

14. If the internal organization and management structure of an enterprise and its system of

internal financial reporting to the board of directors and the chief executive officer are

based neither on individual products or services or groups of related products/services

nor on geographical areas, it is required that the directors and management of the

enterprise should choose either business segments or geographical segments as the

primary reporting format of the enterprise based on their assessment of which reflects the


primary source of the risks and returns of the enterprise, with other as its secondary

reporting format. In that case the directors and management of the enterprise should

determines its business segments and geographical segments for external reporting

purposes based on the factors in the definitions, rather than on the basis of its system of

internal financial reporting to the board of directors and chief executive officer,

consistent with the following:

a) If one or more of the segments reported internally to the directors and

management is a business segment or a geographical segment based on the

factors in the definitions in point 5 but others are not, sub paragraph (b) below

should be applied only to those internal segments that do not meet the definitions

in point 5.

b) For those segments reported internally to the directors and management that do

not satisfy the definitions in point 5, management of the enterprise should look to

the next lower level of the internal segmentation that reports information along

product and service lines or geographical lines, as appropriate under the

definitions under the point 5.

c) If such an internally reported lower-level segment meets the definition of

business segments or geographical segment based on the factors in point 5, the

criteria for identifying reportable segments should be applied to that segment.

Reportable Segments

15. A business segment or geographical segment should be identified as a reportable segment

if:

a) Its revenue from sales to external customers and from transactions with

other segments is 10% or more of the total revenue , external or internal, of

all segments; or

b) Its segment result, whether profit or loss, is 10% or more of-

i. The combined result of all segments in profit, or

ii. The combined result of all segments is loss, whichever is greater in

absolute amount; or

iii. Its segment assets are 10% or more of the total assets of all

segments.

16. A business segment or a geographical segment which is not a reportable segment as per

point 16, may be designated as a reportable segment despite its size at the discretion of

the management of the enterprise. If that segment is not designated as reportable

segment, it should be included as an unallocated reconciling item.


17. If the total external revenue attributable to reportable segments constitutes less than 75

per cent of the total enterprise revenue, additional segments should be identified s

reportable segments, even if they do not meet the 10% thresholds in point 16,until at least

75% of total enterprise revenue is inclined in reportable segments.

18. The 10% thresholds in the statement are not intended to be a guide for determining

materiality for any aspect of financial reporting other than identifying reportable business

and geographical segments.

19. A segment identified as a reportable segment in immediately preceding period because it

satisfied the relevant 10% threshold should continue to be a reportable segment for the

current period notwithstanding that its revenue, result, and assets all no longer meet the

10% threshold.

Segment Accounting Policies

20. Segment information should be prepared in conformity with the accounting policies

adopted for preparing and presenting the financial statements of the financial enterprise

as a whole.

21. Assets and liabilities that relate jointly to two or more segments should be allocated to

segments if, and only if, their related revenues and expenses also are allocated to those

segments.

Disclosure

The disclosure requirements in point 24-26 should be applicable to each reportable segments based

on primary reporting format of an Enterprise.

22. An enterprise should disclose the following for each reportable segment:

a) Segment revenue, classified into segment revenue from sales to external

customers and segment revenue from transactions with other segments;

b) Segment result;

c) Total carrying amount of segment assets;

d) Total amount of segment liabilities;

e) Total cost incurred during the period to acquire segment assets that are expected

to be used during more than one period (tangible and intangible fixed assets);

f) Total amount of expense included in the segment result for depreciation and

amortization in respect of segment assets for the period; and


g) Total amount of significant non-cash expenses, other than depreciation and

amortization in respect of segment assets that we included in segment expense

and, therefore, deducted in measuring segment result.

23. An example of a measure of a segment performance above segment result in the

statement of profit and loss is gross margin on scales.

24. An enterprise that reports the amount of cash flows arising from operating, investing and

financing activities of a segment need not disclose depreciation and amortization expense

and non-cash expenses of such segments pursuant to sub-points f) and g) of point 24.

Segments Defined

1. Business Segment: It is a distinguishable part of an enterprise that is involved in

providing an individual product or a service or a group of related products, or services

and that is subject to risks and returns that are different from those of other business

segments.

2. Geographical Segment: It is a distinguishable part of an enterprise that is involved in

providing products or services within a particular economic environment and that is

subject to risks and returns that are different from those of components operating in other

economics environments.

3. Reportable Segment: It is a business or a geographical segment identified based on the

forgoing definition for which segment information is required to be disclosed.

Terminology

1. Segment Revenue: Revenue reported in statement of profit and loss of an enterprise that is

directly attributable to a segment and the relevant portion of enterprise that can be allocated

on a reasonable basis to a segment ,whether from sales external customers or from

transactions with other segments of the same enterprise. Segment revenue does not include

a) Extraordinary items

b) Interest or dividend income

c) Gain on sales of investment

2. Segment Expense: It is an expense resulting from the operating activities of a segment that

is directly attributed to the segment and the relevant portion of an expense that can be

allocated on the reasonable bases to a segment, including expenses relating to sales to

external customers and expenses related to transactions with other segments of the same

enterprise. Segment expenses does not include.

a) Extraordinary items

b) Interests


c) Losses on sale of investment

d) Income tax expense

e) General administrative expenses

3. Segment Result: It is segment revenue less segment expenses.

4. Segment Assets: These are those overtaking assets that are used by segments in its operating

activities and that either are directly attributable to the segment or can be allocated to the

segment on a reasonable basis.

5. Segment Liabilities: These are those operating liabilities which result from the operating

activities of a division and either are directly attributable to the division or can be allocated to

the division on a reasonable basis.

6. Segment accounting policies: These are framed for preparing and presenting the financial

statements of the enterprise as well as those accounting policies that relate specifically to

segment reporting.

Need For Segment Reporting

Diversified Companies present a unique type of problems for investment decision making. The

performance of diversified company can be judged from the performance of all several segments.

The success of diversified company depends on success of all segments that is why segment

disclosures in companys annual report are more useful to investors and other user groups.

Segment Disclosures and User Groups

1. Investors. Segment reporting provides investor information about profitability risk and

growth of various segments of enterprises operations. Investors will be in better position to

invest accurately a firms future earnings.

2. Employees: Employees and trade unions are also interested in the performance and prospects

of the enterprise from the standpoint of the wage negotiations and job security

3. Management: Segment reporting is also helpful to the management while taking various

important managerial decisions. Management while taking decision may need information on

segmental performance. Lack of information on segmental performance may lead to

misunderstanding between management and workers.


4. Government agencies: Government agencies at national and international level in case of

multinational Companies are becoming more concerned about the activities of large

Companies and the balance of payments

5. Consumers: The interest of consumers and the general public may also be promoted by

segment disclosures in the sense that social responsibility in terms of the removal of price

discrimination could be encouraged by segment disclosures regarding profits.

Problems in Segment Reporting

1. Base of segmentation. Basic problem which arises in segment reporting is division of a

diversified company for segment reporting purposes. Every base of segmentation may create

segments differently. Identification of segmentation is also problematic. Segmentation can be

done on the basis of organizational division, industry, market product etc.

2. Allocation problem: In business organizations where more than one product are to be dealt

with, there are likely to be costs which are common to two or more products. Joint costs can

be general administrative expenses and legal expenses. Allocation of these joint costs

become a complex problem while doing segment reporting. However there can be common

costs which can be apportioned on some reasonable basis for e.g. Electricity charges which

can be apportioned on the basis of light points in a particular segment on the other hand there

can be some common costs like salary of a director which can only be apportioned on some

arbitrary basis.

3. Disclosure costs; Segment reporting also involves cost of disclosures. The provision of

additional information along with routine information increases firms operating cost in

terms of cost of collection processing and costs of management control systems.

4. Managerial conservatism: In the absence of some regulatory provisions to disclose segment

reports; voluntary disclosures are likely to be perceived by manager to be beneficial only in

certain situation

5. Inter-segment transactions: In diversified business entity which may have some inter-

segment transactions. There are no. of methods for intersegment transfers i.e. cost, cost-plus,

market price and negotiated prices

All these methods result in different operating results for operating segment.

Methods of Present Segment Information

There are three ways to present a segment information which are given as under:

1) Within the package of financial statements with explanatory footnotes to the financial

statements.

2) Only in the footnotes.


3) A separate schedule can be prepared as an integral part of the financial statements.

Segment Reporting in India

Segment information in the annual reports such as quantity and value of sales, quantity and value of

units purchased, stocks in quantity and value and purchases in quantity and value are disclosed by

the Indian Companies as per the provisions of India company law. Various researchers have shown

that many diversified Indian Companies develop segment information for management planning and

control. It has also seen that no uniformity is there in presentation of segment information by Indian

Companies.

It has been observed that while going through the annual reports of the many diversified Indian

Companies, they develop segment information and segment analysis for their management planning

and decision making. It has been found that some of the diversified Companies are disclosing

segment information in Directors report on the performance of various divisions.

Segment Disclosures by Indian Companies

Segment Disclosures by Raymond Ltd.

Operating Divisions (Raymond ltd.) Performance of Divisions.

Textile Divisions: The textile division withstood severe all round competition through product

innovation and vigorous sales promotion aided by its extensive distribution network. However the

turnover of the division was limited due to overall fall in demand in the face of keen global

competition exports fared well.

Steel Division: Output was up 45% and there was commensurate increase in sales overall growth in

domestic demand was modest in the face of increased capacities coming on stream, leading to lower

price realization exports were substantially higher.

Cement Division: Production was up by 17% compared to previous year. Margin were under

pressure during greater part of the year in major markets due to ample supplies.

J.K. Toles and Tools Division: There was general change in the demand pattern for tools from the

engineering industry in India and overseas. This led to reduction in the volume of production and

sales. However higher price realization combined with rigid control on costs resulted in improved

performance.

Aviation Division: The development of the fleet was satisfactory and working resulting in a modest

surplus.


Sponge Iron

1999-00 1989-99 % Change

Installed Capacity (TPA) 9000000 990000 0

Production (tonnes) 709094 670231 5.8

Sales volume (Tonnes) 822996 565682 45.5

Gross Divisional Turnover 482.4 315.7 52.8

(Rs. crores)

Net Divisional turnover 418.1 283.2 47.6

(Rs. Crores)

Average Realization 5037 4879 3.2

Operating margins (%) 13.5 12.1 _

Textiles

1999-00 1989-99 % Change

Fabrics

Production (Lac Meters) 165.5 182.9 (-) 9.5

Sales Volume (Lac Meters) 165.3 198.8 (-) 16.9

Gross Turnover (Rs. Crores) 192.8 246.7 (-) 21.8

Average Realisation (Rs./Mtr) 116.6 124.1 (-) 6.0

Yarn

Production (Tonnes) 11934 10562 13.0

Sales Volume (Tonnes) 12021 8325 44.4

Gross Turnover (Rs. Crores) 159.71 147.36 8.4

Average Realisation (Rs./Mtr) 132.85 141.66 (-) 6.2

Gross Divisional Turnover 352.5 394.1 (-) 10.6

(Rs. crores)

Net Divisional turnover 300.79 336.45 (-) 10.6


(Rs. Crores)

Separation costs (%) 7.9 11.5 (-) 10.6

INFLATION ACCOUNTING

Inflation: Definitions

Different economists have defined inflation in different words

a) A state in which the value of money is falling, i.e., prices are rising. a. Prof. Crowther

b) "Inflation is that state of disequilibrium in which an expansion of purchasing power tends to cause or is the effect of an increase of the price level."

a. Prof. Paul Einzig

c) Decrease in purchasing power of money due to an increase in the general price level.

d) A process of steadily rising prices resulting in diminishing purchasing power of a given nominal sum of money

The Penguin Dictionary of Economics

e) Rise in prices brought about by the expansion of the supply of bank money, credit, etc. Oxford Advanced Learners Dictionary of Current English

The basic factors behind the inflation are either the rising demand or the shortening of supply

due to any reason.


Inflation Accounting

The impact of inflation comes in the form of rising prices of output and assets. As the financial

accounts are kept on Historical cost basis, so they don't take into consideration the impact of rise

in the prices of assets and output. This may sometimes result into the overstated profits, under

priced assets and misleading picture of Business etc.

So, the financial statements prepared under historical accounting are generally proved to

be statements of historical facts and do not reflect the current worth of business. This deprives

the users of accounts like management, shareholders, and creditors etc. to have a right picture of

business to make appropriate decisions.

Hence, this leads towards the need for 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.

Significance of Inflation Accounting

The significance of inflation accounting emerges from the inherent limitations of the historical

cost accounting system. Following are the limitations of historical accounting:

a) Historical accounts do not consider the unrealized holding gains arising from the rise in the monetary value of the assets due to inflation.

b) The objective of charging depreciation is to spread the cost of the asset over its useful life and make reserve for its replacement in the future. But it does not take into account the

impact of inflation over the replacement cost which may result into the inadequate charge

of depreciation.

c) Under historical accounting, inventories acquired at old prices are matched against revenues expressed at current prices. In the period of inflation, this may lead to the

overstatement of profits due mixing up of holding gains and operating gains.

d) Future earnings are not easily projected from historical earnings.


Need for Inflation Accounting

Inflation, especially when it is prolonged and high, reduces considerably the meaningfulness and

use of the corporate accounts because the various amounts in current rupee values may not

signify proportionate real amounts, as the real worth of the rupee varies in different years.

Moreover, arithmetical operations involving different amounts in rupees having different real

worth become quite misleading. To make the accounts more meaningful, all items should be

expressed in values relating to a common year. This is attempted through inflation accounting,

the following reasons usually being advanced in its favor:

a) It helps to correct the usually distorted picture of the financial operations and condition of a company presented by the conventional system of accounts;

b) It facilitates inter-company comparisons since inflation hits different firms in different degrees;

c) It also facilitates inter-period comparisons of the performance of a firm;

d) Correct measurement of income is possible only with inflation accounting;

e) When some nominal value in the accounts forms the basis of government action, e.g., taxation based on profits, determination of controlled price on the basis of nominal profits

and so on, inflation may cause unfair decisions by the government, unless the relevant

nominal value is adjusted for inflation.

History of Inflation Accounting

In the last few years, inflation accounting has been adopted as a supplementary financial

statement in the United States and the United Kingdom. This comes after more than 50 years of

debate about methods of adjusting financial accounts for inflation.

Accountants in the United Kingdom and the United States have discussed the effect of inflation

on financial statements since the early 1900s, beginning with index number theory and

purchasing power. Irving Fisher's 1911 book The Purchasing Power of Money was used as a

source by Henry W. Sweeney in his 1936 book Stabilized Accounting, which was about

Constant Purchasing Power Accounting. This model by Sweeney was used by The American

Institute of Certified Public Accountants for their 1963 research study (ARS6) Reporting the

Financial Effects of Price-Level Changes, and later used by the Accounting Principles Board

(USA), the Financial Standards Board (USA), and the Accounting Standards Steering Committee


(UK). Sweeney advocated using a price index that covers everything in the gross national

product. In March 1979, the Financial Accounting Standards Board (FASB) wrote Constant

Dollar Accounting, which advocated using the Consumer Price Index for All Urban Consumers

(CPI-U) to adjust accounts because it is calculated every month. During the Great Depression, some corporations restated their financial statements to reflect inflation. At times during the past

50 years standard-setting organizations have encouraged companies to supplement cost-based

financial statements with price-level adjusted statements. During a period of high inflation in the

1970s, the FASB was reviewing a draft proposal for price-level adjusted statements when the

Securities and Exchange Commission (SEC) issued ASR 190, which required approximately

1,000 of the largest US corporations to provide supplemental information based on replacement

cost. The FASB withdrew the draft proposal.

Still to cater to the needs of an Inflation Accounting, the IASB came out with an Accounting

Standard known as IAS 29.

In India, some companies have been giving inflation-adjusted accounts in India on their own.

Examples from the public sector are Bharat Heavy Electricals Limited (BHEL) and Hindustan

Machine Tools Limited (HMT). The inflation-ad- adjusted accounts, of course, are supplied in

addition to the conventional accounts.

The present position is that though there are very few countries which have officially adopted

inflation accounting, either as a superior substitute for traditional historical cost accounting or as

supplementary to it, there are many other countries which are at least engaged in discussing the

issue seriously and in detail. In the near future a number of countries may actually decide to

adopt inflation accounting officially, if inflationary conditions should continue.

Methods of Inflation Accounting

So far, we have used the term 'inflation accounting' as if it was unambiguous. As a matter of fact,

it is not. One of the reasons why many countries in principle agree that inflation accounting is

desirable but are still unable to implement it, is that the exact method of adjusting the accounts

for inflation is fiercely debated.

As mentioned earlier, historical cost accounts become unsatisfactory during inflation because

they contain values based on both current as well as past values of the unit of money and

calculations are done without paying any attention to this fact. Thus, inflation accounting


essentially involves identifying any value in the accounts, which is expressed in terms of past

rupees, and updating them in line with the rest. This is conceptually simple, as all one has to do

is to convert the values in past rupees to values in current rupees using a suitable index.

However, it is the choice of a "suitable" index that gives rise to a major controversy.

Some examples of indexes are:

General indexes Price Index of Gross Domestic Product Cost-of-living Index

Consumer Price Index

Wholesale Price Index

Production Price Index

Special indexes Industry indexes

Commodity group indexes Commodity indexes

To measure the impact of inflation on financial statements, following are the techniques used:

Current Purchasing Power (CPP) Method

Under this method of adjusting accounts to price changes, all items in the financial statements

are restated in terms of a constant unit of money i.e. in terms of general purchasing power. For

measuring changes in the price level and incorporating the changes in the financial statements we

use General Price Index, which may be considered to be a barometer meant for the purpose. The

index is used to convert the values of various items in the Balance Sheet and Profit and Loss

Account. This method takes into account the changes in the general purchasing power of money

and ignores the actual rise or fall in the price of the given item. CPP method involves the

refurnishing of historical figures at current purchasing power. For this purpose, historical figures

are converted into value of purchasing power at the end of the period. Two index numbers are

required: one showing the general price level at the end of the period and the other reflecting the

same at the date of the transaction.

Profit under this method is an increase in the value of the net asset over a period, all valuations

being made in terms of current purchasing power.


Following are the advantages of CPP method.

a) CPP method adopts the same unit of measurement by taking into account the price changes.

b) Under CPP method, historical accounts continue to be maintained. CPP statements are prepared on supplementary basis.

c) CPP method facilitates the calculation of gain or loss in purchasing power due to the holding of monetary items.

d) CPP method uses common purchasing power as measuring unit. So, the comparative study is easy.

e) CPP method provides reliable financial information for taking management decision to formulate plans and policies.

f) CPP method ensures keeping intact the purchasing power of capital contributed by shareholders. So, this method is of great importance from the point of view of the

shareholders.

Disadvantages Of CPP Method:

a) CPP method considers only the changes in general purchasing power. It does not consider the changes in the value of individual items.

b) CPP method is based on statistical index number, which cannot be used in an individual firm.

c) It is very difficult to choose a suitable price index. d) CPP method fails to remove all the defects of historical cost accounting system. e) The use of general price index for CPP method is questioned. While general price index

deals with consumer goods, business is interested in the price movement of producer

goods.

Current Cost Accounting (CCA) Method

Current costing method is an alternative to current purchasing power (CPP) method. CCA

approach was introduced in 1975 to overcome the difficulties of CPP method. Actually the CPP

method applies the retail price index for finding out the conversion factors to restate the income

statement and balance sheet. So the CPP approach was criticized by the business world.

Current costing accounting (CCA) approach recognizes the changes in the price of

individual due to the change in general price level. This is the method which includes the process

of preparing and interpreting financial statement in such a way that relevant change in the price

is considered significantly. In CCA method, the assets are valued in current cost basis. It does

not consider the retail price index. This method considers the replacement value of the assets for


its real accounting records. The value of assets at which it is to be replaced in future is called the

replacement value. Sometimes it is known as replacement cost accounting approach also. Under

this method, each financial statement is to be restated in terms of the current value of such items.

Features Of Current Cost Accounting (CCA)

a) The fixed assets are recorded at replacement cost value in the balance sheet. b) Inventories are shown at market value rather than market or cost price whichever less as

in the historical system is.

c) Revaluation surplus are transferred to current cost accounting reserve but not distributed as dividend to shareholders.

d) Depreciation of fixed assets is to be calculated at replacement value. e) Two types of profit i.e. profit from operation and profit from revaluation are calculated. f) Liabilities are recorded in their original value because there is no any change in monetary

unit.

g) Used for maintaining the production level of the company h) Main focus on replacement of production capacity i) Money is retained as the unit of measurement j) Different special indexes are applied to different items k) Work intensive

Objectives Of Current Cost Accounting (CCA) Approach

a) To provide correct and reliable financial information based on the current replacement cost.

b) To calculate the profit without changing the historical profit. c) To protect the business in the event of normal inflationary situation. d) To keep level of capital in very balance position by making valuation of assets in proper

value based on replacement value.

e) To provide realistic information to the management, investors, creditors, government and to other interested parties.

f) To prepare the financial statement at the end of the year on the basis of current value of such items.


Example

Suppose a bond was bought by a company in 1975 for Rs 100. In 1982, its market value is, say,

Rs 130. According to CCA, Rs 30 should be shown as holding gain, and the assets should reflect

Rs 130 in place of Rs 100. But, suppose the in flation in the meantime has been 20 per cent.

What Baxter (and others like him) means is that holding gain should be recorded as Rs (13O-

12O) = Rs 10. The rest of the gain, i.e., Rs 20 should be recorded under a separate head.

Among the countries practicing inflation accounting, Latin American countries have all opted for

CPP, whereas Netherlands uses CCA.

Conclusion

Every person on this earth has been affected by Inflation, some positively but most of the people

negatively because the Inflation leads to the erosion of general purchasing power. The Inflation

spares none and it equally influences the Businesses like the people.

Historical cost accounting does not take into account the changes in the rise in the value

of assets and its impact on Balance Sheet and P&L Account due to inflation and does not reflect

the real worth of the business, which is required for effective decision-making.

Inflation Accounting has removed this drawback by providing methods for adjusting the

figure according to General or Specific Price levels.

Despite a right method of presenting financial statements, Inflation Accounting is still not

widely prevalent due to certain limitations. But with more research and development of

accounting software in this field, there is no doubt that Inflation adjusted accounting is the future

of Financial Accounting.

Limitations of Inflation Accounting

Though Inflation Accounting is more practical approach for the true reflection of financial status

of the company, there are certain limitations, which are not allowing this to be a popular system

of accounting.

Following are the limitations:

Change in the price level is a continuous process.

This system makes the calculations a tedious task because of too many conversions and calculations.


This system has not been given preference by tax authorities.

Accounting for price level changes is not free from prejudice.

During the periods of deflation only lower amount of depreciation will be changed.

Computation of profit under this system may not be a realistic profit.

HUMAN RESOURCE ACCOUNTING

Human Resource Accounting (HRA):

There were times, when human beings (or employees of the company) were regarded as a

liability to the company, as the company needed to pay them regularly and invest in their training

programs, so that they learn new and better ways to do work continuously. But, then, there came

a change in this view point. Human resource is now considered to be the asset of the company, as

its the hard work and intellect of the human resource, that a company earns profits. If a

company considers its Human Resource as a liability, it is bound to fall in near future.

Recognising and treating the humans as an asset is, what is required. The concept of considering

the human beings as an asset is an old one, as we see today. The importance which Emperor

Akbar gave to the nine jewels (courtiers) is a strong evidence for the same. The history of our

freedom movement will not be complete without mentioning the names of distinguished freedom

fighters such as Shri Motilal Nehru, Mahatma Gandhi, Sardar Vallabh Bhai Patel and several

others but no effort was made to assign any monetary value to such individuals in the Balance

Sheet of the Nation.

Sir William Petty was the pioneer in this direction. The first attempt to value the human

beings in monetary terms was made by him in 1691. Petty considered that labour was the father

of wealth and it must be included in any estimate of national wealth without fail. Further efforts

were made by William Far in 1853, Earnest Eagle in 1883. The real work started only when

behavioral scientists vehemently criticized the conventional accounting practice of not valuing

the human resources along with other resources. As a result, accountants and economists realized

the fact that an appropriate methodology has to be developed for finding the cost and value of the

people to the organization. For a long period of time, a number of experts have worked on it and

produced certain models for evaluating human resources. The important among them are Shultz,

Flamholtz, Lav and Schwartz, and Kennath Sinclare.

These days, many companies recognise their human resource as an asset, but there are no

ways to represent them on the financial statements as an asset. So, theres a lot to research and do

in this regard. From here, stems the very important Human Resource Accounting, which

means, the process of identifying and reporting investments made in the human resources of an

organization that are presently unaccounted for in the conventional accounting practices. It is an

extension of standard accounting principles. Measuring the value of human resources can assist


organizations in accurately documenting their assets. As someone has very rightly said about the

value of Human Resource for the company:

One asset is omitted and its worth I want to know,

That asset is the value of men who run the show

These lines also reflect that the value of Human Resources is not measured and reflected in the

accounts of the organizations, although the success of the organization largely depends on the

intellect, hard work, ability, efficiency and power of these people. So, it becomes important that

their value be represented like other assets and such accounting generates and presents valuable

and significant information relating to human resources. The traditional accounting systems lack

in representing these values. Accounting of human resources in the financial statements is best

explained by this example:

Example: A firm has started its business with a capital of Rs.10,00,000. It has purchased fixed assets worth

Rs.5,00,000 in cash. It has kept Rs.2,60,000 as working capital and incurred Rs.2,40,000 on

recruiting, training and developing the engineers and few workers. The value of engineers and

workers is assessed at Rs.8,00,000. The above items will be shown in the balance sheet as

follows:

Balance Sheet Including Human Resources

Liabilities Rupees Assets Rupees

Capital

Human Assets

Capital

10,00,000

8,00,000

Fixed Assets

Human Assets:

1. Individuals value

2. Value of firms

investments

Current Assets

5,00,000

8,00,000

2,40,000

2,60,000

18,00,000 18,00,000


Definitions of HRA:

1. HRA is an attempt to identify and report investments made in human resource of an

organization. Basically, it is an information system that tells the management what

changes over time are occurring to human resources of the business. By R. L. Woodruff

2. The American Association of Accountants (AAA) defines HRA as follows: HRA is a

process of identifying and measuring data about human resources and communicating

this information to interested parties.

3. Flamhoitz defines HRA as accounting for people as an organizational resource. It

involves measuring the costs incurred by organizations to recruit, select, hire, train, and

develop human assets. It also involves measuring the economic value of people to the

organization.

4. According to Stephen Knauf, HRA is the measurement and quantification of human

organizational inputs such as recruiting, training, experience and commitment.

5. A term used to describe a variety of proposals that seek to report and emphasize the

importance of human resources knowledgeable, trained and loyal employees in a

company earning process and total assets By Davidson and Roman L Wheel.

Behavioral scientists concerned with management of

organizations pointed out the following reasons for HRA:

1. Under conventional accounting, there is no information about the human resources of an

organization, and without them, the financial and physical resources cannot be

operationally effective.

2. The expenses related to the human organization are charged to current revenue instead of

being treated as investments, to be amortized over a period of time, with the result that

magnitude of net income is significantly distorted. This makes the assessment of firm and

inter-firm comparison difficult.

3. The productivity and profitability of a firm largely depends on the contribution of human

assets. Two firms having identical physical assets and operating in the same market may

have different returns due to differences in human assets. If the value of human assets is

ignored, the total valuation of the firm becomes difficult. It also becomes difficult to


compare both the firms, because with the only difference in the human resource assets,

the firms are definitely going to operate differently, and hence, earn differently.

4. If the value of human resources is not duly reported in profit and loss account and balance

sheet, the important act of management on human assets cannot be perceived.

5. Expenses on recruitment, training, etc. are treated as expenses and written off against

revenue under conventional accounting. All expenses on human resources are to be

treated as investments, since the benefits are accrued over a period of time.

Objectives of HRA:

Rensis Likert described the following objectives of HRA:

1. Providing cost value information about acquiring, developing, allocating and maintaining

human resources: The information about acquiring, developing, allocating and

maintaining the human resources is not mentioned in any statements. Since we consider

them as assets, their complete information must be present in proper records of the

company.

2. Enabling management to monitor the use of human resources: The management can make

better decisions about an asset, it has, by knowing the complete information about it. Till

they dont have any proper, or structured information about their human resources, they

wont be able to monitor them; they wont be able to know, how to better allocate them,

to make effective use of these resources.

3. Finding depreciation or appreciation among human resources: An asset is depreciated

over the time. Human resource is such an asset, which may depreciate or appreciate, with

time. To know this, their proper management is necessary. The useful life of human

resource asset is quite large.


4. Assisting in developing effective management practices: Knowing the complete

knowledge of all the assets of the company, the effective management takes place. And

effective management is necessary to ensure right decisions.

5. Increasing managerial awareness of the value of human resource: Creating awareness

about the value of human resource is very important. Everyone in the organization must

know the value of the assets of its organization.

6. For better planning of the human resource assets: For better planning and better decision-

making, the human resource accounting is must. Without having any information about

them, any decision made for them wont be a good decision.

7. For better decisions about people, based on improved information system: Only when the

management has structured and proper information about the employees, it can make

proper decisions related to them.

8. Assisting in effective utilization of manpower: For allocating manpower to specific work,

knowing their strengths and weaknesses is the key to start with. Without having the

complete knowledge about them, good decisions cant be taken.

Methods of Valuation of Human Resources:

There are certain methods advocated for valuation of human resources. These methods

include historical method, replacement cost method, present value method, opportunity

cost method and standard cost method. All methods have certain benefits as well as

limitations.

Approaches to human resource accounting (HRA) were first developed in 1691. The next

approach was developed from 1691-1960, and the third phase was post-1960. There are

two approaches to HRA. Under the cost approach, also called the "human resource cost

accounting method" or model, there is an acquisition cost model and a replacement cost


model. Under the value approach, there is a present value of future earnings method, a

discounted future wage model, and a competitive bidding model.

Cost Approach

This approach is also called an acquisition cost model. This approach was developed by

Brummet, Flamholtz, and Pyle but the first attempt towards employee valuation was

made by a footwear manufacturing company, R. G. Barry Corporation of Columbus,

Ohio with the help of Michigan University in 1967. This method measures the

organizations investment in employees using the five parameters: recruiting, acquisition,

formal training and familiarization, informal training and informal familiarization, and

experience and development. This model suggests that instead of charging the costs to

profit and loss statement (p&l) accounting, it should be capitalized in the balance sheet.

The process of giving a status of asset to the expenditure item is called capitalization. In

human resource management, it is necessary to amortize the capitalized amount over a

period of time. So, here one will take the age of the employee at the time of recruitment

and at the time of retirement. Out of these, a few employees may leave the organization

before attaining the superannuation. This is similar to a physical asset. e.g.: If a company

spends one lakh on an employee recruited at 25 years, and he leaves the organization at

the age 50, he serves the company for 25 years (his actual retirement age was 55 years).

The company has recovered rupees 83333.33 so the unamortized amount of rupees

16666.66 should be charged to p&l account.

100000\30=3333.33

3333.33*25=83333.33

100000-83333.33=16666.67

This method is the only method of Human Resource Accounting that is based on sound

accounting principals and policies.

Limitations

1. The valuation method is based on the false assumption that the dollar is stable.

2. Since the assets cannot be sold there are no independent checks of valuation.

3. This method measures only the costs to the organization, but ignores completely any

measure of the value of the employee to the organization (Cascio 3).

4. It is too tedious to gather the related information regarding the human values.


Replacement cost approach

This approach measures the cost of replacing an employee. According to Likert (1985)

replacement cost includes recruitment, selection, compensation, and training cost

(including the income foregone during the training period). The data derived from this

method could be useful in deciding whether to dismiss or replace the staff.

Limitations

1. Substitution of replacement cost method for historical cost method does little more than

update the valuation, at the expense of importing considerably more subjectivity into the

measure. This method may also lead to an upwardly biased estimate because an

inefficient firm may incur a greater cost to replace an employee (Cascio 3-4).

Present value of future earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the

present value of future earnings, adjusted for the probability of employees

death/separation/retirement. This method helps in determining what an employees future

contribution is worth today.

According to this model, the value of human capital embodied in a person who is y years

old, is the present value of his/her future earnings from employment and can be

calculated by using the following formula:

where E (Vy) = expected value of a y year old persons human capital, T = the persons

retirement age, Py (t) = probability of the person leaving the organization, I(t) = expected

earnings of the person in period I, and R = discount rate.

Limitations

a) The measure is an objective one because it uses widely based statistics such as census

income return and mortality tables.

b) The measure assigns more weight to averages than to the value of any specific group or

individual (Cascio 4-5).


Value to the organization

Hekimian and Jones (1967) proposed that when an organization had several divisions

seeking the same employee, the employee should be allocated to the highest bidder and the

bid price incorporated into that divisions investment base. For example, a value of a

professional athletes service is often determined by how much money a particular team,

acting in an open competitive market, is willing to pay him or her.

Limitations

1. The soundness of the valuation depends wholly on the information, judgment, and

impartiality of the bidder (Cascio 5).

Expense model

According to Mirvis and Mac (1976), this model focuses on attaching dollar estimates to the

behavioural outcomes produced by working in an organization. Criteria such as

absenteeism, turnover, and job performance are measured using traditional organizational

tools, and then costs are estimated for each criterion. For example, in costing labor turnover,

dollar figures are attached to separation costs, replacement costs, and training costs.

Model on human resource accounting

This model prescribes the human resource accounting approach for two categories of

employees:

1. Employees, who are at strategic, key decision-making positions such as MD, CEO (Top

Executives)

2. Employees, who execute the decision taken by Top Executives

Model states the value of human resources as sum of below-mentioned three parts:

1. Real capital cost part

2. Present value of future salary/wages payments

3. Performance evaluation part


Limitations

1. Calculation process is lengthy and cumbersome.

2. Lev and Schwartz valuation principles have been used at one point of time, so this model

contains a weakness from the Lev and Schwartz model.

Ravindra Tiwari has prescribed another approach to value human resources at the time of

annual appraisal exercise, which suggests valuation of human resources on different

appraisal parameters.

Benefits of HRA:

There are certain benefits for accounting of human resources, which are explained as

follows:

1. The system of HRA discloses the value of human resources, which helps in proper

interpretation of return on capital employed: With the conventional accounting system,

the value of human resources is not known. Hence, the proper return on capital is not

achievable. But with proper accounting, the right value of the employees can be known.

2. Managerial decision-making can be improved with the help of HRA: With proper and

structured accounting of the human resources, the management can make proper

decisions about them and the company, as it would know where it is best to allocate the

manpower, which benefits both the company and the manpower.

3. The implementation of human resource accounting clearly identifies human resources as

valuable assets, which helps in preventing misuse of human resources by the superiors as

well as the management: Accounting of the human resources prevents their misuse as

they hold value, which is recorded in the accounts of the company. Their worth is known

by everyone, and so, everyone is respected.


4. It helps in efficient utilization of human resources and understanding the evil effects of

labour unrest on the quality of human resources: By knowing their worth, i.e. their

strengths and weaknesses, the human resource can be efficiently utilized. They can be

assigned such work which they can do in a better way than others. This will lead to their

growth as well as companys growth.

5. This system can increase productivity because the human talent, devotion, and skills are

considered valuable assets, which can boost the morale of the employees: Proper

recognition of the values of the employees boost their morale because they can be

effective workers and are recognized for their work.

6. It can assist the management for implementing best methods of wages and salary

administration: By right accounting of the values of the human resource, it becomes

easier to devise ways for better remuneration and salaries, based on ones worth.

Limitations of HRA:

HRA is yet to gain momentum in India due to certain difficulties:

1. The valuation methods have certain disadvantages as well as advantages; therefore, there

is always a bone of contention among the firms that which method is an ideal one: The

companies are in dilemma as to choose which method, which method would be better for

them and the employees. As every method has its advantages and disadvantages, they are

considering all the positives and negatives related to all the methods. Since, to

incorporate the accounting of the workforce, the company needs to pay a lot of attention

in this regard and change a lot of things. So, there are time and money constraints.

Moreover, they dont know if the accounting method would be more beneficial or not.

2. There are no standardized procedures developed so far. So, firms are providing only as

additional information: Its been very difficult to present the human resource information


in the form of accounting, so some firms just give additional information, related to them

and not the exact accounting information. As such, there are no standard ways of

accounting in this regard, which is the reason certain companies are not going for it.

3. Under conventional accounting, certain standards are accepted commonly, which is not

possible under this method: Standardization is important in the accounting. If we want to

add the human resource accounting in the conventional accounting, it has to follow the

same standards, which is not quite possible.

4. All the methods of accounting for human assets are based on certain assumptions, which

can go wrong at any time: For example, it is assumed that all workers continue to work

with the same organization till retirement, which is far from possible. This needs to be

worked upon by having discussions. Addressing such assumptions and how to deal with

them in reality needs to be thought upon to have HRA efficiently working.

5. It is believed that human resources do not suffer depreciation, and in fact they always

appreciate, which can also prove otherwise in certain firms: Such points must be covered

while devising proper accounting method for human resource. People with high work

values, have appreciating tendencies, while with low work values, have depreciating

tendencies. So, their accounting must be flexible enough for both kinds of people.

6. The lifespan of human resources cannot be estimated. So, the valuation seems to be

unrealistic: This is a big problem, as we cant estimate the life of any human resource, so

their accounting becomes difficult, because we need to know the expected life of the

assets before their accounting.


PRICE LEVEL ACCOUNTING

Introduction

Prices do not remain constant over a period of time. They tend to change due to various

economic, social or political factors. Changes in the price levels cause two types of economic

conditions, Inflation and deflation. Inflation may be defined as a period of general increase in the

prices of factors of production whereas deflation means fall in the general price level. These

changes in the price levels lead to inaccurate presentation of financial statements which

otherwise are prepared to present a true and fair view of the company's financial health. This is

so because the financial statements are prepared on historical costs on the assumption that the

unit of account, i.e. rupees in case of India, has static value. But the assumption is not valid

because the value of the unit of account, i.e.,, the purchasing power of the rupee has been

changing ever since the beginning of this century. After the First World, War, during 1918-23,

there was a period of higher inflation in Germany. But it was only after the Second World War

that the prices started rising continuously and it made a non-sense of presenting the financial

statements on historical cost basis.

Types of Prices

1. General Price Changes General price-level changes reflect the value of the monetary unit over time. The total supply of

money and the total supply of goods and services in the economy fluctuate, but not usually at the

same rate. This disparity leads to inflation or deflation, changing the value of the monetary unit.

Changes in commodity prices or a discrepancy between total supply and demand of goods and

services can also lead to general price changes.

2. Specific Price Changes Specific price change is the change in the price of a particular commodity, or the change in its

exchange value. Specific price changes are caused by some factors specific to the commodity

3. Relative Price Changes Normally speaking, prices of different goods and services do not move in sync with each other,

much less in the same direction. A relative price change is defined as the change in the price of a

specific commodity as compared to an index such as the Consumer Price Index. For example, if

the Consumer Price Index increased by 10% over last year and car insurance doubled in the

Maritimes, we can say that the relative price increase in car insurance is approximately 82%.


Methods or Technique for Price level Accounting

a) Current Purchasing Power Technique (CPP) b) Replacement Cost Accounting Technique (RCA) c) Current Value Accounting Technique (CVA) d) Current Cost Accounting (CCA)

1. Current Purchasing Power Technique Current purchasing power technique of accounting requires the company to keep their

records and present the financial statements on conventional and historical cost basis bit

it further requires presentation of supplementary statements in terms of current

purchasing power of currency at the end of the accounting period. In this method the

various items of the financial statements, i.e, balance sheet and profit and loss account are

adjusted with the help of recognized general price index. The consumer price index or the

whole sale price index prepared by the Reserve Bank of India can be taken for conversion

of historical costs.

2. Replacement Cost Accounting Technique Replacement cost accounting technique is an important over current purchasing

power technique. One of the major weaknesses of the current purchasing power

technique is that it does take into account the individual price index related to the

particular assets of the company. An accounting system that values assets and

liabilities according to their replacement cost rather than their historical cost.

Replacement cost accounting incorporates the effects of changing prices and the

resultant changing values of the items that are listed in a firm's financial statements.

3. Current Value Accounting Technique

Current value accounting is the concept that assets and liabilities be measured at the

current value at which they could be sold or settled as of the current date. This varies

from the historically-used method of only recording assets and liabilities at the amounts

at which they were originally acquired or incurred (which represents a more conservative

viewpoint). The reason for using current value is that it provides information to the

readers of a company's financial statements that most closely relates to current business

conditions. This is a real concern when reviewing the financial statements of older

companies that may have assets and liabilities on their books from many years in the past,

but is less of an issue for newer companies where this is not the case. It is a particular

problem when a business has older inventory or fixed assets.


4. Current Cost Accounting

The financial accounting term current cost accounting refers to an approach that values assets at

their fair market value rather than historical cost. In practice, current costs can be determined in

a number of ways, including applying a specific price index to the book value of the asset.

Advantages Of Price Level Accounting

In the past few years of high inflation, companies have reported very high profits on the one

hand but on the other they have faced real financial difficulties. This is so because in reality

dividends and taxes have been paid out of capital due to overstated figures of profits arrived at

by adopting historical cost concept. Thus a change from historical cost concept to price level or

inflation accounting has been recommended. The major advantages of Inflation Accounting are

as follows:

1. It enables company to present more realistic view of profitability because

current revenues are

matched with current costs.

2. It enables a company to maintain its real capital by avoiding payment of

dividend and taxes out of its capital due to inflated profits in its historical

accounting.

3. Depreciation charged on current value of its assets in inflation accounting

further enables a firm to show accounting profits more nearer to economic

profits and replacement of these assets when reqired.

4. Balance Sheet reveals a more realistic and true and fair view of the financial

position of a concern because the assets are shown at current values and not

on distorted values as in historical accounting.

5. When financial statements are presented, adjusted to the price level changes, it

makes possible to compare the profitability of two concern set up at different

times.

Disadvantages Of Price Level Accounting

Some people are of the opinion that inflation accounting may create more problems than solving

them because of the following inherent disadvantages of the price level accounting:

1. Adjusting accounts to price level changes is a never-ending process. It involves constant

changes and alterations in the financial statements.

2. Price level accounting involves many calculations and makes financial statements so

complicated and confusing that it becomes very difficult for man of ordinary prudence to

understand, analyze and interpret them.

3. The concept of price level accounting appears to have more theoretical importance than

practical because adjusting the accounts to the changes in the price levels may lead to window

dressing of accounts due to the element of subjectivity in it. People may adjust the accounts


according to the values most suited to them, thereby, making the financial statements more

inaccurate.

4. Depreciation charged on current values of fixed assets is not acceptable under the Income Tax

Act. 1961 and hence adjusting it to price level changes does not Serve any practical purpose.

5. During deflation, when the prices are falling, adjustments of accounts to price level changes

will mean charging lesser depreciation and overstatement of profits.

Distortion in Reported Profile

The Accounted would define Business profit as the difference between the business Revenue and

its related cost. However during the inflationary this business profit reveals errors in actual

profit. This distortion is due to following reasons:

1. Cost of goods sold

2. Depreciation

3. Miscellaneous expenses

4. Purchasing power and gains and losses

Suggested Techniques and Methods

LIFO Method of inventory valuation

Inventory is valued in such a way that helps match current revenue with current cost of goods.

Income statement shows a collection of the most recent purchased cost. However this method is

useful in those cases where raw material purchased at frequent intervals and where all goods

produced are sold during the same period. In many countries this method of inventory valuation

is not allowed as understates the profit and thereby reduces tax liability.

Current value accounting

This method is applied in the case of price rise of the specific commodities. Since a firm is

continually replacing its assets , it is the replacement cost and not the historical cost that should

be taken into account while preparing the income statement or the balance sheet. If the value of

the inventory rises by 40% the equity needs upward revaluation by the same percentage so that

the risen cost of inventory is met increased liabilities

India and Price Level Accounting The problem of price level changes and its impact on the financial statements has assumed

considerable importance in the last few decades. As a matter of the fact the very need for method

of accounting to take cognizance of changing prices has been often questioned. The choice of an

appropriate method has been widely debated. Keeping in view these facts, the Institute of

Chartered Accountants of India issued in September 1982 a Guidance Note on Accounting for


Changing Prices in the hope that it will stimulate thought and encourage a wider use of the

method of accounting for price level changes.

The most relevant aspects of the Guidance Note are as follows:

1. The adoption of a system of accounting for changing prices would require a considerable amount of time, money and specialized skills. Also the various

techniques are still in the process of development. However, in view of the

importance of the subject, it is recommended that enterprises, particularly the large

enterprises, may develop the necessary systems to prepare and present this

information.

2. Out of the various methods of accounting for changing prices, the Current Cost Accounting Method seems to be most appropriate in the context of the economic

environment in India. The periodic revaluations of fixed assets and the adoption of

LIFO formula for inventory valuation are partial responses to the problem of

accounting for changing prices.

3. Adequate data base has presently not been developed in India for accounting for changing prices. Every enterprise, therefore, may have to select the price indices

depending on its own circumstances.

4. Considering the importance of the information regarding the impact of changing prices it is recommended that while the primary financial statements should continue

to be prepared and presented on the historical cost basis, supplementary information

reflecting the effects of changing prices may also be provided in the financial

statements on a voluntary basis, at least by large enterprises.

5. Apart from its utility in external reporting, accounting for changing prices may also provide useful information for internal management purposes. Accounting

information system is designed primarily to provide relevant information to various

levels of management with a view to assist in managerial decision making, control

and evaluation.

6. In countries like the United Kingdom, there have been some reforms in the tax structure in the wake of introduction of accounting for changing prices.


SOCIAL ACCOUNTING

Introduction

Everything on earth from polar ice caps to the tops of the equatorial mountains and from depth of

the sea to the limits of the stratosphere is useful or of value to the human beings and consequently a

natural resource which are classified into two categories renewable and non-renewable, Industrial

units are considered main consumers of these natural resources. The users of financial statements i.e.

investors, creditors money lenders government research scholars are a part of this society in which

the firm has to operate. Traditional financial accounting mainly focuses on the measurement and

reporting of business transactions between two or more business enterprises .Statements are prepared

under conventional accounting are basically prepared for the use of the investors and management .

There are many definitions of social accounting:-

Social accounting is the process of communicating the social and environmental effects of

organizations' economic actions to particular interest groups within society and to society at large.

Social accounting can be dened as a set of organizational activities that deals with the measurement

and analysis of the social performance of organizations and the reporting of results to concerned

groups, both within and outside the organization. According to Bebbington and Thomson (2007),

social accounting is an inclusive eld of accounting for social and environmental events which arise

as a result of, and are intimately tied to, the economic actions of organizations

Social accounting is the process of communicating the social and environmental effects of

organizations economic actions to particular interest groups within society and to society at large.

As such, it involves extending the accountability of organisations (particularly corporations) beyond

the traditional role of providing a nancial account of capital, in particular, to shareholders. Such an

extension is predicated upon the assumption that companies do have wider responsibilities beyond

simply making money for their shareholders(Gray et al. (1987, p. 9))

Social accounting is that aspect of accountancy which, while indistinguishable from nancial and

management accounting, deals more specically with environmental concerns; that is, it is an aspect

of the information system that enables data collection and analysis, performance follow-up, decision-

making and accountability for the management of environmental costs and risks(Gauthier et al.

(1997, p. 1))

Three important parts of social accounting-

1. Social book-keeping the means by which information is routinely collected during the year of

record performance in relation to the stated social objectives

2. Social audit - the process of reviewing and verifying the social accounts at the end of each social

audit cycle. The term social audit is also used generically for the concept and for the whole process.


3. Stake holders - those people or groups who are either affected by or who can affect the activities

of an organization.

Social Reporting

While denitions applicable to social accounting vary, most consider reporting to be a subset of

social accounting. In this regard, social reporting deals with the disclosure of information by an

organisation about product and consumer interests, employee interests, community activities and

environmental impactsthis disclosure of information is deemed to be a part of an organisations

responsibility to its stakeholders or a response to stakeholder expectations (Deegan 2002, 2007; Gray

et al. 1995, 1996; Mathews 1995, 1997). Deegan (2007) offers a more comprehensive denition of

social reporting where he addresses broader areas of corporate responsibility. He denes social

reporting as the provision of information about the performance of an organisation in relation to its

interaction with its physical and social environment and includes, but is not limited to (Deegan 2007,

p. 1265):

interaction with the local community; level of support for community projects; level of support for

developing countries; health and safety record; training, employment and education programs; and

environmental performance.

While the various denitions of social accounting and reporting discussed above do not consider

whether the reporting is voluntary or mandatory, in reality it is predominantly a voluntary corporate

practice (Deegan 2002; Mathews 1995). Hence, social reporting is deemed to represent a term that

relates to the voluntary provision of information about the performance of an organisation in relation

to the broader areas and contexts of corporate social responsibility practices.

The term corporate social performance reflects the impact of a corporation activities on society.

This embodies the impact of its economic functions and other actions taken to contribute to quality

of life.

American Accounting Association committee on measurement of social costs supplement to the

accounting review in 1974 has also emphasised on the role of corporate form of organization in

attaining their operational goals such as enhancement of profit by 7% p.a., increase in sales by 21%,

a reduction in pollution levels by 30% and employee mis reflects the mix of minorities in working

class where plants are located

Concept of Social Accounting

Business is a socio economic activity and it draws its inputs from society, hence its objectives should

be the welfare of the society. Changing environment and social parameters have compelled business

enterprise to accountant report information with regard to discharge of their responsibilities. The

concept of social accounting has gained importance as a result of high level of industrialization

which has brought prosperity as well as many problems to the society. Social accounting is


concerned with the study and Analysis of accounting practice of those activities of an organisation

.Social accounting also known as social responsibility accounting aims to measure and inform

general public about social welfare activities undertaken by the enterprises and their effect on

society. The national association of accountants defined social accounting as identification,

measurement ,monitoring and reporting of the social and economic effects of an institution on

society. It is clear that social accounting is concerned with internal and external reporting of social

costs and benefits both in quantitative as well as qualitative terms by a business enterprise.

GOALS OF SOCIAL ACCOUNTING

1. Periodic measurement and determination of net social benefits in an individual institute which

contains social expenses and internal incomes for the institution and increase of external savings in

social sections

2. Society economic resources are limited, so its necessary to reach maximum productivity in

applying any using them so that the social benefit of their use is more than social expenses.

3. The goods, which were free before, will not be available such free any more. For example, for the

pure water and air heavy expenditure of regulations to control environmental pollution and self-

purification operations is required. So the entity must provide benefits to the community for using it.

4. Its certain right to be aware of social obligation amount of entity to itself and also the amount its

been done and this awareness needs to be according to principles and basics of accounting reporting.

Social accounting includes pollution and environmental issues as one might expect, but many other

issues as well. Some of these issues include:

1. Unsafe products and work places

2. Cost padding and fraud in defense contracting

3. Corporate bulling of communities

4. Racism, and the exploitation of women and other groups

Features

a) Social accounting is an expression of a companys social responsibilities .

b) Social accounting is related to the use of social resources.

c) It emphasize on relationship between firm and society.

d) It is the application of accounting on social sciences .

e) It emphasize on social costs as well as social benefits .

I s s u e s i n C o n t e m p o r a r y A c c o u n t i n g P a g e |

Contemporary Issues in Accounting

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