EMERGING ISSUES IN FINANCIAL ACCOUNTING

RAJIMOL KP, Asst.Prof. , ACME

 1.HUMAN RESOURCES ACCOUNTING
Human Resource Accounting (HRA) is a new branch of
accounting. It is based on the traditional concept that all
expenditure of human capital formation is treated as a charge
against the revenue of the period as it does not create any
physical asset.

Human Resource Accounting is the process of assigning,

budgeting, and reporting the cost of human resources incurred
in an organization, including wages and salaries and training
expenses.
DEFINITION
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.
According to Stephen Knauf, ‘HRA is the
measurement and quantification of human
organizational inputs such as recruiting, training,
experience and com
  HRA facilitates managing the people as one of the
resources of the organization.
 To help the management for making decision about
acquiring, allocating, developing and maintaining human
resources in order to keep control on human resource cost
as one of the organizational objectives.
 To provide information to the management regarding
OBJECTIVES human resource cost and value.
OF HUMAN  To see whether the human resources are effectively
RESOURCE utilized or not
ACCOUNTING
 To see whether the human resources are producing a
return on investment.
 Provide human resources accounting detail to outsiders
like financers such as bankers, financial institutions and
creditors etc.
 Improvement in internal management system

Motivating employee for production efficiency

ADVANTAGES Helps in investment decision

OF HR
ACCOUNTING
It can foresee the change in value, aptitude and
attitude of human resources and accordingly change
the techniques of interpersonal management

It provides scope for advancement and development of

employees by effective training and development.
 LIMITATIONS OF HRA
 There are no specific and clear-cut guidelines for 'cost' and 'value' of human
resources of an organization. The present valuation systems have many limitations.
 It is difficult to identify the proper method of valuation
 There is no enough empirical evidence to support the hypothesis that HRA as a
managerial tool facilitates better and effective management of human resources.
 There is a constant fear of opposition from the trade unions as placing a value on
employees would make them claim rewards and compensations based on such
valuations.
 Tax Laws don’t recognize human beings as assets.
 There is no universally accepted method of the valuation of human resources.
 It is believed that human resources do not suffer depreciation, and in fact they
always appreciate, which can also prove otherwise in certain firms.
 The lifespan of human resources cannot be estimated. So, the valuation seems to be
unrealistic.
METHODS OF HUMAN RESOURCE VALUATIONS

Historical Cost Replacement Economic

Method Cost Method Value Method

Current
Standard Cost Present Value
Purchase
Method Method
Power Method

Opportunity
Cost Method
 This method is based on costs
incurred for recruitment, training,
familiarization etc. It is developed by
Rensis Likert. This is a very simple
method based on traditional principles
Historical of accounting. Under this method an
Cost Method attempt is made to have a proper
match between cost and revenue.
Human resources are valued at the
unexpired portion of the cost of
recruiting training and development of
the employees.
 This method is simple to
understand and easy to
work out.

It meets the traditional

Advantages accounting concept of
matching cost with
revenue.

It can provide a basis of

evaluating a company’s
return on its investment in
human resources.
 It is very difficult to estimate the number of
years an employee will be with the firm.

It is difficult to determine the number of

Limitations years over which the effect of investment
on employees will be realized.

The extent to which the employee will

utilize the knowledge acquired is also
subjectively estimated.
 Under this method the replacement cost of
existing personnel is estimated. Replacement
cost includes the cost of recruitment, training
and opportunity cost for the intervening
period. This serves the purpose of making
Replacement valuation of human resources periodically. It
Cost Method helps in planning for human resources in
future. The difficulty in this method is that
the value differs from person to person
making it difficult to find identical
replacement of the present human assets.
 This approach is more realistic as it
incorporates the current value of
company’s human resources in its financial
statements prepared at the end of the year.

This method has the advantage of adjusting

Advantages the human value of price trends in the
economy and thereby provides more
realistic value in inflationary times.

It has the advantage of present-oriented.

 It is not always possible to find out the exact
replacement of an employee.

The determination of a replacement value

is affected by the subjective considerations to a
marked extent and therefore, the value is likely to
differ from person to person.

Limitations
This method does not reflect the knowledge,
competence and loyalties concerning an
organization that an individual can build over time.

This method is inconsistent with the historical cost of

valuing assets.
 The payment made to the
human resources till their
retirement are calculated and
appropriately discounted to get
Economic their present economic value.
Value According to this method the
Method value of human capital
embodied in a person who is ‘n’
years old is the value from his
employment.
 This model takes into
consideration the employee’s
career movements.

Advantages
If employees leave enterprise
on account of the reasons other
than death and retirement, then
such possibilities are also
considered in this model.
 Estimation of the probabilities for each
employee’s occupying various positions and
valuation of contribution of services from all
these positions is not an easy task.

To estimate exit probabilities and changes from

one position to another is an expensive process.

Limitations
It is difficult to estimate an employee’s expected
tenure of service.

It is also difficult to find out valid data about the

value of expected to be rendered service by an
employee.
 Under this method the standard costs
of recruitment, training and
development are developed and
established every year to overcome
complications in calculations. There
Standard costs represent the value of human
Cost Method resources for accounting. The standard
cost method of human resource
accounting involves determining the
total cost of recruiting and hiring each
employee, as well as the cost of any
training or development.
 This is an easy method for implementation and
the variances produced should be analysed
and would form a useful basis for control.

It involves determining the total cost of

recruiting and hiring each employee, as well as
the cost of any training or development.

Advantages
This approach helps the managers to focus on
certain issues based on the standards of the
employees.

They provide benchmarks that employees can

use to judge their own performance.
 It is difficult to establish a standard cost for employees.

This method is based on the historical data of amount

spend by the company for recruiting, hiring, training
and development. It does not consider the employees’
contribution for the company’s’ future development.

Limitations

This method is expensive and time consuming.

This method controls the operating part of the

organisation and ignores the other items like quality,
productivity etc.
 Under this method the net
contributions of employees to
the earning of the organisation
Present Value are discounted to have present
Method value of human resources. This
method helps in determining
what an employee’s future
contribution is worth today.
 Human capital calculated in this
manner is useful since comparison with
non-human capital will give an idea
about the degree of labour
intensiveness.
Advantages
Depending on the rate of growth in
human capital, it can be determining
that whether organization has an
ageing labour force or a younger
labour force.
 The change in employees’
behaviour as a result of
promotion, transfer etc. is not
considered true.

The discount rate to be used

Limitations cannot be calculated with a high
degree of objectivity.

The basic assumption of the model

that an employee will stay with an
organization until he retires does
not generally hold true.
Current Under this method, the historical cost of
Purchase investment in human resources is
converted into current purchasing power
Power of money with the help of index
Method numbers.
 Advantages

It adopts the same unit of measurement by considering

the price changes.

IT facilitates the calculation of gain or loss in purchasing

power due to the holding of monetary items.
 CPP method considers only the changes
in general purchasing power. It does not
consider the changes in the value of
individual items.

Limitations It is based in statistical index number

which cannot be used in an individual
firm.

It is very difficult to choose a price index.

 Under this method the value of
human asset is determined in their
alternative use or the next best
alternative use. This value forms the
basis for valuation of human asset
Opportunity of organisation. The value of a
Cost Method human resource is determined on
the basis of the value of an
individual employee in alternative
use. If an employee is hired from an
external source, there is no
opportunity cost to him.
 Advantages

This method ensures optional allocation of human resources.

It provides a quantitative base for planning, evaluating and
developing human resources of an organization. Development in
human resource can easily be made based on the information of
this method.
 This method fails to accommodate the
possibility of hiring of employees of similar
efficiency, experience and skill.

It excludes from its purview those members

of the firm’s human resources who are not
Limitations scarce and, therefore, are not being bid by
other divisions of the organization.

The application of this method is doubtful

unless the alternative uses of an
employee’s service available in an
organization are traced out.
2. FORENSIC ACCOUNTING
 Forensic accounting
Forensic accounting utilizes accounting, auditing and
investigative skills to conduct an examination into the
finances of an individual or business. Forensic accounting
provides an accounting analysis suitable to be used in legal
proceedings.
Forensic accountants compile financial evidence, develop
computer applications to manage the information collected
and communicate their findings in the form of reports or
presentations.
 ROLE AND FUNCTIONS OF FORENSIC ACCOUNTANT
Forensic accountants analyse, interpret and summarize complex financial
and business matters.
They develop computerised applications to assist in the analysis and
presentation of the financial evidence.
They communicate their findings in the form of reports, exhibits a
collection of documents.
They assist in legal proceeding, including testifying in courts as an expert
witness and preparing visual aids to support trial evidence.
They play proactive risk reduction roles by designing and performing
extended procedures as a part of the statutory audit acting as advisors to
audit committees and assisting in investment analyst research.
 AREAS COVERED UNDER FORENSIC ACCOUNTING

Litigation support Investigative/fact- Settlement with Settlement of

services finding services. retiring partners. insurance claims
3. SUSTAINABILITY REPORTING
 Sustainability reporting
A sustainability report is a report published by a
company or organization about the economic,
environmental and social impacts caused by its
everyday activities.
Sustainability reporting can help organizations to
measure, understand and communicate their
economic, environmental, social and governance
performance, and then set goals, and manage change
more effectively.
BENEFITS

It is a useful risk management tool.

It can help generate savings.

It helps in better decision-making.

It helps in increasing stakeholder trust.

It improves the operational efficiency.

 ACCOUNTING STANDARDS
An accounting standard is a common set of
principles, standards and procedures that define the
basis of financial accounting policies and practices.
Accounting standards improve the transparency of
financial reporting in all countries.
These Accounting Standards (AS) are issued by an
accounting body or a regulatory board or sometimes
by the government directly. In India, the Indian
Accounting Standards are issued by the Institute of
Chartered Accountants of India (ICAI).
OBJECTIVES OF ACCOUNTING STANDARDS

To bring uniformity in accounting aspects.

To facilitate inter firm and intra firm comparisons.
To improve transparency in financial statements
To help in determining corporate accountability and
managerial effectiveness.
To eliminate the variation in treatment of accounting
aspects.
Attains Uniformity in Accounting

Improves Reliability of Financial Statements

Prevents Frauds and Accounting Manipulations

BENEFITS OF
Assists Auditors
ACCOUNTING
STANDARDS
Comparability

Determining Managerial Accountability

LIMITATIONS OF ACCOUNTING STANDARDS

Difficulty between Restricted Scope

Choosing Alternatives
 AS 1 – Disclosure of Accounting Policies

AS 2 – Valuation of inventories

AS 3- Cash flow statements

ACCOUNTING
STANDARDS AS 6 – Depreciation Accounting

AS 9- Revenue Recognition

AS 20 – Earning Per share

 International Financial Reporting
Standards (IFRS) set common rules so
that financial statements can be
consistent, transparent and
INTERNATIONAL
comparable around the world. IFRS
FINANCIAL are issued by the International
REPORTING
STANDARDS Accounting Standards Board (IASB).
(IFRS) They specify how companies must
maintain and report their accounts,
defining types of transactions and
other events with financial impact.
 Statement of Financial
Position:
Statement of Comprehensive
Income:
IFRS
Requirements Statement of Changes in
Equity
Statement of Cash Flow
Objective of IFRS
To bring consistency in the accounting
practices and principles followed by
companies of various nations while preparing
financial statements.
To provide framework for nations across the
globe on how companies and entities should
prepare and present their financial statements.
To brings synchronisation in accounting
practices across various nations to facilitate
comparison of financial statements.
 Wider acceptability

Comparability of Financials

Benefits of
IFRS Elaborated Guidance

Changes in standards as per

economic situations
 IFRS STANDARDS
 IFRS 1- First time adoption of International Financial Reporting Standards
 IFRS 2- Share-based Payment
 IFRS 3- Business Combinations
 IFRS 4- Insurance Contracts
 IFRS 5- Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6- Exploration for and Evaluation of Mineral Resources
 IFRS 7- Financial Instruments: Disclosures
 IFRS 8- Operating Segments
 IFRS 9-Financial Instruments
 IFRS 10- Consolidated Financial Statements
 1. Meaning

International Financial Reporting

Standards are (IFRS) set common rules
so that financial statements can be
consistent, transparent and comparable
IFRS Vs Indian around the world
GAAP Generally Accepted Accounting Principle
(GAAP) are a common set of principles,
standards and procedures which brings
uniformity in the preparation of books of
accounts
 2.Developed by
 IFRS: International Accounting
IFRS Vs Indian Standard Board (IASB)
GAAP GAAP: Ministry of corporate
affairs
 3. Disclosure of financial statements
IFRS Vs Indian IFRS: IAS-1 specify the format
GAAP  GAAP: As per the schedule VI of
Companies Act 1956
 4.Components of financial statements

 IFRS:
 Statement of financial position
Statement of Income & expenditure
IFRS Vs Indian CFS
GAAP Statement of changes in equity

 Indian GAAP
 Statement of financial position
Statement of Income & expenditure
CFS
 5. Intangible assets
IFRS Vs Indian
 IFRS: Measured at fair value
GAAP
GAAP: Measured at cost
THANK YOU