Module 6 Emeging Issues in Financial Accounting & Computerized Accounting PPTs

EMERGING ISSUES IN FINANCIAL
ACCOUNTING & COMPUTERIZED

ACCOUNTING
Module-6
Prof. Rajimol K P, ACME 1
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, ‘HRA is the
measurement and quantification of human
organizational inputs such as recruiting,
training, experience and com

OBJECTIVES OF HUMAN RESOURCE ACCOUNTING
• 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 human resource cost and value.

OBJECTIVES OF HUMAN RESOURCE ACCOUNTING
• To see whether the human resources are

effectively utilized or not
• 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 OF HR
ACCOUNTING
Helps in investment decision
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.

• There are no specific and clear-cut guidelines
for 'cost' and 'value' of human resources of an
organization.
• It is difficult to identify the proper method of
valuation
LIMITATIONS
• There is no enough empirical evidence to
OF HRA 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
LIMITATIONS suffer depreciation, and in fact they always
OF HRA 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 Standard Cost

Method Cost Method Value Method Method
Current
Present Value Opportunity
Purchase
Method Cost Method
Power 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
of accounting.
Historical ✓Under this method an attempt is made to
have a proper match between cost and
Cost Method 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 accounting

Advantages 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.
Replacement • This serves the purpose of making
valuation of human resources
Cost Method periodically.
• It 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.
Advantages
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 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.

Economic Value
Method
The payment made to the human

resources till their retirement are
calculated and appropriately discounted
to get their present economic value.
According to this method the 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 costs represent the value of
human resources for accounting.
Standard Cost • The standard cost method of human
Method 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
Advantages the cost of any training or development.
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’
Limitations contribution for the company’s’ future development.
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
are discounted to have present
value of human resources. This
method helps in determining
what an employee’s future
contribution is worth today.

Advantages
Human capital calculated in this manner is useful since comparison with

non-human capital will give an idea about the degree of labour
intensiveness.
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 cannot

Limitations 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.

Prof. Rajimol K P, ACME
Under this method, the historical

Current cost of investment in human
Purchase resources is converted into
current purchasing power of
Power money with the help of index
numbers.
Method
25
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 of organisation.
Opportunity • The value of a human resource is
Cost Method 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
Limitations
of the firm’s human resources who are not
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.
Forensic accounting 32
• 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.
33
AREAS
COVERED Litigation support Investigative/fact-
services finding services.
UNDER
FORENSIC
ACCOUNTING
Settlement with Settlement of

retiring partners. insurance claims

Difference between Forensic Accounting & Auditing
Basis of Difference Forensic Accounting Auditing
Meaning A forensic investigation is an examination Auditing is a process of determining whether a

of specific records and information to company’s reported financial position and
help determine facts related to a performance are fairly represented and in
suspicion or allegation of fraud. accordance with certain accounting standards.
Objectives The overall objective of an audit is to The forensic investigation’s objectives include
obtain reasonable assurance about gathering evidence to identify the type of fraud,
whether financial statements as a whole quantifying the amount of loss; determining who
are free from material misstatement, was involved, when it began, why it was able to be
whether due to fraud or error. perpetrated, and how it was concealed; and
reporting the findings verbally or in a written
report along with supporting evidence.

Difference between Forensic Accounting & Auditing
Basis of Difference Forensic Accounting Auditing
Timing Forensic investigations are unforeseen, Audits are planned periodically and on
reactive and nonrecurring. a recurring basis.
Obligation Forensic investigations are typically An audit is an obligated engagement
conducted voluntarily because a for which a company must hire an
company has a suspicion or allegation of auditor to provide an opinion on the
fraud. truthfulness and fairness of its financial
statements.
Performance A forensic investigation is typically An audit is performed by auditors.

performed by a multidiscipline team of
experts that often includes auditors.
Appointment A forensic accountant is appointed by the The appointment of an auditor is made

regulatory bodies. by the shareholders of the company.

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).
✓To bring uniformity in accounting
aspects.
OBJECTIVES OF ✓To facilitate inter firm and intra firm
ACCOUNTING comparisons.
✓To improve transparency in financial
STANDARDS statements
✓To help in determining corporate
accountability and managerial
effectiveness.
✓To eliminate the variation in treatment
of accounting aspects.
42
BENEFITS OF ACCOUNTING STANDARDS
Improves Reliability Prevents Frauds

Attains Uniformity
of Financial and Accounting
in Accounting
Statements Manipulations
Determining
Assists Auditors Comparability Managerial
Accountability

LIMITATIONS OF ACCOUNTING STANDARDS
Difficulty between Choosing Restricted Scope

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)
• International Financial Reporting

Standards (IFRS) set common rules
so that financial statements can be
consistent, transparent and
comparable around the world. IFRS
are issued by the International
Accounting Standards Board
(IASB). 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
1. Meaning
• International Financial Reporting Standards
are (IFRS) set common rules so that
financial statements can be consistent,
IFRS Vs transparent and comparable around the
Indian GAAP world
• Generally Accepted Accounting Principle
(GAAP) are a common set of principles,
standards and procedures which brings
uniformity in the preparation of books of
accounts
51
2.Developed by
IFRS Vs • IFRS: International Accounting
Standard Board (IASB)
Indian GAAP
• GAAP: Ministry of corporate affairs
52
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
53
4.Components of financial statements
• IFRS:
✓Statement of financial position
✓Statement of Income & expenditure
IFRS Vs Indian ✓CFS
✓Statement of changes in equity
GAAP
• Indian GAAP
✓Statement of financial position
✓Statement of Income & expenditure
✓CFS
54
5. Intangible assets
IFRS Vs
Indian GAAP • IFRS: Measured at fair value
•GAAP: Measured at cost
55
Computerized Accounting System
• A computerized accounting
system is an accounting
information system that
processes the financial
transactions and events as per
Generally Accepted Accounting
Principles (GAAP) to produce
reports as per user
requirements.

Better Quality Work
Lower Operating Costs
Advantages of Improves Efficiency

Computerized Facilitates Better Control
Accounting

Greater Accuracy
Facilitates Standardization
Minimizes Mathematical Errors

58
Cost of Training
Limitations of
Computerized Staff Opposition
Accounting
System New Systems and Procedures
System Failure

(a) Ready to use
Accounting
(b) Customized
Packages

(c) Tailored
60
Database management system (DBMS)
• A Database management system is a

computerized record-keeping system.
It is a repository or a container for
collection of computerized data files.
The overall purpose of DBMS is to
allow the users to define, store,
retrieve and update the information
contained in the database on demand.

Data storage management
Data dictionary management

Accounting
and DBMS
Security management
Backup and recovery management

THANK YOU

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EMERGING ISSUES IN FINANCIAL

ACCOUNTING & COMPUTERIZED

• Human Resource Accounting (HRA) is a

• Human Resource Accounting is the process

Prof. Rajimol K P, ACME 2

• The American Association of Accountants

Prof. Rajimol K P, ACME 3

• HRA facilitates managing the people as one of

Prof. Rajimol K P, ACME 4

• To see whether the human resources are

Prof. Rajimol K P, ACME 5

Motivating employee for production efficiency

It can foresee the change in value, aptitude and attitude of

It provides scope for advancement and development of

Prof. Rajimol K P, ACME 6

Prof. Rajimol K P, ACME 7

Prof. Rajimol K P, ACME 8

Historical Cost Replacement Economic Standard Cost

Prof. Rajimol K P, ACME 9

Prof. Rajimol K P, ACME 10

It meets the traditional accounting

It can provide a basis of evaluating

Prof. Rajimol K P, ACME 11

It is difficult to determine the number of

The extent to which the employee will

Prof. Rajimol K P, ACME 12

This approach is more realistic as it incorporates the current value of

It has the advantage of present-oriented.

Prof. Rajimol K P, ACME 14

The determination of a replacement value is affected by the

This method does not reflect the knowledge, competence and

This method is inconsistent with the historical cost of

Prof. Rajimol K P, ACME 15

The payment made to the human

Prof. Rajimol K P, ACME 16

Prof. Rajimol K P, ACME 17

To estimate exit probabilities and changes from one

It is also difficult to find out valid data about the value of

Prof. Rajimol K P, ACME 18

Prof. Rajimol K P, ACME 19

Prof. Rajimol K P, ACME 20

This method is based on the historical data of amount spend

This method controls the operating part of the organisation

Prof. Rajimol K P, ACME 21

Prof. Rajimol K P, ACME 22

Human capital calculated in this manner is useful since comparison with

Depending on the rate of growth in human capital, it can be determining

Prof. Rajimol K P, ACME 23

The discount rate to be used cannot

The basic assumption of the model that an

Prof. Rajimol K P, ACME 24

Under this method, the historical

It adopts the same unit of measurement by

It facilitates the calculation of gain or loss in

Prof. Rajimol K P, ACME 26

Limitations It is based in statistical index number which

It is very difficult to choose a price index.

Prof. Rajimol K P, ACME 27

This method ensures optional allocation of human resources.

It provides a quantitative base for planning, evaluating and developing

Prof. Rajimol K P, ACME 29

It excludes from its purview those members