Emerging Issues in Financial Accounting

Module-6
Emerging Issues in Accounting and Computerized Accounting

1.HUMAN RESOURCES ACCOUNTING

Human resources accounting (HRA) is one of the latest concepts adopted by few corporations
in our country. Most of the corporations have realised that human resources are their most
precious resources. So, it is required to take some measures to develop their human resources
but also taken measures to accelerate their values.
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.

Human Resource Accounting is the activity of knowing the cost invested for employees
towards their recruitment, training them, payment of salaries & other benefits paid and in return
knowing their contribution to organisation towards its profitability. 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. But now a day this concept has changed, and the cost
incurred on any asset (as human resources) should be capitalised as it yields benefits
measurable in monetary terms.

Human Resource Accounting means accounting for people as the organisational resources. It
is the measurement of the cost and value of people to organisations. It involves measuring costs
incurred by private firms and public sectors to recruit, select, hire, train and develop employees
and judge their economic value to the organisation.
Human resource accounting (HRA) involves accounting for expenditures related to human
resources as assets. Human resources accounting is an information system that tells
management what changes are occurring over time to the human resources of the business.

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DEFINITION

1.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.

2. 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’.

3. According to Stephen Knauf, ‘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.
➢ To see whether the human resources are effectively utilized or not
➢ To see whether the human resources are producing a return on investment of the persons
interested in the organization or not.
➢ Provide human resources accounting detail to outsiders like financers such as bankers,
financial institutions and creditors etc.

NEED FOR HRA

✓ Under conventional accounting, no information is made available about the human
resources employed in an organization, and without people the financial and physical
resources cannot be operationally effective.
✓ The expenses related to the human organization are charged to current revenue instead
of being treated as investments, to be amortized over a period, with the result that
magnitude of net income is significantly distorted. This makes the assessment of firm
and inter-firm comparison difficult.

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✓ 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.
✓ 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.
✓ 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.

ADVANTAGES OF HR ACCOUNTING

➢ It checks the corporate plan of the organisation. The corporate plan aiming for
expansion, diversification, changes in technological growth etc. must be worked out
with the availability of human resources for such placements or key positions. If such
manpower is not likely to be available, HR accounting suggests modification of the
entire corporate plan.
➢ It offsets uncertainty and change, as it enables the organisation to have the right person
for the right job at the right time and place.
➢ It provides scope for advancement and development of employees by effective training
and development.
➢ It helps individual employee to aspire for promotion and better benefits.
➢ It aims to see that the human involvement in the organisation is not wasted and brings
high returns to the organisation.
➢ It helps to take steps to improve employee contribution in the form of increased
productivity.
➢ It provides different methods of testing to be used, interview techniques to be adopted
in the selection process based on the level of skill, qualifications and experience of
future human resources.
➢ It can foresee the change in value, aptitude and attitude of human resources and
accordingly change the techniques of interpersonal management
➢ Improvement in internal management system
➢ Motivating employee for production efficiency

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➢ Helps in investment decision.

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.
➢ 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.
➢ 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.
➢ Despite all its significance and necessity, the 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

(1) Historical Cost Method:
This method is based on costs incurred or recruitment, training, familiarization etc. It is
developed by Rensis Likert. This is a very simple method based on traditional principles of
accounting. Under this method an 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.

Advantages
✓ This method is simple to understand and easy to work out.
✓ It meets the traditional accounting concept of matching cost with revenue.

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✓ It can provide a basis of evaluating a company’s return on its investment in human

resources.

Limitations
✓ 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 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.

(2) Replacement Cost Method:

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 valuation of human resources 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.
Limitations
✓ 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.
✓ 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.

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(3) 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.

Advantages

✓ This model takes into consideration the employee’s career movements.

✓ If employees leave enterprise on account of the reasons other than death and retirement,
then such possibilities are also considered in this model.
✓ This model is regarded better, than Lev and Schwartz model due to above two types of
inclusion in this model.
Limitations
✓ 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.
✓ 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.
✓ The measure is an objective one because it uses widely based statistics such as census
income return and mortality tables.
✓ The measure assigns more weight to averages than to the value of any specific group
or individual.

(4) Standard Cost Method:

This method is in improvement over replacement cost method. 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. 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.

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According to the standard cost method, the economic value of an employee is the total of these
expenditures, and the annual economic value of the entire workforce is equal to the total amount
of money spent on recruiting, hiring, training and developing all employees during the year.

Advantages

✓ 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.

✓ 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.

Limitations

✓ 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.

✓ 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.

(5) Present Value Method:

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. According to this model the salaries payable
to the employees during their stay with the organization may be used as a replacement for the
value of human resources, in view of the close co- relation with the employee’s compensation

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and their value to the organization. Thus, the value of the human resources is the present value
of future earnings of homogeneous group of employees.

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 determine that whether
organization has an ageing labour force or a younger labour force.

Limitations
✓ The change in employees’ behaviour as a result of promotion, transfer etc. is not
considered true.
✓ The discount rate to be used 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.

(6) Current Purchase Power Method:

Under this method, the historical cost of investment in human resources is converted into
current purchasing power of money with the help of index numbers. The standard cost method
and the current purchase power method also suffer from all the drawbacks of the replacement
cost method except that they are simplest in calculation.

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.

Limitations

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

✓ It is based in statistical index number which cannot be used in an individual firm.

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✓ It is very difficult to choose a price index.

(7) Opportunity Cost Method:

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.
The value of a 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.
Limitations

✓ 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
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.

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2. 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 are trained
to look beyond the numbers and deal with the business reality of a situation. Forensic
accounting is frequently used in fraud and embezzlement cases to explain the nature of a
financial crime in court. Forensic accounting is the assistance of finance professionals to settle
disputes concerning allegations, fraudulence, suspicion of fraud and misconduct in business.
Forensic accountants analyse, interpret and summarize complex financial and business matters.
They may be employed by insurance companies, banks, police forces, government agencies or
public accounting firms. Forensic accountants compile financial evidence, develop computer
applications to manage the information collected and communicate their findings in the form
of reports or presentations.

According to AICPA “Forensic accounting is the application of accounting principles theories

and discipline to facts or hypothesis at issues in a legal dispute and encompasses every branch
of accounting knowledge.”

ROLE AND FUNCTIONS OF FORENSIC ACCOUNTANT

1. Forensic accountants analyse, interpret and summarize complex financial and business
matters.
2. They develop computerized applications to assist in the analysis and presentation of the
financial evidence.
3. They communicate their findings in the form of reports, exhibits a collection of
documents.
4. They assist in legal proceeding, including testifying in courts as an expert witness and
preparing visual aids to support trial evidence.
5. 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.

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NEED FOR FORENSIC ACCOUNTING/ AREAS COVERED UNDER FORENSIC

ACCOUNTING

The services of forensic accountants are in great demand in the following areas:

1. Litigation support services. A forensic accounting expert measures the

damages experienced by the parties implicated in legal disputes and can aid in
settling conflicts, even before it reaches the courtroom. If a conflict reaches the
courtroom, the forensic accounting professional could give evidence as an
expert witness.
2. Investigative/fact-finding services. A forensic accountant must determine
whether illegal matters such as employee felony, securities embezzlement
(including tampering and distortion of financial accounts), identity theft and
insurance racket have taken place.
3. Settlement with retiring partners. When the retiring partners feels that he has
been unjustly settled with, he can challenge the settlement with the help of a
forensic accountant who can correctly assess the value of the assets and
liabilities due to his client.
4. Settlement of insurance claims: Insurance companies engage forensic
accountant to have an accurate assignment of claims to be settled. A forensic
accountant handles the claims relating to consequential loss policy, property
loss due to various risk, fidelity insurance and other types of insurance claims.
5. Arbitration service: Forensic accountant render arbitration and mediation
service for the business community, since they undergo special training in the
areas of alternative dispute resolution.

3. 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. A sustainability report also
presents the organization's values and governance model and demonstrates the link between its
strategy and its commitment to a sustainable global economy.

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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. A sustainability report is the key platform for
communicating sustainability performance and impacts – whether positive or negative.

Sustainability reporting can be considered as synonymous with other terms for non-financial
reporting; triple bottom line reporting, corporate social responsibility (CSR) reporting, and
more. It is also an intrinsic element of integrated reporting; a more recent development that
combines the analysis of financial and non-financial performance.
The value of the sustainability reporting process is that it ensures organizations consider their
impacts on these sustainability issues and enables them to be transparent about the risks and
opportunities they face. Stakeholders also play a crucial role in identifying these risks and
opportunities for organizations, particularly those that are non-financial. This increased
transparency leads to better decision making, which helps build and maintain trust in businesses
and governments.

PURPOSE OF A SUSTAINABILITY REPORT

➢ Addressing stakeholders beyond those targeted by the integrated report (financial

capital providers);
➢ Details on the organisation’s competitive positioning in the emerging sustainability
space;
➢ A more detailed overview of organisational initiatives relating to social, human and
natural capital.

IMPORTANCE / BENEFITS OF SUSTAINABILITY REPORTING

The value of sustainability reporting is that it ensures organizations consider their impacts on
sustainability issues and enables them to be transparent about the risks and opportunities they
face. In today’s world it’s not good enough to simply make claims about your level of
sustainability. Now, organizations need to provide tangible, credible demonstrations of their
level of sustainability, by following proper guidelines for sustainability reporting.

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This way organizations build trust among customers and all stakeholders, which in turn directly
impacts the bottom lines. As per the business axiom – you can’t manage what you can’t
measure; transparency is a currency that builds trust, which build businesses.

So, in a nutshell, sustainability reporting can have four major benefits to any organisation:

➢ 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.

4. 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.

Accounting standards are rules and guidelines set up by governing bodies,

like FASB and IASB, to keep accounting practices consistent and understandable across all
companies and industries.

Accounting Standards (AS) are basic policy documents. Their main aim is to ensure transparency,
reliability, consistency, and comparability of the financial statements. They do so by
standardizing accounting policies and principles of a nation/economy. So, the transactions of all
companies will be recorded in a similar manner if they follow these accounting standards.

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).

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OBJECTIVES OF ACCOUNTING STANDARDS

1. To bring uniformity in accounting aspects.

2. To facilitate inter firm and intra firm comparisons.
3. To improve transparency in financial statements
4. To help in determining corporate accountability and managerial effectiveness.
5. To eliminate the variation in treatment of accounting aspects.
BENEFITS OF ACCOUNTING STANDARDS

Accounting Standards are the ruling authority in the world of accounting. It makes sure that the
information provided to potential investors is not misleading in any way.

1] Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They
even have a standard format for financial statements. These are steps in achieving uniformity
in accounting methods.

2] Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their
information. Many of these stakeholders base their decisions on the data provided by these
financial statements. Then there are also potential investors who make their investment decisions
based on such financial statements. So it is essential these statements present a true and fair picture
of the financial situation of the company. The Accounting Standards (AS) ensure this. They make
sure the statements are reliable and trustworthy.

3] Prevents Frauds and Accounting Manipulations

Accounting Standards (AS) lay down the accounting principles and methodologies that all entities
must follow. One outcome of this is that the management of an entity cannot manipulate with
financial data. Following these standards is not optional, it is compulsory. So, these standards

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make it difficult for the management to misrepresent any financial information. It even makes it
harder for them to commit any frauds.

4] Assists Auditors

Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a
written format. These policies must be followed. So, if an auditor checks that the policies have
been correctly followed, he can be assured that the financial statements are true and fair.

5] Comparability

This is another major objective of accounting standard. Since all entities of the country follow the
same set of standards their financial accounts become comparable to some extent. The users of
the financial statements can analyse and compare the financial performances of various companies
before taking any decisions. Also, two statements of the same company from different years can
be compared. This will show the growth curve of the company to the users.

6] Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can
help measure the management’s ability to increase profitability, maintain the solvency of the firm,
and other such important financial duties of the management. Management also must wisely
choose their accounting policies. Constant changes in the accounting policies lead to confusion
for the user of these financial statements. Also, the principle of consistency and comparability are
lost.

LIMITATIONS OF ACCOUNTING STANDARDS

There are a few limitations of Accounting Standards as well. The regulatory bodies keep updating
the standards to restrict these limitations.

1] Difficulty between Choosing Alternatives

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There are alternatives for certain accounting treatments or valuations. Like for example, stocks
can be valued by LIFO, FIFO, weighted average method, etc. So, choosing between these
alternatives is a tough decision for the management. The AS does not provide guidelines for the
appropriate choice.

2] Restricted Scope

Accounting Standards cannot override the laws or the statutes. They must be framed within the
confines of the laws prevailing at the time. That can limit their scope to provide the best policies
for the situation.

Accounting standards in INDIA

Every country has its own accounting standard. In India Accounting Standard Board was
constituted by the Institute of Chartered Accountants of India(ICAI) on 21st April1977. The
ICAI is a member of the international Accounting Standard Board (IASB) headquartered in
London. The IASB performs the function of publishing international accounting standards for
published financial statements.

In India Accounting Standard Board formulates accounting standards and these are issued
under the authority of ICAI. The accounting standards will be mandatory from the respective
dates mentioned in the AS. It is the responsibility of the management of the enterprises to
ensure compliance with the AS.

ACCOUNTING STANDARDS

AS 1 – Disclosure of Accounting Policies

AS 2 – Valuation of inventories

AS 3- Cash flow statements

AS 6 – Depreciation Accounting

AS 9- Revenue Recognition

AS 20 – Earning Per share

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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. IFRS were established to create a common accounting language, so that
businesses and their financial statements can be consistent and reliable from company to
company and country to country.

IFRS stands for International Financial Reporting Standards. IFRS are set of accounting
policies and rules developed by International Accounting Standard Board (IASB). In general,
IFRS deals with the following:

• Recognition of items as assets, liabilities, income and expenses;

• How to measure items recognised and its presentation in financial statements; and

• Disclosures related to such items.

Standard IFRS Requirements

IFRS covers a wide range of accounting activities. There are certain aspects of business practice
for which IFRS set mandatory rules.

❖ Statement of Financial Position: This is also known as a balance sheet. IFRS influences
the ways in which the components of a balance sheet are reported.
❖ Statement of Comprehensive Income: This can take the form of one statement, or it can
be separated into a profit and loss statement and a statement of other income, including
property and equipment.
❖ Statement of Changes in Equity: Also known as a statement of retained earnings, this
documents the company's change in earnings or profit for the given financial period.

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❖ Statement of Cash Flow: This report summarizes the company's financial transactions
in the given period, separating cash flow into Operations, Investing, and Financing.

In addition to these basic reports, a company must also give a summary of its accounting
policies. The full report is often seen side by side with the previous report, to show the changes
in profit and loss. A parent company must create separate account reports for each of its
subsidiary companies.

Objective of IFRS:

IFRS was introduced with an object to bring consistency in the accounting practices and
principles followed by companies of various nations while preparing financial statements.
Another object was to provide framework for nations across the globe on how companies and
entities should prepare and present their financial statements. It also brings synchronisation in
accounting practices across various nations to facilitate comparison of financial statements. It
is of more significance for those companies which have dealings in several countries.

Benefits of IFRS:

IFRS have many benefits, some of which are discussed below:

• Wider acceptability: IFRS are widely acceptable. It is applicable to almost 166 jurisdictions
out of which approximately 144 jurisdictions have adopted IFRS Thus, financial statements
prepared as per IFRS are widely acceptable.

• Comparability of Financials: Since IFRS are global standards, companies of different

nations following IFRS can be easily compared.

• Elaborated Guidance: IFRS provides elaborated guidance on how to apply principles given
in standards in different situations.

• Changes in standards as per economic situations: Principles of IFRS are revised/modified

in case there is any major change in economy.

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Application of IFRS:

Countries can either adopt IFRS as it is (known as IFRS adoption) or it can be adopted after
convergence.

1. Adoption of IFRS:
As the name suggests, adoption of IFRS means that the country will adopt IFRS in its original
form (without any deviation) and all the companies in that nation to whom IFRS are applicable
will comply these standards completely.

2. Convergence of IFRS:
Countries may deviate from IFRS issued by IASB to certain extent. Deviation can be change
of terminology used, modifying principles for recognising assets, liabilities, income or
expense, addition or deletion of disclosures (considering the local law of the country applying
IFRS), addition or deletion of examples.

Logic of applying IFRS after applying convergence is that there can be many regulators of a
country and in case the rules and regulations of any law or Act of are in conflict of IFRS, it
will create chaos in corporate reporting. Hence, Ind AS are substantially like the IFRS but with
some carve outs to ensure that these standards are suitable for application in the environment
of the country opting for convergence.

IFRS STANDARDS

1) IFRS 1- First time adoption of International Financial Reporting Standards

It sets out the procedures that an entity must follow when it adopts IFRSs for the first
time as the basis for preparing its general-purpose financial statements. This IFRS
grants limited exemptions from the general requirement to comply with each IFRS
effective at the end of its first IFRS reporting period.

2) IFRS 2- Share-based Payment

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It requires an entity to recognise share-based payment transactions (example: granted

shares, share options, or share appreciation rights) in its financial statements, also
including transactions with employees or other parties to be settled in cash, other
assets, or equity instruments of the entity. Specific requirements are included for
equity-settled and cash-settled share-based payment transactions, as well as those
where the entity or supplier has a choice of cash or equity instruments.

3) IFRS 3- Business Combinations

It outlines the accounting when an acquirer obtains control of a business (example: an
acquisition or merger). Such business combinations are accounted for using the
'acquisition method', which generally requires assets acquired and liabilities assumed
to be measured at their fair values at the acquisition date.

4) IFRS 4- Insurance Contracts

It applies, with limited exceptions, to all insurance contracts (including reinsurance
contracts) that an entity issues and to reinsurance contracts that it holds. In light of the
International Accounting Standard Board's comprehensive project on insurance
contracts, the standard provides a temporary exemption from the requirements of
some other IFRSs, including the requirement to consider International Accounting
Standard- 8 Accounting Policies, Changes in Accounting Estimates and Errors when
selecting accounting policies for insurance contracts.

5) IFRS 5- Non-current Assets Held for Sale and Discontinued Operations

It outlines how to account for non-current assets held for sale (or for distribution to
owners). In general terms, assets held for sale are not depreciated, are measured at the
lower of carrying amount and fair value less costs to sell and are presented separately
in the statement of financial position. Specific disclosures are also required for
discontinued operations and disposals of non-current assets.

6) IFRS 6- Exploration for and Evaluation of Mineral Resources

It has the effect of allowing entities adopting the standard for the first time to use
accounting policies for exploration and evaluation assets that were applied before
adopting IFRSs. It also modifies impairment testing of exploration and evaluation

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assets by introducing different impairment indicators and allowing the carrying

amount to be tested at an aggregate level (not greater than a segment).

7) IFRS 7- Financial Instruments: Disclosures

It requires disclosure of information about the significance of financial instruments to
an entity, and the nature and extent of risks arising from those financial instruments,
both in qualitative and quantitative terms. Specific disclosures are required in relation
to transferred financial assets and a number of other matters.

8) IFRS 8- Operating Segments

It requires particular classes of entities (essentially those with publicly traded
securities) to disclose information about their operating segments, products and
services, the geographical areas in which they operate, and their major customers.
Information is based on internal management reports, both in the identification of
operating segments and measurement of disclosed segment information.

9) IFRS 9-Financial Instruments

It is the International Accounting Standard Board's replacement of International
Accounting Standard 39 Financial Instruments: Recognition and Measurement. It
includes requirements for recognition and measurement, impairment, derecognition
and general hedge accounting.

10) IFRS 10- Consolidated Financial Statements

It outlines the requirements for the preparation and presentation of consolidated
financial statements, requiring entities to consolidate entities it controls. Control
requires exposure or rights to variable returns and the ability to affect those returns
through power over an investee.

11) IFRS 11- Joint Arrangements

It outlines the accounting by entities that jointly control an arrangement. Joint control
involves the contractually agreed sharing of control and arrangements subject to joint
control are classified as either a joint venture; representing a share of net assets and
equity accounted or a joint operation; representing rights to assets and obligations for

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Emerging Issues in Financial Accounting

liabilities, accounted for accordingly.

12) IFRS 12- Disclosure of Interests in Other Entities

It is a consolidated disclosure standard requiring a wide range of disclosures about an
entity's interests in subsidiaries, joint arrangements, associates and unconsolidated
'structured entities'. Disclosures are presented as a series of objectives, with detailed
guidance on satisfying those objectives.

13) IFRS 13-Fair Value Measurement

It applies to IFRSs that require or permit fair value measurements or disclosures and
provides a single IFRS framework for measuring fair value and requires disclosures
about fair value measurement. The Standard defines fair value on the basis of an exit
price notion and uses a fair value hierarchy, which results in a market-based rather
than entity-specific measurement.

14) IFRS 14-Regulatory Deferral Accounts

It permits an entity which is a first-time adopter of International Financial Reporting
Standards to continue to account, with some limited changes, for 'regulatory deferral
account balances' in accordance with its previous GAAP, both on initial adoption of
IFRS and in subsequent financial statements. Regulatory deferral account balances,
and movements in them, are presented separately in the statement of financial position
and statement of profit or loss and other comprehensive income, and specific
disclosures are required.

Applicability of IFRS in India:

India has opted to apply IFRS after making certain deviations from the original IFRS (also
known as carve outs). In India, IFRS in their converged form (after required modifications) are
popularly known as Ind AS. Each individual Ind AS contains an Appendix that explains the
modifications. These Ind AS are applicable to specified category of as discussed below:

In case of Companies:

1. Companies whose equity or debt securities are listed or are in the process of being listed on
any stock exchange in India or outside India;

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2. Unlisted companies having net worth of Rs. 250 crore or more; and

3. Holding, subsidiary, joint venture or associate companies of companies covered in point (1)
and (2) above.

Voluntary applicability: Company may voluntarily apply Indian accounting standards (Ind
AS).

Companies on which Ind AS is not applicable will continue to follow existing Accounting
Standards (AS) which will be upgraded by ICAI.

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 Emerging Issues in Financial Accounting

IFRS Vs Indian GAAP

Point of difference IFRS INDIAN GAAP

Meaning International Financial Reporting Generally Accepted Accounting

Standards are (IFRS) set common rules Principle (GAAP) are a common
so that financial statements can be set of principles, standards and
consistent, transparent and comparable procedures which brings
around the world uniformity in the preparation of
books of accounts

Developed by International Accounting Standard Ministry of corporate affairs

Board (IASB)

Disclosure of financial IAS-1 specify the format As per the schedule VI of

statements Companies Act 1956

Components of financial 1.Statement of financial position 1.Statement of financial position

statements 2.Statement of Income & expenditure 2.Statement of Income &
3. CFS expenditure
4. Statement of changes in equity 3. CFS

Intangible assets Measured at fair value Measured at cost

Computerized Accounting System

Computerized accounting system is a software that helps businesses to manage the big financial
transactions, data, reports, and statements with high efficiency, speed, and better accuracy.
Better quality work, lower operating costs, better efficiency, greater accuracy, minimum errors
are some of the advantages of Computerized Accounting. 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.

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Emerging Issues in Financial Accounting

Modern computerized accounting systems are based on the concept of database. A database is
implemented using a database management system, which is define by a set of computer
programmes (or software) that manage and organize data effectively and provide access to the
stored data by the application programmes. The accounting database is well-organized with
active interface that uses accounting application programs and reporting system.

Every computerized accounting system has two basic requirements.

• Accounting Framework : It consists a set of principles, coding and grouping structure of

accounting.

• Operating Procedure : It is a well-defined operating procedure blended suitably with the

operating environment of the organization.

Need for Computerized Accounting

Its need arises from the benefits of speed, accuracy, and lower cost of handling the business
transactions. Also, it has the capability to record a large number of transactions with speed and
accuracy. It allows quick and quality reporting because of its speed and accuracy.

Manual accounting system requires large storage to keep accounting records, and vouchers.
The requirement of books and stationery and books of accounts along with vouchers and
documents is dependent on the volume of transactions.

There is a need to reduce the paperwork and dispense with a large volume of books of account.
This can be achieved working with the help of computerized accounting system.

Advantages of Computerized Accounting

Better Quality Work: The accounts prepared with the use of computerized accounting system
are usually uniform, neat, accurate, and more legible than a manual job.

Lower Operating Costs: Computer is a reliable and time-saving device. The volume of job
handled with the help of computerized system results in economy and lower operating costs.
The overall operating cost of this system is low in comparison to the traditional system.

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Emerging Issues in Financial Accounting

Improves Efficiency: This system is more efficient in comparison to the traditional system.
The computer makes sure speed and accuracy in preparing the records and accounts and thus,
increases the efficiency of employees.

Facilitates Better Control: From the management point of view, there is greater control
possible and more information may be available with the use of the computer in accounting. It
ensures efficient performance in accounting records.

Greater Accuracy: Computerized accounting make sure accuracy in accounting records and
statements. It prevents clerical errors and omissions in records.

Relieve Monotony: Computerized accounting reduces the monotony of doing repetitive

accounting jobs. Which are tiresome and time-consuming.

Facilitates Standardization: Computerized accounting provides standardization of

accounting routines and procedures. Therefore, it ensures standardization in the accounting
records.

Minimizes Mathematical Errors: While doing mathematical work with computers, errors are
virtually eliminated unless the data is entered improperly in the system.

Limitations of Computerized Accounting System

The main limitations emerge out of the environment in which the computerized accounting
system is made to operate. These limitations are as given below.

• Cost of Training : The sophisticated computerized accounting packages generally require

specialized staff personnel. As a result, a huge training costs are incurred to understand the use
of hardware and software on a continuous basis because newer types of hardware and software
are acquired to ensure efficient and effective use of computerized accounting systems.

• Staff Opposition : Whenever the accounting system is computerized, there is a significant

degree of resistance from the existing accounting staff, partly because of the fear that they shall
be made redundant and largely because of the perception that they shall be less important to
the organization.

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Emerging Issues in Financial Accounting

• Disruption : The accounting processes suffer a significant loss of work time when an
organization switches over to the computerized accounting system. This is due to changes in
the working environment that requires accounting staff to adapt to new systems and procedures.

• System Failure : The danger of the system crashing due to hardware failures and the
subsequent loss of work is a serious limitation of computerized accounting system. However,
providing for back-up arrangements can obviate this limitation. Software damage and failure
may occur due to attacks by viruses. This is of particular relevance to accounting systems that
extensively use Internet facility for their online operations. No full proof solutions are available
as of now to tackle the menace of attacks on software by viruses.

• Inability to Check Unanticipated Errors : Since the computers lack capability to judge,
they cannot detect unanticipated errors as human beings commit. This is because the software
to detect and check errors is a set of programmes for known and anticipated errors.

• Breaches of Security : Computer related crimes are difficult to detect as any alteration of
data may go unnoticed. The alteration of records in a manual accounting system is easily
detected by first sight. Fraud and embezzlement are usually committed on a computerized
accounting system by alteration of data or programmes. Hacking of passwords or user rights
may change the accounting records. This is achieved by tapping telecommunications lines,
wiretapping, or decoding of programmes. Also, the people responsible for tampering of data
cannot be located which in a manual system is relatively easier to detect.

• Ill-effects on Health : The extensive use of computers systems may lead to development of
various health problems: bad backs, eyestrain, muscular pains, etc. This affects adversely the
working efficiency of accounting staff on one hand and increased medical expenditure on such
employees on other.

Accounting Packages

Every Computerized Accounting System is implemented to perform the accounting activity

(recording and storing of accounting data) and generate reports as per the requirements of the
user. From this perspective the accounting packages are classified into the following categories

(a) Ready to use

(b) Customized

(c) Tailored

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Each of these categories offers distinctive features. However, the choice of the accounting
software would depend upon the suitability to the organization especially in terms of
accounting needs.

Ready-to-Use

Ready-to-Use accounting software is suited to organizations running small/ conventional

business where the frequency or volume of accounting transactions is very low. This is because
the cost of installation is generally low, and number of users is limited. Ready-to-use software
is relatively easier to learn and people (accountant) adaptability is very high. This also implies
that level of secrecy is relatively low, and the software is prone to data frauds. The training
needs are simple and sometimes the vendor (supplier of software) offers the training on the
software free. However, these software offer little scope of linking to other information
systems.

Customized

Accounting software may be customized to meet the special requirement of the user.
Standardized accounting software available in the market may not suit or fulfil the user
requirements. For example, standardized accounting software may contain the sales voucher
and inventory status as separate options. However, when the user requires that inventory status
to be updated immediately upon entry of sales voucher and report be printed, the software needs
to be customized. Customized software is suited for large and medium businesses and can be
linked to the other information systems. The cost of installation and maintenance is relatively
high because the high cost is to be paid to the vendor for customization. The customization
includes modification and addition to the software contents, provision for the specified number
of users and their authentication, etc. Secrecy of data and software can be better maintained in
customized software. Since the need to train the software users is important, the training costs
are therefore high.

Tailored

The accounting software is generally tailored in large business organizations with multi users
and geographically scattered locations. This software requires specialized training to the users.
The tailored software is designed to meet the specific requirements of the users and form an
important part of the organizational MIS. The secrecy and authenticity checks are robust in
such software and they offer high flexibility in terms of number of users.

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Emerging Issues in Financial Accounting

Database for Accounting

An organization is built up to take over one or numerous ventures. Normally in a situation with
a single administration. Such cases of organizations are banks, medical centers, producers, and
so forth. Every one of these organizations has diverse functions yet at the same time, there are
a few essentials or regular functions performed by every one of the organizations. One regular
function of the organization is ‘accounting’.

Computerized and PC based AIS need a firm data structure for reserving the information of the
transaction. Above all, the databases are utilized for reserving accounting data. The guidelines
of the planning database (for accounting) start with a reality (also accounting reality) that is
communicated using components of a conceptual data model.

Reality: It takes into consideration some part of real-world circumstances, for which database
is to be designed. In particular, with regards to accounting, it is the accounting reality that will
be defined with the utmost precision.

ER Design: This is a formal blueprint, with a pictures format, in which Entity-Relationship

(ER) Model ideas are utilized for the portrayal of reality.

Relational Data Model: It is authentic data model through which ER configuration is changed
between related data tables alongside the limitation in the form of rules that are indicated to
guarantee the consistency and respectability of accumulated data.

Standardization: Specifically, this is the procedure of refining a database outline (that

comprises interrelated data tables) through which the likelihood of copy or repeated
information things are eliminated or disposed of.

Refinement: Consequently, this is the result of the procedure of standardization as said above.
The final database configuration is reached after the procedure of standardization is finished.

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. Information can be anything that is of significance to an individual or organization.

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Accounting and DBMS:

DBMS performs many necessary functions to ensure effective running of accounting system
in a business. Some of them are listed below:

(i) Data storage management: DBMS stores a variety of data and data related forms, reports,
etc. related to accounting system.

(ii) Data dictionary management: The data dictionary is automatically updated in case of any
modification, alteration, addition, deletion in the database. This dictionary is used to lookup
the required data or components in a journal, ledger, etc

(iii) Security management: It is very important to maintain the security and privacy within
the database from the outside environment.

(iv) Backup and recovery management: DBMS provides adequate backup .and recovery
procedures in order to ensure the safety of information in accounting software.

(v) Database communication interface: DBMS uses the internet services to communicate
reports, queries and distribute other information throughout the accounting system. The process
of computerized accounting system uses databases to store and retrieve data in the form of
inter-related data tables. To understand how a database is designed, let us first know about data
processing cycle. Data Processing is a technique of collecting, sorting, relating, interpreting
and computing data in order to produce meaningful information which can be used for decision
making.

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