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Unit 5
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Global Financial reporting
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Objectives of Accounting in global
context
To standardize Accounting methods , procedures,
and treatments.
To lay down principles for preparation and
presentation of financial statement uniformly.
To establish benchmark for evaluating the quality
of earnings and reporting internationally.
To ensure that international community of usersof financial statements get creditable financial
information.
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Efforts towards Global Harmonisaton
There are two bodies working for this concept.
International Accounting Standard Board(IASB)
Institute of Chartered Accountants of India(ICAI)
International Financial Reporting Standards(IFRSs)
and International Accounting Standards are issued by
IASB.
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Difference between IAS/IFRS and
GAAP(Indian and U.S.)
There are so many dissimilarities in these threeaspects.
Contents of Financial Statements.
Cash and Cash equivalents. Classification of Assets and liabilities
Classifications of incomes and expenditure
Preparation of cash flow statement
Spin off/carve Out Accounting
Fixed Assets
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Cont
Depreciation
Miscellaneous Expendeture
Revenue Recognisation:
Changes in policy or rule
Intrime Financial reporting.
Post balance sheet events.
Contengenses
Earning per Share
Correction of fundamental errors.
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Need for uniform Global Financial
Reporting.
Globlisation of Economies
Companies are collecting capital from
overseas
Investors invest money globally.
Harmonisation required in MNCs.
Incearsing corporate awareness Corporates having future plans to raise capital
from oversees.
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Benefits and strength of US GAAP
Most developed economy.
Sets benchmark
Except the balance sheet other annual financialstatemnts are also requuired to be submited
Multi step income statement presentation as anoption.
Detailed Accounting Standards for Accounting of spinoff, specific industries,etc.
Upward valuation of any fixed Asset is notpermissible.Deferral of expenses , exceptadvertisement is not permitted.
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Benefits
Wider aceptability among the investor
community.
Better international credit rating
Internationalization of companys brand.
Reduced cost of capital
Improved internal decision making process. Improved financial discipline.
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Foreign Currency Accounting,
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When companies using different currencies
transact business, at least one of the
companies will have to translate a foreign
currency into its home currency. For sales
made in cash, this can be done at the time of
sale.
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Cont
When the sale is made on credit , the company will have to recordan account receivable or account payable until the account issettled. During the interim, the relative values of the currenciescould change. The accounting treatment for such changes isgoverned by International Accounting Standard (IAS) 21 and U.S.
Financial Accounting Standard (FAS) 52. The treatment is the sameunder either method. At the time of sale, the sale is recorded at the current exchange rate
and an equivalent value asset or liability is created.
If balance sheets are prepared prior to collection, the asset or liabilitymust be restated to the then-current exchange rate value. The change
is recognized as an unrealized exchange rate gain/loss on the incomestatement.
When the account is collected, the asset or liability is removed andany previously unrecognized gain/loss is recognized on the incomestatement.
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Foreign Exchange Risk Management
Transaction exposure
Change in the value of financial position created by foreigncurrency changes between establishment and settlementof contract
Translation exposure Potential change in value of a companys financial position
due to exposure created during consolidation process
Economic exposure
Potential for value of future cash flows to be affected byunanticipated exchange rate movements
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Transaction Exposure: Hedging
Hedging process to reduce or eliminate financial risk
Forward market hedge
Foreign currency contract sold or bought forward in order to protectagainst foreign currency movement
Currency option hedge Option to buy or sell specific amount of foreign currency at specific
time to protect against foreign currency risk
Money market hedge Method to hedge foreign currency exposure by borrowing and lending
in domestic and foreign money markets
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Transaction Exposure: Swaps
Swap contract Spot sale/purchase of asset against future purchase/sale of
equal amount in order to hedge financial position
Bank Swap Swap made between banks to acquire temporary foreign
currencies
Currency Swap
Exchange of debt service of loan or bond in one currencyfor debt service of loan or bond in another currency
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Transaction Exposure: Swaps contd.
Interest Rate Swap
Exchange of interest rate flows to manage interest rate
exposure
Spot and forward market swaps Use spot and forward markets to hedge foreign currency exposure
Parallel Loans Matched loans across currencies made to cover risk
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Translation Approaches
Current rate method
Current assets and liabilities are valued at current spot
rates and noncurrent assets and liabilities aretranslated at historic exchange rates
Temporal method
Monetary accounts are valued at spot rate and
accounts carried at historical cost are translated athistoric exchange rates
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Inflation Accounting,
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Inflation
Monetary inflation occurs when the money supply of
a country is increased over and above the demand
and need for currency (too much money chasing
too few goods). This results in depreciation in thevalue of currency.
The impact of monetary inflation on prices is usually
not evenly distributed across all goods and services
within an economy.
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Inflation
Inflation distort, or eradicates, the meaning of
financial statement numbers.
As such, when inflation is a substantial
problem, its effects need to be
removed/adjusted so that financial reports
remain useful.
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Inflation Accounting Conceptual Issues
Impact of inflation on financial statements
Understated asset values.
Overstated income and overpayment of taxes.
Demands for higher dividends.
Differing impacts across companies resulting in lack of
comparability.
Learning Objective 1
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Inflation Accounting
Inflation creates two basic reporting
mistakes when traditional accounting
methods are alone employed:
Purchasing power gains/losses are not detected
and reported.
Historical cost numbers lose their relevance.
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Inflation Accounting Conceptual Issues
Impact of inflation on financial statements
Historical cost ignores purchasing power gains and losses.
Purchasing power losses result from holding monetary assets, such as
cash and accounts receivable.
Purchasing power gains result from holding monetary liabilities, such
as accounts payable.
The two most common approaches to inflation accounting are
general purchasing power accounting and current cost
accounting.
Learning Objective 1
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Inflation Accounting -- Methods
General Purchasing Power (GPP) Accounting
Updates historical cost accounting for changes in the general
purchasing power of the monetary unit.
Also referred to as General Price-Level-Adjusted HistoricalCost Accounting (GPLAHC).
Nonmonetary assets and liabilities, stockholders equity and
income statement items are restated using the General Price
Index (GPI).
Requires purchasing power gains and losses to be included in
net income.
Learning Objective 1
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Inflation Accounting -- Methods
Current Cost (CC) Accounting
Updates historical cost of assets to the current cost to replace
those assets.
Also referred to as Current Replacement Cost Accounting. Nonmonetary assets are restated to current replacement
costs and expense items are based on these restated costs.
Holding gains and losses included in equity.
Learning Objective 1
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Human Resource Accounting,
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Men, materials, machines, money and methodsare the resources required
for an organization. These resources are broadly
classified into two categories,viz., animate andinanimate (human and physical) resources. Men,otherwiseknown as the human resources, areconsidered to be animate resources.
Others,namely, materials, machines, money andmethods are considered to be inanimate orphysical resources.
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Human Resource Accounting is an attempt to
identify and report investments made in
human resources of an organization that are
presently not accounted for in conventionalaccounting practice. Basically it is an
information system that tells the management
what changes over time are occurring to thehuman resources of the business.
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Importance of Human Resource Accounting: Human Resource Accounting helps the management in the Employment,
locating and utilization of human resources.
It helps in deciding the transfers, promotion, training and retrenchment ofhuman resources.
It provides a basis for planning of physical assets vis--vis human
resources.
It assists in evaluating the expenditure incurred for imparting further
education and training in employees in terms of the benefits derived by
the firm.
It helps to identify the causes of high labour turnover at various levels and
taking preventive measures to contain it.
It helps in locating the real cause for low return on investment, like
improper or under-utilization of physical assets or human resource or
both.
It helps in understanding and assessing the inner strength of an
organization and helps the management to steer the company well
through most adverse and unfavourable circumstances.
It provides valuable information for persons interested in making long
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Limitations of Human Resource
Accounting:
There is no proper clear-cut and specific
procedure or guidelines for finding cost and
value of human resources of an organization.
The systems which are being adopted havecertain drawbacks.
The period of existence of human resource is
uncertain and hence valuing them underuncertainty in future seems to be unrealistic.
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As human resources are not capable of beingowned, retained and utilized, unlike the physicalassets, there is problem for the management totreat them as assets in the strict sense.
In spite of all its significance and necessity, taxlaws do not recognize human beings as assets.
As far as our country is concerned human
resource accounting is still at the developmentalstage. Much additional research is necessary forits effective application.
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Environment Accounting,
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Environmental accounting is an important tool for
understanding the role played by the natural
environment in the economy. Environmental
accounts provide data which highlight both thecontribution of natural resources to economic
well-being and the costs imposed by pollution or
resource degradation.
"Environmental accounting" - sometimes referred
to as "green accounting", "resource accounting"
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What Environmental Accounting Is -
And Is Not:
It is: a set of aggregate national data linkingthe environment to the economy, which willhave a long-run impact on both economic and
environmental policy-making. It is not: valuation of environmental goods or
services, social cost-benefit analysis ofprojects affecting the environment, or
disaggregated regional or local data about theenvironment.
accounting depends on two crucial
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accounting depends on two crucial
factors:
First, it must be focused on answering important policyquestions. This ensures that the accounting workresponds to a real demand for policy guidance, and isnot driven simply by a desire to build databases.
Second, it must bring in the major players in the areasof environmental policy, economic policy, nationalincome accounting, and the development ofinformation systems on the environment, the
economy, and the population. This ensures that peoplewho could either use or provide the data required willcooperate with and support the project.
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Responsibility Accounting.
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Meaning..
Responsibility accounting is a management
control system based on the principles of
delegating and locating responsibility. The
authority is delegated on responsibility centreand accounting for the responsibility centre.
Responsibility accounting is a system under which
managers are given decisions making authorityand responsibility for each activity occurring
within a specific area of the company.
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Significance of Responsibility
Accounting
Easy Identification:
Motivational Benefits :
Data Availability :
Planning and Decision Making:
Delegation and Control:
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Principles of responsibility Accounting
The main features of responsibility accounting
are that it collects and reports planned and
actual accounting information about the
inputs and outputs of responsibilityaccounting.
Objectives of Responsibility
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Objectives of Responsibility
Accounting
: Responsibility accounting is a method of dividing theorganizational structure into various responsibility centersto measure their performance.
1. To determine the contribution that a division as a sub-unit makes to the total organization.
2. To provide a basis for evaluating the quality of thedivisional managers performance. Responsibilityaccounting is used to measure the performance ofmanagers and it therefore, influence the way the managersbehave.
3. To motivate the divisional manager to operate hisdivision in a manner consistent with the basic goals of theorganization as a whole.
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Problems in Responsibility Accounting
Classification of costs
Inter-departmental Conflicts
Delay in Reporting
Overloading of Information
Complete Reliance will be deceptive
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Thank you