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7/29/2019 UNIT+ +I+HRA+&+Inflation+Accounting

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UNIT I Accounting for Managers

Human Resources Accounting

Our main assets is our people

Labour as the father of wealth in the sense of generator of wealth.

Employees of any organization as its precious wealth

Employees is a Backbone play a stupendous role in its developmental and productive

activities

Many companies start to assess the real value of human assets. While most organizations can

readily give detailed information about their tangible assets, such as plant and machinery, land &

buildings, transport and office equipment, there is no formal record of investment in employees.

Human Assets accounting or human resources accounting (HRA) which stands for measurement

and reporting of the cost and value of people as organizational resources, is still to become an

accepted trend in the Indian IT industry.

Meaning of HRA

Human resources Accounting aims at depicting the human resource potential in money terms

while casting the organizations financial statements. With the emergence of Knowledge

economy, recognition of human capital as an important part of the enterprises total value has

gained importance.

P.K.Gupta, Director of Strategic development-intercontinental operations, of Legato Systems

India.HRA is basically an information system that tells the management what changes are

occurring over time to the human resources of the business. It also involves accounting for

investment in people and their replacement costs and the economic value of the people in an

organization. The current accounting system is not able to provide the actual value of employee

capabilities and knowledge. This indirectly affects future investments of a company, as each

year, the cost on human resources development and recruitment increases.

Definition

American Accounting Association committee defined HRA as The process of identifying and

measuring data about human resources and communicating this information to interested

parties.

Features

KSRCE MBA-AFM UNIT - I


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1. HRA system generates information on various aspects Acquisition, development,

allocation, utilization and replacement.

2. HRA identifies, quantifies and reports the amount of expenditure incurred or capital

employed to recruitment, acquire, train, familiarize and develop the human resources.

3. HRA helps the management deals with the different aspects of employees, such as

acquiring, developing, allocating, utilizing, rewarding and evaluating.

Importance of HRA

It supports to take an effective measurement, reporting system for decision-

making.

Decision making in the areas of :

1. Programming policies and programmes for the development of humanresources.

2. Decisions regarding cost reduction programmes.

3. Training and development

4. Recruitment and selection

5. Manpower planning and control

6. Conservation and reward of human resources.

7. Making a choice between various types of human investment and investments

in other assets.

Classification of Human resources Costs

1. Acquisition costs reporting for duty of employees (Advt, application processing,

screening, conducting test and Interviews, remuneration and other admin expenses.

2. Development Costs Placing the persons (salary of trainees and trainers, cost of

study materials, consultancy fee, a share of administrative expenses and others)

3. Operational Wages and Salaries - Periodical payment to the employees (Employees

insurance fund and provident fund, cost of non-monetary facilities to the employees).

Human Resources Accounting in India

The concept of HRA - implemented in Public sector and Private sector and IT industries.



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1.BHEL 2. Cement Coporation of Indai Limited (CCI) 3. ONGC 4.Minerals and metals trading

corporation (MMTC). 5. Engineers India Limited (EIL) 6. SAIL 7. Southern petrochemicals

and industries corporation (SPIC) and A. ACC (Associated Cement Company).

Inflation Accounting

Inflation accounting is a term describing a range of accounting systems designed to correct

problems arising from historical cost accounting in the presence of inflation.[1] Inflation

accounting is used in countries experiencing high inflation or hyperinflation. For example, in

countries experiencing hyperinflation the International Accounting Standards Board requires

corporate financial statements to be adjusted for changes in purchasing power using a price

index.

Historical costs basis in Inflation Accounting

Fair value accounting (also called replacement cost accounting or current cost accounting) waswidely used in the 19th and early 20th centuries, but historical cost accounting became morewidespread after values overstated during the 1920s were reversed during the Great Depressionof the 1930s. Most principles ofhistorical cost accounting were developed after the Wall StreetCrash of 1929, including the presumption of a stable currency.

Measuring unit principle

Under a historical cost-based system of accounting, inflation leads to two basic problems. First,many of the historical numbers appearing on financial statements are not economically relevantbecause prices have changed since they were incurred. Second, since the numbers on financial

statements represent dollars expended at different points of time and, in turn, embody differentamounts of purchasing power, they are simply not additive. Hence, adding cash of $10,000 heldon December 31, 2002, with $10,000 representing the cost of land acquired in 1955 (when theprice level was significantly lower) is a dubious operation because of the significantly differentamount of purchasing power represented by the two numbers.

By adding dollar amounts that represent different amounts of purchasing power, the resultingsum is misleading, as one would be adding 10,000 dollars to 10,000 Euros to get a total of20,000. Likewise subtracting dollar amounts that represent different amounts of purchasingpower may result in an apparent capital gain which is actually a capital loss. If a buildingpurchased in 1970 for $20,000 is sold in 2006 for $200,000 when its replacement cost is

$300,000, the apparent gain of $180,000 is illusory.

Misleading reporting under historical cost accounting

In most countries, primary financial statements are prepared on the historical cost basis ofaccounting without regard either to changes in the general level of prices or to increases inspecific prices of assets held, except to the extent that property, plant and equipment andinvestments may be revalued.

http://en.wikipedia.org/wiki/Historical_costhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Inflation_accounting#cite_note-0http://en.wikipedia.org/wiki/Hyperinflationhttp://en.wikipedia.org/wiki/International_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Fair_valuehttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Historical_costhttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Capital_gainhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Inflation_accounting#cite_note-0http://en.wikipedia.org/wiki/Hyperinflationhttp://en.wikipedia.org/wiki/International_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Fair_valuehttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Historical_costhttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Capital_gainhttp://en.wikipedia.org/wiki/Historical_cost


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Ignoring general price level changes in financial reporting creates distortions in financialstatements such as

reported profits may exceed the earnings that could be distributed to shareholders withoutimpairing the company's ongoing operations

the asset values for inventory, equipment and plant do not reflect their economic value to

the business future earnings are not easily projected from historical earnings

the impact of price changes on monetary assets and liabilities is not clear

future capital needs are difficult to forecast and may lead to increased leverage, whichincreases the business's risk

when real economic performance is distorted, these distortions lead to social and political

consequenses that damage businesses (examples: poor tax policies and public

misconceptions regarding corporate behavior)

History of inflation accounting

Accountants in the United Kingdom and the United States have discussed the effect of inflationon financial statements since the early 1900s, beginning with index number theory andpurchasing power. Irving Fisher's 1911 book The Purchasing Power of Money was used as asource by Henry W. Sweeney in his 1936 book Stabilized Accounting, which was aboutConstant Purchasing Power Accounting. This model by Sweeney was used by The AmericanInstitute of Certified Public Accountants for their 1963 research study (ARS6) Reporting theFinancial Effects of Price-Level Changes, and later used by the Accounting Principles Board

(USA), the Financial Standards Board (USA), and the Accounting Standards Steering Committee(UK). Sweeney advocated using a price index that covers everything in the gross nationalproduct. In March 1979, the Financial Accounting Standards Board (FASB) wrote ConstantDollar Accounting, which advocated using the Consumer Price Index for All Urban Consumers(CPI-U) to adjust accounts because it is calculated every month.

During the Great Depression, some corporations restated their financial statements to reflectinflation. At times during the past 50 years standard-setting organizations have encouragedcompanies to supplement cost-based financial statements with price-level adjusted statements.During a period of high inflation in the 1970s, the FASB was reviewing a draft proposal forprice-level adjusted statements when the Securities and Exchange Commission (SEC) issued

ASR 190, which required approximately 1,000 of the largest US corporations to providesupplemental information based on replacement cost. The FASB withdrew the draft proposal.

Inflation accounting models

Inflation accounting is not fair value accounting. Inflation accounting, also called price levelaccounting, is similar to converting financial statements into another currency using an exchange

http://en.wikipedia.org/wiki/Index_numberhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accountinghttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/Accounting_Principles_Boardhttp://en.wikipedia.org/wiki/Gross_national_producthttp://en.wikipedia.org/wiki/Gross_national_producthttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Consumer_price_index#United_Stateshttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Replacement_costhttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Index_numberhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accountinghttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/Accounting_Principles_Boardhttp://en.wikipedia.org/wiki/Gross_national_producthttp://en.wikipedia.org/wiki/Gross_national_producthttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Consumer_price_index#United_Stateshttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Replacement_costhttp://en.wikipedia.org/wiki/Exchange_rate


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rate. Under some (not all) inflation accounting models, historical costs are converted to price-level adjusted costs using general or specific price indexes.

Income statement general price-level adjustment example

On the income statement, depreciation is adjusted for changes in general price levelsbased on a general price index.

2001 2002 2003 Total

Revenue 33,000 36,302 39,931 109,233

Depreciation 30,000 31,500 (a) 33,000 (b) 94,500

Operating income 3,000 4,802 6,931 14,733

Purchasing power loss - 1,500 (c) 3,000 (d) 4,500

Net income 3,000 3,302 3,931 10,233

(a) 30,000 x 105/100 = 31,500(b) 30,000 x 110/100 = 33,000(c) (30,000 x 105/100) - 30,000 = 1,500

(d) (63,000 x 110/105) - 63,000 = 3,000

Constant dollar accounting

Constant dollar accounting is an accounting model that converts nonmonetary assets and equitiesfrom historical dollars to current dollars using a general price index. This is similar to a currencyconversion from old dollars to new dollars. Monetary items are not adjusted, so they gain or losepurchasing power. There are no holding gains or losses recognized in converting values.

International standard for hyperinflationary accounting

The International Accounting Standards Board defines hyperinflation in IAS 29 as:"thecumulative inflation rate over three years is approaching, or exceeds, 100%."

Companies are required to restate their historical cost financial reports in terms of the period endhyperinflation rate in order to make these financial reports more meaningful.

The restatement of historical cost financial statements in terms of IAS 29 does not signify theabolishment of the historical cost model. This is confirmed by PricewaterhouseCoopers:"Inflation-adjusted financial statements are an extension to, not a departure from, historical costaccounting."

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