FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem oe MODULE -6 DEPRECIATION AND EMERGING ISSUES IN ACCOUNTING Introduction ‘A business or concer holds fixed assets for regular use and not for resale. The capability of a fixed asset to render service cannot be unlimited. Except land, all other fixed assets have a limited useful life. The benefit of a fixed asset is received throughout its useful life. So its cost is the price paid for the ‘Series of Services’ to be received or enjoyed from it over a number of years and it should be spread over such, Depreciation means gradual decrease in the ,ffffe of aff@WXset due to normal wear and tear, obsolescence etc, In short, depreciation medfif the gradual diminution, loss or shrinkage in the utility value of an asset due to wear a in use, effluxion of time or introduction of technology in the market. A certain percentag assets which has expired and as such tured into expense during the cular accounting In Accounts, Depreciation can B@jigfined as the method of allocgting the egaifof a physical it is to be used for. In J the passage of time, ‘wear and tear and asset over its the reductis obsolescence. companies to redul how to calculate depi ,e will study methods of depreciation and CAUSES OF DEPRECLA’ A. Internal Causes motor vehicles ete. suffer from loss of utility andling, rusting ete, (i) Wear and tear: Plant & machinery, due to vibration, chemical reaction, negli (ii) Depletion (or exhaustion): The decreases with regular extractions. 'Y OF resources of wasting assets (like mines etc.) B. External or Economic Causes (i) Obsolescence: Innovation of better substitutes, change in market demand, imposition of legal restrictions may result into discarding an asset. (ii) Inadequacy: Changes in the scale of production or volume of activities may lead to discarding an asset. ‘Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS. ‘Mysurn. 1FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem C, Time element: With the passage of time some intangible fixed assets like lease, patents, copy-tights etc., lose their value or effectiveness, whether used or not. The word “amortization” is a better term to speak for the gradual fall in their values. D. Abnormal occurrences: An accident, fire or natural calamity can damage the service potential of an asset partly or fully. As a result, the effectiveness of the asset is affected and reduced. CHARACTERISTICS OF DEPRECIATION ‘The Characteristics of Depreciation are: i, Itis a charge against profit. ii, It indicates diminution in service potentij {is an estimated loss of the value of an . It is not an actual loss, iv. It depends upon different assumptions, lik | value of an asset, v. Ibis a process of allocationgind not of valuation. vi. Itarises mainly fro: is treated as any expense chi external transaction, rnal cause like wear and tear or depletion asset. But it is not charged on any current asset. For Iwill. etc, a certain amount of their total known as amortization, In Accounting, there are various any of these methods of calculatin methods for calculating depreciation are’ Is for calculating depreciation. A company can adopt ation depending on its needs. Some of the Straight-line method Written down Value method Annuity method Sinking Fund method Production Unit method ye So let us study the methods of calculating depreciation in detail. Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS ‘Mysuru. 2FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem TT [Link] Line method (SL) Iis a simple method of charging depreciation. Under this method, depreciation is charged on the original cost of an asset, at a fixed rate of percentage. In this method, amount of depreciation remains same from year to year and asset’s value becomes zero at the end of its useful life Amount of depreciation is calculated as under: Original cost ~ Estimated serap value Estimated useful life of an asset Annual Depreciation (p.a.) = Advantages of Straight-Line Method 1. tis simple to calculate, 2. Asset can be completely written off, value is zero. 3. Same amount of depreciation is charg comparison of Profit and Loss Account 4, Its used for assets thag have low repairs and continuously used gt a period of time. asset can be depreciated until the net scrap it helps in easy are 1. Burden gf deprecation profit and loss account fs, when, business. ‘Uses of Straight-Li ‘This method is use! tis also useful when 3. It is useful when the value zero expenses on asset are low. is continuously used from one year to another. ets, such as patent, copyright, goodwill, etc., becomes x [Link] Down Value Method (WDV} This method is applicable where depreciation is charged on the diminishing balance, i.e., book value of the asset. In this method, asset’s value goes on diminishing year after year and the amount of depreciation declines. Rate of depreciation is calculated as follows: [gE see Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru. 3CIAL ACCOUNTING & REPORTING MBA Ist Sem Where, R represents rate of depreciation n represents expected useful life of the asset s represents the scrap value represents the cost of the asset Advantages of Written Down Value Method 1, Itis based on the logical assumption that asset is used more in the earlier years, so more cost is charged in form of depreciation, It is suitable for the assets where repairs lesser and on a whole the combined buy pressure on the net profit over years. 3. This method is accepted by the incor 4. As more depreciation is charged in tht the asset is reduced. Limitations of Written Down Value Method in the later years, as depreciation is ation and repairs exerts equal x authorities, ier years, so the loss due to obsolescence of 1. Itis difficult to and is a time-consuming process, 2. The value of an asset be zero, thus the asset cannot be completalgpwritten off. 3. There arises shortage o' for replacement of new asses, This hapgea due to the fact tha m is retained and used i Co I life of an old asset, bus inds it difficult to arra Uses of Written 1, Itis useful when . 2. Itis useful for those «d maintenance costs in the later years. 3. It provides easy calculation Wide depreciation of additional asset purchased during a year. [Link] Method ‘The annuity method of depreciation calculates depreciation on the asset by calculating its rate of return, This method considers the asset as an investment. It takes into consideration the internal rate of returns on the cash outflows and inflows of the asset. Depreciation cost formula under the annuity method is: Depreciation = (Cost of the Asset - Residual Value) X Annuity factor 4, Sinking Fund Method —<—<—<—$$$_.._._. Mrs. Nirmala S S, Assistant Professor, Department of | Management Studies VTU CPGS. Mysuru. 4FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem ‘The Sinking fund method of depreciation is a method of calculating depreciation where enough amount is accumulated at the end to replace the asset at the end of its useful life. Here the amount of depreciation is charged to a sinking fund account which is invested in various government bonds and securities. The interest eared from these securities is used to replace the asset, ‘Sinking Fund Depreciation Method Formula: Depreciation Value Formula: (Cost of the asset - sinking fund tables for a given rate of interest. ssidual value) X Present value of Rs. 1 at §.Production Unit Method The Production unit method takes into conside produced in a year. The depreciation cost been used over a year. The amount of depre: ber of units that the machine has nds on hw much the machine or asset has on formula under this method is: Estimated Total Cost - Residual Value Depreciation = Estimated Total Output X Actual Output during the year. that, the value has dec} ccordingly. So the riod is calculated with depreciation, And the n down value method, production unit their features making the depreciation ‘The major features of depreciat listed below: . that have passed, there is a loss of value occurred have affected a declination is what depreciation * Depreciation is a continuous process until the useful life period of the asset. We must deduct the cost of expiration, that is depreciation before calculating the taxable profit, * Itdoesn’t involve cash flow. Hence it ean be called a non-cash expense. * The loss measured must be constant and gradual. * In depreciation, maintenance cannot be included, Depreciation Objectives for Providing|ANCIAL ACCOUNTING & REPORTING MBA Ist Sem SS If we have closely checked, the term ‘depreciation’ has two different meanings, As a common term that is generalized, the word depreciation means the decline of the value of property over time, However, in accounting ‘depreciation’ is the expiration cost of the fixed asset. And the assets we mentioned here are physical assets except for land. All other assets do have only a limited period of usefulness. Assets are used for generating income till their economic value. So that must be allocated and it is done smoothly using the depreciation method. And this is considered the primary objective. The Need of Providing Depreciation ‘The amount accumulated as profit during the jod of the asset can be used for the replacement after its expiration period. The capital amount should be secured w' economy. So, it must be well planned. ut affecting the period of inflation in the In a way, true profit obtained as a result ol as the business expenditure, To ascertain thagwe can use depreciati AAs depreciation is consi profits are shared in dividends™ Direct T, statutory need. It must be calculated accordiigly before the Direct tax is a tax le als or entities (corporate and non- corporate). The main f tax, corporation tax, property tax, inheritance tax, and gift tax® ict taxes, stich as value-added tax (VAT) and excise duty levied actions. While direct taxes are imposed on the income or wealth of individuals or entities tect taxes are levied on the sale of goods and services. ‘There are many advantages of dire igect tax is a stable source of revenue for the government, and itis also difficult to avoiihpF evade direct taxes. Moreover, direct taxes help reduce social inequalities by taxing the rf€h more than the poor. However, direct taxes can be burdensome for taxpayers and lead to an economic slowdown, What is Direct Tax? A direct tax levied on an individual or organisation by the government. The tax is based on the ability of the taxpayer to pay and is typically imposed on income, property, sales, or other financial transactions. Direct taxes are generally progressive, meaning those with higher incomes pay higher rates than those with lower incomes. This allows the government to collect more revenue from Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VIU CPGS Mysuru. 6FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem SS those who can afford to pay more. Direct taxes are typically earmarked for specific purposes, such as education or infrastructure development. ‘Types of Direct Taxes in India Now that you have a better idea of what is direct tax and its definition, let's understand the different types of direct tax in India. Direct taxes that are imposed by the various tax authorities in the Government of India and are as below: 1. Income Tax: Income tax in India is payable depending on Income tax slab rates are notified by the go) income tax that must be paid. The taxpay individual not paying income tax may ha sentence. age of an individual tax payer. ent jia and determine the amount of ust file income tax on an annual basis. An pay large penalties and even serve a [Link] Tax: This type of tax must value of the property and the owne th tax shall be paid even if the property d ' in India has been abolishes Domestic companies NMbed to pay corporate tax on their income in also need to pay corporate tax. Income earned through the sale ol fee, royalty, dividends, and interest which is based in hi [Link] Transaction Tax (S' fever transaction of securities like shares and or entity. Securities transaction tax must be pai mutual funds is carried out by an individ §.Dividend Distribution Tax (DDT): In case a domestic company decides to distribute or declare an amount as a dividend by shareholders, dividend distribution tax is levied on the company. DDT was discontinued as per an announcement by the finance minister in Budget 2020. [Link] Alternative Tax (MAT): Under current rules of direct tax in India, MAT is applicable only zero tax organizations that have accounts prepared as per the Companies Act. Mrs. Nirmala § S, Assistant Professor, Department of Management Studies VIU CPGS Mysuru. 7FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem [Link] Gains Tax: This is a type of direct tax which is paid on an income earned from the sale of assets or investments. Investment in property, art, business, shares, mutual funds, and bonds are considered as capital assets, Based on the holding period, capital gains tax can be classified as short-term or long-term capital gains. The applicable holding period for long-term capital gains can vary from one type of capital asset to another. CAPITAL & REVENUE EXPENDITURE & RECEIPTS Capital and revenue receipts Receipts refer to amounts received by a business i as Capital Receipts and Revenue Receipts. because only the revenue receipts are taken ty receipts. h inflows. Receipts may be classified to note this distinction clearly Kd Loss Account and not the capital Capital Receipts Capital receipts are the amounts received in the 1 introduced in the business, (b) loans recgiffBd, and (c) sale proceeds of fixed assets. aware that a ayable sooner or later. Similarly, additional\ggppital received tor's claim over the business assets. Thus two items amount received is not¥Wevenue, eared in the increase the liabilities or reduce he assets. commission earned, rent received, et services rendered by the business and as\ treated as incomes and shown on the ere eceipts are on account of goods sold or some they are not repayable. All revenue receipts are ‘Side of the Profit and Loss Account. Capital Receipts and Revenue Receipts: Receipts which arise in course of normal business activities are revenue receipts. Receipts which are not revenue are capital receipts (e.g. receipts from sale of fixed assets or investments, loan taken, Capital introduced). Revenue and capital receipts are recognized on accrual basis as soon as the right of receipts is established. Revenue receipts are credited to the Profit and Loss A/c. Capital and Revenue Expenditure Capital Revenue 1)_[Long Term benefit Short Term benefit (Maximum 12 ae SNE EE ennneeenee Mrs. Nirmala § S, Assistant Professor, Department of Management Studies VTU CPGS. Mysuru. 8FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem months) 2)_| Non-recurring or One time expenditure. Recurring or Regular expenditure. 3) | Recorded in balance sheet Recording in Manufacturing, Trading or Profit and Loss Ale 4) | a) 7 in production capacity b) ? in earning capacity c) ? in profitability d) t in effecienc ‘Amt. is spent to conduct day to day business Activities and to maintain asset in proper working condition 3) [Eg. Purchase of Assets, Manufacturing Asset for own use, incidental expenses related to purchase of asset. Eg. All expenses debited in above three Ale CAPITAL AND REVENUE EXPENDITU! Capital Expenditure As stated above, when the benefit of an expe! incurred but is available over a number of yeat following expenditures are usually treated as capit Any expenditure whig plant and machinery, furnitui that such capital expenditure in various other gempenses incurred commissioy transportation o} charges incurred in expenditure, [Link] incurred, di plantations till they become oj 3. Cost of experiments which ultim’ cost of experiments which are not su which is written off within two to three is not exhausted in the year in which it is ial expenditure. The , buildings, should note sset but also brokerage or stallation, legal fees and registration d and buildings are also treated as capital sult in the acquisition of a patent. However, the is treated as a deferred revenue expenditure 4, Legal charges incurred in connection with acquiring or defending suits for protecting fixed assets, rights, etc Revenue Expenditure When the benefit of expenditure is not likely to be available for more than one year, it i treated as revenue expenditure. Thus, all expenses which are incurred during the regular course of business are regarded as revenue expenditures. These may be as follows: 1 Expenses incurred in day-to-day conduct of the business postage, stationery, insurance, electricity, ete such as wages, salaries, rent, ee, ‘Mrs. Nirmala $ S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru. 9FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem — I ———————————— 2 Expenditure incurred for buying goods for resale or raw materials for manufacturing. 3 Expenditure incurred for maintaining the fixed assets such as repairs and renewals of building, machinery, etc. 4 Depreciation on fixed assets. This can also be termed as revenue loss. 5 Interest on loans borrowed for running the business. You should note that any interest on Joan paid during the initial period before production commences, is not treated as revenue expenditure. It is treated as capital expenditure. 6 Legal charges incurred during the regular course of business such as legal expenses incurred on collection from debtors, legal charge; ‘on defending a suit for damages. ete. Basis of charge and scope of total income Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru. 10FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem ‘Some basics of charge in income tax in India: + Types of charge: There are different types of charges under the Income Tax Act, such as income tax, surcharge, ‘education cess, and interest. These charges are imposed on the taxable income of a person or entity. + Chargeability:A charge under the income Tax Adis generally based onthe income eamed or reeived by a person ‘OF entity during @ financial year. The chargeabilty of income tax depends on various factors, such as the residential status of the person or entity the type of income eamed, and the applicable tax rates. « Assessment year: The charge for income tax is imposed for a particular financial year, but itis assessed in the following year, which is known as the assessment year. For example, the charge for income tax for the financial year 2021-22 is assessed in the assessment year 2022-23. «Filing of return: The person or entity on whom the charge for income tax is imposed is required to file an income tax ‘etum to report their income and tax lability for the financial year. The retum should be filed within the due date ‘specified by the Income Tax Department. « Penalties: Failure to pay the charge for income tax or fle the income tax return within the due date can attract penalties and interest charges under the Income Tax Act. {tis important for individuals and entities to understand the basics of charge in income tax in India and comply with the applicable tax laws and regulations. Seeking professional advice can help in effective tax planning and minimizing tax Y ‘The scope of total income refers to the extent to which the Income Tax Act, 1961 covers diferent types of income, gains, or profts that are taxable under the act. The term otal income! eters tothe total amount of income on which tax abilty 's calculated, after taking into account various deductions, exemptions, and allowances provided under the act. Scope of Total income Here is a detailed explanation of the scope of total income under the Income Tax Act: ed Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS. Mysuru. uFINANCIAL ACCOUNTING & REPORTING MBA Ist Sem «+ Residential status: The scope of total income varies based on the residential status of the taxpayer. A resident taxpayer is taxed on his global income, ie, income eamed or accrued beth in India and outside India, while @ non- resident or resident but not ordinary resident (RNOR) taxpayer is taxed only on income eamed or accrued in India + Sources of income: The Income Tax Act covers diferent types of income under is Scope, such as income from salary, income from house property, income fom business or profession, capital gains, and income from other sources. The ac species the rules and provisions for calculating the taxable income under each category. + Tax-exempt income: Certain types of income are exempt from tax under the Income Tax Act, such @s agricultural income, dividend income from Indian companies, long-term capital gains on specified assets, etc. The scope of total income excludes these types of income from the tax lity calculation. + Deductions and allowances: The Income Tax Act provides various daductions and allowances that can be claimed by taxpayers to reduce their taxable income, suchas deductions for investments in spectid tax-saving instruments, deductions for expenses incured for certain purposes, and allowences for specific professions. The scope of total income takes into account these deductions and allowances while calculating the tax abit. + Tax treaties: India has signed tax treaties wth various countries to avoid double taxation on the same income. The <00pe of total income considers the provisions ofthese treaties while calculating the tax abit of a taxpayer. ility by taking advantage of the legitinga concessions ww. It involves the iging business 2. Under Section 80CCD company 3. Reinvestment Under Section 54, 2) Tax Evasion Tax Evasion is using illegal means to avoid paying taxes. Usually, tax evasion involves hiding or misrepresenting income. This might be underreporting income, inflating deductions, without proof, hiding or not reporting cash transactions, or hiding money in offshore accounts. Tax evasion is part of an overall definition of tax fraud, which is illegal intentional non-payment of taxes. Fraud can be defined as “an act of deceiving or misrepresenting,” It is not legally permissible under taxing statue. Example: 1, Bogus Expense ES Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS- Mysuru. RFINANCIAL ACCOUNTING & REPORTING MBA Ist Sem ES 2. Underreporting of Income 3. Inflating deductions without proof 4, Hiding or not reporting cash transactions, or hiding money in offshore accounts etc. ‘Tax Management It means planning affairs in such a manner, so that the tax obligation is managed properly. ‘The objective of Tax Management is to comply with the provisions of Income Tax Law and its allied rules, Tax Management helps in avoiding payment of interest, penalty, prosecution etc, Example: - 1, Tax Management deals with filing of Retufftin time. 2. Getting the accounts audited. EMERGING ISSUE IN ACCOUNTI ‘The survey considers the following as some of the most important emerging issues in accounting and the accounting profession, Cloud-based technology in accounting. Human R is a branch of accoul fat identificatit F of the value of huma involves. the resources as an and value of the employeess it in the organization's fin investment that can generate futur statements, HRA considers human resources as an fits for the organization. It uses various techniques to Features of Human Resource Accounting (HRA) The features of Human Resource Accounting (HRA) are as follows: > Valuing human resources: HRA involves identifying and quantifying the value of the knowledge, skills, and experience of an organization's employees, This can be done using a variety of methods, such as estimating the cost of replacing employees or calculating the economic value of their contributions. > Tracking costs: HRA involves tracking the costs associated with managing human resources, such as recruiting, training, and compensation expenses. This can help organizations to identify areas where they can reduce costs and improve efficiency. Mrs. Nirmala § S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru, 13FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem SS > Investment analysis: HRA can be used to analyse the return on investment of human resource management practices, such as training and development programs. This can help o practices and to make decisions about where to allocate resources. > Decision-making: HRA can provide valuable information to support decision-making about human resource management practices, such as determining the optimal level of staffing, identifying areas for improvement in employee performance, and assessing the impact of changes in compensation and benefits. > Reporting: HRA involves creating reports that summarize the value of human resources and the costs associated with managing them. These reports can be used to inform decision-making by managers and exegutives. > Performance evaluation: HRA can to evaluate the performance of employees and to determine the imp: source management practices on ‘employee productivity and performad@® This can help organizations to identify areas where they can improve employee Peformance and develop strategies to enhance productivity. jons to determine the effectiveness of th ani ¥ Strategie planning: HRA can be use ‘ing by providing gonstraints, This to develop strat > Risk management: ng the cost of recruiting, trai foyees, as well as the economic value of their skills, knowledge, and experienc This information can help organizations to better allocate resources and to make informed decisions about HR investments, * To track the costs associated with managing human resources: It can help organizations track the costs associated with managing their human resources, such as recruitment costs, training expenses, and salaries and benefits. By analyzing this information, organizations can identify areas where they can reduce costs and increase efficiency. + To evaluate the effectiveness of human resource management practices: HRA provides a framework for evaluating the effectiveness of HR practices such as training and development programs, employee retention strategies, and compensation and benefits policies. By analysing HR data, organizations can identify areas where they Mrs. Nirmala § S, Assistant Professor, Department of Management Studies VIU CPGS Mysuru. 4Importance of Human Resource Accounti NCIAL ACCOUNTING & REPORTING MBA Ist Sem can improve their HR practices and better support employee productivity and performance. ‘To support decision-making: HRA provides valuable information to support decision-making about HR management practices, such as determining the optimal level of staffing, identifying areas for improvement in employee performance, and assessing the impact of changes in compensation and benefits. ‘To comply with legal and regulatory requirements: HRA can help organizations to comply with legal and regulatory requirements related to HR management, such as equal employment opportunity regulations, minimum wage laws, and workplace safety regulations, By tracking and reporting on compliance-related data, HRA can help organizations to avoid penalties and legglglisputes. > Helps management in employment (@l utilization of human resources in a cost- effective manner; > Helps management in deciding prom s, retrenchment, and VRS schemes. > Provide a basis for planing about human resout > Helps in identifyi employees and their cost and benefits > Aid in making bu > Help management in dire@ifhg employees in improving theje perform: Benefits Manager ith the help of Human Resource Accounting, It helps mai methods of salary, wages, and overtime administration + The system of Hu loses the actual value of the human resource and its bene! Proper and efficient uti of manpower resources; + Productivity can be increas Limitations > There is no standard procedure for valuing human resources, > All methods of valuation are based on assumptions. > The life of working cannot be adequately estimated due to certain factors that are not in the hands of the organization, Hence valuation can be seen as unrealistic. > Different methods used by various firms in the industry; hence no comparison can be made with the industry. > Employee tumover is ignored in valuation. Methods of Human Resource Accounting Mrs. irmala S S, Assistant Professor, Department of Management Studies VTU CPG ‘Mysuru. 15FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem ‘There are various methods through which human resource accounting keeps the records of the employees in an organisation; some of the essential methods of human resource accounting are explained below: 4 The Present Value of Future Earnings Method Under this method of HRA, the present value of future eamings is the value of human resources based on the capacity of future earnings of that human resource. The company's future earnings are expected based on the employees’ skills, knowledge, and experience. ‘ Replacement Cost Method is called the replacement cost. This er benefits provided to the new The cost of replacing an employee with a simil method includes the cost of recruitment, trai employee upon replacing the old one. > Cost-Based Method suring the cost of xd method also This Human Resource accounting method in 2, training, developing, and recruiting reenui Under this method, the value of resources is estimat employees’ contribution enue and prophets. Thi ‘mainly includes the reve mployees and the cause that has been saved organisation is decided based on wvided to employees in a similar position in a different Under this method, the cost salaries, wages, and other benel organisation & Historical Cost Method Under these methods, historical cost refers to the cost that the organisation has spent in recruiting, training, developing, and returning the human capital in the organisation, Under this method, various employee benefits and compensations are also included. ‘© Recruitment Cost Method The cost of recruiting and selecting new employees by the organisation is included in this, method, Other costs like advertising for the job, travelling expenses, and time that the staff of HR has provided in reviewing and selecting the resumes and conducting interviews for the recruitment process are also included under this method. > Economic Value Method Mrs. Nirmala $ S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru. 16|ANCIAL ACCOUNTING & REPORTING MBA Ist Sem a The economic value method considers that employees can generate profit by using their skills, knowledge, and experience. This helps to generate revenue for the organization. FORENSIC ACCOUNTING Forensic accounting is a type of accounting where you investigate financial information for potential evidence of crimes, Forensic accountants use accounting, auditing, and investigative skills to understand whether a person or company has committed financial misconduct, such as embezzlement or fraud, Benefits the commercial landscape has been accounting: Forensic accounting is increasingly more relev; vanding ever since. Following are the benef > Risk Mitigation: Forensic account analysing patterns and data analysil frauds that can save the company goodwill. > Better Corporate basic tenants of is helpful in the early detection of fraud by rly detection of anomalies helps. prevent Forensic accounting assists. investm, iligence process. It fo fable basis for rocess of evidence gathering is objective and red of their unbiased nature, The reliability v responsible, adding to their Limitations > ‘Time-consuming: The organization’s accounting systems are investigated and subjected to numerous tests. The accounting data is verified, and all the parties involved with the transactions under scrutiny are probed. This data proces evidence gathering is a time taking process. > Expensive: Forensic accounting is time-consuming and escalates the cost of conducting forensic audits, The fee for forensic accountants is higher than normal auditors. In case of any underlying legal suit, the company’s operations may be halted Until the forensic accounting data gathering is complete. Specialized Domain: Forensic accounting as a subject came to the fore in the post- modem world. As a new domain with specific knowledge that combines auditing, v Ra era anne Narr eer anaes espe ues sussesnnperrerere senses Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru, 7|ANCIAL ACCOUNTING & REPORTING MBA Ist Sem accounting, and investigating ability, there are far fewer forensic accountants than other professionals in the finance domain. Objective Of Forensic Accounting Forensic accounting aims to investigate financial crimes, disputes, and other irregularities, Forensic accountants use their accounting and investigative skills to analyse financial data and identify fraudulent or illegal activities. ‘The key objectives of forensic accounting can be summarized as follows: * Identify financial crimes: Forensic accountants use their knowledge and skills to identify financial crimes such as fraud, empig@lement, and money laundering. They analyse financial data, review accou and look for inconsistencies or irregularities that may indicate illegal + Gather evidence: Forensic accountdiifg collect and analyse financial data to gather evidence that can be used in legal dings. They may also conduct interviews with employees or other individuals tion relevant to an investigation, “© Quantify dama accountants can money that has been * Provide expert testimi expert Jgatimnony in court ju alidity of financial evids vities, the extent of the damages. They can calcul stolen and provide a report that can be usedlil) court. to provide Types of Fore Following are some c situations. haa oie ate tlie mie [Link] ic accounting under various types of If businesses declare bankruptcy when they are incapable of paying back loans, forensic accountants assist creditors in recovering what they are owed, They do this by investigating Mrs. Nirmala S S, Assistant Professor, Department of Management Studies VIU CPGS Mysuru. 18FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem activities like the secrecy of assets, confidentially exchanging and transferring property under the market value, and others. [Link] Damages Economic damages are financial losses that arise from events like wrongful actions, breach of contract, etc. Forensic accountants help affected parties recover their financial losses by quantifying these damages accurately. This is crucial in legal cases, insurance claims, or settlement negotiations. 3. Tax Evasion Businesses or individuals sometimes intentionally, to escape paying taxes. In such cases, governi to uncover these tax frauds. their expenses or income statements can employ forensic accountants 4. Securities Fraud Also known as investment fraud, securitie: information from investors. Thus, a forensic acct es hide important ies to ensure lures. Thus, a isrepresentations forensic in such cas 6, Financial Theft steal the business's money through discover such thefts, identify the Sometimes, outside parti fraudulent means, Here, a person responsible, and present 7. Money Laundering Money launderers are people who hide Jr illegal sources of income, like trafficking and terrorist funding, and present their income as legal. Thus, it’s the forensic accountant’s job to find the true money sources. 8. Professional Negligence Claims It is when clients file a case against professionals like CAs, lawyers, and accountants for caused by their alleged negligence. Here, Forensic accountants assess the actual credibility and value of the losses. losses 9, Privacy Information Mrs. Nirmala $ S, Assistant Professor, Department of Management Studies VTU CPGS. Mysuru. 19FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem If the private accounting information of a business leaks, it breaches the privacy of a company. Forensic accountants can investigate those privacy breaches to facilitate catching the culprits, 10. Divorce Proceedings During divorce proceedings, a person might hide the true value of their assets from their spouse. Here, a forensic accountant can find the true value of the assets to ensure a fair distribution of wealth. Services We can categorize forensic account g services as, * Investigative Service: The main fy evidence of financial misconduct or f © Litigation Support: The main pu igative services is to help find 9 ttgation support services is to aid legal alculating lost profits, s, and more, Green Accounting, also knoW@as envi ing oF sus wunting, isa system of accounting that takes 4M social costs and benefits impacts of economic g s e in@eition to traditional financial measul Green Accounting The objectives of Green A\ * Integrate environmental processes. * Provide a comprehensive view we costs and benefits of economic activities by incorporating environmental and {9Btal considerations. © Promote sustainable development and support the transition towards a green economy. © Encourage transparency and accountabili ‘management of environmental impacts. © Foster stakeholder engagement and participation in environmental de \d benefits into national accounts and decision-making in the use of natural resources and the ision-making, Green Accounting Types Here is a table summarizing the different types of Green Accounting and their key features: [Link] Management Accounting (EMA): Mrs. Nirmala $ S, Assistant Professor, Department of Management Studies YIU CPGS Mysuru, 20FINANCIAL ACCOUNTING & REPORTING MBA Ist Sem Focuses on internal decision-making and resource management by identifying, measuring, and analysing environmental costs and benefits of a company’s operations, and incorporating this data into management systems to improve environmental performance. [Link] Cost Accounting (FCA): Calculates the total economic, social, and environmental costs of a product or service, including hidden costs that are not typically included in financial accounting, such as pollution and health impacts. This allows for a more comprehensive evaluation of the true cost of production and consumption and can inform policy and business d negative environmental impacts. ions to reduce 3. Sustainability Accounting: Measures and reports on a company’s econo! time, using indicators such as energy and r and social impact assessments. Sustainabilit company’s sustainable development and ci promote stakeholder engagement. F social, atid environmental performance over re consumption, greenhouse gas emissions, iting aims to provide a holistic view of a improvement and © Envi ‘environmental im; nt by encouraging the cons s. © Cost Savin} g environmental impacts, businesses can identify oppor improved resource efficiency, reduced * Risk Management: environmental risks. thal regulatory changes or envi * Stakeholder Engagement: By gon environmental and social performance, businesses can demonstrate thgjcommitment to sustainability to stakeholders, including customers, investors, and regulators, © Policy Development: Green accounting can inform the development of policies and regulations that promote sustainable development and help to address environmental challenges such as climate change and biodiversity loss. accounting helps Id impact their operations or reputation, such as al disasters, sinesses to identify and manage SUSTAINABILITY REPORTING Dirk! Nariiala S ScAastent Protesser: Denartiaent oF Miamacenned Staniae VTO GPCR Mrs. Nirmala $ S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru. uFINANCIAL ACCOUNTING & REPORTIN MBA Ist Through sustainability reporting, companies communicate their performance and impacts on a wide range of sustainability topics, spanning environmental, social and governance Parameters. It enables companies to be more transparent about the risks and opportunities they face, giving stakeholders greater insight into performance beyond the bottom line Building and maintaining trust in businesses and governments is fundamental to creating a sustainable global economy and a thriving world. Every day, decisions are made by businesses and governments that have direct impacts on their stakeholders, such as decisions relating to financial institutions, labour organization: trust they have with them. These decisions are rarely based on financial information alone and often consider risks and opportunities related to a variety of short and long-term factors. Sustainability topics are increasingly integrated i Benefits of Sustainability Reporting: © Increases understanding of risks and © Emphasizes the link between financial laws, norms, failures; finizations and Annual report matters) © Sustainability reports disclosure) * Corporate responsibility/sus * Supplier code of conductiethi ance as well as reporting on ESG etimes called integrated reports, full reports, or full y websites ‘There are many different types of reporting depending on the size of the company, they can be one-off reports or regular reports (annual, quarterly) and they may be stand-alone reports or addenda to other company publications such as the annual report or financial statements, — Mrs. Nirmala § S, Assistant Professor, Department of Management Studies VTU CPGS Mysuru, 22