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Value Added Reporting

Sheryl J
Sheryl J
5 Jun 2019
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Value Added Reporting

  1. ACCOUNTING THEORY AND PRACTICES SHERYL J M.Com 2nd sem
  2. Content 1. Historical Background of VAS 2. Introduction 3. The Value Added: Notion 4. Meaning 5. Definition 6. Assumptions 7. Objectives 8. Concepts of VAR 9. Classification of VAR 10. Approaches of VAR 11. Beneficiaries of VAR 12. Uses of VAR 13. Advantage of VAR 14. Disadvantage of VAR 15. Statement of VAR 16. Conclusion
  3. Historical Background of VAS  The concept of VALUE ADDED is originated in US and the VALUE ADDED STATEMENT has come to be seen with greater frequency in Europe and more particularly in Britain. In 1975, the Accounting Standard Steering Committee[ASSC] published the Corporate Reporting containing the suggestions for British companies to present VAS in addition to the tradition profit or loss account .In India, Britannia Industries limited and some other prepare VAS as supplementary financial statement in their annual reports.  VAS is now being considered as a broad measure of judging the corporate performance than conventional measure based on traditional accounting system of an enterprises. VAS is regarded as an important part of CSR which provide additional information to satisfy all the stakeholders of the enterprises.
  4. Introduction  Conventional reporting in most countries measures and discloses the financial position of the firm, the financial performance of the firm, and the conduct of the firm . Although the usefulness of these statements has been established by their sheer use overtime, they fail to give importance information on the total productivity of the firm and the share of each team of members involved in the management of resources- shareholders, bondholders, workers, and the government. The Value Added Statement can fill that crucial role.
  5. The Value Added: Notion Value added refers to the increase in wealth generated by the productive use of the firm’s resource before its allocation among shareholders, bondholders t, workers and the government. Thus, while the profit is the final return earned by the shareholders. The value added refers to the total return earned by the team of workers, capital providers and the government . The value added can be determined by adding pretax profit to payroll costs and interest charges. Another way of computing value added is to deduct bought in costs from sales revenues where these costs represent all costs and expenses incurred in buying goods and services from other firms.
  6. Meaning  The term ‘ Value-Added’ means the difference between the value of output produced by a firm in a period, and the value of inputs purchase in producing outputs. Value Added = Gross value of output – gross value of input  Value Added is the wealth created by the business during a particular period of time and the wealth or the value so created or added is distributed amongst different stake holders who created it
  7. Definition According to John Sizer -“Value Added is the wealth the company has been able to create by its own and its employees efforts during a period”. Value added is defined as “The wealth created by the reporting entity by its own and employee’s efforts and comprises salaries and wages, fringe benefits, interest, dividend, tax depreciation and net profit retained”.
  8. Assumptions of VAS Following are the basic assumptions which are used for computation of value added income through the preparation of value added statements. 1. VAS is a supplement, not a substitute to P&L account. 2. The same data which is recorded and processed by the conventional accounting system is used in the preparation of VAS. 3. The basic accounting concepts and principals of accounting remain the same in preparation of VAS.  It is convenient to prepare Value Added statements from conventional Profit & Loss account. However, there is a lot of difference between these two statements since the income statements contain certain non value added items e.g. provisions, interests, non-trading profit and losses, etc.
  9. Objectives of VAS The main objectives of preparing Value Added Statements are: 1. To indicate the value or wealth created by an enterprise. In a way it shows the wealth creating ability of the organization. 2. To show the manner in which the wealth created is distributed amongst the employees, shareholders and the government. The pattern of distribution of value added can be clearly understood. 3. To indicate the organizations contribution to national income. 4. To use it as a basis of making inter-firm and intra-firm analysis, for preparation of financial plans and targets, for developing productivity linked incentive schemes.
  10. Concept of VAR The concept of value added has a direct link with the concept of social responsibility. Value Added Analysis is the analysis of wealth creation and application of wealth by any enterprise. If any enterprise in which investments have been made by various provider of finances like shareholders, debenture holders, financial institutions does not create wealth (i.e. value added), it means that enterprise is misusing the public funds.
  11. SHAREHOLDERS EMPLOYEES DEBENTURE HOLDERS GOVERNMENT
  12. Classification of VAR  Value added may be classified as a GROSS VALUE ADDED & NET VALUE ADDED 1. Gross Value Added [GVA] The GVA refers to sales plus income from other services less bought in- materials and services purchases from outside suppliers 2. Net Value Added [NVA] The NVA refers to the difference in GVA and Depreciation. In other words, NAV is the sum of the value added to employees, to providers of loan capital, to government and to owners.
  13. Approaches of VAR ADDITIVE METHOD AND SUBRACTIVE METHOD 1)ADDITIVE METHOD Under this method, the net added value is computed by adding the distribution of added value made to the stakeholders of the output employed to turn out the product, such as wages, salaries, taxes, interest, dividends, and retained funds. GVA = PROFIT BENEFITED TAX + EMPLOYEE COST + DEPRECIATION + INTEREST
  14. 2)SUBTRACTIVE METHOD Under this method, value added is determined as net turnover (revenue) which is obtained by subtracting the cost of materials from the sales proceeds. GVA = SALE + INCOME FROM SERVICE – COST OF BOUGHT IN GOODS AND SERVICES
  15. Beneficiaries of VAR There are four main beneficiaries of the net value added created by an enterprise. These beneficiaries are workers, providers of capital, government and the owners. As a matter of principle, the beneficiaries are the persons contributing or providing their efforts or facilities directly or indirectly 1. Workers 2. Providers of capital 3. Government 4. Owners
  16. Use of VAR Value added reflects the performance of a team, which is, employees, managers, shareholders, creditors. Value added statement helps the employees to perceive them as responsible participators in a team effort with management and thus may motivate them to work harder. Value added statement provides a better measure of the size and importance of a company 1. VA can be used as a basis for wage and salary policies 2. VA can be used as a basis of bonus schemes. 3. VA can be used as a measure of business performance. 4. VA can be used in formulation of business policies. Value added is used in the formulation of various business policies 5. Another use of VA is that it links the company’s financial accounts to national income. 6. VAS are said to improve the attitude of employees towards their employing company. 7. Acts as an excellent measure of the size and importance of the company.
  17. 8. At present, both central and state governments use VAS to determine and collect tax on value addition by an enterprise in its process of production. 9. VAS also provides important accounting and other information that facilitates better communication from concerned to a variety of users who are related or unrelated. Thus, it is more transparent in nature. 9. Enhance users of financial statement 10. Realistic view of retained earnings. 11. VAS facilitate interputation of operating results
  18. Advantage of VAR 1. Labour Organizing 2. Productivity bonus management 3. Explanatory / predictive power 4. National income measurement 5. Size /importance proxy 6. Labour negotiation 7. Investors prediction 8. Economic development measurement 9. Performance measurement 10. Better proxy
  19. Disadvantage of VAR 1. False assumption 2. Possible confusion 3. Possible management misdirection 4. Fallacies 5. Misconceptions
  20. Statement of Value Added Reporting
  21. Conclusion Value added reporting, even though not always mandated, is becoming increasingly popular in Europe, South Africa, Australia, and Singapore. This adoption reflects a greater concern for the public interest and for what may be perceived as socioeconomic accounting. The greater concern for the rights and opportunities of individuals in the United States and Canada has not yet resulted in a favorable climate for the adoption of value added reporting. As accounting becomes more and more actively and explicitly recognized as an instrument of social management and change, value added reporting will constitute the intertwining of the accounting and the social because, unlike conventional reporting, it reveals something about the social character of production. The clear massage conveyed by value added reporting is that the wealth created in production is the result of the combined effort of a team of cooperating members.
  22. THANK YOU
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