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GNDU Question Paper-2023
Bachelor of Commerce
(B.Com) 5
th
Semester
CONTEMPORARY ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss in brief the emergence of Contemporary issues in Accounting.
2. What do you mean by Human Resource Valuation Accounting? Discuss various Human
Resource Valuation Models.
SECTION-B
3. Explain Price Level Accounting, its methods and Corporate Practices in detail.
4. What do you understand by Corporate Reporting? Discuss the Conceptual Framework
of Corporate Accounting.
SECTION-C
5. Explain the Recent Trends in the Presentation of Published Accounts in detail.
6. Define the concept and presentation of Value Added Reporting in brief.
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SECTION-D
7. Discuss briefly the significance and formulating of Accounting Standards in India.
8. Explain the following terms in detail:
(a) Target Costing
(b) Accounting for Intangibles.
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GNDU Question Paper-2023
Bachelor of Commerce
(B.Com) 5
th
Semester
CONTEMPORARY ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss in brief the emergence of Contemporary issues in Accounting.
Ans: Scene 1: The Ledger Room of the Past
Picture an accountant in the 1970s.
• He sits at a wooden desk, surrounded by thick ledger books.
• His main tools: a calculator, a pen, and a ruler.
• His job: record transactions, prepare trial balances, and produce annual financial
statements.
The focus was narrow: recording and reporting financial information for owners and tax
authorities. The environment was relatively stable — fewer global linkages, slower
technology changes, and simpler regulations.
Scene 2: The World Starts to Change
From the 1980s onwards, the business world began to transform:
• Globalisation connected markets and companies across borders.
• Technology — from computers to the internet — sped up transactions and data
flows.
• Financial markets became more complex, with new instruments and risks.
• Stakeholders beyond shareholders — employees, communities, regulators,
environmental groups — began demanding more information.
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Accounting could no longer be just about “keeping the books.” It had to adapt — and that’s
how contemporary issues in accounting began to emerge.
What Do We Mean by “Contemporary Issues”?
In simple words:
Contemporary issues in accounting are the current and emerging challenges, debates, and
developments that shape how accounting is practised, regulated, and understood today.
They arise because:
• The environment in which businesses operate keeps changing.
• The expectations from accounting information keep expanding.
• The tools and methods available to accountants keep evolving.
Scene 3: The Forces Behind the Emergence
Let’s walk through the main forces that have brought these issues to the surface.
1. Globalisation of Business
• Companies now operate in multiple countries, with different currencies, tax laws,
and regulations.
• Investors are global — they want comparable financial statements across borders.
• This led to the push for International Financial Reporting Standards (IFRS) and
convergence of accounting practices.
Impact: Accountants must understand cross-border transactions, foreign exchange effects,
and international reporting norms.
2. Technological Revolution
• From spreadsheets to ERP systems, from cloud accounting to AI-driven analytics —
technology has transformed accounting.
• Real-time reporting is possible, but it also means cybersecurity risks and the need
for data governance.
• Blockchain and cryptocurrencies have created new types of assets and transactions
to account for.
Impact: Accountants must be tech-savvy, manage big data, and adapt to new transaction
types.
3. Complex Financial Instruments
• Derivatives, securitisation, structured products — these didn’t exist in the same way
decades ago.
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• Valuing and reporting these instruments requires advanced knowledge and
judgement.
Impact: Standards on fair value measurement, hedge accounting, and risk disclosures have
become critical.
4. Expanding Stakeholder Demands
• Shareholders still want profits, but society wants sustainability and ethical conduct.
• Environmental, Social, and Governance (ESG) reporting is now a major area.
• Integrated reporting combines financial and non-financial information.
Impact: Accountants must measure and report on carbon footprints, social impact, and
governance practices — areas outside traditional finance.
5. Regulatory Changes
• After corporate scandals (Enron, Satyam) and financial crises, regulations tightened.
• Laws like Sarbanes-Oxley (US) and stricter SEBI norms (India) demand stronger
internal controls and auditor independence.
Impact: Compliance work has grown, and ethical standards are under sharper focus.
6. Economic Volatility
• Global recessions, pandemics, inflation spikes — these create uncertainty.
• Accountants must assess going concern, impairment of assets, and fair value in
volatile markets.
Impact: Greater reliance on estimates and forward-looking information.
7. Social and Environmental Awareness
• Climate change, resource depletion, and social inequality are now boardroom topics.
• Accounting is expected to capture the true cost of business, including environmental
degradation.
Impact: Emergence of environmental accounting, social accounting, and triple bottom line
reporting.
Scene 4: Examples of Contemporary Issues
Let’s put some names to these issues so they’re easy to recall.
1. IFRS Convergence — Harmonising Indian GAAP with global standards.
2. Fair Value Accounting — Measuring assets/liabilities at market value instead of
historical cost.
3. Sustainability Reporting — Disclosing ESG performance.
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4. Integrated Reporting — Linking financial and non-financial performance.
5. Accounting for Digital Assets — Cryptocurrencies, NFTs.
6. Cybersecurity and Data Privacy — Protecting financial data.
7. Ethics and Corporate Governance — Strengthening trust after scandals.
8. Forensic Accounting — Detecting and preventing fraud.
9. Big Data and Analytics — Using data for predictive insights.
10. Climate Risk Disclosure — Reporting exposure to climate-related risks.
Scene 5: How These Issues Emerged — A Timeline Feel
• Pre-1980s: Stable, domestic-focused accounting; manual systems.
• 1980s–1990s: Globalisation, computerisation, early harmonisation efforts.
• 2000s: Corporate scandals → regulatory reforms; internet → faster reporting.
• 2010s: IFRS adoption, sustainability focus, integrated reporting.
• 2020s: Digital assets, AI, ESG mandates, pandemic-driven remote audits.
Scene 6: Why They Matter
These issues aren’t just academic — they affect:
• Investors — need reliable, comparable, timely info.
• Companies — must comply, compete, and communicate effectively.
• Society — wants transparency on social and environmental impact.
• Accountants — must upskill, adapt, and uphold ethics.
Scene 7: The Accountant’s New Role
The modern accountant is:
• A strategic advisor, not just a bookkeeper.
• A data analyst, interpreting trends and risks.
• A communicator, explaining complex info to diverse audiences.
• A guardian of trust, ensuring integrity of information.
A Simple Analogy
Think of accounting as a camera:
• In the past, it took a single annual photo — the year-end financial statements.
• Now, it’s a live video stream with multiple angles — quarterly reports, ESG
disclosures, risk dashboards.
• The camera must capture more than just the money — it must show the people, the
planet, and the processes.
Exam-Ready Summary
Emergence of Contemporary Issues in Accounting:
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• Definition: Current and emerging challenges shaping accounting practice.
• Drivers:
1. Globalisation → need for harmonised standards.
2. Technology → real-time data, cybersecurity.
3. Complex financial instruments → advanced valuation.
4. Stakeholder demands → ESG, integrated reporting.
5. Regulatory changes → stronger compliance.
6. Economic volatility → more estimates, going concern focus.
7. Social/environmental awareness → sustainability accounting.
• Examples: IFRS convergence, fair value, sustainability reporting, digital assets,
forensic accounting.
• Impact: Expands accountant’s role, requires new skills, affects all stakeholders.
Final Takeaway: Contemporary issues in accounting didn’t appear overnight — they’re the
result of decades of change in business, technology, regulation, and society. The
accountant’s world has expanded from balancing ledgers to balancing the needs of
investors, regulators, communities, and the planet. In this new era, adaptability, ethics, and
a willingness to learn are as important as technical skills.
2. What do you mean by Human Resource Valuation Accounting? Discuss various Human
Resource Valuation Models.
Ans: Human Resource Valuation Accounting – A Story of People as Assets
Imagine you are the owner of a small but fast-growing company. You have shiny machines, a
big office, and the latest technology. On paper, your company looks rich because your
balance sheet shows all those buildings, machines, and computers.
But here’s the twist: who actually runs those machines? Who brings creativity, builds
strategies, makes customers happy, or drives innovation? Your employees.
Now ask yourself—if your star employees suddenly left, would your company still be as
valuable as the balance sheet says? Probably not. In fact, without people, those machines
and buildings would just sit there like lifeless furniture.
This is where the idea of Human Resource Valuation Accounting (HRVA) comes in. It tries to
say:
“Let’s not treat humans as just expenses in the books. Let’s treat them as assets and try to
measure their value.”
That’s the heart of this concept. Just as we value land, machinery, and goodwill, HRVA aims
to put a value tag on employees because they are the real assets driving business success.
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What Do We Mean by Human Resource Valuation Accounting?
In simple terms:
• Human Resource Valuation Accounting (HRVA) is a system of accounting where the
value of employees is recognized, measured, and reported in financial statements.
• It focuses on treating employees as assets (like machines or patents), instead of just
expenses (like salaries or training costs).
• The goal is to show the true worth of a company by reflecting how much its
workforce contributes to its growth and sustainability.
For example, a tech company like Google or Infosys may not only be valuable because of its
offices or computers, but mainly because of the skill, creativity, and knowledge of its
employees.
Why Do We Need Human Resource Valuation Accounting?
Think of a cricket team. The stadium, the cricket bats, and even the jerseys are not the real
reasons for victory. The real value lies in the players—their talent, coordination, and
training. If we only counted the bats and the stadium as “assets,” we would be missing the
actual picture.
In the same way, in companies:
1. Employees drive profits – Without them, machinery and money are useless.
2. Recruitment and training are investments – Just like you invest in a new factory, you
invest in people through hiring and training.
3. Decision-making improves – If companies know the actual “value” of their people,
they can make better decisions about promotions, training, or even mergers.
4. Motivation and recognition – When employees are valued (literally, in numbers),
they feel more respected and motivated.
So HRVA is not just about accounting—it’s about recognizing people as the backbone of the
organization.
The Big Question: How Do We Value Humans?
This is where things get tricky. Unlike machines or land, you can’t buy a person and record
their price tag in the books. Humans are unique, unpredictable, and their value changes
with time.
That’s why many models have been developed to measure human resource value. Let’s go
through them one by one—like characters in a story.
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Human Resource Valuation Models
1. Historical Cost Model
Think of this as a “receipt model.”
• Here, the value of human resources is measured by adding up the actual costs
incurred on them.
• Example: recruitment expenses, training costs, salary given until now, etc.
• Just like a machine is valued at the price you paid for it, employees are valued at the
expenses you spent to hire and prepare them.
Limitation: This model ignores the future potential of employees. For instance, you may
have trained a fresh graduate for ₹1 lakh, but tomorrow he could generate millions in
revenue. That won’t be captured here.
2. Replacement Cost Model
Now imagine one of your top managers resigns. How much would it cost you to hire
someone else with similar skills and experience?
That’s what the Replacement Cost Model measures.
• It values employees based on how much it would cost to replace them today.
• For example, if replacing a senior software engineer costs ₹20 lakhs (recruitment,
training, and lost productivity), then that’s the employee’s value.
Limitation: It doesn’t consider the emotional and cultural value that an existing employee
brings. A replacement may not perform exactly the same.
3. Opportunity Cost Model
This is also called the Competitive Bidding Model.
• Imagine two departments in a company both want the same star employee. They
start bidding internally, saying, “He’s worth ₹15 lakhs to us,” or “No, he’s worth ₹18
lakhs!”
• The value of the employee is then decided by this bidding process—basically, their
opportunity cost to the company.
Limitation: This model can create unhealthy competition and may not work for every type
of employee.
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4. Present Value of Future Earnings Model
Here, the idea is:
• Employees generate income for the company over the years.
• If we can estimate their future earnings for the company and calculate its present
value, that becomes their worth.
For example, if a manager is expected to contribute ₹10 lakhs per year for the next 10 years,
and we calculate its present value, that’s his HR value.
Limitation: It’s hard to predict the future accurately—what if the employee resigns, or the
market changes?
5. Economic Value Model (Lev & Schwartz Model)
This is one of the most famous models.
• It calculates the present value of the future earnings of employees until retirement.
• Formula-based and widely used in research studies.
Example: If an employee aged 30 is expected to earn ₹12 lakhs annually until 60, then by
discounting those future earnings, we get his present value.
Limitation: It treats employees like “machines” and ignores human factors like loyalty,
innovation, or leadership.
6. Behavioral Models
Numbers are not everything, right? These models try to capture the non-financial aspects—
like employee motivation, loyalty, satisfaction, and commitment.
• The idea is that a happy and motivated employee is far more valuable than one who
is just present physically.
• These models combine psychology with accounting.
Limitation: It’s tough to assign exact monetary value to feelings and behavior.
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7. Reward Valuation Model
This model values employees based on the rewards or benefits they receive from the
company. The idea is that employees stay and perform as long as they feel rewarded fairly.
The Challenges of HRVA
While all these models sound great, HRVA still faces some real challenges:
1. No universal method – Every model gives a different value, so which one should
companies use?
2. Uncertainty of humans – People may leave, fall ill, or change careers anytime.
3. Ethical issues – Can we really “put a price tag” on humans without making them feel
like commodities?
4. Not accepted legally – Most accounting standards don’t allow HRVA in official
balance sheets; it’s usually done for internal reporting.
Conclusion – Why HRVA Still Matters
Even with challenges, HRVA is like shining a spotlight on the hidden treasure of every
company: its people. Machines rust, buildings age, but talented employees only grow in
value with time—if nurtured.
Think of a company like Infosys, TCS, or Google. Their true value doesn’t lie in their buildings
or laptops, but in the brains and skills of their people. HRVA is a way to acknowledge and, as
far as possible, measure that value.
So, in short:
• HRVA = valuing people like assets.
• Models = different lenses to measure their worth.
• Outcome = better recognition, decisions, and motivation.
It’s not perfect, but it’s a big step toward making accounting more human-centered. After
all, what is a company without its people? Just empty walls and silent machines.
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SECTION-B
3. Explain Price Level Accounting, its methods and Corporate Practices in detail.
Ans: The Story Begins…
Imagine this: You and your friend open a small bakery in 2010. You bought an oven for
₹50,000 and raw materials were cheap. Business was good. Now fast forward to 2025. The
same oven that cost you ₹50,000 back then now costs ₹1,50,000, and flour, sugar, even
electricity charges have doubled or tripled.
One day, when you’re preparing your accounts, your friend says:
“Hey, according to our books, this oven is still valued at ₹50,000.”
You both laugh a little, because you know in reality, no one can buy that oven at ₹50,000
anymore. But here’s the serious problem: your accounts are lying about the real financial
position of the business because they ignore the change in price levels (inflation).
This is where Price Level Accounting enters the story like a hero. It corrects these illusions
and tells the real financial story.
What is Price Level Accounting?
In simple words:
Price Level Accounting is an accounting method that adjusts financial statements to reflect
the impact of changing price levels (mainly inflation or deflation).
Traditional accounting assumes money has a fixed value. But we all know ₹100 today is not
the same as ₹100 ten years ago. Price Level Accounting accepts this truth and revalues items
like assets, expenses, and profits according to the current price level.
So, it ensures that financial reports:
• Show the real worth of assets,
• Present true profits, and
• Help in fair decision-making for management, investors, and shareholders.
Why Do We Need It?
Let’s stick with the bakery example:
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1. True Asset Values – If you show your oven at ₹50,000, you’re under-reporting. Price
Level Accounting updates it to ₹1,50,000.
2. Fair Profits – Suppose you sold bread for ₹100. Traditional accounting may show
profits, but after adjusting costs with inflation, you may actually be earning less than
you think.
3. Better Decisions – Investors, creditors, and managers need real, not imaginary, data.
4. Comparability – If a company reports a profit of ₹1 crore in 2010 and another
reports the same in 2025, can we compare them directly? No! Price Level Accounting
adjusts both to the same standard so comparisons make sense.
In short, it bridges the gap between money illusion (thinking currency never changes) and
economic reality.
Methods of Price Level Accounting
Now, let’s break down the two major methods, with examples, so the concept becomes
crystal clear.
1. Current Purchasing Power (CPP) Method
• This method uses a general price index (like Consumer Price Index) to adjust all
figures in financial statements.
• Think of it as converting old rupees into “today’s rupees.”
Example:
• Suppose your bakery earned a profit of ₹1,00,000 in 2010.
• In 2010, the price index was 100.
• In 2025, the price index is 300.
So, the real profit in 2025 terms =
This method is great for showing the purchasing power of money, but it has a weakness: it
doesn’t consider specific asset price changes (like ovens becoming 3x costlier).
2. Current Cost Accounting (CCA) Method
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• Here, instead of using a general index, we look at the current replacement cost of
assets.
• That means: if we had to replace our oven today, what would it cost? That’s the
value we should use in accounts.
Example:
• Original oven cost = ₹50,000 (2010).
• Current replacement cost (2025) = ₹1,50,000.
So, in accounts, we update the oven value to ₹1,50,000, not the old ₹50,000.
This method shows a more realistic value of assets and depreciation, but it’s more complex
because you need data on the current cost of each item.
CPP vs. CCA
• CPP = Focus on money’s purchasing power using general price index.
• CCA = Focus on asset replacement values using specific costs.
Most companies use a mix or whichever method suits their industry and regulatory
environment.
Corporate Practices of Price Level Accounting
Now, let’s talk about how corporates actually use this in the real world.
1. Disclosure of Inflation-Adjusted Profits
o Some companies voluntarily show both traditional profits and inflation-
adjusted profits in their annual reports.
o This helps shareholders understand the “real” earnings.
2. Asset Revaluation
o Many corporates revalue assets (like land, machinery, buildings) to reflect
current market value.
o This practice is common in industries where asset prices rise rapidly, like real
estate or manufacturing.
3. Depreciation on Current Cost
o Instead of calculating depreciation on the original cost, companies calculate it
on the replacement cost.
o This ensures enough money is available in the future to replace the asset.
4. Dividend Policy Adjustments
o Inflation-adjusted profits prevent companies from distributing imaginary
profits as dividends.
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o This protects the company’s capital base.
5. Regulatory Influence
o In countries with high inflation (like Brazil in the past), governments made
price level accounting compulsory.
o In India, though not mandatory for all, many large companies disclose
revalued figures for transparency.
6. Investor Relations
o Investors often demand inflation-adjusted data to make fair comparisons
between companies operating in different economic climates.
Advantages of Price Level Accounting
• Shows true financial health of the company.
• Prevents overstatement of profits.
• Helps in sound decision-making.
• Ensures fair dividend distribution.
• Makes comparison between different time periods possible.
Limitations
• Calculations can be complex and time-consuming.
• Data on current costs may not always be available.
• Not universally adopted, so comparison between companies can still be tricky.
• Some critics argue it may introduce subjectivity into accounts.
Wrapping Up with a Human Touch
Think of Price Level Accounting as giving your financial statements a pair of glasses. Without
glasses, everything looks blurry—you might think you’re seeing profits, but they’re illusions
caused by inflation. Once you wear the glasses of Price Level Accounting, you see the reality:
the true worth of assets, the real profits, and the actual financial health of the company.
In real life, just like you wouldn’t want to live with outdated glasses, businesses shouldn’t
rely on outdated accounting numbers. They need updated, inflation-adjusted data to survive
and grow.
So, next time you see a company showing crores of profit, ask yourself: “Is this in real terms,
or just money illusion?” That’s the magic question that Price Level Accounting teaches us to
ask.
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4. What do you understand by Corporate Reporting? Discuss the Conceptual Framework
of Corporate Accounting.
Ans: Scene 1: The Company’s Voice to the World
Imagine “Everbright Industries Ltd.” — a large, publicly listed company. Every quarter and
every year, it steps up to a metaphorical podium and speaks to its audience: shareholders,
investors, regulators, employees, customers, and the public.
This “speech” is not given in words alone — it’s given through Corporate Reporting.
What is Corporate Reporting?
In simple words:
Corporate Reporting is the process by which a company communicates information about
its financial performance, financial position, and other relevant activities to its stakeholders,
in a structured and standardised way.
It’s more than just the annual financial statements. It includes:
• Financial Reports — Balance Sheet, Profit & Loss, Cash Flow, Changes in Equity.
• Management Discussion & Analysis (MD&A) — narrative explaining the numbers.
• Corporate Governance Reports — how the company is managed and controlled.
• Sustainability/ESG Reports — environmental, social, and governance performance.
• Interim Reports — quarterly or half-yearly updates.
• Other Disclosures — risk management, related-party transactions, segment
reporting.
Purpose of Corporate Reporting
1. Accountability — Show how management has used the resources entrusted to it.
2. Transparency — Provide a clear picture of the company’s activities.
3. Decision-Making — Help investors, creditors, and others make informed decisions.
4. Compliance — Meet legal and regulatory requirements.
5. Trust Building — Maintain confidence among stakeholders.
Types of Corporate Reporting
• Mandatory Reporting — Required by law/regulators (e.g., Companies Act, SEBI,
IFRS/Ind AS).
• Voluntary Reporting — Beyond legal requirements (e.g., sustainability reports,
integrated reports).
Scene 2: Why a Conceptual Framework is Needed
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Now, imagine if every company spoke a different “language” in its reports — one used
cricket metaphors, another used cooking recipes, another used secret codes. Investors
would be lost.
That’s why we need a Conceptual Framework — a common language and set of principles
for preparing and presenting corporate accounts.
What is the Conceptual Framework of Corporate Accounting?
Definition: A Conceptual Framework is a system of interrelated objectives and fundamental
concepts that underpins the preparation and presentation of financial statements.
It:
• Provides a foundation for developing accounting standards.
• Helps preparers develop consistent accounting policies when no specific standard
applies.
• Assists users in interpreting the information.
Globally, the IASB’s Conceptual Framework for Financial Reporting is the reference point
(Ind AS in India is aligned to it).
Scene 3: Walking Through the Framework — Step by Step
Let’s walk through the main “rooms” of this framework, like a well-designed building.
1. Objective of General-Purpose Financial Reporting
The primary objective is:
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders, and other creditors in making decisions about providing
resources to the entity.
This includes:
• Assessing the entity’s ability to generate cash flows.
• Evaluating management’s stewardship of resources.
2. Qualitative Characteristics of Useful Financial Information
These are like the qualities that make the company’s “voice” clear and trustworthy.
Fundamental Characteristics:
1. Relevance — Information must be capable of influencing decisions (predictive or
confirmatory value).
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2. Faithful Representation — Information must represent the substance of what it
purports to depict, completely, neutrally, and free from error.
Enhancing Characteristics:
• Comparability — Across periods and entities.
• Verifiability — Different observers can agree it’s accurate.
• Timeliness — Available in time to influence decisions.
• Understandability — Clear and concise for users with reasonable knowledge.
3. The Reporting Entity
Defines what constitutes the “entity” whose financial information is being reported — could
be a single company or a group (consolidated statements).
4. Elements of Financial Statements
These are the building blocks:
• Assets — Present economic resources controlled by the entity.
• Liabilities — Present obligations to transfer resources.
• Equity — Residual interest in assets after deducting liabilities.
• Income — Increases in assets or decreases in liabilities that result in increases in
equity (other than contributions from owners).
• Expenses — Decreases in assets or increases in liabilities that result in decreases in
equity (other than distributions to owners).
5. Recognition and Derecognition
• Recognition — When to include an item in the financial statements (if it meets the
definition of an element and provides relevant, faithfully represented information).
• Derecognition — When to remove an item (e.g., when an asset is sold or no longer
controlled).
6. Measurement
How to quantify elements:
• Historical Cost — Original transaction price.
• Current Value — Includes fair value, value in use, current cost.
• Choice depends on relevance, faithful representation, and cost-benefit
considerations.
7. Presentation and Disclosure
• Presentation — How information is structured in the statements.
• Disclosure — Additional information in notes to help users understand the numbers.
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8. Capital and Capital Maintenance
• Financial Capital Maintenance — Profit is earned only if the financial amount of net
assets at the end exceeds the beginning, excluding owner transactions.
• Physical Capital Maintenance — Profit is earned only if the physical productive
capacity at the end exceeds the beginning.
Scene 4: How the Framework Supports Corporate Reporting
Think of the Conceptual Framework as the grammar book for the language of corporate
reporting:
• Ensures consistency across companies and time.
• Guides standard-setters in writing new accounting rules.
• Helps preparers when no specific standard exists.
• Assists auditors and users in interpreting reports.
Scene 5: An Example in Action
Everbright Industries buys a new machine:
• Asset Definition — It’s a resource controlled by the company with future economic
benefits.
• Recognition — Include it in the balance sheet when purchased and ready for use.
• Measurement — Initially at historical cost; later, maybe revalued at fair value.
• Presentation — Show under “Property, Plant & Equipment.”
• Disclosure — Depreciation method, useful life, revaluation details.
Every step follows the Conceptual Framework.
Scene 6: The Expanding Scope
Modern corporate reporting, guided by the framework, is expanding to include:
• Integrated Reporting — Linking financial and non-financial performance.
• Sustainability Reporting — ESG metrics.
• Risk Reporting — Detailed disclosures on uncertainties.
The framework’s principles can be adapted to these new areas, ensuring they’re still
relevant, faithfully represented, and comparable.
Exam-Ready Summary
Corporate Reporting:
• Definition: Communication of financial and other information to stakeholders.
• Purpose: Accountability, transparency, decision-making, compliance, trust.
• Types: Mandatory (statutory) and voluntary (beyond compliance).
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• Components: Financial statements, MD&A, governance reports, ESG reports, interim
reports.
Conceptual Framework of Corporate Accounting:
1. Objective: Provide useful info to investors, lenders, creditors.
2. Qualitative Characteristics: Relevance, faithful representation; comparability,
verifiability, timeliness, understandability.
3. Reporting Entity: Defines the boundary of what’s reported.
4. Elements: Assets, liabilities, equity, income, expenses.
5. Recognition/Derecognition: Criteria for including/removing items.
6. Measurement: Historical cost, current value, fair value, etc.
7. Presentation/Disclosure: Structure and explanatory notes.
8. Capital Maintenance: Financial vs physical.
Final Takeaway: Corporate Reporting is the company’s public voice; the Conceptual
Framework is the grammar and dictionary that make sure that voice is clear, consistent, and
trustworthy. Without the framework, reports would be like conversations in a room where
everyone speaks a different language — confusing and unreliable. With it, stakeholders
anywhere in the world can “read” the company’s story and make informed decisions.
SECTION-C
5. Explain the Recent Trends in the Presentation of Published Accounts in detail.
Ans: Scene 1: The Changing Face of Published Accounts
Published accounts are the public face of a company’s financial story. They’re not just for
regulators anymore — they’re for investors, analysts, employees, customers, and even the
general public.
In the past:
• Annual reports were long, text-heavy, and purely financial.
• The focus was on statutory compliance.
• Presentation was formal and often difficult for non-accountants to understand.
Now:
• Reports are multi-dimensional — combining financial, non-financial, and
forward-looking information.
• They’re visually appealing — with charts, infographics, and photographs.
• They’re accessible — available online, interactive, and often mobile-friendly.
• They’re strategic — used as a branding and trust-building tool.
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Scene 2: The Forces Driving Change
Why have published accounts evolved so much? Several forces are at play:
1. Globalisation — Investors compare companies across countries; presentation must
meet global standards.
2. Technology — Digital publishing, interactive PDFs, and online dashboards make
richer presentation possible.
3. Regulatory Changes — IFRS/Ind AS, SEBI’s listing requirements, and ESG disclosure
mandates.
4. Stakeholder Expectations — Demand for transparency, sustainability, and
governance information.
5. Competition — Companies want to stand out and build investor confidence.
Scene 3: The Recent Trends — Room by Room in the Showroom
Let’s walk through each “room” of our modern showroom and see the trends in action.
1. Integrated Reporting (IR)
The Room: A central display showing how the company creates value over time — not just
profits, but also people, planet, and purpose.
• What it is: Combines financial and non-financial information into a single, cohesive
report.
• Framework: Guided by the International Integrated Reporting Council (IIRC).
• Focus: Six capitals — financial, manufactured, intellectual, human, social &
relationship, and natural.
• Benefit: Shows the big picture of value creation, not just short-term results.
Example: A manufacturing company explains how its R&D (intellectual capital) and
employee training (human capital) contribute to long-term profitability.
2. Sustainability and ESG Reporting
The Room: A green-themed section with charts on carbon emissions, water usage, diversity
ratios, and community projects.
• What it is: Reporting on Environmental, Social, and Governance (ESG) performance.
• Drivers: Investor demand, regulatory push (e.g., SEBI’s BRSR in India), and global
frameworks like GRI, SASB, TCFD.
• Content: Climate risk disclosures, social impact, governance practices.
• Benefit: Builds trust with socially conscious investors and customers.
3. Enhanced Corporate Governance Disclosures
The Room: A transparent glass wall showing the boardroom — who’s on the board, their
skills, independence, and meeting attendance.
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• What it is: Detailed reporting on governance structures, policies, and practices.
• Includes: Board composition, committees, remuneration policies, risk management
frameworks.
• Benefit: Demonstrates accountability and ethical leadership.
4. Digital and Interactive Reports
The Room: Touchscreens where visitors can click to explore financial data, watch CEO
videos, or filter charts by year.
• What it is: Moving from static PDFs to interactive online reports.
• Features: Searchable content, clickable charts, embedded videos, downloadable
datasets.
• Benefit: Improves accessibility and engagement, especially for global stakeholders.
5. Infographics and Visual Storytelling
The Room: Walls covered with colourful charts, timelines, and icons instead of dense tables.
• What it is: Using visuals to simplify complex data.
• Examples: Revenue breakdown pie charts, process flow diagrams, milestone
timelines.
• Benefit: Makes reports easier to understand for non-financial readers.
6. Segment-Wise and Geographic Reporting
The Room: A world map showing revenue and profit by region, and a product wall showing
performance by business segment.
• What it is: Breaking down results by product line, geography, or customer segment.
• Benefit: Helps investors see which parts of the business are driving growth or facing
challenges.
7. Forward-Looking Statements
The Room: A “future zone” with projections, strategic priorities, and risk outlooks.
• What it is: Management’s view on future trends, opportunities, and risks.
• Benefit: Gives context to current performance and helps stakeholders anticipate
changes.
8. Compliance with Global Standards
The Room: A library shelf with IFRS, Ind AS, and other standard-setting books.
• What it is: Presenting accounts in line with globally accepted accounting standards.
• Benefit: Improves comparability and credibility in global markets.
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9. Inclusion of Non-Financial KPIs
The Room: A dashboard showing customer satisfaction scores, employee turnover,
innovation metrics.
• What it is: Reporting key performance indicators beyond finance.
• Benefit: Gives a more rounded view of performance drivers.
10. Real-Time and More Frequent Reporting
The Room: A live ticker showing quarterly updates, not just annual results.
• What it is: Interim reports, investor presentations, and earnings calls.
• Benefit: Keeps stakeholders informed throughout the year.
Scene 4: How These Trends Improve Stakeholder Communication
These trends:
• Enhance Transparency — More detail, more honesty.
• Improve Accessibility — Easier to find and understand information.
• Build Trust — Showing not just results, but how they’re achieved.
• Support Decision-Making — Richer data for investors and analysts.
• Strengthen Brand — A well-presented report reflects professionalism.
Scene 5: An Example Journey — From Old to New
Old Annual Report (1995):
• 100 pages of black-and-white text.
• Tables of numbers with minimal explanation.
• Printed copies only.
Modern Annual Report (2025):
• 200 pages, but with half the space devoted to visuals and narratives.
• Integrated reporting structure.
• ESG section with measurable targets.
• Interactive online version with video messages from leadership.
• Downloadable Excel sheets for analysts.
Scene 6: Challenges in Adopting These Trends
• Cost and Resources — Designing interactive, high-quality reports needs investment.
• Data Collection — Gathering reliable non-financial data can be complex.
• Standardisation — ESG and integrated reporting frameworks are still evolving.
• Avoiding “Window Dressing” — Risk of style over substance; content must remain
accurate and meaningful.
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Scene 7: The Road Ahead
Expect even more innovation:
• AI-Driven Analysis — Automated insights in reports.
• Blockchain Verification — Ensuring data integrity.
• Customisable Reports — Stakeholders choose the sections they want to view.
• Greater Assurance on Non-Financial Data — Audits extending beyond financials.
Exam-Ready Summary
Recent Trends in Presentation of Published Accounts:
1. Integrated Reporting — holistic view of value creation.
2. Sustainability/ESG Reporting — environmental, social, governance metrics.
3. Enhanced Corporate Governance Disclosures — board, policies, risk.
4. Digital & Interactive Reports — online, clickable, multimedia.
5. Infographics & Visual Storytelling — charts, diagrams, timelines.
6. Segment & Geographic Reporting — performance by product/region.
7. Forward-Looking Statements — strategy, risks, opportunities.
8. Compliance with Global Standards — IFRS/Ind AS alignment.
9. Non-Financial KPIs — customer, employee, innovation metrics.
10. More Frequent Reporting — quarterly updates, investor calls.
Benefits: Transparency, accessibility, trust, decision-support, brand image. Challenges: Cost,
data collection, evolving standards, avoiding superficiality.
Final Takeaway: Published accounts have evolved from static, compliance-driven
documents into dynamic, multi-dimensional communication tools. They now tell a
company’s story in a way that blends numbers with narratives, compliance with creativity,
and past performance with future vision. In the modern “showroom” of corporate
reporting, presentation is not just about looking good — it’s about being clear, credible, and
connected to the people who matter most.
6. Define the concept and presentation of Value Added Reporting in brief.
Ans: Imagine a bakery in your neighbourhood. Every morning, the baker buys raw
ingredients like flour, sugar, and eggs. By the end of the day, these ingredients are
transformed into delicious cakes and pastries. Now, the question is: how much value did the
bakery create from the raw materials it purchased? This is where Value Added Reporting
(VAR) comes into play. Value Added Reporting is like the financial storytelling of how much
value a business creates from the resources it uses. It shows the extra worth added by the
company’s operations and management during a specific period.
Understanding the Concept of Value Added Reporting
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At its core, Value Added Reporting is an accounting and financial reporting tool that focuses
on measuring the contribution of an organization to the economy and stakeholders. Unlike
traditional financial statements, which primarily focus on profits, expenses, and revenue,
value-added reporting emphasizes the creation of wealth and how it is distributed among
various stakeholders—such as employees, shareholders, government, and the business
itself.
Think of it like this: when a company earns revenue, not all of it is pure profit. Some money
goes into paying suppliers, taxes, salaries, and reinvestments. The remaining portion, which
is “added” through the company’s efforts, reflects its real economic contribution.
Essentially, VAR helps answer questions like:
• How much wealth did the company generate over and above the costs of materials
and services purchased?
• Who benefited from this wealth, and in what proportion?
Why Value Added Reporting Is Important
Imagine two companies, Company A and Company B, both earning a revenue of 1 crore
rupees. At first glance, it seems they are equally successful. But when we dig deeper using
Value Added Reporting, we might discover:
• Company A added 40 lakh rupees of value through its operations, while
• Company B added only 15 lakh rupees.
Even if both companies show similar net profits, Company A is clearly creating more wealth
from the same level of resources. This is valuable information for investors, employees, and
policymakers because it shows the efficiency and effectiveness of business operations, not
just accounting profits.
Moreover, Value Added Reporting encourages transparency and responsibility. By showing
how wealth is distributed, it promotes fairness among stakeholders and can also boost the
morale of employees when they see their contribution acknowledged in the report.
Components of Value Added Reporting
A Value Added Report usually contains the following elements:
1. Revenue from Operations: This includes total sales or turnover of the business. It is
the starting point of the report.
2. Cost of Purchased Materials and Services: This is subtracted from revenue to find
the net value added. Materials, energy, and services purchased externally are not
considered part of the company’s own contribution.
3. Value Added by the Organization: The difference between revenue and external
costs is the value created by the company. It represents the additional wealth
generated.
4. Distribution of Value Added: Once the total value added is calculated, it is
distributed among various stakeholders, often in this sequence:
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o Employees: Wages, salaries, benefits.
o Government: Taxes paid.
o Providers of Capital: Dividends to shareholders, interest to lenders.
o Retained Earnings: Profits reinvested in the business for future growth.
Let’s visualize it with an example. Suppose a company generates 50 lakh rupees in revenue.
It spends 20 lakh on materials, 5 lakh on external services, and 25 lakh is what remains as
the value added. This 25 lakh will then be divided among employees, government,
shareholders, and reinvested funds.
Presentation of Value Added Reporting
The beauty of Value Added Reporting lies in its presentation. Unlike a complex balance
sheet, VAR is often presented in a clear, tabular form showing each step of value creation
and distribution. A typical presentation might look like this:
Particulars
Amount (₹)
Revenue from Operations
50,00,000
Less: Cost of Purchased Inputs
25,00,000
Value Added
25,00,000
Distributed as:
- Employees (Wages & Benefits)
10,00,000
- Government (Taxes)
5,00,000
- Shareholders (Dividends)
4,00,000
- Retained Earnings
6,00,000
This table gives a clear snapshot of how the company transforms raw inputs into value and
how that value benefits different parties. Some organizations also include graphs or charts
to show proportions of distribution visually, making it even easier for stakeholders to
comprehend.
Advantages of Value Added Reporting
VAR provides multiple benefits:
1. Focus on Wealth Creation: It highlights the actual contribution of the company,
beyond mere profits.
2. Transparency: Shows a fair and clear distribution of wealth among employees,
government, shareholders, and reinvested funds.
3. Decision Making: Helps management, investors, and analysts assess operational
efficiency.
4. Motivation: Recognizes employees’ contribution, encouraging a more engaged
workforce.
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5. Societal Responsibility: Demonstrates how the company contributes to society
through taxes and social welfare initiatives.
Practical Example – Bringing the Story to Life
Let’s go back to our bakery. Suppose the bakery sells cakes worth ₹1,00,000 in a month. It
spends ₹40,000 on flour, sugar, and other ingredients purchased externally. It also spends
₹10,000 on electricity and maintenance. The bakery thus adds a value of ₹50,000 through
its baking skills, recipes, and labour. This ₹50,000 is then distributed as:
• Employees (bakers and helpers): ₹20,000
• Government (taxes): ₹5,000
• Owner’s reinvestment: ₹15,000
• Profit for the owner/shareholders: ₹10,000
Through Value Added Reporting, even a small bakery can showcase how it contributes
economically and socially, which is incredibly insightful for investors, community members,
and employees.
Conclusion
In simple terms, Value Added Reporting tells the story of wealth creation. It is an
accounting and management tool that goes beyond profits to show how a company
transforms resources into value and how that value benefits various stakeholders. The
presentation is usually straightforward, using tables and sometimes charts, making it easy to
understand even for someone unfamiliar with accounting. It provides transparency,
motivates employees, helps decision-making, and demonstrates the company’s societal
contribution.
So, just like our neighbourhood bakery turns simple ingredients into delicious cakes and
distributes the fruits of its labour fairly, every organization, through Value Added Reporting,
showcases its ability to generate wealth and share it wisely. It is, in essence, the heartbeat
of responsible and insightful financial storytelling
SECTION-D
7. Discuss briefly the significance and formulating of Accounting Standards in India.
Ans: Imagine you are the captain of a ship navigating through the vast ocean of business.
The sea is filled with waves of financial transactions, storms of investment decisions, and
currents of taxation and regulation. Without a proper map, compass, or lighthouse,
navigating these waters would be chaotic and risky. In the world of business, accounting
standards act as your guiding lighthouse—they ensure that no matter how stormy the
business environment, everyone understands the financial position of a company in the
same way.
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Significance of Accounting Standards in India
Accounting is often called the “language of business.” But what if every business spoke a
slightly different dialect? One company might call profits “earnings,” another might hide
certain expenses, while a third might report revenue prematurely. Investors, creditors,
regulators, and even employees would be left confused, making it nearly impossible to
compare financial statements or make informed decisions. This is where accounting
standards become indispensable.
1. Ensuring Uniformity and Consistency
Accounting standards are like the grammar rules of financial reporting. They create
uniformity in the way businesses record and present their financial information. For
example, whether it’s a textile company in Mumbai or a software firm in Bengaluru,
both will follow the same principles for recognizing revenue or valuing inventory.
This consistency allows stakeholders to trust the numbers, making comparisons
across time periods and industries meaningful.
2. Enhancing Transparency and Reliability
Imagine you’re an investor looking to invest in two different companies. Without
accounting standards, each company might present numbers in its own way, hiding
risks or inflating profits. Accounting standards require companies to disclose relevant
information in a clear and systematic manner. This transparency builds reliability,
which in turn boosts investor confidence and promotes the flow of capital in the
economy.
3. Facilitating Decision Making
Management, investors, lenders, and regulators all rely on financial statements to
make decisions. A bank deciding whether to give a loan, a manager planning
expansion, or an investor evaluating a stock—all need accurate and comparable
information. Accounting standards provide the framework that ensures financial
statements are a dependable source for such decision-making.
4. Protecting Stakeholders’ Interests
In India, a significant portion of the population invests in companies, either directly
through the stock market or indirectly through mutual funds and retirement funds.
Accounting standards safeguard these stakeholders by minimizing manipulation,
misrepresentation, or distortion of financial results. They act as a shield against
corporate malpractices, promoting ethical financial reporting.
5. Promoting Economic Growth
Reliable financial information also has macroeconomic significance. By fostering
transparency and trust in corporate reporting, accounting standards encourage
investment, facilitate access to credit, and reduce the cost of capital. In essence,
they create a healthier business environment, contributing to overall economic
growth.
Formulating Accounting Standards in India
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Now that we understand why accounting standards are important, let’s delve into how they
are formulated in India. Think of this process as creating the rules of the game—ensuring
fairness, clarity, and adaptability to changing business needs.
1. The Role of ICAI
The Institute of Chartered Accountants of India (ICAI) is the primary body responsible
for formulating accounting standards in India. Established under the Chartered
Accountants Act, 1949, ICAI is the professional authority for accountants in India.
The process of standard formulation begins with recognizing a need—maybe due to
a new type of transaction, regulatory change, or international developments in
accounting practices.
2. The Accounting Standards Board (ASB)
ICAI has set up a specialized committee called the Accounting Standards Board (ASB).
Think of the ASB as a team of experts tasked with drafting the playbook for
accounting practices. They study global standards, examine domestic business
requirements, and identify areas where guidelines are necessary.
3. Research and Consultation
Before finalizing any standard, ASB conducts extensive research. They study how
similar issues are addressed internationally (such as by the International Accounting
Standards Board—IASB), evaluate legal and economic contexts in India, and consult
widely with industry professionals, auditors, regulators, and other stakeholders. This
ensures that standards are practical, globally aligned, and locally relevant.
4. Exposure Draft and Feedback
Once a draft standard is prepared, it is published as an Exposure Draft. This is like
sending a rough blueprint to builders before the actual construction. Stakeholders
are invited to review the draft, provide suggestions, and point out potential issues.
Public consultation ensures inclusivity and helps in refining the standard to cover all
practical scenarios.
5. Finalization and Issuance
After considering all feedback, the ASB finalizes the standard and issues it officially.
In India, accounting standards are known as Indian Accounting Standards (Ind AS),
which have been largely harmonized with International Financial Reporting
Standards (IFRS) to ensure global comparability. Companies are then required to
comply with these standards in preparing their financial statements.
6. Continuous Review and Updates
The business world is dynamic, and new transactions, technologies, and financial
instruments emerge regularly. Accounting standards are not static; they evolve. The
ASB continuously monitors developments, reviews existing standards, and revises
them when necessary. This ensures that Indian accounting practices remain relevant,
robust, and responsive to changing business realities.
Challenges in Formulating Accounting Standards
While the importance of accounting standards is unquestionable, formulating them in India
comes with challenges.
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• Diverse Business Environment: India has a wide variety of businesses, from small
family-run firms to multinational corporations. A standard that suits one may be
difficult to implement for another.
• Complex Transactions: Modern businesses engage in complex financial transactions
that require sophisticated accounting treatments. Drafting standards that capture
these nuances is not easy.
• Global Convergence: While aligning with international standards promotes
comparability, it also poses challenges because Indian business, legal, and tax
environments may differ from global norms.
• Implementation Issues: Even after standards are issued, educating businesses and
ensuring compliance requires ongoing efforts, workshops, and professional
guidance.
Conclusion
To sum up, accounting standards in India act as the guiding compass in the complex sea of
financial reporting. They ensure uniformity, transparency, reliability, and comparability,
protecting the interests of investors, creditors, and other stakeholders while promoting
sound economic growth. The formulation of these standards is a meticulous, consultative
process led by the ICAI and its ASB, involving research, stakeholder input, drafting,
exposure, and continuous updates to remain relevant.
Without accounting standards, financial reporting would be a chaotic jumble of numbers,
leaving decision-makers adrift in uncertainty. With them, businesses and investors navigate
confidently, regulatory bodies enforce fairness, and the economy thrives. In essence,
accounting standards are not just rules—they are the very language that enables trust,
clarity, and progress in the financial world.
8. Explain the following terms in detail:
(a) Target Costing
(b) Accounting for Intangibles.
Ans: Chapter One — Target Costing: Designing Backwards from the Price Tag
Scene 1: The Challenge
At “BrightWave Electronics Ltd.”, the marketing team bursts into the design room with
exciting news:
“The market is hot for a new smart speaker. Customers are willing to pay ₹4,000 for one
with these features.”
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The product design team is thrilled — until the finance manager says:
“If we want our usual 20% profit margin, our total cost per unit must not exceed ₹3,200.
Right now, our prototype costs ₹3,600 to make. We need to cut ₹400 without losing
quality.”
This is Target Costing in action.
What is Target Costing?
In simple words:
Target Costing is a pricing method where you start with the market-determined selling
price, subtract your desired profit margin, and the result is your target cost. Then you design
and produce the product to meet that cost.
Formula: Target Cost = Target Selling Price – Desired Profit Margin
Why Use Target Costing?
• In competitive markets, companies are often price takers, not price makers — the
market sets the price.
• The only way to achieve desired profits is to control and reduce costs.
• It forces cost discipline early in the design stage, when changes are cheaper and
easier.
Key Features
1. Market-Driven Price — Selling price is based on customer expectations and
competitor pricing.
2. Profit Margin Built-In — Desired profit is deducted upfront to set the cost limit.
3. Cross-Functional Teams — Design, engineering, purchasing, and marketing work
together.
4. Cost Reduction Focus — Identify and eliminate unnecessary costs without harming
value.
5. Early Planning — Applied during product planning and design, not after production
starts.
Steps in Target Costing
1. Identify Customer Needs — What features, quality, and price do customers want?
2. Set Target Selling Price — Based on market research and competition.
3. Decide Desired Profit Margin — As per company strategy.
4. Calculate Target Cost — Price minus profit.
5. Estimate Current Cost — Based on initial design.
6. Close the Cost Gap — Use value engineering, process improvements, supplier
negotiations.
7. Launch Product — Once target cost is achieved.
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Example in Action
• Target Selling Price: ₹4,000
• Desired Profit Margin: ₹800 (20%)
• Target Cost: ₹3,200
• Current Estimated Cost: ₹3,600
• Cost Gap: ₹400 → Reduce by redesigning components, sourcing cheaper materials,
improving efficiency.
Advantages
• Aligns product design with market expectations.
• Encourages innovation and efficiency.
• Reduces risk of cost overruns.
• Improves cross-department collaboration.
Limitations
• May pressure teams to cut costs at the expense of quality if not managed well.
• Requires accurate market and cost data.
• Not suitable for monopoly or highly differentiated products where the company can
set prices freely.
In short: Target Costing flips the traditional approach. Instead of “cost + profit = price,” it’s
“price – profit = cost.” It’s like designing a house knowing exactly how much you can spend,
and making every design choice fit that budget.
Chapter Two — Accounting for Intangibles: Valuing the Invisible
Scene 1: The Invisible Vault
In the finance department of “BrightWave Electronics,” the CFO opens a report for the
board:
• Patents: ₹50 crore
• Brand Value: ₹80 crore
• Software Licenses: ₹10 crore
A new director frowns:
“I don’t see these in our warehouse. Where are they?”
The CFO smiles:
“You can’t touch them, but they’re some of our most valuable assets. They’re intangibles.”
What are Intangible Assets?
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Definition (IAS 38 / Ind AS 38): An intangible asset is an identifiable non-monetary asset
without physical substance that:
1. Is controlled by the entity.
2. Will provide future economic benefits.
3. Can be measured reliably.
Examples
• Legal Rights: Patents, copyrights, trademarks, franchises.
• Technology: Software, proprietary algorithms.
• Customer-Related: Customer lists, contracts.
• Marketing-Related: Brand names, domain names.
• Others: Licenses, permits, goodwill (from acquisitions).
Recognition Criteria
An intangible asset is recognised only if:
1. Probable Future Benefits — It will generate future cash flows.
2. Reliable Measurement — Cost can be measured reliably.
If these aren’t met, the expenditure is expensed (e.g., most research costs).
Purchased vs Internally Generated
• Purchased Intangibles: Acquired from another entity — recorded at purchase price
plus directly attributable costs.
• Internally Generated: Created within the company — recognition is tricky:
o Research Phase: Costs expensed (too uncertain).
o Development Phase: Costs capitalised if criteria are met (technical feasibility,
intent to complete, ability to use/sell, probable benefits, resources available,
costs measurable).
Measurement
• Initial Measurement: At cost (purchase price or development cost).
• Subsequent Measurement:
o Cost Model: Cost less accumulated amortisation and impairment.
o Revaluation Model: Fair value at revaluation date (if active market exists).
Amortisation
• Intangibles with finite useful life — amortised over that life (e.g., a patent over 20
years).
• Intangibles with indefinite useful life — not amortised, but tested annually for
impairment (e.g., brand names with enduring value).
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Impairment
If the recoverable amount (higher of fair value less costs to sell and value in use) is less than
carrying amount, recognise an impairment loss.
Goodwill Special Case
• Arises in a business combination when purchase price > fair value of net assets
acquired.
• Not amortised; tested annually for impairment.
Example in Action
BrightWave develops a new software:
• Research costs: ₹5 lakh → expensed.
• Development costs (meeting criteria): ₹15 lakh → capitalised as intangible asset.
• Amortised over 5 years: ₹3 lakh/year.
Differences from Tangible Assets
Tangible Assets
Intangible Assets
Physical form (machinery, buildings)
No physical form (patents, brands)
Depreciated
Amortised (if finite life)
Easier to value
Often harder to value
Salvage value possible
Usually no salvage value
Why Accounting for Intangibles Matters
• In modern economies, intangible assets often exceed tangible ones in value.
• Accurate accounting helps investors understand the true worth of a company.
• Misstating intangibles can mislead stakeholders.
Challenges
• Valuation subjectivity.
• Rapid technological changes can shorten useful life.
• Legal rights may be hard to enforce in some jurisdictions.
Bringing It Together — The Two Sides of Modern Cost & Asset Management
• Target Costing is about designing products to meet a cost goal set by the market
price and desired profit — proactive cost control.
• Accounting for Intangibles is about measuring and reporting invisible assets that
drive future value — ensuring they’re recognised, valued, and disclosed properly.
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One works at the front end of the business cycle (design and pricing), the other at the
reporting end (financial statements and valuation). Together, they show how modern
accounting is as much about strategy and foresight as it is about recording history.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
