Unit 4: Contemporary accounting and financial reporting
Accounting for Management and Reporting notes · PTU syllabus (MBA 104-18)
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Unit summary
Accounting keeps evolving — for inflation, people, internal pricing, modern costing and global reporting. This unit covers price-level accounting, human resource accounting, transfer pricing, target costing, kaizen costing, activity-based costing, life-cycle costing, the objectives and environment of financial reporting, Indian Accounting Standards, US GAAP, IFRS and harmonisation of accounting practices.
After this unit you can
- Explain price-level and human resource accounting
- Explain transfer pricing and modern costing techniques
- Explain the objectives and environment of financial reporting
- Compare Ind AS, US GAAP and IFRS and explain harmonisation
PTU syllabus topics
- Price level accounting
- human resource accounting
- transfer pricing
- target costing
- kaizen costing
- activity-based costing
- life cycle costing
- financial reporting objectives and environment
- Indian Accounting Standards (ICAI)
- US GAAP
- IFRS
- harmonization of accounting practices
- Activity-based costing
- Assigns overheads by activities that drive cost
- Target costing
- Target price − desired profit = allowable cost
- Kaizen costing
- Continuous small cost cuts during production
- Life cycle costing
- All costs from design to disposal
- Transfer pricing
- Price for goods traded between divisions
Topic 1
Price-level accounting
Historical cost accounts overstate profits and understate assets during inflation.
Current purchasing power (CPP)
Adjust historical figures by a general price index; monetary gains and losses
Current cost accounting (CCA)
Current (replacement) cost of assets; adjustments — depreciation, cost of sales, monetary working capital, gearing
Hybrid
Combination of the two
- Ind AS 29: financial reporting in hyperinflationary economies (cumulative inflation over three years approaching 100%).
Topic 2
Human resource accounting
Human resource accounting (HRA) is identifying and measuring data about human resources and communicating it to interested parties (American Accounting Association).
Cost-based
Historical cost (recruitment, training), replacement cost, opportunity cost (Hekimian and Jones)
Value-based
Lev and Schwartz present value of future earnings, Flamholtz's reward valuation, Hermanson's unpurchased goodwill
- Lev and Schwartz model: value = present value of future earnings of employees till retirement, discounted at a cost of capital.
- Indian practice: BHEL (first in India, 1973), Infosys, SAIL, ONGC disclosed HR values voluntarily.
- Limitations: no accepted method, people are not owned assets, subjectivity, tax and legal issues.
Topic 3
Transfer pricing
Transfer price: the value placed on goods or services transferred between responsibility centres of the same company.
- Objectives: goal congruence, performance evaluation of divisions, divisional autonomy, simplicity, tax and regulatory compliance (international).
Market-based
Market price (best when a competitive market exists)
Cost-based
Variable cost, full cost, cost-plus, standard cost
Negotiated
Divisions bargain
Two-step pricing
Variable cost per unit + periodic fixed fee
Profit sharing / dual pricing
Selling division at market, buying division at cost
Minimum transfer price
Variable cost + Opportunity cost (lost contribution) for the selling division
Example
Division A makes a component with variable cost ₹60, market price ₹100. If A has idle capacity, the minimum price is ₹60; if A is at full capacity, it is ₹100 (₹60 + ₹40 lost contribution).
Topic 4
Target, kaizen, activity-based and life-cycle costing
Activity-based costing (ABC)
Overheads are traced to activities (cost pools) and then to products using cost drivers — number of set-ups, purchase orders, inspections, machine hours.
- 1Identify activities
- 2Create activity cost pools
- 3Identify cost drivers
- 4Compute cost driver rates
- 5Assign overheads to products by driver usage
Example
Set-up cost pool ₹60,000 for 30 set-ups = ₹2,000 per set-up. Product A needs 20 set-ups (₹40,000) while Product B needs 10 (₹20,000) — even if B uses more machine hours.
- Gives more accurate product costs where overheads are large and products diverse.
Other techniques
| Technique | Key idea |
|---|---|
| Just-in-Time (JIT) | Produce and buy only when needed; near-zero inventory; pull system (Toyota) |
| Target costing | Target cost = Target selling price − Desired profit; design product to meet it |
| Life-cycle costing | Track costs over the product's entire life — R&D, design, production, marketing, disposal |
| Value analysis | Examine each component to reduce cost without reducing function, quality or reliability |
| Kaizen costing | Continuous small cost reductions during the manufacturing stage |
| Total Quality Management (TQM) | Organisation-wide commitment to quality and customer satisfaction; cost of quality — prevention, appraisal, internal and external failure |
| Back-flush costing | Costs recorded only at completion or sale, then "flushed back" to inventory — suits JIT environments |
Exam tip
Target costing works before production (design stage); Kaizen costing works during production — a neat contrast for exam answers.
Topic 5
Objectives and environment of financial reporting
- Objective (Conceptual Framework): provide useful financial information to existing and potential investors, lenders and creditors for decisions.
- Qualitative characteristics: fundamental — relevance (including materiality) and faithful representation; enhancing — comparability, verifiability, timeliness, understandability.
- Content: financial statements (balance sheet, P&L, cash flow, changes in equity, notes), directors' report, management discussion and analysis (MD&A), corporate governance report, auditor's report, BRSR.
- Issues: fair value vs historical cost, earnings management and creative accounting, off-balance-sheet items, complexity and information overload, intangibles not recognised, timeliness, non-GAAP measures (EBITDA).
Topic 6
Ind AS, US GAAP and IFRS
| Area | IFRS | Ind AS | US GAAP |
|---|---|---|---|
| Approach | Principles-based | Principles-based (IFRS-converged with carve-outs) | Rules-based, detailed |
| Standard setter | IASB | ICAI/MCA (NFRA advises) | FASB |
| Inventory — LIFO | Not allowed | Not allowed | Allowed |
| Revaluation of PPE | Allowed | Allowed | Not allowed |
| Development costs | Capitalised if criteria met | Capitalised if criteria met | Generally expensed |
| Extraordinary items | Prohibited | Prohibited | Eliminated (2015) |
| Impairment reversal | Allowed (except goodwill) | Allowed (except goodwill) | Not allowed for held assets |
- Ind AS carve-outs: e.g., bargain purchase gain to capital reserve, option to recognise foreign exchange differences on long-term monetary items (transition), real estate revenue earlier.
Topic 7
Harmonisation of accounting practices
Harmonisation reduces differences in accounting practices across countries to improve comparability; standardisation imposes uniform rules; convergence aligns national standards with IFRS.
- Need: cross-border investment and listing, multinational groups, lower cost of capital, comparability for analysts.
- Obstacles: legal systems (common vs code law), tax-driven accounting, culture, economic development, sovereignty concerns.
- Bodies: IASB (IFRS Foundation), IOSCO, IFAC, the EU (IFRS mandatory since 2005), the ISSB for sustainability standards (IFRS S1, S2).
Key terms
- Current purchasing power method
- Restating accounts by a general price index
- Human resource accounting
- Measuring and reporting the value of employees
- Target costing
- Target price minus required profit gives allowable cost
- Kaizen costing
- Continuous incremental cost reduction during production
- Harmonisation
- Reducing international differences in accounting
Quick revision
- CPP and CCA methods; Ind AS 29.
- HRA models: cost-based and value-based (Lev and Schwartz).
- Transfer pricing: market, cost, negotiated, dual.
- Target, kaizen, ABC, life-cycle costing.
- Financial reporting objectives; Ind AS vs IFRS vs US GAAP; harmonisation.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is CPP accounting?
- Q2.State the Lev and Schwartz model.
- Q3.What is a transfer price?
- Q4.Distinguish target costing and kaizen costing.
- Q5.What is life-cycle costing?
- Q6.State two differences between IFRS and US GAAP.
Long-answer questions
- Q1.Explain price-level accounting and human resource accounting.
- Q2.Explain transfer pricing and its methods.
- Q3.Explain target, kaizen, activity-based and life-cycle costing.
- Q4.Explain financial reporting and the convergence of Ind AS, US GAAP and IFRS.
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