Unit 2: Leases and contemporary accounting
Accounting Theory notes · PTU syllabus (MCOP104-18)
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Unit summary
Business has changed — leases, derivatives, inflation, people and the environment all need to be accounted for. This unit covers accounting for leases and hire purchase and their standards, accounting for derivatives, price-level changes, human resource accounting, social, forensic and environmental accounting, and accounting for cryptocurrencies.
After this unit you can
- Explain accounting for leases (Ind AS 116/AS 19) and hire purchase
- Explain accounting for derivatives and price-level changes
- Explain human resource accounting and social and environmental accounting
- Explain forensic accounting and accounting for cryptocurrencies
PTU syllabus topics
- Accounting for leases and hire purchase and their standards
- accounting for derivatives
- accounting for price-level changes
- human resource accounting
- social accounting
- forensic accounting
- environmental accounting
- accounting for cryptocurrencies
Human resource accounting
Valuing people as assets
Social accounting
Social costs and benefits
Environmental accounting
Environmental costs and liabilities
Forensic accounting
Fraud investigation
Price-level accounting
Adjusts for inflation
Crypto-asset accounting
Treatment of digital assets
Topic 1
Accounting for leases and hire purchase
Classification
Finance vs operating lease
Single model — right-of-use (ROU) asset for all leases
Operating lease
Rentals expensed
Recognised as ROU asset and lease liability
Exemptions
—
Short-term (≤ 12 months) and low-value leases
P&L effect
Rent expense
Depreciation on ROU + interest on liability (front-loaded)
- Lessor accounting (Ind AS 116): still classifies leases as finance (derecognise asset, recognise receivable) or operating (keep asset, recognise income).
- Hire purchase: the hirer records the asset at cash price and a liability to the vendor; interest is charged to P&L over the period (actuarial or sum-of-digits); depreciation on full cash price; the vendor records HP debtors and interest income.
Example
Cash price ₹1,00,000; down payment ₹20,000; three annual instalments of ₹32,000 including interest → total interest = 20,000 + 96,000 − 1,00,000 = ₹16,000, allocated over three years.
Topic 2
Accounting for derivatives
- Derivatives: forwards, futures, options, swaps — value derived from an underlying.
- Ind AS 109: derivatives recognised at fair value; changes go to profit or loss unless designated as hedges.
- Hedge accounting: fair value hedge (gains/losses on both hedged item and instrument in P&L), cash flow hedge (effective portion in OCI), net investment hedge; requires documentation and effectiveness.
- Disclosures (Ind AS 107): risk management objectives, credit, liquidity and market risks.
Topic 3
Accounting for price-level changes
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 4
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 5
Social, forensic and environmental accounting
- Social accounting: measuring and reporting the social costs and benefits of a firm's activities — employee welfare, community, consumers; social balance sheet and income statement; links to CSR (Section 135) and BRSR.
- Environmental accounting: recording environmental costs (pollution control, remediation, compliance) and liabilities; green accounting at the national level (SEEA by UN); disclosures under BRSR — energy, water, emissions, waste.
- Forensic accounting: applying accounting, auditing and investigative skills to detect fraud and provide evidence for legal proceedings — litigation support, fraud investigation, asset tracing, valuation in disputes. Cases: Satyam (2009), PNB–Nirav Modi (2018), IL&FS (2018).
- 1
Initial assessment
- 2
Plan the investigation
- 3
Gather evidence
Documents, data analytics, interviews
- 4
Analyse and quantify loss
- 5
Report findings
- 6
Expert testimony in court
Topic 6
Accounting for cryptocurrencies
- No specific IFRS/Ind AS; the IFRS Interpretations Committee (2019) said holdings are generally intangible assets (IAS 38) at cost or revaluation, or inventory (IAS 2) if held for sale in the ordinary course (traders).
- India: Schedule III (amended 2021) requires companies to disclose profit/loss on crypto transactions, amounts held and deposits/advances for crypto trading.
- Tax: income from transfer of virtual digital assets taxed at 30% (Section 115BBH) with no deductions except cost; 1% TDS (Section 194S).
- Challenges: volatility, valuation, custody and existence verification, regulatory uncertainty.
Key terms
- Right-of-use asset
- Lessee's asset representing the right to use a leased asset
- Hedge accounting
- Matching gains and losses of hedging instruments and hedged items
- Current cost accounting
- Valuing assets and expenses at current replacement cost
- Human resource accounting
- Measuring and reporting the value of human resources
- Forensic accounting
- Accounting and investigative skills used for legal purposes
Quick revision
- Ind AS 116: ROU asset and lease liability for lessees; AS 19 still classifies.
- Derivatives at fair value; fair value, cash flow and net investment hedges.
- Inflation accounting: CPP and CCA; Ind AS 29.
- HRA: cost-based and value-based (Lev and Schwartz); BHEL first in India.
- Social, environmental (BRSR), forensic accounting; crypto as intangible/inventory, VDA tax 30%.
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 a right-of-use asset?
- Q2.What is a cash flow hedge?
- Q3.Distinguish CPP and CCA.
- Q4.State the Lev and Schwartz model.
- Q5.What is forensic accounting?
- Q6.How are cryptocurrencies classified under IFRS?
Long-answer questions
- Q1.Explain accounting for leases under AS 19 and Ind AS 116 and accounting for hire purchase.
- Q2.Explain accounting for derivatives and hedge accounting.
- Q3.Explain methods of accounting for price-level changes.
- Q4.Explain human resource, social, environmental and forensic accounting.
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