Value Added Reporting

ACCOUNTING THEORY AND PRACTICES
SHERYL J
M.Com 2nd sem

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

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.

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.

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.

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

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”.

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.

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.

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.

SHAREHOLDERS
EMPLOYEES
DEBENTURE
HOLDERS
GOVERNMENT

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.

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

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

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

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.

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

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

Disadvantage of VAR
1. False assumption
2. Possible confusion
3. Possible management misdirection
4. Fallacies
5. Misconceptions

Statement of Value Added Reporting

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.

Value Added Reporting

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