Category: University of Mumbai BMS Notes

(a) Purchase of Investment:

When investment is purchased, its face value is recorded on the debit side of Investment Account and the actual cost (including brokerage, stamp duty, etc.) is recorded in the principal column. But if the same is purchased under cum-interest/dividend basis, the accrued interest must be recorded in ‘Interest’ column and will be deducted from the purchase price as the real cost is to be recorded in ‘Principal’ column.

But, if the investment is purchased under ex-interest/dividend basis, the quoted price together with brokerage and stamp duty will be recorded in the ‘Principal’ column. The accrued interest is, however, entered on the Interest/Income column.

(b) Sale of Investment:

When investment is sold, the same is recorded on the credit side of Investment Account, the face value being recorded in ‘Nominal’ column; the net selling price is entered, however, in the ‘Principal’ column. But if the investment is sold as cum-interest/dividend, the accrued interest will be recorded in ‘Interest/Income’ column and the net selling price (capital portion) on the ‘Principal’ column.

On the contrary, if the same is sold as ex- interest/dividend, the accrued interest/dividend is received by the seller in addition to quoted sale price. The accrued interest/dividend is entered on the ‘Interest/Income’ column and the quoted sale price in the ‘Capital’ column.

(c) Profit or Loss on Sale of Investment:

The difference between the capital cost of securities and the consideration received towards capital at the time of sale reveals the profit or loss on sale of investment. The profit or loss may be ascertained either for each individual sale or may be ascertained for all selling transactions at the end of the year as a whole. And if the entire investments are sold, the difference between these two ‘Principal’ columns represents profit or loss, as the case may be.

But if a part of investments is sold, the balance of investments on hand should be ascertained first. Therefore, the balance is either valued at cost if the investment is treated as fixed asset, or the balance is valued at cost or market price, whichever is less if the investment is treated as current asset.

Naturally, the value of investments at hand is entered on the credit side of the Investment Account in ‘Principal’ column and the difference represents the profit or loss on sale of investment. The profit or loss on such sale is transferred to Profit and Loss Account if the investment is treated as a current asset or the profit or loss on such sale is treated separately if the investment is treated as a fixed asset.

(d) Balancing Investment Account:

The Balance of Investment account is ascertained at the end of the accounting period. The balance of ‘Nominal’ column reveals the face value of the investment in hand and after recording the closing balance of investment in ‘Principal’ column the profit or loss is to be ascertained (which has been explained earlier). And the difference between the two ‘Interest/Income’ columns represents income/interest from Investment Account which is, ultimately, transferred to Profit and Loss Account.

But, in the true sense of the term, Accounting Treatment depends on the date of purchase and sale of investment.

It may, again, be of two types:

1. Purchase and Sale of Investment just at the date of payment of interest; and
2. Purchase and Sale of Investment before the date of payment of interest.
3. When Purchase and Sale of Investment are made just at the date of payment of interest:

Under the circumstances, there will be no problem as to the cost of investment, because the quoted price does not include the amount of interest. The quoted price represents the cost of investment.

1. Purchase and Sale of Investment before the date of payment of interest:

Under the circumstances, question arises before us whether the quoted price of investment is inclusive of interest/dividend or exclusive of interest/dividend. In short, we are to face the problem of Cum-Interest and Ex-Interest.

Cum-Interest or Cum-Dividend:

Where the right to receive interest or dividend from the issuer of security passes from the seller to the buyer, the transaction is known as ‘Cum-Interest’ or ‘Cum-Dividend’ purchase or sale. In other words, when the accrued interest or dividend from the last interest or dividend date up to the date of transaction is included in the quoted price, the capital cost of investment purchased or sold is ascertained by deducting the accrued interest/dividend from the quoted prices. And the difference between the quoted price and the actual cost may be represented as ‘Cum-Interest’ or ‘Cum-Dividend’.

Ex-Interest or Ex-Dividend:

When the seller retains the right to receive the interest/dividend, the transaction is called ‘Ex-Interest’ or ‘Ex-dividend’ purchase or sale. In other words, when the price quoted is exclusive of accrued interest/dividend, the price so quoted is treated as the capital cost of investment, i.e., the buyer has to pay accrued interest due from the last interest date to the date of transaction to the seller along with the cost price of investment.

For Cum-Interest Purchase and Sales:

To Sum up:

When investments are purchased at Cum-Interest it means quoted price is inclusive of accrued interest. So, we are to ascertain the amount of interest and the same must be deducted from the quoted price in order to find out the cost. Investment will be debited with actual cost (to be posted in Principal column) and accrued interest will be debited with the amount of interest (to be posted in Interest column) and Bank Account will be credited for the total (i.e., quoted price).

Same principle is to be followed also in case of sale of investment which includes Cum- Interest, i.e., from the quoted selling price, the amount of interest will be deducted in order to ascertain the cost/principal for this purpose, Bank Account will be debited with total amount or quoted price and Investment Account will be credited at cost and Interest Account will be credited with the amount of interest.

Ex-Interest Purchases and Sales:

When investments are purchased at Ex-Interest, it means quoted price is exclusive of accrued interest. In that case, the Investment Account will be debited with quoted prices, Interest Account will be debited with accrued interest and Bank Account will be credited with total amount (i.e., quoted price plus interest).

Entries in Case of Ex-Interest Purchase:

But when investment are sold at Ex-interest, quoted price is exclusive of interest. In other words, Investment Account will be credited with quoted price and Interest Account will be credited with Accrued Interest and Bank Account will be credited with total i.e., quoted price plus interest.

Entries in the Case of Ex-Interest Sale:

Profit or Loss on sale of investment should be transferred to Profit and Loss Account. The entries for this purpose we have shown earlier.

Prior to electronic worksheets, accountants had several pads of paper with a varying number of columns (and rows) pre-printed on them. The pads of paper were labelled as columnar pads. The pre-printed paper in these pads allowed accountants and bookkeepers to easily prepare manual spreadsheets.

The Investment Account is maintained in a columnar form with three amount columns on each side viz., Nominal, Interest/Income and Principal/Capital. The face value or nominal value of securities purchased or sold is recorded, however, in the ‘Nominal’ column. The accrued Interest/Dividend on purchase or sale of securities including the Interest/Dividend so received is recorded, however, in the ‘Interest/Income’ column. The third column, ‘Capital/Principal’, reveals the true cost or true sales consideration.

Investors are one of the many players in the financial markets, who deploy savings when there is a surplus and demand it back when there is need. The terms at which the money will be used or lent is determined by the market place and the investors’ choices have to be framed in this context. The focus, therefore, is not so much on the promises that can be made to the investor, but how well the investors evaluate their own cash-flow needs and that of the seekers of their money.

The summary of an investor’s financial life can be drawn in three columns on a worksheet. The first column holds the cash inflow of the investor. The second shows the drawdown or the outflow that may be needed. The third shows the value of assets the investor has accumulated.

Consider a young investor who has just begun to earn an income. The cash inflow is the salary income, and the outflow is the expense and the assets are those saved, provided expense is lower than the income. If the investor sees himself as earning a steadily rising income and is able to meet most of his needs with this income, he can build long-term growth assets that he need not access at a short notice. In the market place, he may be able to get a better return if he makes such an investment choice.

A retired investor, on the other hand, may find that he has a large asset base representing his accumulated wealth and retirement corpus (column 3), but does not have a steady income from salary (column 1). The assets have to continue to grow in value to meet his growing need for cash as the years go by, given the depleting caused by inflation. Therefore, he is seeking an adequate future cash flow, except that he does not frame the problem thus. Instead, he makes faulty assumptions that a fixed rate of interest represents an adequate cash flow to meet future needs.

Since, he is unwilling to draw from the corpus as he is no longer contributing to it, the investment choices available to him seem unsatisfactory. Instead, if the retirement problem is seen as a diligent management of assets, not all of which are required for immediate cash flow needs, investors can make better choices.

A newly married couple trying to build their financial lives can see how accretions to their income are not translating into an accretion to their assets. They may see that the demands on their cash inflow are too high. If they visualise any cash requirement that exceeds their income, they have no buffer in the form of assets to meet that need. If they resort to borrowing, the EMI takes away even more of the income, leaving too little for anything else. If they work towards better levels of income for themselves and move up in their professions, they will be able to build long-term assets. Until then, they need assets that they can access when needed, and rebuild when possible.

These examples are without doubt an over-simplification. Each investor’s situation could be specifically different, but financial lives can be simplified if the focus is on taking charge of these three elements of accretion (inflow), drawdown (outflow) and accumulation (assets). A financial goal is nothing but a large future cash-flow need, which cannot be met from the regular income, but has to be drawn down from the accumulated assets. A borrowing is nothing but a drawdown from a future income, which may or may not have a matching asset.

The reason I propose this framework is to return the focus to control and management of finances. We may not be able to accurately forecast the future, but we can have a plan for assets we want to build based on aspirations that need drawdowns. Then our choices in investing are completely driven by our needs. We are no longer the ‘entitled’ investors who have to be handed down an ideal product. We are investors in charge of our own lives, making choices based on what we can earn, save and invest. We then focus on our assets and their use for us and, therefore, choose carefully. We monitor them regularly and adjust what we hold based on our need. We can manage the risks to the assets by diversifying well.

How does this approach solve the problem of investment choices? We begin to see everyone else who is seeking our money as cash-flow managers and builders of assets too. We ask what their incomes are, and what their drawdowns are, and if they too would have a surplus. We begin to ask if what they offer matches what we need. We stop looking for tips, tricks, short-cuts, magical methods, assurances, iron men and miracles. We begin to see the market place and find our space there.

Format of a Three Column Cash Book

The common format used in a three-column cash book is shown below.

A company, while computing its earnings per share (EPS) for a defined period, derives the result by dividing the profit generated with the total number of shares outstanding. Here, apart from its profit factor, its earnings can also be affected by the shares outstanding, which is subject to change over time due to multiple factors.

A company thus resorts to a weighted average shares calculation to accurately determine its earnings. It utilises this calculation to arrive at a total of outstanding shares not only at the end of a period but also throughout such duration.

The number of shares in a company changes across a period due to factors like:

• Issue of shares
• Repurchase of shares
• Exercising employee stock option
• Existing shares retiring
• Stock split
• Warrant conversion
• Share buyback

The formula for EPS calculation goes as:

EPS = (Net Income of the Company – Dividend Paid to Preference Shareholders) / Weighted Average Shares Outstanding for the Said Period

The weighted average shares can thus be calculated in the following few steps.

• Identify the count of shares outstanding at the beginning of a concerned period. Also, account all changes in common shares throughout such period.
• Compute and list down an updated total of all common shares after each change.

Here, you must note that any new share issue increases a total count while share repurchase leads to a total share count reduction. Similarly, you must take into account the effects of all changes and compute the total outstanding after each change accordingly.

• Assign a weight to each outstanding share count based on the time gap between one change and the next.

If calculated in days, the weight assigned would be: Total outstanding days / 365

If calculated in months, the weight assigned would be: Total outstanding month / 12

With this weighted average number of shares formula, the calculation of a weighted average of outstanding shares can be accurately done for EPS computation.

AS 13 Accounting for Investments is widely used and deals with accounting for investments in financial statements prepared by a Company and prescribes various disclosure requirements.

Applicability of AS 13 Accounting for Investments

AS 13 Accounting for Investments doesn’t deal with the following:

• The base for recognizing dividends, interest, and rentals which are earned on the investments that are covered by AS 9
• Finance or operating leases which are covered by AS 19
• Investments in retirement benefit plans and life insurance enterprises which is covered by AS 15
• The following which is formed under the Central or the State Government Act or declared under Companies Act, 2013

1. Mutual Funds
2. Venture Capital Funds and related Asset Management Companies
3. Banks as well as public financial institutions

Disclosures in the Financial Statements

The below mentioned are the disclosures in the financial statements with respect to AS 13 Accounting for Investments is applicable:

(a) Accounting policies employed for determining carrying amount of investment.

(b) The amounts which are included in the profit and loss statement for:

(i) Dividends, interest, and rentals on the investments presenting the income from such long-term and current investments separately. Gross income must be stated, amount of TDS (tax deducted at source) included under the Advance Taxes Paid.

(ii) Profits and losses on the disposal of current investment and the changes in carrying the amount of the investment.

(iii) Profits and losses on the disposal of long-term investment and the changes in carrying the amount of the investment.

(c) Substantial limitations on the right of ownership, realizability of the investments or remittance of income and proceeds of disposal.

(d) The total amount of both the quoted and unquoted investments, providing the total market value of the quoted investments.

(e) Other disclosures as explicitly as required by the relevant statute governing the.

Treatment

The following points should carefully be remembered:

(a) For Dividend Received:

(i) If we receive dividend from Pre-incorporation profit, the same must be recorded in Nominal Column.

(ii) If we receive dividend from Post-acquisition Profit/Current Profit, such dividend must be recorded in Interest Column.

(b) For Bonus Shares and Right Shares:

If bonus shares are received, entry is made in the debit side of Investment Account in ‘Nominal’ column only and nothing is to be recorded in ‘Principal’ column. In other words, when bonus shares are received, their face value is simply shown in the Investment Account stated above. But in the case of Right shares, the shareholders have the right to avail the ‘Right’ himself or he can refer to third party. The face value of such right shares are recorded in the ‘Nominal’ column and the amount so’ paid in this regard is to be entered in the ‘Principal’ column. But in the case of sale, the amount so received against the sale of ‘Right’ will be entered on the credit side of Investment Account in ‘Principal’ column.

Broker’s Account:

A Broker purchases and sells securities on behalf of his clients. Practically, purchases and sales are made in the name of the client on his information without the receipt of cash or scripts and, consequently, the settlement of payment is made by payment of difference not by actual delivery or by payment.

However, the cost price of the share along with brokerage is debited in client’s account and similarly, the sales minus brokerage is credited in his account against the particular share. It should be remembered in this respect that brokerage should always be calculated on the face/nominal value of shares and not on the cost/selling price of the same (No brokerage is usually charged on sale if the same shares are purchased and sold in the same settlement day).

It has already been stated that the accounts are settled on the settlement or contango day at the end of settlement period. The period may be either 15 days or one month. If, however, the party does not want to settle the account he may carry forward to the next settlement period and the difference after carrying forward is made by Cash. For this carry forward, the broker makes a charge. The charge is called contango when the payment is due and the same is called backwadation when the delivery is due.

The proportionate contango or backwadation in relation to the portion of settlement period which falls in the next year is carried forward at the time of closing the accounts.

Conversion of Convertible Debentures into Equity Shares:

Sometimes Convertible Debentures may be converted into Equity Shares.

Under the circumstances we are to pass the following entry:

• Convertible Debentures into Equity Shares

  Equity Shares in …………Co. Ltd            Dr.

      To (Convertible) Debentures of….Co. Ltd A/c

It must be remembered that if there is loss on conversion such loss may be adjusted against General Reserve.

In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency.

The exchange rate is defined as the rate on the basis of which two countries involved in trade exchange marketable items or commodities. It is basically the cost of exchanging one currency for another currency.

In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency. The quoted rates will incorporate an allowance for a dealer’s margin (or profit) in trading, or else the margin may be recovered in the form of a commission or in some other way.

Different rates may also be quoted for different kinds of exchanges, such as for cash (usually notes only), a documentary form (such as traveler’s checks), or electronic transfers (such as a credit card purchase). There is generally a higher exchange rate on documentary transactions (such as for traveler’s checks) due to the additional time and cost of clearing the document, while cash is available for resale immediately.

Therefore, the exchange rate can be calculated as per the below-mentioned relationship:

Exchange Rate = Money in Foreign Currency / Money in Domestic Currency

Additionally, it can also be determined as per the below-mentioned relationship:

Exchange Rate = Money in After Exchange / Money Before Exchange

The equation for the exchange rate can be calculated by using the following steps:

• First, determine the amount that is to be transferred or exchanged from domestic currency to foreign currency.
• Next, the individual can access foreign exchange markets through trading platforms or through financial institutions to determine the available exchange rates prevalent between the two nations.
• Next, multiply the exchange rate with the domestic currency to arrive at the foreign currency.

Model

Purchasing Power Parity

Purchasing power parity is a way of determining the value of a product after adjusting for price differences and the exchange rate. Indeed, it does not make sense to say that a book costs $20 in the US and £15 in England: the comparison is not equivalent. If we know that the exchange rate is £2/$, the book in England is selling for $30, so the book is actually more expensive in England

If goods can be freely traded across borders with no transportation costs, the Law of One Price posits that exchange rates will adjust until the value of the goods are the same in both countries. Of course, not all products can be traded internationally (e.g. haircuts), and there are transportation costs so the law does not always hold.

The concept of purchasing power parity is important for understanding the two models of equilibrium exchange rates below.

Balance of Payments Model

The balance of payments model holds that foreign exchange rates are at an equilibrium level if they produce a stable current account balance. A nation with a trade deficit will experience a reduction in its foreign exchange reserves, which ultimately lowers, or depreciates, the value of its currency. If a currency is undervalued, its nation’s exports become more affordable in the global market while making imports more expensive. After an intermediate period, imports will be forced down and exports will rise, thus stabilizing the trade balance and bringing the currency towards equilibrium.

Asset Market Model

Like purchasing power parity, the balance of payments model focuses largely on tangible goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. The flows from transactions involving financial assets go into the capital account item of the balance of payments, thus balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model.

Accounting Treatment of Exchange Difference Approach # 1. Single Transaction Approach:

Single transaction approach is based on the premise that any transaction and its settlement is a single event. So if any exchange difference is there that may be charged to cost of goods purchased or to an export sale.

Accounting Treatment of Exchange Difference Approach # 2. Double Transaction Approach:

In contrast to single transaction approach, Dual transaction approach considers exchange element separately, hence emphasizes on accounting treatment of both separately. In other words, purchase or sale is recorded in the books of accounts at the exchange rate prevailing at the date of transaction and adjustments are not made for any change in exchange rates. These changes in exchange rates on different dates are treated as expenses and charged to loss on foreign exchange account.

1. Fully Underwritten:

When the Entire Issue is Underwritten, i.e., Fully Underwritten:

It is of two types:

(a) When Full Underwriting is done by one person.

(b) When Full Underwriting is done by more than one person.

(a) When Full Underwriting is done by one person:

If the entire issue is underwritten by one person he will be given the full credit. As such, his liability will be just equal to the number of shares underwritten minus the number of shares applied for; and, if the shares are fully or over-subscribed, there will be no liability. He will, in that case, get his agreed commission.

The following illustration will make the principle clear:

(b) When Full Underwriting is done by more than one underwriter:

Sometimes the entire issue may be underwritten by more than one underwriter.

In other words, if the full underwriting is taken by two or more underwriters in an agreed ratio, the following process should carefully be followed:

Step I: Calculate the Gross/Total Liability of each Underwriter as per agreed ratio;

Step II: Deduct Marked Application (excluding firm’s Underwriting) from such total liability;

Step III: Deduct Unmarked Applications as per Gross/Total liability ratio; Deduct Firm Underwriting, if any;

Step IV: If any minus figure appears, transfer the same to others underwriter’s account in the ratio of Gross/Total Liability.

2. Partial Underwriting:

(a) When a part of the issue of shares or debentures is underwritten by one person only. In such a case, only a part of the whole issue is underwritten only by one underwriter and the balance amount is deemed to have been underwritten by the company itself. In such a situation the unmarked applications are treated as marked application from the point of view of the company.

The liability is determined as follows:

Net Liability = Gross Liability – Marked Applications

3. Firm Underwriting:

It is an underwriting agreement where the underwriter or underwriters agree to buy a certain number of shares or debentures irrespective of the number of shares or debentures subscribed by the public. It is a case of firm underwriting.

Thus, in firm underwriting, the underwriters agree that a certain number of shares be allotted to them, whether or not the issue is over-subscribed. The liability of the underwriters in such a case will be the unsubscribed shares or debentures plus the shares or debentures under firm underwriting.

Total Liability = (Net liability for unsubscribed on the basis of underwriting agreement) + (Liability under firm Liability)

In the calculation of net liability, the shares under firm underwriting may be treated as marked or unmarked application. The liability of underwriters differs under the two methods. The steps involved under both the methods are given followed by an illustration worked out under both the methods.

Competency mapping is a way of assessing the strengths and weaknesses of a worker or organization. It is about identifying a person’s job skills and strengths in areas like teamwork, leadership and decision making. Thus, it is about identifying a person’s job skills and strengths in the areas like teamwork, leadership and decision-making.

Many competency mapping models break down strengths in to two major areas- functional and behavioral. Functional skills include practical knowledge that a person needs to perform a job. For e.g. functional requirements for a secretary might include familiarity with computer systems and office machinery as well as bookkeeping knowledge. These skills are generally easy to measure through skill tests and can define whether a worker is capable of carrying out his or her responsibilities.

Competency Mapping is a process of identifying key competencies for a company or institution and the jobs and functions within it. Competency mapping is important and is an essential exercise. Every well managed firm should have well defined roles and list of competencies required to perform each role effectively. Such list should be used for recruitment, performance management, promotions, placement and training needs identification.

Benefits to competency management

Benefits for Staff:

If competency mapping can actually give a picture of the structure of the course as the students experience it, teaching staff will be able to use that picture as the basis for course refinement. The identification of key concepts is the first step towards designing a syllabus. The information gained can also be published to the students, for example by including it in the subject information handout that students usually receive in their first lecture, or by putting it on the courseware web page.

Of course, it is quite possible that the structure revealed by analysis of student results does not match the lecturer’s idea of the conceptual structure of the course. In this case, the revealed structure may suggest ways in which the course can be improved. For example, if two competencies that should be revealed (for example, C pointers and passing by reference) are not clustered together, it could indicate a need to make the connection more explicit to the students.

If the competency map uses all the coursework marks as input, this will not help the students of that year; however, it may well help teaching staff to refine the coursework for the next delivery of the course. It would also be useful to staff who are teaching follow-on courses, as they would gain a better idea of which topics need revision.

A competency map using only the marks for half of the course can be produced if staff wishes to refine the course on the fly, but care must be taken that the data are sufficient; if the only marks on record are the first six practical marks, it is unlikely that any useful conclusions can be drawn. It is not yet certain how many points are needed for competency mapping to be useful, but it is likely to depend on the amount and complexity of the course material.

These uses assume that competency mapping will educate the structure of the course. If, however, the technique does not do this, then there are still potential benefits; logically, we would expect that activities that test strongly related competencies should show correlation’s in their marks; if this is not the case there must be some reason. For example, written exam questions about linked lists might not correlate strongly with practical questions about linked lists if success in practical is more closely related to factors other than subject knowledge.

This could be the case if some students find their work environment operating system, compiler and editor-difficult to use. In this case, practical questions will tend to cluster much more strongly with other practical questions, and much less strongly with theory questions. The competency map can show that there is a problem, it is then up to the teaching staff to investigate that problem. Of course, competency mapping over subsequent years of the course will help the staff to know when they have ameliorated the problem.

In a University setting, competency mapping can be used to compare demographic subsets of students to students’ access to education, for example, if there is concern that students of non-English speaking background are finding a particular activity especially difficult because of the complex language used to explain it, then competency mapping can be applied separately to the results from students belonging to that group and the results compared to a competency map derived from the marks of the rest of the student body.

In this case, a problem with English would result in a distorted cluster arrangement; written-answer questions and questions with complex requirements would tend to cluster together. The technique may also be used to determine whether female students conceptualise the subject differently to male students. Again, if a problem is found, competency mapping over subsequent years will show staff whether the remedies are working.

Benefits for Students:

The primary benefit of competency mapping for students is the increased understanding of the student viewpoint that the teaching staff will have, and resulting in likely course improvements. However, students should also benefit directly from it. A constructivist view of the teaching process suggests that students will assimilate new knowledge and gain new skills more readily if they can be made aware of how those new- competencies interrelate with knowledge and skills that are already mastered.

Of course, Lecturers know this, most new topics begin with an explanation is almost always exclusively verbal. Information about relationships is often best presented in visual form, especially if the relationships are multidimensional, but words are one-dimensional map of the course structure, may help students construct their understanding of the course material.

If it is possible to use competency mapping to break the subject down into components that are close to orthogonal, it should also be possible to design assessment on the basis of that break down. Once the components are known, assessment tasks can be designed that test them individually, or (since it is virtually impossible to test anything in isolation) as close to it as possible. Thus a test can be delivered to students that are quite small, but gives results that are interpretable in terms of the course’s competency map.

Because competency mapping measures correlation between task marks across students, it is obviously impossible to generate a competency map based on a single student’s data, however, numeric results can be presented alongside the group competency map for example, by shading regions that correspond to topics that the student needs to work on. In this way, a student may be able to use her test results to determine her own weaknesses, and then consult the map to see how they relate to the rest of the course; using this map and compass, she may find it easier to navigate through the material.

If she still has trouble understanding the material, she may ask a staff member for help. In this case, if the staff member has access to her test results, it would be easier to pinpoint the misconstruction that is at the heart of the problem. Experience shows that determining the problem is almost always harder and more time-consuming than solving it; figuring out what needs to be explained is more difficult than developing an explanation, especially considering that teachers can develop a set of explanations that work and reuse them.

This means that the student need not worry as much about coming to consultation, and (because consultation time can be used more effectively) the teaching staff are more likely to be free to help her.

To generate a concept map, cluster analysis and multidimensional scaling are applied to proximity data generated from the number of times, concepts were clustered together. Competency maps are generated in a similar way; after student marks, data is collected; cluster analysis and multidimensional scaling are applied to proximity data generated from the matrix of correlations between the marks.

Some other Benefits:

• This ability to identify which skills are necessary for a job means that HR can better identify the candidates that will succeed in the role.
• Competency management can identify which skills a person needs to perform well in order to succeed in their specific role.
• Employee onboarding and training is made easier, as there is a structure in place. Employees who receive clear, defined instructions of their job parameters will do better in their roles.
• Errors and other issues will be decreased as a result of this improved training.
• Employee retention is improved, employees who feel that their leadership team is investing in them are more likely to stay in their job, keeping their valuable skills and knowledge within the organization.
• Productivity is improved by the ability to evaluate skills, identify which ones an employee is lacking, and providing the necessary training.
• Better understanding of what skills are necessary for the organization to grow and succeed in the future, as well as the ability to select or train for these skills in new and current employees.
• Leaders can be created from within. Leadership opportunities are important to employees, and building a skilled, loyal leadership team through effective competency management will engage employees and turn them into long-term assets.

Challenges

• It is generally a time-consuming process even if it has its own rewards.
• If you implement a general competency plan, then it might not suit the specific requirements of your organization. If you opt for a customized tool, then it will prove expensive, and the additional expenses will affect the bottom line of the financial statement.
• It is not easy to implement as the organization will need trained employees for its successful and effective implementation. This means additional expenses in terms of money, time and effort for the organization.
• Most of the competency-based tools are paper-based spreadsheets. Have an automated competency model because, without it, the management will not be able to assess the employee performance effectively, nor is it possible for it to close skill gaps.
• It is easy to overlook competencies that seem less critical.
• The process is, in most cases, treated as a process related to the HR department because they align it with improving the performance and skill of employees. It is not considered a business imperative.
• Many competency models do not include technical competencies in the functional portion. It is then not effective in organizations where technical skills are part of job roles for instance industries like medical, engineering and information and technology.

Competencies are characteristics of a job, role, or function. An employee’s ability to apply the core competencies of his or her job is a key factor in successful performance and employee engagement.  Many companies include competencies in position descriptions and job postings without a clear explanation of the skills or level of proficiency required, which can ultimately lead to high turnover and poor cultural fit.

From an organizational perspective, competence development serves two main purposes:

• To improve the alignment between the competencies of employees and the strategic goals of the organization.
• To stimulate and develop employee involvement in the organization. The result? Content staff and less attrition.

It helps managers at all levels identify core competencies that are critical for success in a particular position.  This effort completed, documented, and accepted by organization leadership can be used to guide a number of related performance management components in a systematic fashion, such as:

• Pre-Screening: Creating behavioral-based interview questions relative to competencies.
• Candidate selection: Confirming strengths/potential challenges of candidate in new role.
• Ongoing talent management.
• Managing, appraising, and rewarding performance.
• Identifying HiPo (high-potential) performers and developing leaders.
• Designing corporate and individual training and development plans.

Process

Data Collection

A list of relative job competencies is developed via a basic questionnaire, along with a thorough review of the job description. Interviews are conducted with key stakeholders to discuss these identified competencies. If possible, interviews are conducted with successful employees in the same role.

Competency Development

A summary report is created and evaluated in a systematic process with primary stakeholders to gain consensus. Typically, 6 to 10 key competencies are developed per position.

Measurement

A measurement process is established to determine the skill level of an individual (employee or candidate) ranked against each of the identified core competencies. This may include psychological assessments, scenario-based exercises, and/or 360° feedback.

Framework for competence development

How does one develop competence development? The exact approach may vary depending on the organization, but there is an effective framework that consists of several fixed steps.

Step 1: Preparation

Putting competence development into practice begins with sound preparation.

• First and foremost, determine what goal you want to achieve with competence development.
• What information do you want to collect?
• How and for what purpose do you want to use that data?
• And what scope do you apply?

The answers to these questions allow you to determine what individuals within the organization will be working with the framework for competence development.

Step 2: Collecting information

The next step is information gathering. The more data you’ve got, the more precise and detailed you will be able to organize the process of competence development.

In collecting the necessary information, there are several methods (and combinations of methods) at your disposal.

• Observe how people go about their job. This method is especially useful when it comes to tasks that require manual labor (factory work, construction, etc.).
• Talk to your staff. Interviews can be conducted individually or in groups.
• Design a survey or questionnaire and have it distributed to all relevant employees.
• Analyze work and business processes. Verify whether they are aligned with the strategic goals of the organization and whether they are efficient enough.

Step 3: Building the framework

You have now collected all the relevant information. Good news, because you can now start building a good framework for competence development.

The steps below serve to make the building process easier and more transparent.

• Group all the collected information into competence categories.
• Divide competencies and their associated employees into subcategories. Refine these categories further.
• Identify and name the competencies at the individual level.

Step 4: Implementing the framework

With the final framework ready to go, the time has come to implement your competence development plan into your organization. Communicate with the employees involved. Generating support is an important precondition for successful competence development.

 Below you will find some tips on framework adoption.

• Ensure a clear connection between individual competencies and business objectives.
• Reward competencies with a fitting salary and proper growth opportunities.
• Provide high-quality coaching and training.
• Keep it simple. A framework for competence development has to be clear and understandable to all. A complex network of rules beats the purpose.
• Be honest and transparent with your employees when it comes to the how and the why of competence development.

The term “Competency Mapping” has gained a wider circulation and importance among academicians and businesses in recent times. In a competitive business scenario, organizations have felt the utmost need for procuring and retaining competent employees and developing distinct competencies. Most of the jobs contain some critical elements or parts.

To perform or fulfill these parts, it is important for the employees to have special competencies. It is also natural that some people perform a particular job more effectively than others. This difference exists because a particular individual may have certain competencies that other individuals might lack. This might help him/her to have an edge over the other in a particular job.

An organization examines every job to ascertain the component parts and the work environment in which it is performed. The process of examining a job is termed as job analysis. Job analysis com­prises two functions, namely, job description and job specification. These are interrelated, interactive, and interdependent. Job description comprises job orientation, whereas job specification is oriented towards the jobholder.

In other words, job description is a broad statement, which consists of the pur­pose, duties, and responsibilities of a job, all taken together. Job specification, on the other hand, is also a broad statement, which specifies only the qualities required for a job holder.

It is evidenced that in earlier days, people in an organization were convinced that technical skills of the people in the research and development team was primarily responsible for the increased performance/ output. On further exploration and extended study, it was revealed much to their surprise, that one of the most important differentiators between top performers and all others was their presentation skills.

The key to validate these competencies is to determine the competencies (technical or interpersonal skills) and differentiate the best from the rest. Otherwise, one ends up with a very subjective data.

Features

The concept of competency mapping now exists in organizations with well-developed HR practices. HR directors and their top management have always paid attention to consider competencies and incorporated them in the appraisal forms in order to improve the performance management system. Companies such as Larsen & Toubro, National Dairy Development Board, Life Insurance Corpora­tion of India, Hindustan Lever Ltd (presently Hindustan Unilever Ltd), NOCIL Ltd, Bharat Petroleum, and so on, have felt the utmost need for management of competencies and revised their performance appraisal systems.

Some of their objec­tives while performing their competency mapping are as follows:

• Identifying the key success factors
• Pinpointing triggers for each role
• Laying direction for superior performance
• Setting defined expectations from employees
• Serving means for communicating performance expectations
• Ensuring that the employees obtain greater transparency about their roles
• Providing opportunities for development
• Creating a more empowered workforce
• Employing the workforce effectively

Therefore, from the discussion, it is clear that competency mapping is important.

Purpose:

The main purpose of competency mapping is to ensure effectiveness of an organization in terms of having a clear idea regarding the summation of the required competencies.

This facilitates further:

• Gap analysis in competencies
• Role clarity
• Selection, potential identification, growth plans.
• Succession planning.
• Restructuring
• Inventory of competencies for future planning.

Need

Competency mapping has gained commonness, momentum, and popularity. The old maxim, ‘Slow and steady wins the race’ has lost its validity in view of the fast changing business environment. In order to cope with the changing world economy and keeping in view that the world is becoming a global vil­lage, companies have become more aware of the need for having competent employees and developing distinguished competencies for every organization.

In terms of quality of people, organizations need fast and consistent manpower. As such, in the sharper focus of management, competency mapping is engaged in the collection and constellation of information about the appropriate talent in various levels.

The needs for competency mapping are enumerated here:

• The cost of manpower is becoming increasingly high.
• Realization of the truth that people can transform an organization.
• Getting more from the people rather than getting more people.
• Increased customer focus; identifying and fulfilling implied customer needs and expectations.
• Recognizing the fact that the right kind of human resources can monitor and manage the technology, finance, market, customers, customer relationship, processes, procedures, and the system effectively.
• Importance of role performer vis-a-vis time management.

Importance

• For employees, it increases the awareness of existing skill, sets as well as skill gaps in the organization.
• To ensure that the employees are going in the right direction.
• To guide the competencies to increase their productivity.
• It’s an approach to build trust between the employees.
• Competency helps the employees to reach the organizational objectives.
• It avails to integrate management practices.

Competency

Competency is the capability to apply or use the set of related knowledge, skills, and abilities required to successfully perform ‘critical work functions’ or tasks in a defined work setting. Competencies often serve as the basis for skill standards that specify the level of knowledge, skills, and abilities required for success in the workplace as well as potential measurement criteria for assessing competency attainment. Competence is a measure of both proven skills and proven knowledge.

Approaches

• Assessment is the formal process of collecting evidence of the competencies (skills and knowledge) a worker has developed through:
• A structured learning environment
• On-the-job training
• Off-the-job training
• Other relevant workplace experience.

Recognition of prior learning (RPL)

RPL is an assessment pathway to confirm the skills and knowledge that a worker has gained previously through informal or non-formal training, or through life or other work experiences. For example, if a worker has been trained and worked on a piece of plant for several years, but for some reason has never been assessed, the RPL assessment process could be used.

The evidence supplied and assessed for RPL must be valid, sufficient, current and authentic. RPL should never bypass or shortcut the assessment process. It is a means to acknowledge that sufficient evidence has been collected to verify competence.

Recognition of current competency (RCC)

RCC is an assessment pathway for workers who have previously completed an assessment, been deemed competent, and are now required to be reassessed to ensure that competence has been maintained. For example, a worker previously been assessed as competent for issuing work permits on a company’s mine site, may be assessed by RCC when they start work on another mine site of the same company using an identical work permit system.

The evidence supplied and assessed for RCC must be valid, sufficient, current and authentic.

Online and electronic training and assessment

The department does not endorse any specific e-learning technologies for training and assessment. In general, best practice should consider the following.

Participants developing an e-learning community

The e-learning environment should facilitate communication among the participants so that they develop as a student community. Students should also be able to interact easily with their instructors.

Establish how the e-learning environment operates

Students should receive an orientation so they understand how the e-learning environment will operate. The instructor should establish the standards expected for submitted work. Submission deadlines for assignments and delivery methods must be clear.

Incorporate different kinds of learning activities

It is important to incorporate activities that are more interactive, as well as research projects. For example, use webinars (live courses or seminars over the internet) as well as offline coursework.

Competence

Competence is the set of demonstrable characteristics and skills that enable and improve the efficiency or performance of a job. The term “Competence” first appeared in an article authored by R.W. White in 1959 as a concept for performance motivation. In 1970, Craig C. Lundberg defined the concept in “Planning the Executive Development Program”. The term gained traction when in 1973, David McClelland wrote a seminal paper entitled, “Testing for Competence Rather Than for Intelligence”. It has since been popularized by Richard Boyatzis and many others, such as T.F. Gilbert (1978) who used the concept in relationship to performance improvement. Its use varies widely, which leads to considerable misunderstanding.

Some scholars see “Competence” as a combination of practical and theoretical knowledge, cognitive skills, behavior and values used to improve performance; or as the state or quality of being adequately or well qualified, having the ability to perform a specific role. For instance, management competency might include systems thinking and emotional intelligence, and skills in influence and negotiation.

Studies on competency indicate that competency covers a very complicated and extensive concept, and different scientists have different definitions of competency. In 1982, Zemek conducted a study on the definition of competence. He interviewed several specialists in the field of training to evaluate carefully what makes competence. After the interviews, he concluded: “There is no clear and unique agreement about what makes competency.”

Here are several definitions of competency by various researchers:

• Hayes (1979): Competences generally include knowledge, motivation, social characteristic and roles, or skills of one person in accordance with the demands of organizations of their clerks.
• Boyatzis (1982): Competence lies in the individual’s capacity which superposes the person’s behavior with needed parameters as the results of this adaptation make the organization to hire him.
• Albanese (1989): Competences are individual’s characteristics which are used to effect on the organization’s management.
• Woodruff (1991): Competence is a combination of two topics of personal competence and merit at work. Personal merit is a concept which refers to the dimensions of artificial behavior in order to show the competence performance and merit at work depends on the competences of the person in his field.
• Mansfield (1997): The personal specifications which effect on a better performance are called competence.
• Standard (2001) ICB (IPMA Competence Baseline): Competence is a group of knowledge, personal attitudes, skills and related experiences which are needed for the person’s success.
• Rankin (2002): A collection of behaviors and skills which people are expected to show in their organization.
• Unido (United Nations Industrial Development Organization) (2002): Competence is defined as knowledge, skill and specifications which can cause one person to act better, not considering his special proficiency in that job.
• Industrial Development Organization of United States (2002): Competences are a collection of personal skills related to knowledge and personal specifications which can make competence in people without having practices and related specialized knowledge.
• CRNBC (College Of Registered Nurses Of British Columbia) (2009): Competences are a collection of knowledge, skills, behavior and power of judging which can cause competence in people without having enough practice and specialized knowledge.
• Hay group (2012): Measurable characteristics of a person which are related to efficient actions at work, organization and special culture.
• Chan and her team (the University of Hong Kong) (2017, 2019): Holistic competency is an umbrella term inclusive of different types of generic skills (e.g. critical thinking, problem-solving skills), positive values, and attitudes (e.g. resilience, appreciation for others) which are essential for students’ life-long learning and whole-person development.
• The ARZESH Competency Model (2018): Competency is a series of knowledge, abilities, skills, experiences and behaviors, which leads to the effective performance of individual’s activities. Competency is measurable and could be developed through training. It is also breakable into the smaller criteria.

Competency has multiple different meanings, and remains one of the most diffuse terms in the management development sector, and the organizational and occupational literature.

Competencies are also what people need to be successful in their jobs. Job competencies are not the same as job task. Competencies include all the related knowledge, skills, abilities, and attributes that form a person’s job. This set of context-specific qualities is correlated with superior job performance and can be used as a standard against which to measure job performance as well as to develop, recruit, and hire employees.

Competencies and competency models may be applicable to all employees in an organization or they may be position specific. Identifying employee competencies can contribute to improved organizational performance. They are most effective if they meet several critical standards, including linkage to, and leverage within an organization’s human resource system.

Core competencies differentiate an organization from its competition and create a company’s competitive advantage in the marketplace. An organizational core competency is its strategic strength.

Competencies provide organizations with a way to define in behavioral terms what it is that people need to do to produce the results that the organization desires, in a way that is in keep with its culture. By having competencies defined in the organization, it allows employees to know what they need to be productive. When properly defined, competencies, allows organizations to evaluate the extent to which behaviors employees are demonstrating and where they may be lacking. For competencies where employees are lacking, they can learn. This will allow organizations to know potentially what resources they may need to help the employee develop and learn those competencies. Competencies can distinguish and differentiate your organization from your competitors. While two organizations may be alike in financial results, the way in which the results were achieve could be different based on the competencies that fit their particular strategy and organizational culture. Lastly, competencies can provide a structured model that can be used to integrate management practices throughout the organization. Competencies that align their recruiting, performance management, training and development and reward practices to reinforce key behaviors that the organization values.

Competence v/s Competency