Tag: Lucknow University Notes

Environmental accounting is a subset of accounting proper, its target being to incorporate both economic and environmental information. It can be conducted at the corporate level or at the level of a national economy through the System of Integrated Environmental and Economic Accounting, a satellite system to the National Accounts of Countries (among other things, the National Accounts produce the estimates of gross domestic product otherwise known as GDP).

Environmental accounting is a field that identifies resource use, measures and communicates costs of a company’s or national economic impact on the environment. Costs include costs to clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies and waste management costs.

An environmental accounting system consists of environmentally differentiated conventional accounting and ecological accounting. Environmentally differentiated accounting measures effects of the natural environment on a company in monetary terms. Ecological accounting measures the influence a company has on the environment, but in physical measurements.

Functions and Roles

External Functions

By disclosing the quantitatively measured results of its environmental conservation activities, external functions allow a company to influence the decision-making of stakeholders, such as consumers, investors, and local residents.

Internal Functions

As one step of a company’s environmental information system, internal function makes it possible to manage environmental conservation cost and analyze the cost of environmental conservation activities versus the benefit obtained, and promotes effective and efficient environmental conservation activities through suitable decision-making.

Benefits/Importance

While environmental accounting can focus on environmental management accounting or financial accounting, the most prominent benefits come from the application of environmental management accounting methods. This type of accounting focuses on gathering, estimating and analyzing costs associated with the use of energy and physical materials like timber, metal or coal. Standard accounting practices tended to place these costs in the catch all category of overhead, but environmental management accounting allows accountants to apply activity based cost principles to more accurately associate these costs to various projects or events. Decision makers who can see exactly where these natural resources are used across various projects can locate areas of synergy that allow them to reduce the amount of wasted materials at the program or enterprise level.

Relevance

Environmental accounting should provide valid information related to a company’s environmental conservation costs and benefits from associated activities which contributes to the decision-making of stakeholders.

Reliability

Environmental accounting should eliminate seriously inaccurate or biased data and aid in building the trust and reliability of stakeholders.

Neutrality

Information that is disclosed taking a fair and impartial stance.

Prudence

Information that may be vague or unclear should be handled carefully and the nature, scope and grounds on which it is based should be made clear.

Completeness

The scope of environmental accounting should extend to all material and significant information for all environmental conservation activities.

Understandability

By achieving understandability of disclosure of necessary environmental accounting data, environmental accounting should eliminate the possibility of any mistaken judgment about the company’s environmental conservation activities.

Comparability

Environmental accounting makes it possible for a company to make year-on-year comparisons. Information provided should be comparable with different companies in the same sector.

Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provisions (such as education, healthcare and housing), security, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that money left in private hands could bring better returns. In the 20th century, John Maynard Keynes argued the role of public expenditure in determining levels of income and distribution in the economy. Since then, government expenditures has shown an increasing trend. Sources of government revenue include taxes, and non-tax revenues.

In the 17th and the 18th centuries, public expenditure was considered a wastage of money. Thinkers believed government should stay with their traditional functions of spending on defense and maintaining law and order.

Public expenditure refers to expenditure of the government. In the past, the subject of public expenditure was neglected because the expenditure of the government was very small. There has been a persistent and continuous increase in public expenditures in countries all over the world. This tendency was observed in the 19th century itself but it has become clear and definite in the 20th century.

1. Principle of Maximum Social Advantage

The objective behind this principle is that public money should be spent for general cause and must promote social welfare. It should not be spent for the benefit of a particular group of society. Public expenditure should result in increased production, elimination of inequality and promotion of welfare of all. It should secure internal peace and also protection from external aggression.

2. Canon of Economy

The authorities are expected to follow utmost economy in its expenditure. Public money should not be misused and not result in any wastage. Whenever money is raised by taxation, public expenditure in return should bring maximum benefit. It should not produce unfavorable effect on production. Canon of economy does not mean niggardliness or miserliness. It simply means the prevention of extravagance and waste of all kinds.

3. Canon of Sanction

Without the sanction of the public authority, no money should be spent. At the same time, the amount of money must be spent for the purpose for which it was sanctioned.

This will ensure that:

• Waste and extravagance are avoided,
• There is proper audit done compulsorily,
• There is control and legislative supervision over public expenditure,
• It is seen whether the expenditure has fulfilled the objective.

In the absence of proper sanction, there may be misuse and misappropriation of public funds. The Public Accounts Committee established by every legislature sees that these objectives are achieved.

4. Canon of Elasticity

This implies that there should be scope for varying the expenditure according to need or circumstances. There should not be any rigidity in public expenditure.

5. Canon of Surplus

To greater extent, the government expenditure should lead to increased production, employment and income. The expenditure should be with in the revenue of the State. Deficit is permitted only for a short duration. In times of crisis, government is allowed to have deficit budget. The deficit must be made good after the normalcy returns.

Finally, public expenditure should promote economic growth, stability and social justice. Public expenditure should be directed to achieve economic and social objectives of the country.

Effects of Public Expenditure

Public expenditure is beneficial since it influences the economy in many directions. The effects of public expenditure are always beneficial. It increases the capacity of the people to produce output efficiently. It influences the production not only directly but also indirectly. It increases the community’s productive power. It promotes social and economic equality and finally increases income, employment and welfare.

1. Effects on production

Expenditure on defence becomes productive and it becomes a protective expenditure. Development of infrastructures facilitates production and thereby helps to increase national income and in turn per capita income. Expenditures on social services like free education, health and medical aid, which increase the capacity of the people to work and save and productive power.

2. Effects on distribution

Public expenditure is an ideal medium to remove economic inequalities in society. The government should tax more the rich. The amount so collected should be spent on free education, medical aid, cheap food, subsidized houses, old age pension, etc. This process of public expenditure will bring about redistribution of national income in favour of the poor.

3. Effects on income and employment

Public expenditure affects the level of income and employment in the country by removing the widespread unemployment. Investing more on public works like roads, hydro-electric generating works, etc. will create a multiplier effect on the economy and thereby increases the income and employment. This results in increased consumption and in turn develops the consumption goods industries and capital goods industries.

Public expenditure can be divided into COFOG (Classification of the Functions of Government) categories. Those categories are

• Social protection: Pensions, subsidies for family and children, unemployment subsidies, R&D (Research and Development) on social protection.
• Health: public health services, medical products, appliances and equipment, hospital services, R&D on healthcare.
• General Public Services: Executive and legislative organs, financial and fiscal affairs, external affairs, foreign economic aid, public debt transactions, R&D related to general public services
• Education: Pre-primary, primary, secondary, tertiary education, R&D on education etc.
• Economic Affairs: General economic, agriculture, fuel and energy, commercial and labour affairs, forestry, fishing and hunting, mining, manufacturing, transport, communication etc.
• Public order and safety – police, fire-protection services, law courts, prisons etc.
• Defence: Military defence, civil defence, foreign military aid.
• Recreation, culture and religion: Recreational and sporting services, cultural services, broadcasting and publishing services, religious services etc.
• Environmental protection: Waste management, pollution abatement, protection of biodiversity and landscape etc.
• Housing and community services: Housing development, community development, water supply, street lighting etc.

Principles Governing Public Expenditure

Rules or principles that govern the expenditure policy of the government are called canons of public expenditure. The following four canons of public expenditure:

1. Canon of Benefit: Public spending must be done in a manner that it brings greatest social benefits.
2. Canon of Economy: It says that economy does not mean miserliness. Public expenditure must be made productively and efficiently.
3. Canon of Sanction: Public spending should not be made without sanction od an appropriate authority.
4. Canon of Surplus: Public expenditure should be done in a way avoiding deficit. Government must prepare budget to create a surplus.

Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social also known informally as profits, planet, and people. Increasingly, companies are making public commitments to sustainability through actions like reducing waste, investing in renewable energy, and supporting organizations that work toward a more sustainable future.

Sustainability accounting (also known as social accounting, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, or non-financial reporting) was originated about 20 years ago and is considered a subcategory of financial accounting that focuses on the disclosure of non-financial information about a firm’s performance to external stakeholders, such as capital holders, creditors, and other authorities. Sustainability accounting represents the activities that have a direct impact on society, environment, and economic performance of an organisation. Sustainability accounting in managerial accounting contrasts with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organisation’s performance at economic, ecological, and social (known as the triple bottom line or Triple-P’s; People, Planet, Profit) level. Sustainability accounting is often used to generate value creation within an organisation.

Sustainability accounting is a tool used by organisations to become more sustainable. The most known widely used measurements are the Corporate Sustainability Reporting (CSR) and triple bottom line accounting. These recognise the role of financial information and shows how traditional accounting is extended by improving transparency and accountability by reporting on the Triple-P’s.

As a result of triple bottom level reporting, and in order to render and guarantee consistency in social and environmental information, the GRI (Global Reporting Initiative) was established with the goal to provide guidelines to organisations reporting on sustainability. In some countries, guidelines were developed to complement the GRI. The GRI states that “reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting”.

Measuring environmental-economic-social interrelationships requires a clear understanding of the relationships that exists between the natural environment and the economy. It is not possible without understanding the physical representation. The physical flow accounts are helpful in showing the characteristics of production and consumption activities. Some of these accounts focus on the physical exchange between the economic system and natural environment.

Wealth-based approaches to sustainability refer to the preservation of stock of wealth. Sustainability is observed as the maintenance of the capital base of a country and therefore potentially measured. A number of environmental changes are also contained in these financial statements that are measured during an accounting period of time.

The GRI offers advanced material to help organisations of all types to create their accountability reports. This published material lead organisations through the reporting process with the main idea of becoming more sustainable in their practices in everyday business.

Specific techniques to measure information in sustainability accounting include:

• Inventory Approach
• Sustainable Cost Approach
• Resource Flow/Input-Output Approach

The Inventory Approach focuses on the different categories of natural capital and their consumption and/or enhancement. This approach identifies, records, monitors, and then reports on these different categories. These categories are analyzed according to specific classifications, including critical, non-renewable/nonsubstitutable, non-renewable/substitutable, and renewable natural capital.

The Sustainable Cost Approach results in a notional amount on the income statement that quantifies the organization’s failure to “leave the biosphere at the end of the accounting period no worse off than it was at the beginning of the accounting period”. In other words, this amount represents how much it would cost an organization to return the biosphere to its natural state at the beginning of the accounting period.

The Resource Flow/Input-Output Approach attempts to report the resource flows of the organization. Rather than explicitly reporting sustainability, it focuses on resources used to provide transparency. This approach catalogues the resources flowing into and out of the organization to pinpoint potential areas of improvement.

Benefits

• Greenwashing
• Mimicry and industry pressure
• Legislative pressure
• Stakeholder pressure and ensuring the “license to operate”
• Self-regulation, corporate responsibility and ethical reasons
• Managing the business case for sustainability

Significance of internal reconstruction

(a) When there is an overvaluation of assets and undervaluation of liabilities.

(b) When there is a difficulty to meet the financial crisis and there are continuous losses.

Accounting Entries on Internal Re-Construction

Entry for share capital reduced without changing the face value of the shares

Share Capital A/c

   To Capital Reduction/Reconstruction A/c

Entry if face value of the shares is also changed on reduction of capital a new

category of share capital is created :

Share Capital A/c (Old)

         To Share capital A/c (New)

         To Capital reduction A/c

Entry where rate of dividend on preference shares is changed under the scheme of reconstruction:

Preference Share Capital A/c (OLD)

      To Preference Share Capital A/c (New)

Entry When debenture holder and creditors are also ready to reduce their claim against company:

Debenture A/c

Creditors A/c

       To Capital reduction A/c

Reduction in paid up value only

Here the nominal value of shares remains same only paid up is reduced.

Example 1. The shareholders may agree to reduce the paid up value of Rs.100 into paid up value of Rs.10 by making a sacrifice of Rs. 900 per share. For this transaction the following journal entry will executed:

2. Reduction in both Nominal and Paid-up value

In this case both the paid up capital and nominal value are reduced. If we consider the above example, then the following journal entries will be passed:

Methods of Accounting for Amalgamations

7. There are two main methods of accounting for amalgamations:

• The pooling of interest method
• The purchase method

The use of the pooling of interest method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.

The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase.

The Pooling of Interests Method

Under the pooling of interest method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (after making the adjustments required.

If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS)5, Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies.

The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company.

For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs.

(a) The foreseeable life of the business or industry.

(b) The effects of product obsolescence, changes in demand and other economic factors.

(c) The service life expectancies of key individuals or groups of employees.

(d) Expected actions by competitors or potential competitors.

(e) Legal, regulatory or contractual provisions affecting the useful life.

Amalgamation

Amalgamation is the process of combining or uniting multiple entities into one form.

In Amalgamation, two or more companies combine to create a new company. All the combining companies lose their separate existence and entity. The new company takes over all existing assets and liabilities of the companies amalgamated. The new company allots its shares to the shareholders of the amalgamating companies.

Example of Amalgamation

For e.g. Arcelor, the world’s largest steel company (which has been since been acquired by Mittal Steel) came into being as a result of amalgamation. French steel company Usinor amalgamated with Aceralia of Spain and Arbed of Luxembourg in the year 2002 and the new company formed out of this amalgamation was named as Arcelor.

Amalgamation in the nature of merger:

In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transfer company. In this case, the business of the transfer or company is intended to be carried on after the amalgamation. There are no adjustments intended to be made to the book values. The other conditions that need to be fulfilled include that the shareholders of the vendor company holding atleast 90% face value of equity shares become the shareholders’ of the vendee company.

Procedure for Amalgamation

• The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
• A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
• Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
• A new company is formed and shares are issued to the shareholders’ of the transferor company.
• The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company.

Accounting of Amalgamation

Pooling of Interests Method:

Through this accounting method, the assets, liabilities and reserves of the transfer or company are recorded by the transferee company at their existing carrying amounts.

Purchase Method:

In this method, the transfer company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transfer or company on the basis of their fair values at the date of amalgamation.

Acquisition

An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Acquisitions, which are very common in business, may occur with the target company’s approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.

Advantages:

1. Fresh ideas and perspective

M&A often helps put together a new team of experts with fresh perspectives and ideas and who are passionate about helping the business reach its goals.

2. Access to capital

After an acquisition, access to capital as a larger company is improved. Small business owners are usually forced to invest their own money in business growth, due to their inability to access large loan funds. However, with an acquisition, there is an availability of a greater level of capital, enabling business owners to acquire funds needed without the need to dip into their own pockets.

3. Access to experts

When small businesses join with larger businesses, they are able to access specialists such as financial, legal or human resource specialists.

4. New competencies and resources

A company can choose to take over other businesses to gain competencies and resources it does not hold currently. Doing so can provide many benefits, such as rapid growth in revenues or an improvement in the long-term financial position of the company, which makes raising capital for growth strategies easier. Expansion and diversity can also help a company to withstand an economic slump.

5. Market power

An acquisition can help to increase the market share of your company quickly. Even though competition can be challenging, growth through acquisition can be helpful in gaining a competitive edge in the marketplace. The process helps achieves market synergies.

6. Reduced entry barriers

With M&A, a company is able to enter into new markets and product lines instantaneously with a brand that is already recognized, with a good reputation and an existing client base. An acquisition can help to overcome market entry barriers that were previously challenging. Market entry can be a costly scheme for small businesses due to expenses in market research, development of a new product, and the time needed to build a substantial client base.