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Value Added Statement

Value Added Statement may be called the part of the development in the financial reporting but the concept of Value Added is considered old.

Accountants in UK have periodically deliberated upon that the concept should be incorporated in Financial Accounting Practice. In 1975 the Accounting Standard Board (ASB) of UK advocated the publication of Value Added Statement along with the conventional annual corporate reports. Subsequently large British Companies included Value Added Statement in their annual reports.

In this context UK have given the concept called Enterprise Concept or Enterprise Theory. As per enterprise concept profit is calculated for :-

1. Employees

2. Directors

3. Government

4. Providers of long term finance

5. Shareholders

6. Entity ( Legal Body)

Such profit is called Value Added.

Value Added is the wealth generated by the entity through the collective efforts of capital providers, management and employees .

Value Added Statement : A statement of Value Added represents the profit and loss accounts in different and possibly in more useful manner. The Value Added Statement is divided into two parts :-

The first part shows low Value Added is arrived at the end and

The second part shows the application of such Value Added.

Advantages of Value Added Statement

The various advantages of defining income in such a way are as follows:-

1. Value Added Statement reflects a broader view of the companies  ives and responsibilities, so it improve the attitude of the employees towards the employing company.

2. Value Added Statement makes it easier for the company to introduce the productivity linked bonus scheme for employees based on Value Added for this Value Added payroll ratio is used as a basis.

3. Value Added provides a very good measure of the size and importance of a company.

4. Value Added Statement link a companies financial accounts to the

National Income. A companies Value Added Statement indicates the

companies contribution to National Income. As Value Added

Statement is based on the System Of National Accounts given by

UNO to calculate GDP and India signatory to it.

Value Added Statement (Gross Value Added)

Particulars.

Amount

Sales

Xxx

Add

Direct Incomes

(Sale of scrap, Royalty, etc)

Xxx

Total A

Xxx

Expenditure/ Cost of bought in Material and Services (BIMS)

Xxx

All expenses, Direct, Indirect Except :

Employees Contribution

Director Contribution

Taxes (Government)

Interest on Long Term Finance

Dividend/ Shareholders Charge

Any Reserve

Depreciation

Total B

Xxx

Value Added by trading/Manufacturing Activities

Total (A - B)

XXX

Add

Indirect Incomes

Add/ Less

Extraordinary Items (Abnormal)

GROSS VALUE ADDED

Xxx

Application Statement

Towards

Amount

Percentage

Employees

Directors

Government Taxes

Providers of Long Term Finance

Share holders

Entity

Total

xxx

100 %

Notes:

1: Employees include Permanent , Temporary workers, white collard, casual labour and traders etc. Amount paid or payable to employees can be in cash or in kind (Perquisite)

Staff welfare expenses is considered as Application not expense

Official tour and traveling is considered as expence

Auditors are not employees

2: Directors include whole time, part time, managing Directors, executive directors, non executive director benefit any be in cash or in kind.

Directors sitting fees is considered as expences.

3: Government Taxes:- They may be of two types :

Recoverable

Non Recoverable

Eg. Excise Duty, Service Tax, Sales Tax / VAT

Income Tax, Wealth tax, House Tax, Cess, Local Tax

These taxes are not contribution towards government since they are recoverable.

These taxes are applicable towards government since they are not recoverable.

These are shown as expences

These taxes are application towards government since they are not recoverable.

Provision for deferred tax liability (DTL) is considered as application towards entity not for government.

4: Providers of finance means long term finance. Debentures are considered as long erm finance.

5: Share holders means equity and preference share holder. All dividend will be included in application.

6: Towards entity include all reserves generated during the year. Retained earning during the year is also application towards entity.

Value added before depreciation is called Gross Value added.

Therefore NVA = GVA Depreciation

Economic Value Added

Economic Value Added is used to measure earning efficiency of an ENTITY.

Economic Value Added is simply the operating profit after tax (-) Charge for Capital , Equity, Debt used in the business.

In addition Economic Value Added is a management tool which helps the managers to take their decisions for increasing shareholders wealth. It includes some strategic decisions such as what investment to make, what financial structure is needed etc.

EVA= ( ROC WACC ) OC

ROC = Return on Operating Capital

WACC = Weighted Average Cost of Capital

OC = Operating Profit

ROC = Net Operating Profit After Tax / Capital Employed * 100

NOPAT = EBIT (-) Net Operating Income (-) taxes

Capital Employed = Debt + Equity

WACC includes Ke, Kd, Kp.

Ke = Rf + b (Rm Rf)

Rf = Risk free Return

Rm= Market Rate of Return

Market Value Added

Market Value Added is the difference between the current value of a firm and the capital contribution by investors. If Market Value Added is positive the firm has added value. If it is negative the firm has destroyed it.

To find out whether management has created or destroyed value since its inception, the firm`s Market Value Added can be used.

MVA = MV of Capital Employed Capital employed

This method is used only for Listed company.

There is an alternative method to calculate Market Value Added which is known as Capitalization Method ;

MVA = Economic Value Added / Discount Rate.

Higher the Market Value Added, its better.

A high Market Value Added indicates that company has created substantial wealth for shareholders.

A negative Market Value Added means that the value of action and investment of management is less than the value of capital contributed to the company by the capital by the capital market i.e. wealth or value has been destroyed.




Category Accounts, Other Articles by - CA Lalit Mohan Agarwal 



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