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GNDU Question Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
CONTEMPORARY ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss the meaning and objectives of Human Resources Accounting. Explain the value
based models of human resources accounting.
2. Write a detailed note on the influences of other disciplines on Accounting
SECTION-B
3. Explain the meaning of Price Level Accounting. Give arguments for and against Price
level adjusted financial statements.
4. What do you understand by Corporate Social Performance? Explain the various areas of
Corporate Social Performance.
SECTION-C
5. Describe the BASEL III norms. How have these norms helped to improve the
performance of banking sector in India?
6. Write notes on:
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(a) Reporting by Diversified Companies
(b) EVA Disclosure in India
SECTION-D
7. What is meant by Intangible Assets? Discuss the accounting standard relating to
Intangibles.
8. Write notes on:
(a) Accounting for Leases
(b) Target Costing.
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GNDU Answer Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
CONTEMPORARY ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Discuss the meaning and objectives of Human Resources Accounting. Explain the value
based models of human resources accounting.
Ans: A Fresh Beginning: The Company That Counted Only Machines
Once upon a time, there was a manufacturing company called SteelSpark Ltd. Every year,
the finance department proudly presented its balance sheet showing the value of land,
buildings, machines, and vehicles.
But one day, the CEO asked a simple question:
We have the best engineers, designers, and managers in the industry. Why dont they
appear anywhere in our accounts? Arent they our most valuable assets?
The accountants smiled awkwardly because traditional accounting never recorded the
value of people. This is where Human Resources Accounting (HRA) comes in a way to
measure and report the value of human capital just like we do for physical and financial
assets.
Part 1: Meaning of Human Resources Accounting
Definition: Human Resources Accounting is the process of identifying, measuring, and
reporting the value of human resources in an organization, in monetary terms, so that they
can be treated as assets rather than just expenses.
Key Idea
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In traditional accounting: Salaries, training costs = expenses.
In HRA: People are assets that generate future economic benefits, so their value
should be recorded.
Diagram HRA Concept
Traditional Accounting:
People = Expense
HRA Approach:
People = Asset (with measurable value)
Part 2: Objectives of Human Resources Accounting
Lets break them down like the CEOs goals for SteelSpark Ltd.
1. Recognize People as Assets
Show employees as valuable resources in financial statements.
Change the mindset from cost to investment.
2. Provide Information for Decision-Making
Help management decide on recruitment, training, promotions, and retention.
Example: If training increases employee value, its worth the investment.
3. Improve Human Resource Management
Track the value of human capital over time.
Identify areas where skills are depreciating and need upgrading.
4. Facilitate Better Communication
Show shareholders and stakeholders the real worth of the organizations talent.
5. Aid in Long-Term Planning
Forecast future manpower needs and costs.
Plan succession and leadership development.
Diagram Objectives of HRA
Recognize Assets → Better Decisions → Improved HRM → Stakeholder Confidence
→ Long-Term Planning
Part 3: Why HRA is Needed
People drive performance machines dont innovate, people do.
Competitive advantage often comes from talent, not just technology.
Transparency investors want to know the quality of the workforce.
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Retention strategy knowing the value of employees helps justify retention costs.
Part 4: Value-Based Models of Human Resources Accounting
Now comes the interesting part how do we put a price tag on people? Value-based
models try to measure the economic value of employees to the organization.
1. Historical Cost Model
Records the actual cost incurred in recruiting, hiring, training, and developing
employees.
Analogy: Like recording the purchase price of a machine.
Limitation: Ignores the current market value or productivity of employees.
2. Replacement Cost Model
Measures how much it would cost to replace an existing employee with someone of
similar skills and experience.
Includes recruitment, selection, training, and lost productivity during replacement.
Analogy: Like estimating the cost to replace a damaged machine.
3. Opportunity Cost Model
Values employees based on the opportunity cost of employing them in one
department versus another.
Often used in internal bidding for scarce talent.
Limitation: Not practical for valuing all employees.
4. Present Value of Future Earnings Model (Lev & Schwartz Model)
Calculates the present value of all future earnings an employee is expected to
generate for the organization until retirement.
Formula:
Where:
Et = expected earnings in year t
r = discount rate
n = remaining years of service
Diagram Lev & Schwartz Model
Future Earnings → Discount to Present Value → Human Resource Value
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5. Economic Value Model
Measures the employees contribution to the organizations profits.
Often linked to performance metrics and profitability.
6. Competency Model
Assigns value based on the competencies, skills, and knowledge employees bring.
More qualitative but can be quantified using scoring systems.
Part 5: Example Applying a Value-Based Model
Lets say SteelSpark Ltd. has an engineer, Ravi:
Expected annual earnings: ₹10,00,000
Remaining service years: 10
Discount rate: 10%
Using the Lev & Schwartz Model:
Present value of each years earnings is calculated and summed.
This gives Ravis human resource value in todays terms.
Part 6: Benefits of Value-Based HRA Models
Better Investment Decisions Know where to spend on training.
Retention Justification Show the cost of losing a key employee.
Performance Measurement Link employee value to company performance.
Transparency Show investors the real worth of your talent pool.
Part 7: Limitations of HRA
Valuation is subjective Different models give different values.
Human value changes Skills can improve or decline quickly.
Ethical concerns Putting a price tag on people may feel uncomfortable.
Not recognized by accounting standards Cant be included in statutory balance
sheets in most countries.
Part 8: Diagram HRA Process Flow
Identify Employees → Choose Valuation Model → Measure Value → Report in HR
Statements → Use for Decisions
Final Story Recap
In the story of SteelSpark Ltd.:
The CEO realized people are the most valuable assets.
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HRA gave a way to measure and report that value.
Objectives included better decision-making, planning, and communication.
Value-based models like Historical Cost, Replacement Cost, and Lev & Schwartz
helped put numbers to human capital.
The result? A company that not only counted its machines but also valued its people
and made smarter, more human-centered decisions.
2. Write a detailed note on the influences of other disciplines on Accounting
Ans: A Fresh Beginning: Accountings Busy Crossroads
Imagine Accounting as a grand railway station. Trains from different cities Economics,
Law, Mathematics, Statistics, Psychology, Sociology, Information Technology, and
Management all arrive here daily. Each train brings passengers (ideas, methods, and
tools) that help Accounting run more efficiently, make better decisions, and serve society.
Without these incoming trains, Accounting would be like a station with no connections
limited, outdated, and unable to meet modern demands.
Part 1: Why Accounting Needs Other Disciplines
Accounting is often called the language of business, but no language develops in isolation.
It borrows vocabulary, grammar, and style from other fields to:
Improve accuracy
Enhance decision-making
Adapt to changing business environments
Serve diverse stakeholders
Diagram Accounting at the Centre of Disciplines
Economics
|
Law ---- Accounting ---- Mathematics
|
IT ---- Statistics ---- Management
|
Psychology & Sociology
Part 2: Influences from Major Disciplines
Lets take a walk through each city that sends its train to Accounting Station.
1. Economics
Influence: Economics studies how resources are allocated, markets function, and
costs/benefits are measured.
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Impact on Accounting:
o Concepts like opportunity cost, marginal cost, and economic value influence
cost accounting and decision-making.
o National income accounting borrows heavily from economic principles.
Example: Deciding whether to produce in-house or outsource uses economic cost
benefit analysis.
2. Law
Influence: Business operates within a legal framework company law, tax law,
contract law.
Impact on Accounting:
o Preparation of financial statements must comply with legal requirements
(e.g., Companies Act).
o Tax accounting is shaped by income tax laws.
o Auditing standards are influenced by legal obligations.
Example: Depreciation methods allowed under tax laws may differ from those used
for internal reporting.
3. Mathematics
Influence: Mathematics provides the tools for precise calculation and logical
structuring.
Impact on Accounting:
o Ratio analysis, trend analysis, and budgeting rely on mathematical formulas.
o Present value and future value calculations in investment decisions.
Example: Calculating compound interest for loan amortization schedules.
4. Statistics
Influence: Statistics deals with data collection, analysis, and interpretation.
Impact on Accounting:
o Forecasting sales, estimating bad debts, and sampling in audits.
o Variance analysis in standard costing.
Example: Using regression analysis to predict future sales based on past trends.
5. Psychology
Influence: Psychology studies human behavior and decision-making.
Impact on Accounting:
o Understanding how managers and employees react to performance reports.
o Designing incentive systems that motivate desired behaviors.
Example: Behavioral accounting examines how people interpret and use accounting
information.
6. Sociology
Influence: Sociology examines how groups and societies function.
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Impact on Accounting:
o Social responsibility accounting reporting on environmental and
community impact.
o Understanding cultural influences on accounting practices.
Example: A multinational company adapting its reporting style to local cultural
expectations.
7. Information Technology (IT)
Influence: IT provides the infrastructure for processing and storing data.
Impact on Accounting:
o Computerized accounting systems (Tally, SAP, QuickBooks).
o Real-time financial reporting and data analytics.
Example: Cloud-based accounting allows instant access to financial data from
anywhere.
8. Management
Influence: Management focuses on planning, organizing, and controlling resources.
Impact on Accounting:
o Management accounting provides information for internal decision-making.
o Budgetary control and performance measurement.
Example: Using accounting data to set departmental targets and monitor
performance.
Part 3: How These Influences Work Together
In reality, these disciplines dont influence Accounting in isolation they interact.
Example: When a company considers launching a new product:
Economics helps assess market demand.
Law ensures compliance with regulations.
Mathematics & Statistics forecast sales and costs.
Psychology & Sociology guide marketing strategies.
IT manages data collection and analysis.
Management uses all this information to make the final decision.
Diagram Interdisciplinary Flow into Accounting Decisions
Economics →
Law →
Math/Stats → Accounting → Business Decisions
Psych/Soc →
IT →
Management →
Part 4: Benefits of Interdisciplinary Influence
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1. Better Decision-Making More accurate and holistic.
2. Improved Compliance Meets legal and regulatory standards.
3. Enhanced Efficiency IT and math streamline processes.
4. Human-Centric Reporting Psychology and sociology ensure reports are
understandable and relevant.
5. Strategic Advantage Economics and management help align accounting with
business goals.
Part 5: Challenges of Interdisciplinary Influence
Complexity Integrating multiple perspectives can be challenging.
Conflicting Priorities Legal requirements may clash with economic efficiency.
Skill Requirements Accountants need knowledge beyond traditional accounting.
Part 6: Real-Life Story Recap
Think of Accounting as the central control room of a spaceship (the business).
Economics is the navigation system telling you where the opportunities are.
Law is the safety manual ensuring you dont break rules.
Mathematics & Statistics are the calculators and sensors giving precise readings.
Psychology & Sociology are the crew morale officers ensuring the human side is
cared for.
IT is the onboard computer processing all data instantly.
Management is the captain making final calls based on all inputs.
Without these systems working together, the spaceship would drift aimlessly or crash.
Final Exam-Friendly Summary Table
Discipline
Influence on Accounting
Example
Economics
Cost concepts, resource allocation
Make-or-buy decision
Law
Compliance, reporting standards
Tax accounting
Mathematics
Calculations, financial analysis
ROI calculation
Statistics
Forecasting, sampling
Sales prediction
Psychology
Behavioral insights
Incentive design
Sociology
Social responsibility
CSR reporting
IT
Automation, data processing
ERP systems
Management
Planning, control
Budgetary control
Final Words for the Examiner
By showing Accounting as a hub of many disciplines, with clear examples, diagrams, and a
relatable story, you demonstrate:
Conceptual clarity (you understand the influences)
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Technical accuracy (you know the specifics)
Communication skill (you can make it enjoyable to read
SECTION-B
3. Explain the meaning of Price Level Accounting. Give arguments for and against Price
level adjusted financial statements.
Ans: A Fresh Beginning: The Shopkeepers Illusion
Imagine a shopkeeper, Mr. Arjun, who bought a delivery van in 2015 for ₹5,00,000. In 2025,
he proudly shows his balance sheet to a friend the van is still recorded at ₹5,00,000.
But heres the catch:
In 2025, the same van would cost ₹9,00,000 due to inflation.
The profit Arjun thinks hes making is partly an illusion because when he needs
to replace the van, the old recorded cost wont be enough.
This is exactly the problem Price Level Accounting tries to solve adjusting financial
statements to reflect changes in the purchasing power of money.
Part 1: Meaning of Price Level Accounting
Definition: Price Level Accounting is a method of accounting that adjusts historical cost
figures in financial statements to reflect changes in the general price level (inflation or
deflation), so that the reported values are stated in terms of current purchasing power.
Why Its Needed
Traditional accounting records assets at historical cost the price paid when
acquired.
Over time, inflation changes the value of money.
Without adjustment, profits may be overstated and assets understated.
Diagram Concept of Price Level Accounting
Historical Cost Accounting:
Asset bought in 2015 = ₹5,00,000 → Still shown as ₹5,00,000 in 2025
Price Level Accounting:
Asset bought in 2015 = ₹5,00,000 → Adjusted to ₹9,00,000 in 2025
(current value)
Part 2: Objectives of Price Level Accounting
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1. Reflect True Financial Position Show assets and liabilities at current values.
2. Avoid Illusory Profits Prevent distribution of profits that are not real.
3. Aid Decision-Making Provide realistic data for management.
4. Protect Capital Ensure enough funds to replace assets.
5. Improve Comparability Make financial statements comparable across years.
Part 3: Methods of Price Level Accounting
Two main approaches are used:
1. Current Purchasing Power (CPP) Method
Adjusts all historical figures using a general price index.
Focuses on maintaining the purchasing power of capital.
Formula:
Adjusted Value=Historical Value×Current Price IndexBase Year Price Index\text{Adjusted
Value} = \text{Historical Value} \times \frac{\text{Current Price Index}}{\text{Base Year Price
Index}}
2. Current Cost Accounting (CCA) Method
Assets are shown at their current replacement cost.
Depreciation and cost of goods sold are based on current costs.
Focuses on maintaining the operating capability of the business.
Diagram Two Approaches
Price Level Accounting
├── CPP Method → Adjust by general price index
└── CCA Method → Adjust to current replacement cost
Part 4: Arguments FOR Price Level Adjusted Financial Statements
Lets imagine Arjuns shop again heres why adjusting for price levels helps him.
1. Shows True Profit
Adjusts for inflation so profits are not overstated.
Prevents paying dividends out of capital.
2. Realistic Asset Values
Assets shown at current value give a more accurate picture of financial health.
3. Better Decision-Making
Management can plan replacements and expansions with realistic cost data.
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4. Protects Lenders and Investors
Shows the real earning capacity and solvency of the business.
5. Useful in High Inflation
In countries with high inflation, historical cost statements can be misleading.
Example: If Arjuns van is still shown at ₹5,00,000, his depreciation charge is too low
making profits look bigger than they really are. Price level adjustment fixes this.
Part 5: Arguments AGAINST Price Level Adjusted Financial Statements
But not everyone is a fan here are the common criticisms.
1. Complexity
Requires price indices or market valuations more work for accountants.
2. Subjectivity
Replacement cost estimates can vary; different indices may give different results.
3. Lack of Standardization
No universally accepted method; hard to compare between companies.
4. Cost of Implementation
Frequent revaluation can be expensive.
5. Not Always Necessary
In periods of low inflation, adjustments may not significantly change results.
Example: If inflation is only 1% per year, the benefit of adjusting may not justify the effort.
Part 6: Balanced View
Price Level Accounting is like updating the map before a journey:
If the roads (prices) have changed a lot, you need a new map (adjusted statements).
If the roads are mostly the same, the old map (historical cost) might still work.
Part 7: Diagram For vs Against
FOR:
- True profit
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- Realistic assets
- Better decisions
- Protects stakeholders
- Useful in inflation
AGAINST:
- Complex
- Subjective
- No standardization
- Costly
- Not always needed
Part 8: Real-Life Applications
Corporate Reporting in Inflationary Economies Countries like Brazil, Argentina,
and Zimbabwe have used inflation-adjusted statements.
International Accounting Standards IAS 29 requires inflation-adjusted reporting in
hyperinflationary economies.
Capital-Intensive Industries Manufacturing, airlines, and utilities benefit from
realistic asset replacement values.
Final Story Recap
In the story of Arjuns shop:
Historical cost accounting made him think he was richer than he was.
Price Level Accounting revealed the real picture higher asset values, lower real
profits.
Supporters say its essential for truth and fairness.
Critics say its complex and sometimes unnecessary.
The wise accountant knows when to use it especially when inflation is high and
decisions depend on accurate, current values.
4. What do you understand by Corporate Social Performance? Explain the various areas of
Corporate Social Performance.
Ans: Corporate Social Performance (CSP): A Humanized Story
Imagine you are walking through a busy marketplace. There are many shopssome sell
clothes, some sell food, and some sell electronics. Now, think for a moment:
Why do you prefer one shop over another?
Maybe one shop gives you good quality.
Another shop treats you politely.
Another one keeps the street clean.
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And yet another supports a nearby school.
You will naturally feel more connected to those shops that not only sell products but also
behave responsibly toward society.
This is exactly how companies operate on a larger scale. In todays world, companies are not
judged only by the money they make, but also by how they treat employees, customers, the
environment, and society at large. This broader responsibility is called Corporate Social
Performance (CSP).
Meaning of Corporate Social Performance (CSP)
In simple words:
Corporate Social Performance is like a report card of a companys behavior toward society.
It shows how well a company balances profits with ethics, social responsibility, and
environmental care.
Its not just about donating money to charity; its about consistent, responsible, and ethical
actions in all business areas.
Think of CSP as the soul of business performance where profit is important, but so are
people and the planet.
Diagram 1: CSP as a Balanced Triangle
Corporate
Social
Performance
/ | \
Profit People Planet
This diagram shows that CSP stands on three main legs: Profit, People, and Planet. If any one
side is ignored, the balance is lost.
Areas of Corporate Social Performance
CSP is not one single activity; it spreads into different areas. Lets understand them one by
one, like different chapters of a story.
1. Economic Responsibility
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At the base level, a company must earn profit.
Why? Because without money, no company can survive or support others.
But heres the catch:
Profit should be earned fairly.
No cheating customers.
No exploiting workers.
No cutting corners in quality.
Example:
A mobile company that sells good-quality phones at a fair price is fulfilling its economic
responsibility.
2. Legal Responsibility
Companies must play by the rules.
Paying taxes honestly.
Following labour laws.
Respecting environmental regulations.
Think of it like driving a car. You may be an excellent driver, but if you dont follow traffic
signals, you are a danger to everyone.
Similarly, a company without legal responsibility is harmful to society.
3. Ethical Responsibility
Now comes the moral side.
Not everything legal is always ethical.
For example:
A company may legally cut down trees for paper, but ethically, should it plant new trees
too?
Yes!
Ethical responsibility is about doing what is morally right, even if the law doesnt force it.
4. Philanthropic Responsibility
This is like the cherry on the cake.
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Philanthropy means voluntary efforts to help society.
Donating to schools.
Supporting hospitals.
Funding scholarships.
Its not compulsory but creates goodwill.
Example:
Tata Group in India funds schools, hospitals, and research centers, winning peoples trust
and respect.
Diagram 2: Carrolls CSR Pyramid (Adapted for CSP)
Philanthropic
----------------------
Ethical
----------------------
Legal
----------------------
Economic
This pyramid shows the layers of responsibilities:
First, a company must be economically strong.
Then it must follow the law.
Then act ethically.
And finally, support society through philanthropy.
5. Environmental Responsibility
In todays age of climate change, this is extremely important.
Companies must:
Reduce pollution.
Save energy.
Use renewable resources.
Support sustainability.
Example:
An automobile company making electric vehicles contributes to reducing carbon emissions.
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6. Human Resource Responsibility
Employees are the backbone of any organization. Treat them well, and they become loyal;
exploit them, and the company suffers.
Areas include:
Fair wages.
Safe working conditions.
Training and career growth.
Respect for diversity.
When employees feel valued, they work harder and stay longer.
7. Customer Responsibility
Customer is king we have heard this line many times.
But in CSP, it means:
Providing quality goods.
Ensuring safety.
Offering after-sales service.
Listening to feedback.
A company that cheats customers may make short-term profit but will lose in the long run.
8. Community Development Responsibility
Companies do not exist in isolation. They are part of a community.
Good CSP means:
Helping local schools, colleges, and hospitals.
Building roads, parks, or libraries.
Running skill-development programs.
Example:
Infosys Foundation in India works for rural development and education.
Diagram 3: Areas of CSP as a Wheel
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+-------------------+
| Environment |
+-------------------+
/ | \
+----------+ | +----------+
| Employees| | | Customers|
+----------+ | +----------+
\ | /
+-------------------+
| Community |
+-------------------+
This wheel shows that CSP touches all sides of society: environment, employees, customers,
and community.
Why is CSP Important?
1. Builds Reputation People trust companies that act responsibly.
2. Attracts Talent Employees want to work where they are respected.
3. Customer Loyalty Customers prefer ethical brands.
4. Risk Reduction Legal and ethical practices save companies from penalties.
5. Long-Term Success CSP ensures sustainability of both company and society.
Conclusion
Corporate Social Performance is like the character certificate of a company. It shows how
well the company balances profit with responsibility.
In short:
A company must first earn money (economic).
Then follow laws (legal).
Then act fairly (ethical).
And finally, give back to society (philanthropy).
When all these areas work together, the company not only grows but also becomes loved
and respected by society.
So, CSP is not just about businessits about building trust, spreading goodwill, and
creating a better tomorrow for everyone.
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SECTION-C
5. Describe the BASEL III norms. How have these norms helped to improve the
performance of banking sector in India?
Ans: BASEL III Norms and Their Impact on Indian Banking
A Different Beginning
Imagine youre running a small shop in your neighbourhood. You lend some products on
credit to your customers, expecting theyll pay you back later. But if too many customers fail
to return the money, your shop will face trouble. To keep your shop running, you always
keep some emergency savings aside, you avoid giving goods to unreliable people, and you
ensure you never lend more than what you can afford.
Now, replace the shopkeeper with a bank, and replace the customers with borrowers.
Banks also lend money, but if too many loans turn bad, the whole banking system may
collapsejust like your shop could. To prevent this, the world came up with a set of safety
rules for banks called BASEL norms. The latest and most important version is BASEL III,
which made banks safer and stronger, especially in countries like India.
1. What are BASEL Norms?
BASEL norms are international banking regulations decided by the Basel Committee on
Banking Supervision (BCBS).
Think of BCBS as a group of financial guardians sitting in Basel, Switzerland, who
design rules to make banks around the world safer.
These rules mainly talk about:
1. Capital how much money banks should keep safe for emergencies.
2. Risk management how carefully banks should lend.
3. Liquidity how much ready cash banks should have to meet sudden
demands.
2. Why BASEL III Was Needed?
Earlier, there were BASEL I and BASEL II norms. But the 2008 Global Financial Crisis showed
that banks were still very weak. Many collapsed because:
They had very little capital.
They took huge risks.
They didnt have enough cash during emergencies.
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To fix these problems, BASEL III was introduced in 2010. It made the rules stricter, asking
banks to keep more safety money (capital), be more transparent, and manage risks better.
3. Main Features of BASEL III
Lets understand the core features in a student-friendly way:
(A) Capital Requirements
Banks must keep a minimum percentage of their money safe, called the Capital
Adequacy Ratio (CAR).
Under BASEL III:
o Minimum CAR = 8% (Indias RBI made it stricter: 9%).
o Within this, banks need high-quality capital called Tier 1 capital (mainly
equity shares).
The idea: the more safety money banks have, the more stable they are.
Diagram 1 Capital Structure under BASEL III
Banks Capital
-------------------
| Tier 1 Capital | (Equity + Reserves) → Strongest
-------------------
| Tier 2 Capital | (Subordinated debt, etc.) → Weaker
-------------------
(B) Leverage Ratio
Earlier, banks could lend excessively compared to their capital.
BASEL III introduced a leverage ratio = Tier 1 capital / Total exposure (should be at
least 3%).
This acts like a speed governor on a vehiclebanks cannot over-lend blindly.
(C) Liquidity Standards
Banks must always have enough cash-like assets to survive financial shocks. Two new ratios
were introduced:
1. Liquidity Coverage Ratio (LCR)
o Banks should have enough liquid assets (cash, govt. bonds, etc.) to survive a
30-day stress scenario.
2. Net Stable Funding Ratio (NSFR)
o Banks should fund their long-term loans with stable sources like deposits, not
just short-term borrowing.
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Diagram 2 Liquidity Standards
Short-Term Safety: Liquidity Coverage Ratio (LCR) → 30-day survival
Long-Term Safety: Net Stable Funding Ratio (NSFR) → 1-year stability
(D) Counter-Cyclical Buffers
Banks must build extra reserves during good times so they can use them in bad
times.
This prevents banks from collapsing when the economy slows down.
4. Impact of BASEL III on Indian Banking
Now lets see how these norms helped improve the Indian banking sector.
Stronger Banks
Indian banks were forced to keep more capital.
This reduced chances of banks failing like in the 2008 crisis.
Example: When NPAs (bad loans) rose in India, higher capital helped banks absorb
losses.
Better Risk Management
Banks now assess borrowers more carefully.
Earlier, loans were given too freely (especially to big corporates).
After BASEL III, stricter checks reduced risky lending.
Improved Liquidity
With LCR and NSFR, banks always maintain enough cash-like assets.
This ensures depositors can withdraw their money without fear.
Trust of Investors and Customers
A safe bank attracts more customers.
BASEL III norms increased confidence in Indian banks, both for domestic depositors
and foreign investors.
Global Competitiveness
Since Indian banks follow global standards, they are respected internationally.
This helps in cross-border trade and investments.
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5. Challenges Faced by Indian Banks
Of course, it wasnt all smooth:
Public sector banks struggled to raise extra capital.
Compliance required heavy investment in technology and training.
Profitability sometimes went down because banks couldnt lend aggressively.
But in the long run, these pains made the system much healthier.
6. Simple Story Illustration
Think of a cricket team (the bank):
Players = Banks assets (loans, investments, etc.)
Captain = Capital (provides leadership and stability)
Coach = Risk management (ensures right strategy)
Water bottles & substitutes = Liquidity (ready support in emergencies)
If the team has a strong captain, good coach, and enough substitutes, it can survive even
tough matches. Similarly, BASEL III norms ensure banks can survive financial crises.
7. Conclusion
The BASEL III norms acted like a safety shield for the Indian banking sector. They taught
banks to:
Save more,
Lend carefully,
Keep emergency cash,
Build trust with people.
Even though implementing these rules was tough, they helped Indias banking system
become more resilient, reliable, and respected worldwide. Today, whenever you deposit
money in a bank, you can feel safer knowing that behind the scenes, BASEL III norms are
protecting your hard-earned savings.
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6. Write notes on:
(a) Reporting by Diversified Companies
(b) EVA Disclosure in India
Ans: ✦ Notes on Reporting by Diversified Companies & EVA Disclosure in India
A Fresh Beginning
Imagine you walk into a huge shopping mall. Inside, there are different sections one for
clothes, another for electronics, another for food, and even a movie theatre. Now, if the
owner of this mall simply tells you, Our mall earned ₹10 crore this year, would that give
you the full picture?
Not really. Youd be curious to know:
Did the clothing section earn more?
Was the food court running at a loss?
Which section contributed most to profits?
This same situation arises in diversified companies big firms that operate in multiple
industries or segments. Just like the mall owner must report separately for each section,
these companies are also expected to report financial results segment-wise.
On the other hand, theres another concept called EVA (Economic Value Added) which
answers a bigger question: Is the company really creating value beyond the cost of
capital?
Both of these are modern approaches in corporate reporting and help investors, managers,
and stakeholders see the true financial picture. Lets dive deeper into both.
(a) Reporting by Diversified Companies
What Does Diversified Company Mean?
A diversified company is like a basket full of different fruits. Instead of relying on just
apples, the company also sells oranges, bananas, and mangoes. For example:
Reliance Industries operates in oil, telecom (Jio), and retail.
ITC deals in FMCG, hotels, paperboards, and agri-business.
Each line of business has different risks, returns, and challenges.
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Why Reporting by Diversified Companies is Needed?
Imagine if ITC only reports one total profit figure. Investors wont know whether profits
came from cigarettes (stable but controversial) or from FMCG (growing but competitive).
Thus, Segment Reporting was introduced, requiring diversified companies to report
performance by business segment and geographical segment.
Benefits of Segment Reporting
1. Transparency Investors see clearly which division is performing well.
2. Better Decision-Making Management can allocate resources wisely (e.g., close
down a weak segment).
3. Risk Assessment Different industries have different risks; segment reporting
reveals them.
4. Comparability Helps compare companies with similar segments.
5. Accountability Each business unit manager can be evaluated properly.
Rules & Standards
Accounting Standard 17 (AS-17) in India (under ICAI) requires segment reporting.
Segments may be classified as:
o Business Segment (e.g., Telecom, Oil, Retail for Reliance).
o Geographical Segment (e.g., India, USA, Europe).
Diagram: Segment Reporting
+------------------------------+
| Diversified Company |
+------------------------------+
|
+-----------------+------------------+
| |
Business Segments Geographical Segments
| |
(Telecom, Oil, Retail) (India, USA, Europe)
Each segment is reported separately so that performance can be analyzed clearly.
Limitations of Segment Reporting
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Sometimes companies may hide details under broad heads.
Allocating expenses (like head office cost) is tricky.
Too much detail may overwhelm investors.
Still, despite these challenges, it is crucial for diversified companies.
(b) EVA Disclosure in India
What is EVA?
EVA or Economic Value Added is like checking if your business piggy bank is truly growing
after deducting the cost of the coins you borrowed to fill it.
In simple terms:
It measures true economic profit, not just accounting profit.
Why EVA is Important?
Most traditional accounting measures (like net profit, EPS, ROA) do not consider the cost of
capital. A company may show profit, but if it hasnt covered the cost of funds (equity +
debt), it is not creating wealth.
EVA tells whether the company is:
Creating Wealth → EVA Positive
Destroying Wealth → EVA Negative
Diagram: Concept of EVA
Profit Before Capital Cost → Accounting Profit
Profit After Capital Cost → Economic Value Added (EVA)
EVA Disclosure in India
In India, EVA became popular in the 1990s when Reliance Industries and Infosys started
disclosing it voluntarily. Although not mandatory under law, many companies use it as a
measure of shareholder value creation.
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SEBI encourages transparency, and EVA is one way companies show value creation.
Some Indian companies (TCS, Infosys, Reliance) include EVA in their annual reports.
EVA is also used for performance-linked managerial remuneration.
Advantages of EVA Disclosure
1. True Value Indicator Better than profit/EPS as it deducts cost of capital.
2. Investor Confidence Shareholders see whether wealth is created.
3. Managerial Accountability Encourages managers to invest only in projects that
generate returns above the cost of capital.
4. Performance Measurement Useful for setting bonuses and rewards.
Challenges of EVA in India
Calculation of cost of capital is complex.
Many companies hesitate as disclosure may reveal weaknesses.
Not mandatory, so not uniformly adopted.
Connecting Both Concepts
Segment Reporting shows where profits come from.
EVA Disclosure shows whether profits actually create value.
Together, they ensure clarity, accountability, and fairness in corporate reporting.
Combined Diagram:
+-----------------------------+
| Corporate Transparency |
+-----------------------------+
/ \
/ \
Segment Reporting EVA Disclosure
(Where is profit?) (Is value created?)
Conclusion
In todays business world, a simple profit figure is like telling only half the story.
Stakeholders want to know:
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1. Where did the profit come from? (answered by Segment Reporting)
2. Is the profit really creating shareholder value? (answered by EVA Disclosure)
Thus, both concepts are like two eyes of corporate reporting one gives clarity of vision
across business lines, and the other ensures true wealth creation is measured.
For diversified companies in India, combining segment reporting and EVA disclosure
ensures that financial reporting is transparent, fair, and value-oriented something every
examiner (and investor!) would love to see.
SECTION-D
7. What is meant by Intangible Assets? Discuss the accounting standard relating to
Intangibles.
Ans: Intangible Assets: A Story-Based Explanation
A Different Beginning
Imagine you are walking into a big modern companys office lets say Google, Infosys, or
even a famous startup. What do you see?
Beautiful glass buildings, shiny laptops, desks, chairs, and air-conditioned rooms. These are
the tangible assets the things you can touch and feel.
But heres the real twist: do you know what gives these companies their real power? Its not
just the furniture or machines. Its the brand name, software, patents, goodwill, customer
trust, and unique ideas.
These things are invisible you cannot touch them, yet they add tremendous value to the
company. This is exactly where the story of Intangible Assets begins.
What are Intangible Assets?
An Intangible Asset is something that:
1. Has no physical form you cant touch it like a machine or building.
2. Provides future economic benefits meaning it helps the company earn profits or
save costs.
3. Is controlled by the company nobody else can use it without permission.
In short, Intangible Assets are invisible valuables that help a business grow.
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Examples of Intangible Assets
Lets break it into two categories with a simple diagram:
INTANGIBLE ASSETS
-----------------
| |
Identifiable Non-Identifiable
(Can be separated) (Cannot be separated)
- Patents - Goodwill
- Copyrights - Brand Value
- Trademarks
- Software
- Licenses
Identifiable Intangibles: You can separate them and even sell them. For example,
Microsoft sells software licenses, and pharmaceutical companies sell patents.
Non-Identifiable Intangibles: These are inseparable from the company, like
Goodwill (the reputation of a business).
Story Example
Think of Apple. Why do people pay more for an iPhone than a normal phone with the same
features?
Its because of Apples brand name, design rights, patents, and goodwill.
These are Intangible Assets that add billions to its value even more than its
factories or computers!
Accounting Standard on Intangible Assets
Now that we know what intangibles are, lets understand how accountants deal with them.
India follows Accounting Standard (AS) 26 and for companies under Ind AS framework, Ind
AS 38. Both give rules on how to recognize, measure, and report intangible assets.
Lets simplify the rules into a step-by-step story.
1. Recognition of Intangible Assets
An expense or investment can only be called an intangible asset if it satisfies two golden
tests:
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Future Benefit Test: Will it help the business earn profits or save money in the
future?
Control Test: Does the company have exclusive rights over it?
For example:
Buying a patent → Yes, its an intangible.
Spending on staff training → No, because employees can leave; you dont control
their knowledge.
2. Initial Measurement
Once recognized, how do we measure its value?
Purchased Intangibles: If you buy software for ₹10 lakh, its cost is simply the
purchase price + related expenses.
Self-Generated Intangibles: For example, if you build software in-house, you can
recognize it only after the development phase, not during the research stage.
Diagram: Self-Generated Intangibles
Research Phase → Cost treated as Expense
Development Phase → Cost can be Capitalized (Asset)
3. Subsequent Measurement
Over time, the value of intangible assets may reduce (just like machines lose value). This is
called Amortization.
Intangibles are amortized over their useful life.
If useful life is not certain, then in India, AS 26 prescribes maximum 10 years.
Example: If a software is expected to be useful for 5 years and costs ₹5,00,000, then every
year, ₹1,00,000 will be charged as an expense (amortization).
4. Disclosure in Financial Statements
AS 26 requires companies to show:
The nature of intangible assets (software, patents, goodwill).
The useful life and amortization method.
The gross carrying amount and accumulated amortization.
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This ensures transparency for investors.
Important Points to Note
Goodwill: If purchased (like when one company buys another), it can be recognized
as an intangible. But internally generated goodwill is not recorded.
Research vs. Development: Research costs = Expense, Development costs = Can be
an Asset (if criteria are met).
Revaluation: Generally, AS 26 does not allow revaluation of intangibles due to
difficulty in measuring fair value.
Diagram: Accounting Treatment of Intangible Assets
Step 1: Recognition
- Future benefits?
- Controlled by entity?
|
v
Step 2: Measurement
- Purchased → Record at Cost
- Self-generated → Only development cost
|
v
Step 3: Amortization
- Useful life → Expense allocated
|
v
Step 4: Disclosure
- Show in Balance Sheet & Notes
Why Are Intangible Assets So Important?
Lets reflect on why accountants and investors care so much about intangibles.
They often represent the true value of modern businesses.
In todays digital world, ideas matter more than machines.
Intangibles like data, software, and patents can be worth billions.
For example:
Facebook bought WhatsApp for $19 billion, even though WhatsApp had very few
tangible assets. Why? Because its brand, technology, and user base were priceless
intangible assets.
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Conclusion
To sum up our story:
Intangible Assets are the invisible gold mines of a business.
They are things like patents, copyrights, goodwill, and software that cannot be
touched but drive huge value.
According to AS 26 (or Ind AS 38), they are recognized only if they give future
benefits and are controlled by the business.
They are initially measured at cost, then amortized over their useful life, and
properly disclosed in the accounts.
So, while tangible assets may shine under the lights of a factory, its the invisible intangibles
the reputation, ideas, and rights that often decide whether a company becomes an
industry leader or just another name in the crowd.
8. Write notes on:
(a) Accounting for Leases
(b) Target Costing.
Ans: A New Beginning
Imagine youve just opened a little café. You dream of serving coffee so aromatic that even
passersby cant resist stepping in. But heres the twistyou dont own the coffee machine,
the tables, or even the building! Instead, youve got agreements with others that allow you
to use their assets without outright buying them. This arrangement is what we call a lease.
On the other hand, when youre trying to price your cup of cappuccino, you dont just
randomly pick a number. You think: Customers will only pay ₹100 for this coffee. If I want to
make a profit of ₹20, I must manage my costs carefully so that they dont exceed ₹80.
Thats exactly what Target Costing is all about.
So, today well explore Accounting for Leases and Target Costing in the form of simple
stories, supported by diagrams to lock the ideas in your memory.
Part (a) Accounting for Leases
1. The Story of Leases
A lease is like renting a house. You dont own it, but you get to live in it and enjoy its
benefits, as long as you follow the agreement. Similarly, in business, companies often lease
assetslike buildings, cars, or machinesinstead of buying them.
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But accounting is all about rules, and rules want to know:
Should we treat this leased asset as if the company owns it, or just as a rented item?
2. Types of Leases
There are two main types:
1. Finance Lease (Capital Lease):
o Think of it like renting a house for 20 years with a clause that, at the end, you
can buy it at a nominal price.
o Here, all the risks and rewards of ownership are transferred to the lessee (the
person who uses the asset).
o In accounting, the lessee shows the leased asset on their balance sheet as if
they own it.
2. Operating Lease:
o Like renting a flat for just 2 years. You enjoy it temporarily, then return it.
o Risks and rewards stay with the owner (lessor).
o The lessee just records rent expense in their books.
3. Accounting Entries
Finance Lease (Lessees Books):
o Record the asset on the balance sheet.
o Record a liability for lease payments.
o Depreciate the asset just like owned property.
o Pay interest on liability.
Operating Lease (Lessees Books):
o No asset or liability recorded.
o Simply record lease rent expense every year.
4. Diagram: Finance Lease vs Operating Lease
+-------------------+ +-------------------+
| Finance Lease | | Operating Lease |
+-------------------+ +-------------------+
| Asset shown in | | Asset NOT shown |
| Balance Sheet | | in Balance Sheet |
| Depreciation done | | Rent expense only |
| Lease Liability | | No liability |
+-------------------+ +-------------------+
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5. Why Important?
For companies, lease accounting ensures true financial position is reflected.
If youre using an asset as if its your own, the world should see it on your books.
Investors rely on this information to judge how asset-heavy or debt-heavy a
business is.
Part (b) Target Costing
1. The Story of Target Costing
Lets go back to your café. You want to sell a coffee at ₹100. You also want a profit of ₹20.
Simple math tells you:
Target Cost = Selling Price Desired Profit = ₹100 ₹20 = ₹80.
So, if your current cost is ₹90, you must work hard to reduce costs by ₹10 without hurting
quality. That is the art of Target Costing.
2. Definition
Target Costing is a cost management technique in which the selling price is determined by
market conditions, and from that, the desired profit is subtracted to arrive at the target
cost. Businesses must then design their products and operations to achieve that target.
3. Steps in Target Costing
1. Identify the Market Price What customers are willing to pay.
2. Set Desired Profit Margin The profit you want to earn.
3. Calculate Target Cost Selling Price Profit.
4. Compare with Current Cost Is current cost higher or lower?
5. Take Action Use value engineering, better design, cheaper material (without
quality loss), process improvement, etc.
4. Diagram: Steps in Target Costing
Market Price (₹100)
↓
Desired Profit (₹20)
↓
Target Cost (₹80)
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↓
Compare with Actual Cost (say ₹90)
↓
Cost Reduction Efforts (Bring it to ₹80)
5. Advantages of Target Costing
Forces efficiency and innovation.
Ensures products are market-driven (not overpriced).
Aligns company goals with customer expectations.
Encourages teamwork between design, production, and marketing.
6. Limitations
Requires accurate market research.
May pressure employees to cut costs, sometimes risking quality.
Works best in competitive markets, not monopolistic ones.
Putting It All Together
Both Accounting for Leases and Target Costing are about smart financial decisions:
Leasing allows businesses to use assets without heavy investment upfront, but
accounting rules make sure financial statements remain transparent.
Target Costing helps businesses stay competitive in the market by controlling costs
and focusing on customer-driven pricing.
So whether youre running a café, a manufacturing plant, or a tech company, these tools
help you balance dreams with realityensuring sustainability, profitability, and growth.
Combined Diagram: Quick Snapshot
BUSINESS DECISIONS
┌───────────────────┐
│ │
│ Leasing Assets │
│ (Accounting Rules)│
│ │
└───────┬───────────┘
│
▼
┌───────────────────┐
│ │
│ Target Costing │
│ (Cost Management) │
│ │
└───────────────────┘
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Final Words
Think of it this way:
Leases let you borrow the strength of big assets without emptying your pockets.
Target Costing ensures you price smartly so customers are happy, and your business
still makes money.
Together, theyre like the backbone of practical business strategyhelping companies walk
the fine line between opportunity and discipline.
This paper has been carefully prepared for educaonal purposes. If you noce any mistakes or have
suggesons, feel free to share your feedback.
