A financial statement shows how much wealth a reporting entity has been able to create for its shareholders within an accounting period through utilization of its capital, employees and other resources. Whereas, the value added technique is considered to be an effective tool for measuring the performance of a company as it displays an additional financial information which can supplement the need of various stakeholders.
Therefore, you may say that a value added statement reports value created by an enterprise for different stakeholders including shareholders through the collective effort of capital, management manpower and other resources.
Historical Background of Value Added Statement
The concept of Value Added (VA) is originated in U.S. and the Value Added Statement (VAS) has come to be seen with greater frequency in Europe and more particularly in Britain. In 1975, the Accounting Standard Steering Committee (ASSC) published the Corporate Report containing the suggestions for British companies to present VAS in addition to the traditional profit and loss account. In India, Britannia Industries Limited (An Indian food-products Corporation based in Kolkata) and some others prepare VAS as supplementary financial statement in their annual reports.
Value Added Statement is now being considered as a broad measure of judging the corporate performance than conventional measures based on traditional accounting system of an enterprise. VAS is regarded as an important part of Corporate Social Reporting (CSR) which provide additional information to satisfy all stakeholders of the enterprise.
Is Value Added Statement (VAS) substitute to Profit and Loss Account?
Is it mandatory to prepare VAS?:
The Value Added Statement is nothing but a financial statement which displays how much value has been created by an enterprise during a particular period and application of that created value to the following five stakeholders including shareholders:
To Pay:
- Employees;
- Directors;
- Government;
- Providers of Capital; and
- To Provide for maintenance and Expansion of the company.
The profit and loss account basically concentrate on net profit which is calculated on entity concept and more attributable towards shareholders. Whereas the VAS is wider in nature and created on enterprise concept or enterprise theory with an objective that all ascertaining profits attributable to five more stakeholders in addition to shareholders. Accordingly, the VAS puts profit in a different perspective and focuses on the success of a company in creating wealth and generating national income.
If you look closer and compare profit and loss account with the value added statement then you will find that VAS is just reproduced statement of P/L account in a different way to show how much value (wealth) has been allocated to stakeholders.
But, you should remind one thing that VAS can never substitute the Profit and Loss account which is a part of Financial Statement in accordance with sub-clause (ii) of clause (40) of section 2 of the Companies Act, 2013. Consequently, VA statement may be shown as supplementary statement of financial information and is not a mandatorily requirement for companies.
Definition of the term Gross/Net Value Added
What is Value Added?:
The term value added may be simply defined as a positive difference between the value of goods or services produced (i.e. the value of output) and the value of services purchased (i.e. the value of inputs) from other firms in producing output. In equation form it can be stated as follows:
Value Added (VA) = Value of Output (VO) – Value of Inputs (VI)
The Value Added may be classified into two categories: Gross value added (GVA) and Net value added (NVA).
a) Gross Value Added (GVA): The GVA refers to sales plus income from other services less bought-in-materials and services purchased from outside suppliers; and
b) Net Value Added (NVA): The NVA refers to the difference between GVA and Depreciation. In other words, NVA is the sum of the value added to employees, to providers of loan capital, to Government and to owners.
Why most of Companies prefers to report GVA and not the NVA
The majority of British companies as well as Indian companies prefer to present their value added statement as a report on Gross Value Added (GVA) rather than Net Value Added (NVA). There are two most important reasons for reporting GVA rather than NVA by companies:
i) Gross Value Added or Total Value Added reports depreciation along with retained profits. GVA shows that depreciation is also available for reinvestment in addition to the retained earnings and reserves for the maintenance and expansion of the company.
Whereas, in case of NVA, depreciation is treated as expenses and therefore denotes that it is not available for re-investment purpose by the enterprise.
ii) The gross measures of national income is also liked by the Economists rather than the net reporting. Accordingly, the GVA statement is congruent with the economist’s views and preferences for gross measures of national income. In other words, reporting GVA indicates the company’s contribution to national income.
How to prepare Gross and Net Value Added Statement
The Value Added Statement (VAS) can be prepared either in Vertical Form like a Report or Horizontal Form like an Account. However, many companies prefer to report GVA/NVA in Vertical form rather horizontal form. Further, the apex body of Accountancy Profession in India, the Institute of Chartered Accountants of India (ICAI) has also illustrated and recommends to prepare the VAS as report. If you are student of CA Institute you may refer the study material, Revision Test Papers (RTPs) and Practice Manual for the same.
The conventional VAS is divided into two parts viz. the first part shows the calculation of Gross and/or Net value added and the second part displays the application of such value added to different stakeholders.
AUBSP Pvt. Ltd.
VALUE ADDED STATEMENT
for the year ended March 31, 2018
| Particulars | Amount (₹) | Amount (₹) |
|---|---|---|
| Sales | XXXXX | |
| Less: Cost of Bought in Material and Services: | ||
| 1) Consumption of raw materials | XXXX | |
| 2) Consumption of stores | XXXX | |
| 3) Increase in Stock | XXXX | |
| 4) Audit fees | XXXX | |
| 5) Provision for doubtful debts | XXXX | |
| 6) Interest on Working Capital Loans from Bank | XXXX | |
| 7) Interest on bank overdraft | XXXX | |
| 8) Other Manufacturing Expenses | XXXX | XXXXX |
| Value added by manufacturing and trading activities | XXXXX | |
| Add: Other income | XXXXX | |
| Gross/Total value added | XXXXX | |
| Less: Depreciation | XXXXX | |
| Net Value Added | XXXXX | |
| Application of Value Added: | ||
| To Pay Employees Salaries, Wages, Bonus, Gratuities and Other Benefits | XXXXX | |
| To Pay Directors Salaries, remuneration and Commission | XXXXX | |
| To Pay Government Income Tax, Wealth Tax, Corporation Tax, Tax on distributed profits, Cess and Local Taxes | XXXXX | |
| To Pay Providers of Capital Interest on debenture, Interest on borrowings, Interest on Fixed Loans from Financial Institutions, Equity Dividend, Preference Dividend | XXXXX | |
| To Provide for Maintenance and Expansion of the Company Depreciation, Retained profit, General Reserve, Fixed Assets Replacement Reserve, Deferred Tax Account | XXXXX | |
| XXXXX |
Meaning and Treatment of some items for VA Statement Preparation
While preparing the total value added statement, you should think about the each item that whether it will be treated as application or expense. Let us discuss the treatment of some items while preparing VA statement of a company.
1) Cost of Bought in Material and Services:
The cost of bought in material and services shall include the following items i.e. deducted from sales/turnover to arrive value added by manufacturing and trading activities:
1) Consumption of raw materials
2) Consumption of stores
3) Increase in Stock
4) Other Manufacturing Expenses
5) Audit fees
6) Provision for doubtful debts
7) Interest on Working Capital Loans from Bank
8) Interest on bank overdraft
The bank overdraft is a temporary source of finance and therefore shall be considered as the provision of a banking service rather than of capital. Accordingly, interest on bank overdraft shall be shown by way of deduction from sales and as a part of ‘cost of bought in material and services’.
2) Salaries, Wages, Bonus, Gratuities and Other Benefits:
These items shall be treated as the value addition towards employees of a company. Therefore, it should be excluded from the cost of bought in material and services. Staff welfare expenses is also considered as application not expense. However, official tour and traveling is considered as expense of the entity.
Employees means all persons under employer employee relationship e.g. Permanent/Full time worker, Temporary/Part time workers, Skilled or Unskilled workers/employees, casual labour and traders etc. irrespective of payment made to them in cash or in kind (Perquisite).
Note that Auditors are not employees of a company and therefore the audit fee shall be treated administration expenses.
3) Government Taxes:
There are mainly two types of government taxes viz. recoverable and non-recoverable for the purpose of VA reporting. Taxes which are recovered in sales shall be treated as expense whereas those taxes which are not recovered shall be shown as contribution towards government.
A) Recoverable Taxes: You may assume that Service Tax, Sales Tax, Excise Duty and Value Added Tax (VAT) are recoverable taxes and therefore should be shown as expense. In other words, these taxes are not contribution towards government since they are recoverable.
B) Non Recoverable Taxes: Income Tax, Wealth Tax, Corporation Tax, Tax on distributed profits i.e. CDT, Cess and Local Taxes are non-recoverable taxes and therefore should be displayed as application towards government.
Note that the provision for Deferred Tax Liability (DTL) is considered as application towards entity and shall not be shown as contribution for government.
4) Salaries and commission to directors:
Any payments made to directors including salaries, remuneration, commission, sitting fee etc. shall be shown as value addition for them. However, the directors sitting fee may also be treated as expense. In other words, the Directors sitting fees can either be treated as application or expenses.
Directors include whole time, part time, managing directors, executive directors, non-executive director etc. and the benefit to them may either be in cash or in kind.
5) Depreciation:
The treatment of depreciation is depends on whether you are going to calculate total value added i.e. GVA or NVA. If total value added is to be calculated then depreciation should be treated as revenue and shown as application towards equity. However, in case of NVA it is treated as expenses because NVA can be defined as GVA less depreciation.
6) Interest and Other Charges:
Interest paid to debenture holders, Interest on Fixed Loans from Financial Institutions shall be treated as application towards financiers i.e. Providers of Capital.
7) Dividend:
Dividend payable or paid shall be treated as application towards shareholders. Shareholders means equity and preference share holder. Hence, all kind of dividend will be included in the application.
In professional examinations like CA Final, you will be provided with the summarized profit and loss account of a company for the year ended and asked to prepare a Gross Value Added Statement of the Company and show the reconciliation between Gross Value Added and Profit and Loss before taxation.
Note that in recent CA Final examinations, the CA Institute provides last 5 years VA statement in question paper and asking to calculate the amount of incentive payable to the employees and the application of Value Added for the year ended after payment of the incentive.