Distribution of Gross Value addition

As per the concept of Value added statement, gross value added is distribute to employees in form of salaries and wages, to government in form of taxes and duties, to financer in form of interest, to shareholders in form of dividend and balance remained in business in form of retained earning including depreciation.

Value Added Statement:

A simplified financial statement that shows how much wealth has been created by a company. A value added statement calculates total output by adding sales, changes in stock, and other incomes, then subtracting depreciation, interest, taxation, dividends, and the amounts paid to suppliers and employees. Such value added can be taken to represent in monetary terms the net output of an enterprise. This is the difference between the total value of its output and the value of the inputs of materials and services obtained from other enterprises. The value added is seen to be due to the combined efforts of capital, management and employees, and the statement shows how the value added has been distributed to each of these factors.

Advantages of Value Added Statement –

1. It is an alternative performance measure to profit and therefore helps in the comparison of the performance of the company. Value added is superior performance measure because it pays attention on inputs which are under the control of the management.

2. By employing various productivity measures like value added per rupee of capital employed, value added per rupee sales, value added per employee etc., it helps in judging the productivity of the company.

3. Resource allocation decisions are normally based on the concept of maximizing profit but value added statement provides a better alternative by focusing on other factors rather than just profit.

4. It also helps in devising the incentives schemes for the employees of the company in a better way.

5. It reflects a broader view of the company’s objectives and responsibilities rather than just focusing only on the small aspects about the company

Limitation of Value added Statement

There is a duality associated with the VAS in that it reports on the calculation of value added and its application among the stakeholders in the company. Many inconsistencies are found in practice in both the calculation and presentation of value added in the VAS. These inconsistencies make the statement confusing, non-comparable and unverifiable. The main areas of inconsistencies include, but are not limited to, the following:

1. The treatment of depreciation resulting in gross and net value added;

2. The treatment of taxes like pay-as-you-earn, fringe benefits and other benefits in the employees’ share of value added;

3. The timing of recognition of value added – production or sales;

4. The treatment of taxes such as VAT /GST and deferred tax; and

5. The treatment of non-operating items.

This has resulted in a company having more than one possible value added figure and that the allocation of value added between the various stakeholders can be presented in different ways.