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  Problems of the Vas

Introduction to the Problems of the VAS

The proposal to involve a VAS as part of the annual report was primarily greeted with enthusiasm. At the height of its popularity, it was involved in the annual reports of approximately one-third of the hundred largest listed businesses. Though, this height has long passed and now the VAS has become an unusual sighting in the financial reporting landscape.

Even though the VAS (value added statement) just rearranges information that contained in the conventional income statement, the influence of this rearrangement is to increase a number of thorny theoretical and practical problems. Several of these problems stay unresolved, leaving doubts over its helpfulness.

The more significant of these problems are as follow:

  • The team concept

A few persons dismiss the idea of a business being a team of stakeholders working jointly as no more than a public relations exercise. It is seen like a misguided effort to obscure the underlying conflict among suppliers of capital and employees.

  • Team membership

Yet if the team concept is accepted, there is room for debate regarding to the nature and composition of the team. For instance, suppliers may work intimately with a business to make sure the timely flow of goods and services however cannot be considered as team members due to the way in which value added is computed. Though, they may have a stronger case for being regarded team members than, say, government that may have slight contact with a business, apart from while collecting taxes.

  • The classification of items

The VAS (value added statement) is beset with classification problems. For instance, gross wages paid to employees (i.e. wages before tax and national insurance payments are deducted) are generally displayed under the section 'To employees'. However it is the government which receives the taxation and National Insurance payments.

Employees will get their wages net of taxation and National Insurance, along with the employer paying the deductions directly to the government.

  • The importance of profit

Under a capitalist economy, profit will all the time be at the heart of financial reporting. Shareholders, that are the owners and principal risk takers, are regarded with the returns from their investment. If managers do not maintain this firmly in mind and give shareholders along with acceptable returns, they are possible to be replaced through managers who will.

  • Loss of focus

There is a risk that if managers turn into too concerned with rising value added this may have an adverse influence on profit.

At last, it is worth making the point that the profit produced by a business is possible to be significant to several stakeholders and not just to shareholders. Lenders will be interested in the profit produced to allow them to assess the riskiness of their loan; governments will be interested for taxation purposes; and employees will be interested for the assessment of probable future pay raises and job security. Thus far, there has been a failure to illustrate that value added is as helpful for decision-making purposes as profit.

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