FINANCIAL ACCOUNTING AND REPORTING PDF

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Financial Accounting and Reporting is the most up to date text on the market. Now fully updated in its fourteenth edition, it includes extensive coverage of International Accounting Standards (IAS) and International Financial Fourteenth Edition Fourteenth Edition Reporting Standards (IFRS). FINANCIA...

Description

Financial Accounting and Reporting is the most up to date text on the market. Now fully updated in its fourteenth edition, it includes extensive coverage of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS).

Financial Accounting and Reporting offers: • Academic rigour combined with an engaging and accessible style • Coverage of International Financial Reporting Standards • Illustrations taken from real published accounts • An excellent range of review questions • Extensive references • A section on the analysis of accounts • Chapters covering such issues as corporate governance, ethics and sustainability: environmental and social reporting

New for this edition: • Fully updated to May 2010 • Updated coverage of International Financial Reporting Standards • More examples of extracts from real financial reports • New, additional questions and exercises in selected chapters

Substantial revisions to: • Published financial statements • Regulatory and conceptual frameworks • Analysis of accounts • Corporate governance • Ethical behaviour and the implication for accountants

Financial Accounting and Reporting comes with MyAccountingLab, a state of the art online learning resource that gives students access to: • A personalised study plan that highlights where you excel and where you need to improve so you can study more efficiently • Practice problems with hundreds of different variables which allow you to practise over and over again with no repetition

FINANCIAL ACCOUNTING AND REPORTING

This market-leading text offers students a clear, well-structured and comprehensive treatment of the subject. Supported by illustrations and exercises, the book provides a strong balance of theoretical and conceptual coverage. Students using this book will gain the knowledge and skills to help them apply current standards, and critically appraise the underlying concepts and financial reporting methods.

Fourteenth Edition

Visit www.myaccountinglab.com to utilise these online resources. For more information on how to register see inside the book.

Jamie Elliott is a Director with Deloitte. Prior to this he has lectured at university on undergraduate degree programmes and as an assistant professor on MBA and Executive programmes at the London Business School.

Elliott Elliott

Barry Elliott is a training consultant. He has extensive teaching experience at undergraduate, postgraduate and professional levels in China, Hong Kong, New Zealand and Singapore. He has wide experience as an external examiner both in higher education and at all levels of professional education.

Fourteenth Edition

FINANCIAL ACCOUNTING AND REPORTING Barry Elliott Jamie Elliott

Financial Accounting and Reporting

We work with leading authors to develop the strongest educational materials in business and finance bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk

Financial Accounting and Reporting FOURTEENTH EDITION

Barry Elliott and Jamie Elliott

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 1993 Second edition 1996 Third edition 1999 Fourth edition 2000 Fifth edition 2001 Sixth edition 2002 Seventh edition 2003 Eighth edition 2004 Ninth edition 2005 Tenth edition 2006 Eleventh edition 2007 Twelfth edition 2008 Thirteenth edition 2009 Fourteenth edition 2011 © Prentice Hall International UK Limited 1993, 1999 © Pearson Education Limited 2000, 2011 The rights of Barry Elliott and Jamie Elliott to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. Pearson Education is not responsible for the content of third party internet sites. ISBN: 978-0-273-74444-3 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 10 14

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Typeset in 10/12 Ehrhardt MT by 35 Printed by Ashford Colour Press Ltd., Gosport

Brief contents

Preface and acknowledgements Guided tour of MyAccountingLab Part 1 INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1 2 3 4

xx xxv

1

Accounting and reporting on a cash flow basis Accounting and reporting on an accrual accounting basis Income and asset value measurement: an economist’s approach Accounting for price-level changes

3 22 40 59

Part 2 REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY

99

5 6 7 8 9

Financial reporting – evolution of global standards Concepts – evolution of a global conceptual framework Ethical behaviour and implications for accountants Preparation of statements of comprehensive income and financial position Annual Report: additional financial statements

101 129 156 186 223

Part 3 STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE

255

10 11 12 13 14 15 16 17 18 19

257 283 312 343 375 404 441 461 497 523

Share capital, distributable profits and reduction of capital Off balance sheet finance Financial instruments Employee benefits Taxation in company accounts Property, plant and equipment (PPE) Leasing R&D; goodwill; intangible assets and brands Inventories Construction contracts

vi • Brief Contents

Part 4 CONSOLIDATED ACCOUNTS 20 Accounting for groups at the date of acquisition 21 Preparation of consolidated statements of financial position after the date of acquisition 22 Preparation of consolidated statements of comprehensive income, changes in equity and cash flows 23 Accounting for associates and joint ventures 24 Accounting for the effects of changes in foreign exchange rates under IAS 21

547 549 568 583 603 623

Part 5 INTERPRETATION

639

25 26 27 28 29

641 668 696 736 782

Earnings per share Statements of cash flows Review of financial ratio analysis Analytical analysis – selective use of ratios An introduction to financial reporting on the Internet

Part 6 ACCOUNTABILITY

799

30 Corporate governance 31 Sustainability – environmental and social reporting

801 838

Index

884

Full contents

Preface and acknowledgements Guided tour of MyAccountingLab

Part 1 INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1 Accounting and reporting on a cash flow basis 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12

Introduction Shareholders What skills does an accountant require in respect of external reports? Managers What skills does an accountant require in respect of internal reports? Procedural steps when reporting to internal users Agency costs Illustration of periodic financial statements prepared under the cash flow concept to disclose realised operating cash flows Illustration of preparation of statement of financial position Treatment of non-current assets in the cash flow model What are the characteristics of these data that make them reliable? Reports to external users Summary Review questions Exercises References

2 Accounting and reporting on an accrual accounting basis 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8

Introduction Historical cost convention Accrual basis of accounting Mechanics of accrual accounting – adjusting cash receipts and payments Subjective judgements required in accrual accounting – adjusting cash receipts in accordance with lAS 18 Subjective judgements required in accrual accounting – adjusting cash payments in accordance with the matching principle Mechanics of accrual accounting – the statement of financial position Reformatting the statement of financial position

xx xxv

1 3 3 3 4 4 5 5 8 8 12 14 15 16 16 17 18 21

22 22 23 24 24 25 27 28 28

viii • Full Contents

2.9 2.10

Accounting for the sacrifice of non-current assets Reconciliation of cash flow and accrual accounting data Summary Review questions Exercises References

3 Income and asset value measurement: an economist’s approach 3.1 3.2 3.3 3.4 3.5 3.6 3.7

Introduction Role and objective of income measurement Accountant’s view of income, capital and value Critical comment on the accountant’s measure Economist’s view of income, capital and value Critical comment on the economist’s measure Income, capital and changing price levels Summary Review questions Exercises References Bibliography

4 Accounting for price-level changes 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11

Introduction Review of the problems of historical cost accounting (HCA) Inflation accounting The concepts in principle The four models illustrated for a company with cash purchases and sales Critique of each model Operating capital maintenance – a comprehensive example Critique of CCA statements The ASB approach The IASC/IASB approach Future developments Summary Review questions Exercises References Bibliography

Part 2 REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY 5 Financial reporting – evolution of global standards 5.1 5.2 5.3 5.4

Introduction Why do we need financial reporting standards? Why do we need standards to be mandatory? Arguments in support of standards

29 32 34 34 35 38

40 40 40 43 46 47 53 53 55 55 56 57 58

59 59 59 60 60 61 65 68 79 81 83 84 86 87 88 97 97

99 101 101 101 102 104

Full Contents • ix

5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17

Arguments against standards Standard setting and enforcement in the UK under the Financial Reporting Council (FRC) The Accounting Standards Board (ASB) The Financial Reporting Review Panel (FRRP) Standard setting and enforcement in the US Why have there been differences in financial reporting? Efforts to standardise financial reports What is the impact of changing to IFRS? Progress towards adoption by the USA of international standards Advantages and disadvantages of global standards for publicly accountable entities How do reporting requirements differ for non-publicly accountable entities? Evaluation of effectiveness of mandatory regulations Move towards a conceptual framework Summary Review questions Exercises References

6 Concepts – evolution of a global conceptual framework 6.1 6.2 6.3 6.4 6.5 6.6

Introduction Historical overview of the evolution of financial accounting theory FASB Concepts Statements IASC Framework for the Presentation and Preparation of Financial Statements ASB Statement of Principles 1999 Conceptual framework developments Summary Review questions Exercises References

7 Ethical behaviour and implications for accountants 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13

Introduction The meaning of ethical behaviour Financial reports – what is the link between law, corporate governance, corporate social responsibility and ethics? What does the accounting profession mean by ethical behaviour? Implications of ethical values for the principles versus rules based approaches to accounting standards The principles based approach and ethics The accounting standard-setting process and ethics The IFAC Code of Ethics for Professional Accountants Ethics in the accountants’ work environment – a research report Implications of unethical behaviour for financial reports Company codes of ethics The increasing role of whistle-blowing Why should students learn ethics?

104 105 106 106 108 109 113 117 118 119 119 123 125 125 126 127 127

129 129 130 134 137 138 149 150 152 153 154

156 156 156 158 159 161 163 164 165 168 169 172 174 178

x • Full Contents

Summary Review questions Exercises References

8 Preparation of statements of comprehensive income and financial position 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8

Introduction The prescribed formats – the statement of comprehensive income The prescribed formats – the statement of financial position Statement of changes in equity Has prescribing the formats meant that identical transactions are reported identically? The fundamental accounting principles underlying statements of comprehensive income and statements of financial position What is the difference between accounting principles, accounting bases and accounting policies? What does an investor need in addition to the financial statements to make decisions? Summary Review questions Exercises References

9 Annual Report: additional financial statements 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8

Introduction The value added by segment reports Detailed review and evaluation of IRFS 8 – Operating Segments IFRS 5 – meaning of ‘held for sale’ IFRS 5 – implications of classification as held for sale Meaning and significance of ‘discontinued operations’ IAS 10 – Events after the reporting period Related party disclosures Summary Review questions Exercises References

179 179 182 184

186 186 187 194 197 198 201 201 206 210 211 212 222

223 223 223 224 232 232 233 235 237 241 241 242 253

Part 3 STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE

255

10 Share capital, distributable profits and reduction of capital

257

10.1 10.2 10.3 10.4 10.5 10.6

Introduction Common themes Total owners’ equity: an overview Total shareholders’ funds: more detailed explanation Accounting entries on issue of shares Creditor protection: capital maintenance concept

257 257 258 259 262 263

Full Contents • xi

10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15

Creditor protection: why capital maintenance rules are necessary Creditor protection: how to quantify the amounts available to meet creditors’ claims Issued share capital: minimum share capital Distributable profits: general considerations Distributable profits: how to arrive at the amount using relevant accounts When may capital be reduced? Writing off part of capital which has already been lost and is not represented by assets Repayment of part of paid-in capital to shareholders or cancellation of unpaid share capital Purchase of own shares Summary Review questions Exercises References

11 Off balance sheet finance 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9

Introduction Traditional statements – conceptual changes Off balance sheet finance – its impact Illustrations of the application of substance over form Provisions – their impact on the statement of financial position ED IAS 37 Non-financial Liabilities ED/2010/1 Measurement of Liabilities in IAS 37 Special purpose entities (SPEs) – lack of transparency Impact of converting to IFRS Summary Review questions Exercises References

12 Financial instruments 12.1 12.2 12.3 12.4 12.5 12.6

Introduction Financial instruments – the IASB’s problem child IAS 32 Financial Instruments: Disclosure and Presentation IAS 39 Financial Instruments: Recognition and Measurement IFRS 7 Financial Statement Disclosures Financial instruments developments Summary Review questions Exercises References

13 Employee benefits 13.1 13.2 13.3 13.4

Introduction Greater employee interest in pensions Financial reporting implications Types of scheme

264 264 265 265 267 267 268 273 274 277 277 277 282

283 283 283 284 286 289 297 303 304 305 306 307 308 311

312 312 312 315 320 330 333 336 337 338 342

343 343 343 344 344

xii • Full Contents

13.5 13.6 13.7 13.8 13.9 13.10 13.11 13.12 13.13 13.14 13.15 13.16 13.17 13.18 13.19 13.20 13.21 13.22 13.23 13.24

Defined contribution pension schemes Defined benefit pension schemes IAS 19 (revised) Employee Benefits The liability for pension and other post-retirement costs The statement of comprehensive income Comprehensive illustration Plan curtailments and settlements Multi-employer plans Disclosures Other long-service benefits Short-term benefits Termination benefits IFRS 2 Share-Based Payment Scope of IFRS 2 Recognition and measurement Equity-settled share-based payments Cash-settled share-based payments Transactions which may be settled in cash or shares Transitional provisions IAS 26 Accounting and Reporting by Retirement Benefit Plans Summary Review questions Exercises References

14 Taxation in company accounts 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9 14.10 14.11 14.12

Introduction Corporation tax Corporation tax systems – the theoretical background Corporation tax systems – avoidance and evasion Corporation tax – the system from 6 April 1999 IFRS and taxation IAS 12 – accounting for current taxation Deferred tax FRS 19 (the UK standard on deferred taxation) A critique of deferred taxation Examples of companies following IAS 12 Value added tax (VAT) Summary Review questions Exercises References

15 Property, plant and equipment (PPE) 15.1 15.2 15.3 15.4 15.5 15.6

Introduction PPE – concepts and the relevant IASs and IFRSs What is PPE? How is the cost of PPE determined? What is depreciation? What are the constituents in the depreciation formula?

346 347 349 349 352 353 355 355 356 356 357 358 359 360 360 360 363 363 364 364 367 368 370 374

375 375 375 376 377 380 381 382 384 392 393 396 396 399 399 400 402

404 404 404 405 406 408 411

Full Contents • xiii

15.7 15.8 15.9 15.10 15.11 15.12 15.13 15.14 15.15 15.16

How is the useful life of an asset determined? Residual value Calculation of depreciation Measurement subsequent to initial recognition IAS 36 Impairment of Assets IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations Disclosure requirements Government grants towards the cost of PPE Investment properties Effect of accounting policy for PPE on the interpretation of the financial statements Summary Review questions Exercises References

411 412 412 416 418 424 424 425 427 428 430 430 431 440

16 Leasing

441

16.1 16.2 16.3 16.4 16.5 16.6 16.7

441 441 443 444 445 446

Introduction Background to leasing Why was the IAS 17 approach so controversial? IAS 17 – classification of a lease Accounting requirements for operating leases Accounting requirements for finance leases Example allocating the fin...