Intermediate Accounting:

Transcription

1 Intermediate Accounting: IFRS Edition Third Edition DONALD E. KIESO PHD, CPA Northern Illinois University DeKalb, Illinois JERRY J. WEYGANDT PHD, CPA University of Wisconsin Madison Madison, Wisconsin TERRY D. WARFIELD, PHD University of Wisconsin Madison Madison, Wisconsin WlLEY

2 Contents 1 Financial Reporting and Accounting Standards 1-1 REVOLUTION IN INTERNATIONAL FINANCIAL REPORTING 1-2 Global Markets 1-3 Financial Statements and Financial Reporting 1-4 Accounting and Capital Allocation 1-4 High-Quality Standards 1-5 Objective of Financial Reporting 1-6 General-Purpose Financial Statements 1-6 Equity Investors and Creditors 1-6 What Do the Numbers Mean? Don't Forget Stewardship 1-6 Entity Perspective 1-6 Decision-Usefulness 1-7 Standard-Setting Organizations 1-7 International Organization of Securities Commissions (IOSCO) 1-8 What Do the Numbers Mean? How Is It Going? 1-8 International Accounting Standards Board (IASB) 1-9 Hierarchy of IFRS 1-11 Financial Reporting Challenges 1-12 IFRS in a Political Environment 1-12 What Do the Numbers Mean? Fair Consequences? 1-13 The Expectations Gap 1-13 Significant Financial Reporting Issues 1-14 Ethics in the Environment of Financial Accounting 1-14 International Convergence 1-15 What Do the Numbers Mean? Can You Do That? 1-15 Conclusion 1-16 Global Accounting Insights Conceptual Framework for Financial Reporting 2-1 WHAT IS IT? 2-2 Conceptual Framework 2-3 Need for a Conceptual Framework 2-3 What Do the Numbers Mean? What's Your Principle? 2-4 Development of a Conceptual Framework 2-4 Overview of the Conceptual Framework 2-5 Basic Objective 2-6 Fundamental Concepts 2-6 Qualitative Characteristics of Accounting Information 2-6 What Do the Numbers Mean? Unfaithful For 20 Years 2-10 What Do the Numbers Mean? Show Me the Earnings! 2-12 Basic Elements 2-12 Assumptions 2-13 Economic Entity Assumption 2-13 Going Cancern Assumption 2-14 Monetary Unit Assumption 2-14 Periodicity Assumption 2-15 Accrual Basis of Accounting 2-15 Measurement, Recognition, and Disclosure Concepts 2-16 Basic Principles of Accounting 2-16 Cost Constraint 2-20 What Do the Numbers Mean? Let's Be Prudent 2-21 Summary ofthestructure 2-21 Evolving Issue A Revised Conceptual Framework 2-22 Global Accounting Insights The Accounting Information System 3-1 NEEDED: A RELIABLE INFORMATION SYSTEM 3-2 Accounting Information System 3-3 Basic Terminology 3-4 Debits and Credits 3-4 The Accounting Equation 3-5 Financial Statements and Ownership Structure 3-7 The Accounting Cycle 3-8 Record and Summarize Basic Transactions 3-10 Journalizing 3-10 Posting 3-11 Chart ofaccounts 3-12 The Recording Process lllustrated 3-13 Trial Balance 3-18 What Do the Numbers Mean? Charge Management 3-19 Identify and Prepare Adjusting Entries 3-19 Typesof Adjusting Entries 3-20 Adjusting Entries for Deferrals 3-20 Adjusting Entries for Accruals 3-25 Adjusted Trial Balance 3-29 Preparing Financial Statements 3-30 What Do the Numbers Mean? 24/7 Accounting 3-31 Closing 3-32 Post-Closing Trial Balance 3-33 Reversing Entries An Optional Step 3-34 What Do the Numbers Mean? Hey, It's Complicated 3-35 The Accounting Cycle Summarized 3-35 Financial Statements for a Merchandising Company 3-36 Income Statement 3-36 Retained Earnings Statement 3-36 Statement of Financial Position 3-37 Closing Entries 3-38 Appendix 3A Cash-Basis Accounting versus Accrual-Basis Accounting 3-38 Conversion from Cash Basis to Accrual Basis 3-40 Service Revenue Computation 3-41 Operating Expense Computation 3-41 Theoretical Weaknesses of the Cash Basis 3-43 Appendix 3B Using Reversing Entries 3-43 xi

3 xii Contents Illustration of Reversing Entries Accruals 3-43 Illustration of Reversing Entries Deferrals 3-44 Summary of Reversing Entries 3-45 Appendix 3C Using A Worksheet: The Accounting Cycle Revisited 3-46 Worksheet Columns 3-46 Trial Balance Columns 3-46 Adjustments Columns 3-46 Adjustments Entered on the Worksheet 3-46 Adjusted Trial Balance 3-48 Income Statement and Statement of Financial Position Columns 3-48 Preparing Financial Statements from a Worksheet 3-49 Global Accounting Insights Income Statement and Related Information 4-1 FINANCIAL STATEMENTS ARE CHANGING 4-2 Income Statement 4-3 Usefulness of the Income Statement 4-3 Limitations of the Income Statement 4-4 Quality of Earnings 4-4 What Do the Numbers Mean? Four: The Loneliest Number 4-5 Content and Format of the Income Statement 4-5 Elements of the I ncome Statement 4-5 Intermediate Components of the Income Statement 4-6 Condensed Income Statements 4-8 What Do the Numbers Mean? You May Need a Map 4-8 Reporting Various Income Items 4-9 Gross Profit 4-9 Income from Operations 4-9 What Do the Numbers Mean? Are One-Time Charges Bugging You? 4-12 Income Before Income Tax 4-12 Net Income 4-13 Earnings per Share 4-13 Discontinued Operations 4-14 Allocation to Non-Controlling Interest 4-17 Summary 4-17 What Do the Numbers Mean? Different Income Concepts 4-18 Accounting Changes and Errors 4-19 Changes in Accounting Principle 4-19 Changes in Accounting Estimates 4-20 Corrections of Errors 4-20 Summary 4-20 Related Equity Statements 4-21 Retained Earnings Statement 4-21 Comprehensive Income Statement 4-22 Evolving Issue Income Reporting 4-23 Statement of Changes in Equity 4-24 Global Accounting Insights Statement of Financial Position and Statement of Cash Flows 5-1 HEY, IT DOESN'T BALANCE! 5-1 Statement of Financial Position 5-3 Usefulness of the Statement of Financial Position 5-3 Limitations of the Statement of Financial Position 5-4 Classification in the Statement of Financial Position 5-5 What Do the Numbers Mean? What Comes First? 5-6 Preparation of the Statement of Financial Position 5-14 What Do the Numbers Mean? Warning Signals 5-14 Statement of Cash Flows 5-16 Purpose of the Statement of Cash Flows 5-16 Content of the Statement of Cash Flows 5-16 What Do the Numbers Mean? Watch That Cash Flow 5-17 Preparation of the Statement of Cash Flows 5-18 Usefulness of the Statement of Cash Flows 5-21 Additional Information 5-24 Notes to the Financial Statements 5-24 Techniques of Disclosure 5 27 Other Guidelines 5-28 Evolving Issue Statement of Financial Position Reporting: Gross or Net? 5-29 Appendix 5A Ratio Analysis A Reference 5-30 Using Ratios to Analyze Performance 5-30 Global Accounting Insights Accounting and the Time Value of Money 6-1 HOW DO I MEASURE THAT? 6-2 Basic Time Value Concepts 6-3 Applications of Time Value Concepts 6-3 The Nature of Interest 6-4 Simple Interest 6-5 Compound Interest 6-5 What Do the Numbers Mean? A Pretty Good Start 6-6 Fundamental Variables 6-8 Single-Sum Problems 6-9 Future Value of a Single Sum 6-9 Present Value of a Single Sum 6-11 Solving for Other Unknowns in Single-Sum Problems 6-12 Annuities (Future Value) 6-14 Future Value of an Ordinary Annuity 6-14 Future Value of an Annuity Due 6-16 Examples of Future Value of Annuity Problems 6-18 Annuities (Present Value) 6-19 Present Value of an Ordinary Annuity 6-19 What Do the Numbers Mean? Up in Smoke 6-21 Present Value of an Annuity Due 6-21 Examples of Present Value of Annuity Problems 6-22 Other Time Value of Money Issues 6-24 Deferred Annuities 6-24

4 Contents xiii Valvation of Long-Term Bonds 6-26 Effective-Interest Method of Amortization of Bond Discount or Premium 6-27 Present Value Measurement Cash and Receivables 7-1 NO-TELL NORTEL 7-1 Cash 7-2 Reporting Cash 7-3 Summary of Cash-Related Items 7-4 What Do the Numbers Mean? Deep Pockets 7-5 Receivables 7-6 Recognition of Accounts Receivable 7-6 Measurement of the Transaction Price 7-7 Variable Consideration 7-7 Valuation of Accounts Receivable 7-10 Direct Write-Off Method for Uncollectible Accounts 7-10 Allowance Method for Uncollectible Accounts 7-11 Notes Receivable 7-14 Recognition of Notes Receivable 7-14 Valuation of Notes Receivable 7-18 What Do the Numbers Mean? Economic Consequences and Write-Offs 7-18 Other Issues Related to Receivables 7-19 Derecognition of Receivables 7-19 Presentation and Analysis 7-23 What Do the Numbers Mean? I'm Stil! Waiting 7-25 Appendix 7A Cash Controls 7-26 Using Bank Accounts 7-26 The Imprest Petty Cash System 7-27 Physical Protection of Cash Balances 7-28 Reconciliation of Bank Balances 7-28 Global Accounting Insights Valuation of Inventories: A Cost-Basis Approach 8-1 IT SHOULD BE EASY, BUT IT ISN'T! 8-1 Inventory Issues 8-3 Classification 8-3 Inventory Cost Flow 8-4 Inventory Control 8-6 Determining Cost of Goods Sold 8-7 What Do the Numbers Mean? Staying Lean 8-7 Goods and Costs Included in Inventory 8-7 Goods Included in Inventory 8-7 What Do the Numbers Mean? No Parking! 8-10 Costs Included in Inventory 8-10 Which Cost Flow Assumption to Adopt? 8-12 Specific Identification 8-12 Average-Cost 8-13 First-In, First-Out (FIFO) 8-14 Inventory Valuation Methods Summary Analysis 8-16 Effect of Inventory Errors 8-17 Ending Inventory Misstated 8-17 Purchases and Inventory Misstated 8-18 Appendix 8A LIFO Cost Flow Assumption 8-19 Last-In, First-Out (LIFO) 8-19 Inventory Valuation Methods Summary Analysis Inventories: Additional Valuation Issues 9-1 NOT WHAT IT SEEMS TOBE 9-2 Lower-of-Cost-or-Net Realizable Value (LCNRV) 9-3 Net Realizable Value 9-3 Illustration of LCNRV 9-3 Methods ofapplying LCNRV 9-4 Recording Net Realizable Value Instead of Cost 9-5 Use of an Allowance 9-6 Recovery of Inventory Loss 9-6 Evaluation of the LCNRV Rule 9-7 Valuation Bases 9-7 Net Realizable Value 9-7 Relative Standalone Sates Value 9-10 Purchase Commitments A Special Problem 9-11 The Gross Profit Method of Estimating Inventory 9-12 Computation of Gross Profit Percentage 9-13 Evaluation of Gross Profit Method 9-15 What Do the Numbers Mean? The Squeeze 9-15 Retail Inventory Method 9-15 Retail-Method Concepts 9-16 Retail Inventory Method with Markups and Markdowns Conventional Method 9-17 Special Items Relating to Retail Method 9-19 Evaluation of Retail Inventory Method 9-20 Presentation and Analysis 9-20 Presentation of Inventories 9-21 Analysis of Inventories 9-22 Global Accounting Insights Acquisition and Disposition of Property, Plant, and Equipment 10-1 WATCH YOUR SPENDING 10-1 Property, Plant, and Equipment 10-3 Acquisition of Property, Plant, and Equipment 10-3 Cost of Land 10-4 Cost of Buildings 10-5 Cost of Equipment 10-5 Self-Constructed Assets 10-5 Interest Costs Düring Construction 10-6 Qualifying Assets 10-7 Capitalization Period 10-7 Amount to Capitalize 10-7 Comprehensive Example of Interest Capitalization 10-9 Special Issues Related to Interest Capitalization Observations What Do the Numbers Mean? What's in Your Interest? 10-11

5 xiv Contents Valuation of Property, Plant, and Equipment Cash Discounts Deferred-Payment Contra cts Lump Sum Purchases Issuance of Shares Exchanges of Non-Monetary Assets Government Grants Costs Subsequent to Acquisition Additions Improvements and Replacements Rearrangement and Reorganization Repairs What Do the Numbers Mean? Disconnected Summary of Costs Subsequent to Acquisition Disposition of Property, Plant, and Equipment Sale of Plant Assets Involuntary Conversion Depreciation, Impairments, and Depletion 11-1 HERE COME THE WRITE-OFFS 11-2 Depreciation A Method of Cost Allocation 11-3 Factors Involved in the Depreciation Process 11-4 Methods of Depreciation 11-5 Other Depreciation Issues 11-8 Component Depreciation 11-8 Depreciation and Partial Periods 11-9 Depreciation and Replacement of Property, Plant, and Equipment Revision of Depreciation Rates What Do the Numbers Mean? Depreciation Choices Impairments Recognizing Impairments Impairment lllustrations Reversalof Impairment Loss Cash-Generating Units Impairment of Assets to Be Disposed Of Depletion Establishing a Depletion Base Write-Offof ResourceCost Estimating Recoverable Reserves Liquidating Dividends Presentation on the Financial Statements Revaluations Recognizing Revaluations Revaluation Issues What Do the Numbers Mean? To Revalue or Not Presentation and Analysis Presentation of Property, Plant, Equipment, and Mineral Resources Analysis of Property, Plant, and Equipment Appendix IIA Revaluation of Property, Plant, and Equipment Revaluation of Land Revaluation 2019: Valuation Increase Revaluation 2020: Decrease below Historical Cost Revaluation 2021: Recovery of Impairment Loss Revaluation of Depreciable Assets Revaluation 2019: Valuation Increase Revaluation 2020: Decrease below Historical Cost 11 Revaluation 2021: Recovery of Impairment Loss Global Accounting Insights Intangible Assets 12-1 IS THIS SUSTAINABLE? 12-1 Intangible Asset Issues 12-2 Characteristics 12-2 Valuation 12-3 Amortization of Intangibles 12-4 Types of Intangible Assets 12-5 Marketing-Related Intangible Assets 12-6 What Do the Numbers Mean? Keep Your Hands Off My Intangible! 12-6 Customer-Related Intangible Assets 12-6 Artistic-Related Intangible Assets 12-7 Contract-Related Intangible Assets 12-8 Technology-Related Intangible Assets 12-8 What Do the Numbers Mean? Patent Batties 12-9 What Do the Numbers Mean? Patents Strategie Lifeblood Goodwill Impairment and Presentation of Intangible Assets Impairment of Limited-Life Intangibles Reversal of Impairment Loss Impairment of Indefinite-Life Intangibles OtherThan Goodwill Impairment of Goodwill Presentation of Intangible Assets Research and Development Costs What Do the Numbers Mean? Global R&D Incentives Identifying R&D Activities Accounting for R&D Activities Evolving Issue Recognition of R&D and Internally Generated Intangibles Costs Similar to R&D Costs What Do the Numbers Mean? Branded Presentation of Research and Development Costs Global Accounting Insights Current Liabilities, Provisions, and Contingencies 13-1 NOW YOU SEE IT, NOW YOU DON'T 13-2 Current Liabilities 13-3 Accounts Payable 13-4 Notes Payable 13-4 Current Maturities of Long-Term Debt 13-6 Short-Term Obligations Expected to Be Refinanced 13-6 What Do the Numbers Mean? Going, Going, Gone 13-7 Dividends Payable 13-8 Customer Advances and Deposits 13-8 Unearned Revenues 13-8 What Do the Numbers Mean? Microsoft's Liabilities Good or Bad? 13-9

6 Contents xv Sates and Value-Added Taxes Payabte 13-9 Income Taxes Payable Employee-Related Liabilities Provisions Recognition of a Provision Measurement of Provisions Common Types of Provisions What Do the Numbers Mean? Frequent Flyers Evolving Issue Greenhouse Gases: Let's Be Standard-Setters Disclosures Related to Provisions Contingencies Contingent Liabilities Contingent Assets Presentation and Analysis Presentation of Current Liabilities Analysis of Current Liabilities What Do the Numbers Mean? I'll Pay You Later Non-Current Liabilities 14-1 GOING LONG 14-1 Bonds Payable 14-2 Types of Bonds 14-3 Issuing Bonds 14-3 What Do the Numbers Mean? All About Bonds 14-4 Valuation and Accounting for Bonds Payable 14-4 What Do the Numbers Mean? How About a 100-Year Bond? 14-7 Effective-Interest Method 14-7 Long-Term Notes Payable Notes Issued at Face Value Notes Not Issued at Face Value Special Notes Payable Situations Mortgage Notes Payable Extinguishment of Non-Current Liabilities Extinguishment with Cash before Maturity Extinguishment by Exchanging Assets or Securities Extinguishment with Modification of Terms Presentation and Analysis Fair Value Option Off-Balance-Sheet Financing Evolving Issue Off-and-On Reporting Presentation of Non-Current Liabilities Analysis of Non-Current Liabilities Global Accounting Insights Equity 15-1 IT'SA GLOBAL MARKET 15-1 Corporate Capital 15-3 Corporate Form 15-3 What Do the Numbers Mean? A Class (B) Act 15-4 Componentsof Equity 15-5 Issuance of Shares 15-5 Preference Shares 15-9 Reacquisition of Shares What Do the Numbers Mean? Signals to Buy? Purchase of Treasury Shares Sale of Treasury Shares Retiring Treasury Shares What Do the Numbers Mean? Buyback Volatility Dividend Policy Financial Condition and Dividend Distributions Types of Dividends Share Dividends and Share Splits What Do the Numbers Mean? Dividends Up, Dividends Down Presentation and Analysis of Equity Presentation of Equity Analysis Appendix ISA Dividend Preferences and Book Value per Share Dividend Preferences Book Value per Share Global Accounting Insights Dilutive Securities and Earnings per Share is-i KICKING THE HABIT 16-2 Dilutive Securities 16-3 Debt and Equity 16-3 Convertible Debt 16-3 Convertible Preference Shares 16-8 What Do the Numbers Mean? How Low Can You Go? 16-9 Share Warrants 16-9 Share Warrants Issued with Other Securities Rights to Subscribe to Additional Shares Share Compensation Plans Measurement Share Compensation Recognition Share Compensation Restricted Shares Employee Share-Purchase Plans Disclosure of Compensation Plans Debate over Share-Option Accounting Basic Earnings per Share Earnings per Share Simple Capital Structure Comprehensive Example Diluted Earnings per Share Diluted EPS Convertible Securities Diluted EPS Options and Warrants Contingently Issuable Shares Antidilution Revisited EPS Presentation and Disclosure Summary of EPS Computation Appendix 16A Accounting for Share-Appreciation Rights SARS Share-Based Equity Awards SARS Share-Based Liability Awards Share-Appreciation Rights Example Appendix 16B Comprehensive Earnings per Share Example Diluted Earnings Per Share Global Accounting Insights 16-57

7 xvi Contents 17 Investments 17-1 WHAT TO DO? 17-1 Debt Investments 17-2 Classification and Measurement of Financial Assets 17-3 A Closer Look at Debt Investments 17-4 What Do the Numbers Mean? What Is Fair Value? Equity Investments Holdings of Less Than 20% What Do the Numbers Mean? The Fair Value Challenge Holdings Between 20% and 50% Holdings of More Than 50% What Do the Numbers Mean? Who's in Control Here? Summary of Reporting Treatment of Investments Other Reporting Issues Impairment of Value What Do the Numbers Mean? Too Little, Too Late Recycling Adjustments Transfers Between Categories Evolving Issue Fair Value Controversy Appendix 17A Accounting for Derivative Instruments Defining Derivatives Who Uses Derivatives, and Why? Producers and Consumers Speculators and Arbitrageurs Basic Principles in Accounting for Derivatives Derivative Financial Instrument (Speculation) Differences between Traditional and Derivative Financial Instruments Derivatives Used for Hedging What Do the Numbers Mean? Risky Business Fair Value Hedge Cash Flow Hedge Other Reporting Issues Embedded Derivatives Qualifying Hedge Criteria Summary of Derivatives Accounting Comprehensive Hedge Accounting Example Fair Value Hedge Financial Statement Presentation of an Interest Rate Swap Controversy and Concluding Remarks Appendix 17B Fair Value Disclosures Disclosure of Fair Value Information: Financial Instruments Disclosure of Fair Values*. Impaired Assets or Liabilities Conclusion Global Accounting insights Revenue Recognition 18-1 IT'S BACK 18-2 Fundamentals of Revenue Recognition 18-3 Background 18-3 New Revenue Recognition Standard 18-4 Overview of the Five-Step Process Airbus Example 18-4 Extended Example of the Five-Step Process: BEAN 18-5 The Five-Step Process Revisited 18-9 Identifying the Contract with Customers Step Identifying Separate Performance Obligations Step Determining the Transaction Price Step Allocating the Transaction Price to Separate Performance Obligations Step Recognizing Revenue When (or as) Each Performance Obligation Is Satisfied Step Summary Accounting for Revenue Recognition issues Sales Returns and Allowances Repurchase Agreements Bill-and-Hold Arrangements Principal-Agent Relationships Consignments Warranties Non-Refundable Upfront Fees Summary Presentation and Disclosure Presentation Disclosure Evolving Issue Revenue: "It's Like an Octopus" Appendix ISA Long-Term Construction Contracts Revenue Recognition Over Time Percentage-of-Completion Method Cost-Recovery (Zero-Profit) Method Long-Term Contract Losses Appendix 18B Revenue Recognition for Franchises Franchise Accounting Recognition of Franchise Rights Revenue over Time Accounting for Income Taxes 19-1 SAFE (TAX) HÄVEN? 19-1 Fundamentals of Accounting for Income Taxes 19-3 Future Taxable Amounts and Deferred Taxes 19-5 What Do the Numbers Mean? "Real Liabilities" 19-8 Future Deductible Amounts and Deferred Taxes 19-8 What Do the Numbers Mean? "Real Assets" Deferred Tax Asset (Non-Recognition) Additional Issues Income Statement Presentation Specific Differences Tax Rate Considerations What Do the Numbers Mean? Global Tax Rates Accounting for Net Operating Losses Loss Carryback Loss Carryforward Loss Carryback Example Loss Carryforward Example Evolving Issue Uncertain Tax Positions Financial Statement Presentation Statement of Financial Position Income Statement Tax Reconciliation What Do the Numbers Mean? The Tax Twist Review of the Asset-Liability Method 19 27

8 Contents xvii Appendix 19A Comprehensive Example of Interperiod Tax Allocation First Year Taxabte Income and Income Taxes Payable Computing Deferred Income Taxes End of Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes Financial Statement Presentation Second Year Taxable Income and Income Taxes Payable Computing Deferred Income Taxes End of Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes Financial Statement Presentation Global Accounting Insights Accounting for Pensions and Postretirement Benefits 20-1 PENSION PERIL 20-2 Fundamentals of Pension Plan Accounting 20-3 Defined Contribution Plan 20-4 Defined Benefit Plan 20-4 What Do the Numbers Mean? Which Plan Is Right for You? 20-5 The Rote of Actuaries in Pension Accounting 20-6 Measures of the Liability 20-6 Reporting Changes in the Defined Benefit Obligation (Asset) 20-8 Plan Assets and Actual Return Using a Pension Worksheet Entries and Worksheet Funded Status Past Service Cost Entries and Worksheet Remeasurements Asset Gains and Losses Liability Gains and Losses Entries and Worksheet What Do the Numbers Mean? Roller Coaster Reporting Pension Plans in Financial Statements Within the Financial Statements Within the Notes to the Financial Statements Other Postretirement Benefits ConcludingObservations What Do the Numbers Mean? How's YourVolatility? Global Accounting Insights Accounting for Leases 21-1 TIMES ARE A-CHANGING 21-1 The Leasing Environment 21-3 A Look at the Lessee 21-3 Advantages of Leasing Lessees 21-4 A Look at the Lessor 21-4 Advantages of Leasing Lessors 21-5 What Do the Numbers Mean? Residual Value Regret 21-6 Lessee Accounting 21-6 Measurement of the Lease Liability and Lease Asset 21-7 Subsequent Lessee Accounting 21-9 What Do the Numbers Mean? Your Lease Is Killing My Income Summary of Lessee Accounting Lessor Accounting Economicsof Leasing Classification of Leases by the Lessor What Do the Numbers Mean? Not so Fast Accounting Measurement and Presentation Lessor Accounting for Operating Leases Special Lease Accounting Problems Other Lease Adjustments Presentation, Disclosure, and Analysis Evolving Issue Bring It On! Appendix 21A Sale-Leasebacks Accounting Issues in Sale-Leaseback Transactions Sale Transaction Financing Transaction (Failed Sale) Sale-Leaseback Example Appendix 21B Comprehensive Example Lease Terms: Scenario Lease Classification Lessee/Lessor Accounting Lease Terms: Scenario Lease Classification Lessee Accounting Lessor Accounting Operating Lease Global Accounting Insights Accounting Changes and Error Analysis 22-1 NEEDED: VALID COMPARISONS 22-2 Accounting Changes 22-3 Background 22-3 Changes in Accounting Policy 22-3 What Do the Numbers Mean? Comparison Challenges Squared 22-5 Impracticability Changes in Accounting Estimates Prospective Reporting What Do the Numbers Mean? A Change for the Better? Disclosures Accounting Errors Example of Error Correction What Do the Numbers Mean? Guard the Financial Statements! Summary of Accounting Changes and Correction of Errors What Do the Numbers Mean? What's Your Motivation? Error Analysis Statement of Financial Position Errors Income Statement Errors 22-23

9 xviii Contents Statement of Financial Position and Income Statement Errors Comprehensive Example: Numerous Errors Preparation of Financial Statements with Error Corrections Global Accounting Insights Statement of Cash Flows 23-1 SHOW ME THE MONEY! 23-1 The Statement of Cash Flows 23-2 Usefulness of the Statement of Cash Flows 23-3 Classification of Cash Flows 23 3 Cash and Cash Equivalents 23-5 What Do the Numbers Mean? How's My Cash Flow? 23-5 Format of the Statement of Cash Flows 23-6 Preparing the Statement of Cash Flows 23-6 lllustrations Tax Consultants Inc Sources of Information for the Statement of Cash Flows Net Cash Flow from Operating Activities Direct Method Evolving Issue Direct versus Indirect Special Problems in Statement Preparation Adjustments to Net Income Accounts Receivable (Net) Other Working Capital Changes Net Losses Disclosures What Do the Numbers Mean? Better than ROA? Use of a Worksheet Preparation of the Worksheet Analysis of Transactions Preparation of Final Statement Global Accounting Insights Presentation and Disclosure in Financial Reporting 24-1 WE NEED BETTER, NOT MORE 24-1 Füll Disclosure Principle 24-3 Increase in Reporting Requirements 24-4 Differential Disclosure 24-4 Notes to the Financial Statements 24-5 What Do the Numbers Mean? Footnote Secrets 24-8 Disclosure Issues 24-8 Disclosure of Special Transactions or Events 24-8 Events after the Reporting Period (Subsequent Events) Reporting for Diversified Konglomerate) Companies Interim Reports Evolving Issue It's Faster But Is It Better? Auditor s and Management s Reports Auditor's Report What Do the Numbers Mean? Heart of the Matter Managemente Reports Current Reporting Issues Reporting on Financial Forecasts and Projections What Do the Numbers Mean? Global Forecasts Internet Financial Reporting Fraudulent Financial Reporting Criteria for Making Accounting and Reporting Choices Evolving Issue Disclosure Overload? Appendix 24A Basic Financial Statement Analysis Perspective on Financial Statement Analysis Ratio Analysis Limitations of Ratio Analysis Comparative Analysis Percentage (Common-Size) Analysis Appendix 24B First-Time Adoption of IFRS General Guidelines Relevant Dates Implementation Steps Opening IFRS Statement of Financial Position Exemptions from Retrospective Treatment Presentation and Disclosure Summary Global Accounting Insights APPENDIX A Specimen Financial Statements: Marksand Spencer Group plc A-l APPENDIX B Specimen Financial Statements: adidas AG B-l APPENDIX c Specimen Financial Statements: Puma Group C-l INDEX