Barry Elliott and Jamie Elliott

Transcription

1 FIFTEENTH EDITION Barry Elliott and Jamie Elliott Financial Times Prentice Hall is an imprint of Harlow, England London New York Boston San Francisco Toronto Sydney Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town Madrid Mexico City Amsterdam Munich Paris Milan

2 Full contents Preface and acknowledgements Guided tour of MyAccountingLab xx xxv Fart I F FSNANCBAL STATEMENTS D 1 Accounting and reporting on a cash flow basis 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 16 Summary 17 Review questions 18 Exercises 18 References 20 2 Accounting and reporting on an accrual accounting basis 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 payments in accordance with the matching principle Mechanics of accrual accounting - the statement of financial position 24 ' 2.7 Reformatting the statement of financial position Accounting for the sacrifice of non-current assets 25

3 viii Full contents 2.9 Reconciliation of cash flow and accrual accounting data 29 Summary 31 Review questions 31 Exercises 32 References 33 3 Preparation of financial statements Introduction Preparing an internal statement of income from a trial balance The format of statements of income for publication Other comprehensive income Accounting for current tax Presentation using IAS I Alternative method (Format 2) The statement of financial position Statement of changes in equity The accounting rules for asset valuation The explanatory notes that accompany a statement of financial position Has prescribing the formats meant that identical transactions are reported identically? What does an investor need in addition to the financial statements to make decisions? ASB review of narrative reporting What is meant by a fair view? 59 Summary 61 Review questions 62 Exercises 63 References 74 4 Annual Report: additional financial statements 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 disclosure of 'discontinued operations' IAS 10 - events after the reporting period Related party disclosures 88 Summary 93 Review questions 93 Exercises 94 References Statements of cash flows Introduction Development of statements of cash flows Applying IAS 7 (revised) Statements of Cash Flows Step approach to preparation of a statement of cash flows - indirect method I Statement of cash flows - direct method I 12

4 Additional notes required by IAS 7 Analysing statements of cash flows Critique of cash flow accounting Summary proposal for change in presentation of the financial statements Summary Review questions Exercises References Full contents IX IMCOME AMD ASSET VALUE MEASUREMENT SYSTEMS 6 Income and asset value measurement: an economist's approach 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 148 Summary 150 Review questions 150 Exercises 151 References 152 Bibliography Accounting for price-level changes 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 179 Summary " 181 Review questions 182 Exercises 182 References 191. Bibliography Revenue recognition Introduction The issues 193

5 Full contents 8.3 The challenge Revenue defined -IAS 18 Revenue Proposed IFRS 196 Summary 202 Review questions 203 Exercises 204 References 207 ULATOIfW FKAMEWOIRK - AIM ATTEMPT T1 EVE UNDF [rlmity 9 Financial reporting - evolution of global standards Introduction Why do we need financial reporting standards? 21 I 9.3 Why do we need standards to be mandatory? Arguments in support of standards 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? Does the need for standards and effective enforcement still exist in the 21 st century? Move towards a conceptual framework 233 Summary 234 Review questions 234 Exercises 235 References Concepts - evolution of a global conceptual framework 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 Conceptual framework developments 255 Summary 257 Review questions 259

6 Full contents xi Exercises 259 References 261 I I Ethical behaviour and implications for accountants 262 I I. I Introduction 262 I 1.2 The meaning of ethical behaviour The accounting standard setting process and ethics The IFAC Code of Ethics for Professional Accountants 264 I 1.5 Implications of ethical values for the principles versus rules-based approaches to accounting standards 267 I 1.6 Ethics in the accountants' work environment research report 270 I 1.7 Implications of unethical behaviour for stakeholders using the financial reports The increasing role of whistle blowing The role of financial reporting authorities Why should students learn ethics? 280 Summary 282 Review questions 282 Exercises 284 References 286 Part 4 STATEMENT F FGMANC1AL POSITION - EQUBTY, LIAHQUTY AND ASSET MEASUREMENT AND DISCLOSURE ' Share capital, distributable profits and reduction of capital 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 Creditor protection: why capital maintenance rules are necessary Creditor protection: how to quantify the amounts available to meet creditors' claim Issued share capital: minimum share capital Distributable profits: general considerations I 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 308 Summary 311 Review questions 311 Exercises 31 I References 316

7 xii Full contents 13 Liabilities Introduction Provisions - their impact on the statement of financial position ED IAS 37 Non-financial liabilities ED/2010/1 Measurement of Liabilities in IAS Summary 333 Review questions 334 Exercises 335 References Financial instruments Introduction Financial instruments -the lasb'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 362 Summary 365 Review questions 366 Exercises 366 References Employee benefits Introduction Greater employee interest in pensions Financial reporting implications Types of scheme Defined contribution pension schemes Defined benefit pension schemes I AS 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 Exposure draft of amendments to IAS IFRS 2 Share-Based Payment Scope of IFRS Recognition and measurement Equity-settled share-based payments Cash-settled share-based payments Transactions which may be settled in cash or shares IAS 26 Accounting and Reporting by Retirement Benefit Plans 395 Summary 398 Review questions 399 Exercises 399 References 405

8 Full contents xiii 16 Taxation in company accounts Introduction Corporation tax Corporation tax systems - the theoretical background Corporation tax systems - avoidance and evasion Corporation tax - the system from 6 April I 16.6 IFRS and taxation IAS 12 - accounting for current taxation Deferred tax FRS 19 (the UKltandard on deferred taxation) A critique of deferred taxation I Examples of companies following IAS Value added tax (VAT) 427 Summary 429 Review questions 429 Exercises 430 References Property, plant and equipment (PPE) Introduction PPE - concepts and the relevant lass and IFRSs What is PPE? (IAS 16) How is the cost of PPE determined? What is depreciation? What are the constituents in the depreciation formula? 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 (IAS 20) Investment properties Effect of accounting policy for PPE on the interpretation of the financial statements 459 Summary 461 Review questions 462 Exercises 462 References Leasing 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 finance charge using the sum of the digits method 478

9 xiv Full contents 18.8 Accounting for the lease of land and buildings Leasing - a form of off balance sheet financing Accounting for leases - a new approach Accounting for leases by lessors 487 Summary 488 Review questions 488 Exercises 489 References R&D; goodwill; intangible assets and brands Introduction Accounting treatment for research and development Research and development (IAS 38) Why is research expenditure not capitalised? Capitalising development costs The judgements to be made when deciding whether to capitalise development costs Disclosure of R&D IFRS for SMEs Goodwill The accounting treatment of goodwill Critical comment on the various methods that have been used to account for goodwill Negative goodwill Intangible assets Brand accounting Justifications for reporting all brands as assets Accounting for acquired brands Emissions trading Intellectual property Review of implementation of IFRS Summary 516 Review questions 517 Exercises 519 References Inventories Introduction Inventory defined The controversy IAS 2 Inventories Inventory valuation Work-in-progress Inventory control Creative accounting Audit of the year-end physical inventory count Published accounts I Agricultural activity 546 Summary 549 Review questions 550

10 Full contents xv Exercises 551 References Construction contracts Introduction The need to replace IAS 11 Construction Contracts Identification of contract revenue Identification of contract costs Proposed new accounting rules Approach when a contract can be separated into components Accounting for a contract Illustrated - profitable contract using step approach Illustrated - loss-making contract using step approach Developments in accounting for revenue Public-private partnerships (PPPs) 567 Summary 573 Review questions 574 Exercises 575 References 581 solbdated ACCOUNTS SS3 22 Accounting for groups at the date of acquisition Introduction The definition of a group Consolidated accounts and some reasons for their preparation The definition of control Alternative methods of preparing consolidated accounts The treatment of positive goodwill The treatment of negative goodwill The comparison between an acquisition by cash and an exchange of shares Non-controlling interests The treatment of differences between a subsidiary's fair value and book value How to calculate fair values IFRS 10 - summary of significant revisions 596 Summary 597 Review questions 597 Exercises 598 References, Preparation of consolidated statements of financial position after the date of acquisition Introduction Pre- and post-acquisition profits/losses Inter-company balances Unrealised profit on inter-company sales Provision for unrealised profit affecting a non-controlling interest 614

11 xvi Full contents 23.6 Uniform accounting policies and reporting dates How is the investment in subsidiaries reported in the parent's own statement of financial position? 615 Summary 615 Review questions 615 Exercises 615 References Preparation of consolidated statements of comprehensive income, changes in equity and cash flows Introduction Preparation of a consolidated statement of comprehensive income - the Ante Group The statement of changes in equity (SOCE) Other consolidation adjustments Dividends or interest paid by the subsidiary out of pre-acquisition profits A subsidiary acquired part of the way through the year Published format statement of comprehensive income Consolidated statements of cash flows 628 Summary, 629 Review questions 630 Exercises 630 References Accounting for associates and joint ventures Introduction Definitions of associates and of significant influence The treatment of associated companies in consolidated accounts The Brill Group - the equity method illustrated The treatment of provisions for unrealised profits The acquisition of an associate part-way through the year Joint arrangements 645 Summary 647 Review questions 648 Exercises 648 References, Accounting for the effects of changes in foreign exchange rates under IAS Introduction The difference between conversion and translation and the definition of a foreign currency transaction The functional currency The presentation currency Monetary and non-monetary items The rules on the recording of foreign currency transactions carried out directly by the reporting entity The treatment of exchange differences on foreign currency transactions 662

12 Full contents xvii 26.8 Foreign exchange transactions in the individual accounts of companies illustrated Boil pic The translation of the accounts of foreign operations where the functional currency is the same as that of the parent The use of a presentation currency other than the functional currency Granby Ltd illustration Granby Ltd illustration continued Implications of IAS Critique of use of presentation currency 669 Summary 670 Review questions 670 Exercises 670 References Earnings per share Introduction Why is the earnings per share figure important? How is the EPS figure calculated? The use to shareholders of the EPS Illustration of the basic EPS calculation Adjusting the number of shares used in the basic EPS calculation Rights issues Adjusting the earnings and number of shares used in the diluted EPS calculation Procedure where there are several potential dilutions Exercise of conversion rights during financial year I Disclosure requirements of IAS The Improvement Project Convergence project 697 Summary 697 Review questions 698 Exercises 699 References Review of financial ratio analysis Introduction Initial impressions What are accounting ratios? Revision of key ratios Key ratios for JD Wetherspoon Comment on the current ratio Interpreting the key ratios-jd Wetherspoon Description of subsidiary ratios ' Limitations of ratio analysis Earnings before interest, tax, depreciation and amortisation (EBITDA) used for management control purposes 729

13 Jtvii; Full contents Summary 730 Review questions 731 Exercises 732 References Analytical analysis - selective use of ratios Introduction Improvement of information for shareholders Disclosure of risks and focus on relevant ratios Shariah compliant companies - why ratios are important Ratios set by lenders in debt covenants Predicting corporate failure Performance related remuneration - shareholder returns Valuing shares of an unquoted company - quantitative process Professional risk assessors 768 Summary 770 Review questions 771 Exercises 772 References An introduction to financial reporting on the Internet Introduction The reason for the development of a business reporting language Reports and the flow of information pre-xbrl What are HTML, XML and XBRL? Reports and the flow of information post-xbrl XBRL and the IASB Why should companies adopt XBRL? What is needed to use XBRL for outputting information? What is needed when receiving XBRL output information? Progress of XBRL development for internal accounting Further study 798 Summary. 799 Review questions 799 Exercises 800 References 800 Bibliography, Corporate governance Introduction The concept Corporate governance effect on corporate behaviour Pressures on good governance behaviour vary over time Types of past unethical behaviour Different jurisdictions have different governance priorities The effect on capital markets of good corporate governance The role of accounting in corporate governance 810

14 Full contents «xix 31.9 External audits in corporate governance Corporate governance in relation to the board of directors Executive remuneration Market forces and corporate governance Risk management Corporate governance, legislation and codes Corporate governance - the UK experience 825 Summary 836 Review questions 836 Exercises 838 References Sustainability - environmental and social reporting Introduction How financial reporting has evolved to embrace sustainability reporting The Triple Bottom Line (TBL) The Connected Reporting Framework IFAC Sustainability Framework The accountant's role in a capitalist industrial society The accountant's changing role Sustainability - environmental reporting Environmental information in the annual accounts Background to companies' reporting practices European Commission's recommendations for disclosures in annual accounts Evolution of stand-alone environmental reports International charters and guidelines Self-regulation schemes Economic consequences of environmental reporting Summary on environmental reporting Environmental auditing: international initiatives The activities involved in an environmental audit Concept of social accounting Background to social accounting Corporate social responsibility reporting Need for comparative data International initiatives towards Triple Bottom Line reporting 866 Summary 869 Review questions 869 Exercises 870 References 876 Bibliography 877 Index 879