Financial Accounting and Reporting 18th Edition [18th ed] 9781292162409, 9781292162430, 9781292162423, 1292162406, 1292162422, 1292162430

Table of contents :
Cover......Page 1
Brief Contents......Page 6
Contents......Page 8
Preface......Page 22
Publisher’s acknowledgements......Page 28
Part 1 Introduction to accounting on a cash flow and accrual accounting basis......Page 30
1.2 Shareholders......Page 32
1.4 Managers......Page 33
1.6 Procedural steps when reporting to internal users......Page 34
1.8 Illustration of periodic financial statements prepared under the cash flow concept to disclose realised operating cash flows......Page 37
1.9 Illustration of preparation of statement of financial position......Page 42
1.10 Treatment of non-current assets in the cash flow model......Page 43
1.11 What are the characteristics of these data that make them reliable?......Page 44
1.12 Reports to external users......Page 45
Summary......Page 46
Exercises......Page 47
Notes......Page 49
2.1 Introduction......Page 50
2.3 Accrual basis of accounting......Page 51
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments......Page 52
2.6 Accounting for the sacrifice of non-current assets......Page 53
2.7 Published statement of cash flows......Page 56
Review questions......Page 57
Exercises......Page 58
Notes......Page 59
Part 2 Preparation of internal and published financial statements......Page 60
3.2 Preparing an internal statement of income from a trial balance......Page 62
3.3 Reorganising the income and expenses into one of the formats required for publication......Page 65
3.4 Format 1: classification of operating expenses and other income by function......Page 66
3.6 Other comprehensive income......Page 69
3.7 How non-recurring or exceptional items can affect operating income......Page 70
3.9 Statement of changes in equity......Page 72
3.10 The statement of financial position......Page 73
3.11 The explanatory notes that are part of the financial statements......Page 74
3.12 Has prescribing the formats meant that identical transactions are reported iden-tically?......Page 77
3.13 Fair presentation......Page 80
3.14 What does an investor need in addition to the primary financial statements to make decisions?......Page 81
Summary......Page 85
Review questions......Page 86
Exercises......Page 87
Notes......Page 97
4.2 IAS 10 Events after the Reporting Period......Page 99
4.3 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors......Page 102
4.5 IFRS 8 Operating Segments......Page 104
4.6 Benefits and continuing concerns following the issue of IFRS 8......Page 108
4.7 Discontinued operations – IFRS 5 Non-current Assets Held for Sale and Discon-tinued Operations......Page 111
4.8 Held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Op-erations......Page 112
4.9 IAS 24 Related Party Disclosures......Page 114
Review questions......Page 119
Exercises......Page 120
Notes......Page 130
5.2 Development of statements of cash flows......Page 131
5.3 Applying IAS 7 (revised) Statements of Cash Flows......Page 132
5.4 Step approach to preparation of a statement of cash flows – indirect method......Page 135
5.5 Additional notes required by IAS 7......Page 138
5.6 Analysing statements of cash flows......Page 139
5.7 Approach to answering questions with time constraints......Page 145
5.8 Preparing a statement of cash flows when no statement of income is available......Page 147
Summary......Page 149
Exercises......Page 150
Notes......Page 157
Part 3 Regulatory framework – an attempt to achieve uniformity......Page 158
6.2 Why do we need financial reporting standards?......Page 160
6.3 Why do we need standards to be mandatory?......Page 161
6.4 Arguments in support of standards......Page 163
6.6 Standard setting and enforcement by the Financial Reporting Council (FRC) in the UK......Page 164
6.7 The International Accounting Standards Board......Page 167
6.8 Standard setting and enforcement in the European Union (EU)......Page 168
6.9 Standard setting and enforcement in the US......Page 171
6.10 Advantages and disadvantages of global standards for publicly accountable entities......Page 173
6.11 How do reporting requirements differ for non-publicly accountable entities?......Page 174
6.13 Why have there been differences in financial reporting?......Page 175
6.14 Move towards a conceptual framework......Page 179
Review questions......Page 180
Exercises......Page 181
Notes......Page 182
7.2 Different countries meant different financial statements......Page 184
7.3 Historical overview of the evolution of financial accounting theory......Page 185
7.4 Framework for the Preparation and Presentation of Financial Statements......Page 187
7.5 Conceptual Framework for Financial Reporting 2010......Page 188
7.6 Chapter 4 content......Page 192
7.7 The Conceptual Framework for Financial Reporting – latest developments......Page 193
7.8 Current developments – concept of materiality......Page 196
Summary......Page 198
Exercises......Page 199
Notes......Page 201
8.2 The meaning of ethical behaviour......Page 202
8.3 The accounting standard-setting process and ethics......Page 203
8.4 The IFAC Code of Ethics for Professional Accountants......Page 204
8.5 Implications of ethical values for the principles – versus rules-based approaches to accounting standards......Page 207
8.6 Ethics in the accountant’s work environment – a research report......Page 210
8.7 Implications of unethical behaviour for stakeholders using the financial reports......Page 212
8.8 The increasing role of whistle-blowing......Page 217
8.9 Legal requirement to report – national and international regulation......Page 219
8.10 Why should students learn ethics?......Page 220
Summary......Page 221
Review questions......Page 222
Exercises......Page 224
Notes......Page 226
Part 4 Income and asset value measurement systems......Page 228
9.2 Role and objective of income measurement......Page 230
9.3 Accountant’s view of income, capital and value......Page 233
9.4 Critical comment on the accountant’s measure......Page 236
9.5 Economist’s view of income, capital and value......Page 237
9.7 Income, capital and changing price levels......Page 243
Review questions......Page 245
Exercises......Page 246
Bibliography......Page 248
10.2 Review of the problems of historical cost accounting (HCA)......Page 249
10.4 The concepts in principle......Page 250
10.5 The four models illustrated for a company with cash purchases and sales......Page 251
10.6 Critique of each model......Page 255
10.7 Operating capital maintenance – a comprehensive example......Page 258
10.8 Critique of CCA statements......Page 269
10.10 The IASB position where there is hyperinflation......Page 270
10.11 Future developments......Page 271
Summary......Page 273
Exercises......Page 274
Bibliography......Page 281
11.1 Introduction......Page 282
11.2 IAS 18 Revenue......Page 283
11.3 The issues involved in developing a new standard......Page 284
11.4 The challenges under both IAS 18 and IFRS 15......Page 285
11.5 IFRS 15 Revenue from Contracts with Customers......Page 286
11.6 Five-step process to identify the amount and timing of revenue......Page 287
11.7 Disclosures......Page 298
Review questions......Page 299
Exercises......Page 301
Notes......Page 305
Part 5 Statement of financial position – equity, liability and asset measurement and disclosure......Page 306
12.2 Common themes......Page 308
12.3 Total owners’ equity: an overview......Page 309
12.4 Total shareholders’ funds: more detailed explanation......Page 310
12.5 Accounting entries on issue of shares......Page 312
12.7 Creditor protection: why capital maintenance rules are necessary......Page 313
12.8 Creditor protection: how to quantify the amounts available to meet creditors’ claims......Page 314
12.10 Distributable profits: general considerations......Page 315
12.13 Writing off part of capital which has already been lost and is not represented by assets......Page 317
12.15 Purchase of own shares......Page 323
Review questions......Page 325
Exercises......Page 326
Notes......Page 331
13.1 Introduction......Page 332
13.2 Provisions – a decision tree approach to their impact on the statement of finan-cial position......Page 333
13.4 The general principles that IAS 37 applies to the recognition of a provision......Page 334
13.5 Management approach to measuring the amount of a provision......Page 335
13.7 Provisions for specific purposes......Page 337
13.9 Contingent assets......Page 340
13.10 ED IAS 37 Non-financial Liabilities......Page 341
Summary......Page 348
Exercises......Page 349
Notes......Page 354
14.2 Financial instruments – the IASB’s problem child......Page 355
14.3 IAS 32 Financial Instruments: Disclosure and Presentation......Page 358
14.4 IFRS 9 Financial Instruments......Page 364
14.5 IFRS 7 Financial Instruments: Disclosure......Page 374
Review questions......Page 380
Exercises......Page 381
Notes......Page 387
15.2 Greater employee interest in pensions......Page 388
15.4 Types of scheme......Page 389
15.6 Defined benefit pension schemes......Page 392
15.8 The asset or liability for pension and other post-retirement costs......Page 393
15.9 Changes in the pension asset or liability position......Page 394
15.10 Comprehensive illustration......Page 397
15.12 Disclosures......Page 398
15.14 Short-term benefits......Page 399
15.15 Termination benefits......Page 400
15.16 IFRS 2 Share-based Payment......Page 401
15.19 Equity-settled share-based payments......Page 402
15.20 Cash-settled share-based payments......Page 405
15.22 IAS 26 Accounting and Reporting by Retirement Benefit Plans......Page 406
Review questions......Page 409
Exercises......Page 410
Notes......Page 414
16.2 Corporation tax......Page 415
16.3 Corporation tax systems – the theoretical background......Page 416
16.4 Corporation tax and dividends......Page 417
16.5 Corporation tax systems – avoidance and evasion......Page 418
16.6 IAS 12 – accounting for current taxation......Page 422
16.7 Deferred tax......Page 423
16.8 A critique of deferred taxation......Page 431
16.9 Value added tax (VAT)......Page 433
Review questions......Page 434
Exercises......Page 435
Notes......Page 438
17.2 PPE – concepts and the relevant IASs and IFRSs......Page 439
17.3 What is PPE?......Page 440
17.4 How is the cost of PPE determined?......Page 441
17.5 What is depreciation?......Page 443
17.6 What are the constituents in the depreciation formula?......Page 444
17.7 Calculation of depreciation......Page 446
17.8 Measurement subsequent to initial recognition......Page 450
17.9 IAS 36 Impairment of Assets......Page 452
17.10 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations......Page 457
17.11 Disclosure requirements......Page 458
17.12 Government grants towards the cost of PPE......Page 459
17.13 Investment properties......Page 461
17.14 Effect of accounting policy for PPE on the interpretation of the financial statements......Page 462
Review questions......Page 464
Exercises......Page 465
Notes......Page 471
18.1 Introduction......Page 472
18.2 Need for an accounting standard on leasing......Page 473
18.3 Distinction between finance leases and operating leases......Page 476
18.4 Reason for a replacement standard for IAS 17......Page 477
18.5 IFRS 16 Leases – the criteria that determine whether it’s a lease......Page 478
18.6 Leases in the financial statements of lessees......Page 480
18.7 Leases in the financial statements of lessors......Page 484
18.8 Sale and leaseback transactions......Page 486
Summary......Page 489
Review questions......Page 490
Exercises......Page 491
Note......Page 493
19.2 Intangible assets defined......Page 494
19.3 Accounting treatment for research and development......Page 497
19.4 Why is research expenditure not capitalised?......Page 498
19.5 Capitalising development costs......Page 499
19.7 IFRS for SMEs’ treatment of intangible assets......Page 500
19.9 The accounting treatment of goodwill......Page 501
19.10 Critical comment on the various methods that have been used to account for goodwill......Page 503
19.11 Negative goodwill/badwill......Page 505
19.12 Brands......Page 506
19.13 Accounting for acquired brands......Page 508
19.14 Intellectual capital disclosures (ICDs) in the annual report......Page 509
19.16 Review of the implementation of identified intangibles under IAS 38......Page 510
Review questions......Page 512
Exercises......Page 514
Notes......Page 520
20.2 Inventory defined......Page 522
20.3 The impact of inventory valuation on profits......Page 523
20.4 IAS 2 Inventories......Page 524
20.5 Inventory valuation......Page 525
20.6 Work in progress......Page 531
20.7 Inventory control......Page 533
20.8 Creative accounting......Page 534
20.9 Audit of the year-end physical inventory count......Page 536
20.10 Published accounts......Page 538
20.11 Agricultural activity......Page 539
Review questions......Page 542
Exercises......Page 543
Notes......Page 547
21.2 The need to replace IAS 11 Construction Contracts......Page 548
21.4 Identification of contract costs under IAS 11......Page 550
21.5 IFRS 15 treatment of construction contracts......Page 553
21.6 An approach when a contract can be separated into components......Page 555
21.7 Accounting for a contract – an example......Page 556
21.8 Illustration – loss-making contract using the step approach......Page 558
21.9 Public–private partnerships (PPPs)......Page 560
Summary......Page 563
Exercises......Page 564
Notes......Page 571
Part 6 Consolidated accounts......Page 572
22.3 IFRS 10 Consolidated Financial Statements......Page 574
22.4 Fair values......Page 576
22.5 Illustration where there is a wholly owned subsidiary......Page 577
22.6 Preparing consolidated accounts when there is a partly owned subsidiary......Page 578
22.7 The treatment of differences between a subsidiary’s fair value and book value......Page 581
22.8 The parent issues shares to acquire shares in a subsidiary......Page 582
22.10 When may a parent company not be required to prepare consolidated ac-counts?......Page 583
22.12 IFRS 13 Fair Value Measurement......Page 584
Review questions......Page 586
Exercises......Page 587
Notes......Page 593
23.3 Pre- and post-acquisition profits/losses......Page 594
23.4 The Bend Group – assuming there have been no inter-group transactions......Page 595
23.5 Inter-company transactions......Page 597
23.6 The Prose Group – assuming there have been inter-group transactions......Page 598
Summary......Page 600
Exercises......Page 601
Notes......Page 607
24.2 Eliminate inter-company transactions......Page 608
24.3 Preparation of a consolidated statement of income – the Ante Group......Page 609
24.5 Other consolidation adjustments......Page 611
24.6 A subsidiary acquired part-way through the year......Page 613
24.7 Published format statement of income......Page 615
24.8 Consolidated statements of cash flows......Page 616
Review questions......Page 618
Exercises......Page 619
Notes......Page 629
25.2 Definitions of associates and of significant influence......Page 630
25.4 The Brill Group – group accounts with a profit-making associate......Page 631
25.5 The Brill Group – group accounts with a loss-making associate......Page 634
25.6 The acquisition of an associate part-way through the year......Page 636
25.7 Joint arrangements......Page 637
25.8 Disclosure in the financial statements......Page 641
25.9 Parent company use of the equity method in its separate financial statements......Page 642
Review questions......Page 644
Exercises......Page 645
Notes......Page 655
26.1 Introduction......Page 656
26.2 How to record foreign currency transactions in a company’s own books......Page 657
26.3 Boil plc – a more detailed illustration......Page 659
26.4 IAS 21 Concept of Functional and Presentation Currencies......Page 660
26.6 Preparation of consolidated accounts......Page 662
26.7 How to reduce the risk of translation differences......Page 666
26.9 IAS 29 Financial Reporting in Hyperinflationary Economies......Page 667
Review questions......Page 669
Exercises......Page 670
Notes......Page 677
Part 7 Interpretation......Page 678
27.2 Why is the earnings per share figure important?......Page 680
27.3 How is the EPS figure calculated?......Page 681
27.4 The use to shareholders of the EPS......Page 682
27.6 Adjusting the number of shares used in the basic EPS calculation......Page 683
27.7 Rights issues......Page 686
27.8 Adjusting the earnings and number of shares used in the diluted EPS calcula-tion......Page 691
27.9 Procedure where there are several potential dilutions......Page 693
27.11 Disclosure requirements of IAS 33......Page 695
27.13 The Convergence Project......Page 697
Review questions......Page 698
Exercises......Page 699
Notes......Page 705
28.1 Introduction......Page 706
28.2 Overview of techniques for the analysis of financial data......Page 707
28.3 Ratio analysis – a case study......Page 708
28.4 Introductory review......Page 709
28.5 Financial statement analysis, part 1 – financial performance......Page 712
28.6 Financial statement analysis, part 2 – liquidity......Page 719
28.7 Financial statement analysis, part 3 – financing......Page 722
28.8 Peer comparison......Page 724
28.9 Report based on the analysis......Page 725
28.10 Caution when using ratios for prediction......Page 726
Review questions......Page 728
Exercises......Page 729
Note......Page 741
29.1 Introduction......Page 742
29.2 Improvement of information for shareholders......Page 743
29.3 Published financial statements – their limitations for interpretation purposes......Page 745
29.4 Published financial statements – additional entity-wide cash-based performance measures......Page 746
29.5 Ratio thresholds to satisfy Shariah compliance......Page 749
29.6 Use of ratios in restrictive loan covenants......Page 750
29.7 Investor-specific ratios......Page 753
29.8 Determining value......Page 756
29.9 Predicting corporate failure......Page 761
29.10 Professional risk assessors......Page 765
29.11 Valuing shares of an unquoted company – quantitative process......Page 766
29.12 Valuing shares of an unquoted company – qualitative process......Page 769
29.13 Possible effect of ‘Brexit’ on financial statements......Page 771
Summary......Page 772
Review questions......Page 773
Exercises......Page 774
Notes......Page 782
30.2 The objectives of financial reporting......Page 784
30.3 Reports and the flow of information pre-XBRL......Page 786
30.4 What are HTML, XML and XBRL?......Page 787
30.5 Reports and the flow of information post-XBRL......Page 788
30.6 Why are companies adopting XBRL?......Page 789
30.7 What are the processes followed to adopt XBRL for outputting information?......Page 792
30.8 What is needed when receiving XBRL output information?......Page 795
30.10 Real-time reporting......Page 800
Stakeholder interaction with XBRL data......Page 801
Summary......Page 802
Exercises......Page 803
Notes......Page 804
Bibliography......Page 805
Part 8Accountability......Page 808
31.2 A systems perspective......Page 810
31.3 Different jurisdictions have different governance priorities......Page 812
31.5 Types of past unethical behaviour......Page 814
31.6 The effect on capital markets of good corporate governance......Page 815
31.7 Risk management......Page 816
31.8 The role of internal control, internal audit and audit committees in corporate governance......Page 818
31.9 External audits in corporate governance......Page 819
31.10 Executive remuneration in the UK......Page 825
31.11 Corporate governance, legislation and codes......Page 829
31.12 Corporate governance – the UK experience......Page 830
Summary......Page 839
Review questions......Page 840
Exercises......Page 842
Notes......Page 844
32.1 Introduction......Page 846
32.2 Environmental and social disasters and the adverse consequences that can follow......Page 847
32.3 Management accountability for environmental and social responsibility......Page 850
32.4 Integrated reporting concepts......Page 854
32.5 The historical context of the evolution of integrated reporting including the driv-ers of this movement......Page 857
32.6 The efforts on which integrated reporting builds......Page 861
32.7 The contribution of accountants......Page 866
32.8 Integrated reporting – its impact on the future development of financial reporting and accounting......Page 872
Review questions......Page 873
Exercises......Page 875
Notes......Page 880
Index......Page 882