Financial Accounting and Reporting (19th Edition)

Table of contents

Table of contents :
Front Cover……Page 1
Half Title Page……Page 2
Title Page……Page 4
Copyright Page……Page 5
Brief contents……Page 6
Contents……Page 8
Preface……Page 21
Publisher’s acknowledgements……Page 27
Part 1 INTRODUCTION TO ACCOUNTING ON A CASH FLOW AND ACCRUAL ACCOUNTING BASIS……Page 36
1.2 Shareholders……Page 38
1.4 Managers……Page 39
1.6 Procedural steps when reporting to internal users……Page 40
1.8 Illustration of periodic financial statements prepared under the cash flow concept to disclose realised operating cash flows……Page 43
1.9 Illustration of preparation of statement of financial position……Page 48
1.10 Treatment of non-current assets in the cash flow model……Page 49
1.11 What are the characteristics of these data that make them reliable?……Page 50
1.12 Reports to external users……Page 51
Summary……Page 52
Review questions……Page 53
Exercises……Page 54
Notes……Page 55
2.1 Introduction……Page 56
2.3 Accrual basis of accounting……Page 57
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments……Page 58
2.6 Accounting for the sacrifice of non-current assets……Page 59
2.7 Published statement of cash flows……Page 62
Review questions……Page 63
Exercises……Page 64
Notes……Page 65
Part 2 PREPARATION OF INTERNAL AND PUBLISHED FINANCIAL STATEMENTS……Page 66
3.2 Preparing an internal statement of income from a trial balance……Page 68
3.3 Reorganising the income and expenses into one of the formats required for publication……Page 71
3.4 Format 1: classification of operating expenses and other income by function……Page 72
3.6 Other comprehensive income……Page 75
3.7 How non-recurring or exceptional items can affect operating income……Page 77
3.9 Statement of changes in equity……Page 79
3.10 The statement of financial position……Page 80
3.11 The explanatory notes that are part of the financial statements……Page 81
3.12 Has prescribing the formats meant that identical transactions are reported identically?……Page 84
3.13 Fair presentation……Page 86
3.14 What does an investor need in addition to the primary financial statements to make decisions?……Page 88
Review questions……Page 93
Exercises……Page 95
Notes……Page 105
4.2 IAS 10 Events after the Reporting Period……Page 107
4.3 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors……Page 110
4.5 IFRS 8 Operating Segments……Page 112
4.6 Benefits and continuing concerns following the issue of IFRS 8……Page 116
4.7 Discontinued operations – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations……Page 118
4.8 Held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations……Page 119
4.9 IAS 24 Related Party Disclosures……Page 121
Review questions……Page 126
Exercises……Page 127
Notes……Page 138
5.2 Development of statements of cash flows……Page 139
5.3 Applying IAS 7 (revised) Statements of Cash Flows……Page 140
5.4 Step approach to preparation of a statement of cash flows – indirect method……Page 143
5.5 Additional notes required by IAS 7……Page 146
5.6 Analysing statements of cash flows……Page 147
5.7 Approach to answering questions with time constraints……Page 153
5.8 Preparing a statement of cash flows when no statement of income is available……Page 155
5.9 Disclosure Initiative (Amendments to IAS 7)……Page 157
Review questions……Page 158
Exercises……Page 159
Notes……Page 167
Part 3 REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY……Page 168
6.2 Why do we need financial reporting standards?……Page 170
6.3 Why do we need standards to be mandatory?……Page 171
6.5 Arguments against standards……Page 173
6.6 Standard setting and enforcement by the Financial Reporting Council (FRC) in the UK……Page 174
6.7 The International Accounting Standards Board……Page 177
6.8 Standard setting and enforcement in the European Union (EU)……Page 178
6.9 Standard setting and enforcement in the US……Page 181
6.10 Advantages and disadvantages of global standards for publicly accountable entities……Page 183
6.11 How do reporting requirements differ for non-publicly accountable entities?……Page 184
6.12 IFRS for SMEs……Page 185
6.13 Why have there been differences in financial reporting?……Page 186
Summary……Page 189
Review questions……Page 190
Exercises……Page 191
Notes……Page 192
7.2 Different countries meant different financial statements……Page 194
7.3 Historical overview of the evolution of financial accounting theory……Page 195
7.4 Developing a Framework for the Preparation and Presentation of Financial Statements……Page 197
7.5 Conceptual Framework for Financial Reporting 2018……Page 198
7.6 Current developments – concept of materiality……Page 214
Review questions……Page 215
Exercises……Page 216
8.2 The meaning of ethical behaviour……Page 219
8.3 The accounting standard-setting process and ethics……Page 220
8.4 The International Code of Ethics for Professional Accountants……Page 221
8.5 Implications of ethical values for the principles versus rules-based approaches to accounting standards……Page 224
8.6 Ethics in the accountant’s work environment – a research report……Page 228
8.7 Implications of unethical behaviour for stakeholders using the financial reports……Page 229
8.8 The increasing role of whistle-blowing……Page 234
8.9 Legal requirement to report – national and international regulation……Page 236
8.10 Why should students learn ethics?……Page 237
Summary……Page 238
Review questions……Page 239
Exercises……Page 241
Notes……Page 243
Part 4 INCOME AND ASSET VALUE MEASUREMENT SYSTEMS……Page 246
9.2 Role and objective of income measurement……Page 248
9.3 Accountant’s view of income, capital and value……Page 251
9.4 Critical comment on the accountant’s measure……Page 254
9.5 Economist’s view of income, capital and value……Page 255
9.7 Income, capital and changing price levels……Page 261
Review questions……Page 263
Exercises……Page 264
Bibliography……Page 266
10.2 Review of the problems of historical cost accounting (HCA)……Page 267
10.4 The concepts in principle……Page 268
10.5 The four models illustrated for a company with cash purchases and sales……Page 269
10.6 Critique of each model……Page 273
10.7 Operating capital maintenance – a comprehensive example……Page 276
10.8 Critique of CCA statements……Page 287
10.10 The IASB position where there is hyperinflation……Page 288
10.11 Future developments……Page 289
Summary……Page 291
Exercises……Page 292
Bibliography……Page 299
11.1 Introduction……Page 300
11.2 IAS 18 Revenue……Page 301
11.3 The issues involved in developing a new standard……Page 302
11.4 The challenges under both IAS 18 and IFRS 15……Page 303
11.5 IFRS 15 Revenue from Contracts with Customers……Page 304
11.6 Five-step process to identify the amount and timing of revenue……Page 305
11.7 Disclosures……Page 316
Review questions……Page 317
Exercises……Page 319
Notes……Page 324
Part 5 STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE……Page 326
12.2 Common themes……Page 328
12.3 Total owners’ equity: an overview……Page 329
12.4 Total shareholders’ funds: more detailed explanation……Page 330
12.5 Accounting entries on issue of shares……Page 332
12.7 Creditor protection: why capital maintenance rules are necessary……Page 333
12.8 Creditor protection: how to quantify the amounts available to meet creditors’ claims……Page 334
12.10 Distributable profits: general considerations……Page 335
12.13 Writing off part of capital which has already been lost and is not represented by assets……Page 337
12.15 Purchase of own shares……Page 343
Summary……Page 345
Exercises……Page 346
Notes……Page 351
13.1 Introduction……Page 352
13.2 Provisions – a decision tree approach to their impact on the statement of financial position……Page 353
13.4 The general principles that IAS 37 applies to the recognition of a provision……Page 354
13.5 Management approach to measuring the amount of a provision……Page 355
13.7 Provisions for specific purposes……Page 357
13.9 Contingent assets……Page 360
13.10 ED IAS 37 Non-financial Liabilities……Page 361
13.11 ED/2010/1 Measurement of Liabilities in IAS 37……Page 367
Review questions……Page 369
Exercises……Page 370
References……Page 374
14.2 Financial instruments – the IASB’s problem child……Page 375
14.3 IAS 32 Financial Instruments: Disclosure and Presentation……Page 377
14.4 IFRS 9 Financial Instruments……Page 382
14.5 IFRS 7 Financial Instruments: Disclosure……Page 392
Summary……Page 397
Review questions……Page 398
Exercises……Page 399
Notes……Page 405
15.2 Greater employee interest in pensions……Page 406
15.3 Financial reporting implications……Page 407
15.4 Types of scheme……Page 408
15.5 Defined contribution pension schemes……Page 410
15.7 IAS 19 (revised 2011) Employee Benefits……Page 411
15.8 The asset or liability for pension and other post-retirement costs……Page 412
15.9 Changes in the pension asset or liability position……Page 413
15.10 Comprehensive illustration……Page 415
15.13 Other long-service benefits……Page 418
15.14 Short-term benefits……Page 419
15.16 IFRS 2 Share-based Payment……Page 420
15.17 Scope of IFRS 2……Page 421
15.19 Equity-settled share-based payments……Page 422
15.21 Transactions which may be settled in cash or shares……Page 425
15.22 IAS 26 Accounting and Reporting by Retirement Benefit Plans……Page 426
Review questions……Page 429
Exercises……Page 430
Notes……Page 434
16.2 Corporation tax……Page 435
16.3 Corporation tax systems – the theoretical background……Page 436
16.4 Dividends pre and post 2016……Page 437
16.5 Corporation tax systems – avoidance and evasion……Page 438
16.6 IAS 12 – accounting for current taxation……Page 443
16.7 Deferred tax……Page 444
16.8 A critique of deferred taxation……Page 452
16.9 Value added tax (VAT)……Page 453
Summary……Page 454
Review questions……Page 455
Exercises……Page 456
Notes……Page 459
17.2 PPE – concepts and the relevant IASs and IFRSs……Page 460
17.3 What is PPE?……Page 461
17.4 How is the cost of PPE determined?……Page 462
17.5 What is depreciation?……Page 464
17.6 What are the constituents in the depreciation formula?……Page 465
17.7 Calculation of depreciation……Page 467
17.8 Measurement subsequent to initial recognition……Page 471
17.9 IAS 36 Impairment of Assets……Page 473
17.10 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations……Page 478
17.11 Disclosure requirements……Page 479
17.12 Government grants towards the cost of PPE……Page 480
17.13 Investment properties……Page 482
17.14 Effect of accounting policy for PPE on the interpretation of the financial statements……Page 483
Review questions……Page 486
Exercises……Page 487
Notes……Page 494
18.1 Introduction……Page 495
18.2 Need for an accounting standard on leasing……Page 496
18.3 Terms and conditions of a lease……Page 501
18.4 Leases in the financial statements of lessees under IFRS 16……Page 503
18.5 Leases in the financial statements of lessors……Page 508
18.6 Sale and leaseback transactions……Page 510
Review questions……Page 514
Exercises……Page 516
19.1 Introduction……Page 520
19.2 Intangible assets defined……Page 521
19.3 Accounting treatment for research and development……Page 524
19.4 Why is research expenditure not capitalised?……Page 525
19.6 Disclosure of R&D……Page 526
19.8 Internally generated and purchased goodwill……Page 527
19.9 The accounting treatment of goodwill……Page 528
19.10 Critical comment on the various methods that have been used to account for goodwill……Page 530
19.11 Negative goodwill/Badwill……Page 532
19.12 Brands……Page 533
19.14 Intellectual capital disclosures (ICDs) in the annual report……Page 535
19.16 Review of implementation of identified intangibles under IAS 38……Page 537
Review questions……Page 539
Exercises……Page 540
Notes……Page 547
20.2 Inventory defined……Page 550
20.3 The impact of inventory valuation on profits……Page 551
20.4 IAS 2 Inventories……Page 552
20.5 Inventory valuation……Page 553
20.6 Work in progress……Page 559
20.7 Inventory control……Page 561
20.8 Creative accounting……Page 562
20.9 Audit of the year-end physical inventory count……Page 564
20.10 Published accounts……Page 566
20.11 Agricultural activity……Page 567
Summary……Page 569
Exercises……Page 570
Notes……Page 576
21.1 Introduction……Page 577
21.2 The need to replace IAS 11 Construction Contracts……Page 578
21.3 Identification of contract revenue under IAS 11……Page 579
21.4 Identification of contract costs under IAS 11……Page 580
21.5 IFRS 15 treatment of construction contracts……Page 582
21.6 An approach when a contract can be separated into components……Page 584
21.7 Accounting for a contract – an example……Page 585
21.8 Illustration – loss-making contract using the step approach……Page 587
21.9 Public–private partnerships (PPPs)……Page 589
Summary……Page 592
Exercises……Page 593
Notes……Page 600
Part 6 CONSOLIDATED ACCOUNTS……Page 602
22.3 IFRS 10 Consolidated Financial Statements……Page 604
22.4 Fair values……Page 606
22.5 Illustration where there is a wholly owned subsidiary……Page 607
22.6 Preparing consolidated accounts when there is a partly owned subsidiary……Page 608
22.7 The treatment of differences between a subsidiary’s fair value and book value……Page 611
22.8 The parent issues shares to acquire shares in a subsidiary……Page 612
22.9 IFRS 3 Business Combinations treatment of goodwill at the date of acquisition……Page 613
22.11 When may a parent company exclude or not exclude a subsidiary from a consolidation?……Page 614
22.12 IFRS 13 Fair Value Measurement……Page 615
22.13 What advantages are there for stakeholders from requiring groups to prepare consolidated accounts?……Page 616
Review questions……Page 617
Exercises……Page 618
Notes……Page 624
23.3 Pre- and post-acquisition profits/losses……Page 625
23.4 The Bend Group – assuming there have been no inter-group transactions……Page 626
23.5 Inter-company transactions……Page 628
23.6 The Prose Group – assuming there have been inter-group transactions……Page 629
Summary……Page 631
Exercises……Page 632
Notes……Page 637
24.2 Eliminate inter-company transactions……Page 638
24.3 Preparation of a consolidated statement of income – the Ante Group……Page 639
24.5 Other consolidation adjustments……Page 641
24.6 A subsidiary acquired part-way through the year……Page 643
24.7 Published format statement of income……Page 645
24.8 Consolidated statements of cash flows……Page 646
Review questions……Page 648
Exercises……Page 649
Notes……Page 659
25.2 Definitions of associates and of significant influence……Page 660
25.4 The Brill Group – group accounts with a profit-making associate……Page 661
25.5 The Brill Group – group accounts with a loss-making associate……Page 664
25.6 The acquisition of an associate part-way through the year……Page 666
25.7 Joint arrangements……Page 667
25.8 Disclosure in the financial statements……Page 671
25.9 Parent company use of the equity method in its separate financial statements……Page 672
Review questions……Page 674
Exercises……Page 675
Notes……Page 685
26.1 Introduction……Page 686
26.2 How to record foreign currency transactions in a company’s own books……Page 687
26.3 Boil plc – a more detailed illustration……Page 689
26.4 IAS 21 Concept of Functional and Presentation Currencies……Page 690
26.6 Preparation of consolidated accounts……Page 692
26.7 How to reduce the risk of translation differences……Page 696
26.9 IAS 29 Financial Reporting in Hyperinflationary Economies……Page 697
Review questions……Page 699
Exercises……Page 700
Notes……Page 707
Part 7 INTERPRETATION……Page 708
27.2 Why is the earnings per share figure important?……Page 710
27.3 How is the EPS figure calculated?……Page 711
27.4 The use to shareholders of the EPS……Page 712
27.6 Adjusting the number of shares used in the basic EPS calculation……Page 713
27.7 Rights issues……Page 716
27.8 Adjusting the earnings and number of shares used in the diluted EPS calculation……Page 721
27.9 Procedure where there are several potential dilutions……Page 723
27.11 Disclosure requirements of IAS 33……Page 725
27.12 Enhanced disclosures……Page 727
Review questions……Page 728
Exercises……Page 729
Notes……Page 735
28.1 Introduction……Page 736
28.2 Overview of techniques for the analysis of financial data……Page 737
28.3 Ratio analysis – a case study……Page 738
28.4 Introductory review……Page 739
28.5 Financial statement analysis, part 1 – financial performance……Page 742
28.6 Financial statement analysis, part 2 – liquidity……Page 749
28.7 Financial statement analysis, part 3 – financing……Page 752
28.8 Peer comparison……Page 754
28.9 Report based on the analysis……Page 755
28.10 Caution when using ratios for prediction……Page 756
Review questions……Page 758
Exercises……Page 759
Note……Page 770
29.1 Introduction……Page 771
29.2 Improvement of information for shareholders……Page 772
29.3 Published financial statements – their limitations for interpretation purposes……Page 774
29.4 Published financial statements – additional entity-wide cash-based performance measures……Page 775
29.5 Ratio thresholds to satisfy Shariah compliance……Page 778
29.6 Use of ratios in restrictive loan covenants……Page 779
29.7 Investor-specific ratios……Page 782
29.8 Predicting corporate failure……Page 787
29.9 Professional risk assessors……Page 791
29.10 Valuing shares of an unquoted company – quantitative process……Page 792
29.11 Valuing shares of an unquoted company – qualitative process……Page 795
29.12 Possible effect of ‘Brexit’ on financial statements……Page 797
Summary……Page 798
Review questions……Page 799
Exercises……Page 800
Notes……Page 812
30.2 The objectives of financial reporting……Page 814
30.3 Reports and the flow of information pre-XBRL……Page 816
30.4 What are HTML, XML and XBRL?……Page 817
30.5 Reports and the flow of information post-XBRL……Page 818
30.6 Why are companies adopting XBRL?……Page 819
30.7 What are the processes followed to adopt XBRL for outputting information?……Page 823
30.8 What is needed when receiving XBRL output information?……Page 826
30.10 Real-time reporting……Page 831
30.11 Stakeholder interaction with XBRL data……Page 833
Summary……Page 834
Exercises……Page 835
Notes……Page 837
Part 8 ACCOUNTABILITY……Page 840
31.2 A systems perspective……Page 842
31.3 Different jurisdictions have different governance priorities……Page 844
31.4 Pressures on good governance behaviour vary over time……Page 845
31.5 Types of past unethical behaviour……Page 846
31.6 The effect on capital markets of good corporate governance……Page 847
31.7 Risk management……Page 848
31.8 The role of internal control, internal audit and audit committees in corporate governance……Page 849
31.9 External audits in corporate governance……Page 851
31.10 Executive remuneration in the UK……Page 857
31.11 Corporate governance, legislation and codes……Page 861
31.12 Corporate governance – the UK experience……Page 862
Review questions……Page 870
Exercises……Page 873
Notes……Page 875
32.1 Introduction……Page 878
32.2 Environmental and social disasters, the adverse consequences that can follow and the lessons to be learnt……Page 879
32.3 Management accountability for environmental and social responsibility……Page 881
32.4 Integrated reporting concepts……Page 885
32.5 The historical context of the evolution of integrated reporting including the drivers of this movement……Page 889
32.6 The efforts on which integrated reporting builds……Page 893
32.7 The contribution of accountants……Page 897
32.8 Integrated reporting – its impact on the future development of financial reporting and accounting……Page 902
Review questions……Page 904
Exercises……Page 906
Notes……Page 911
Index……Page 914
Back Cover……Page 925