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 Fourteenth Edition FINANCIAL ACCOUNTING AND REPORTING Barry Elliott Jamie Elliott 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 ACCESS CODE INSIDE 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 unlock valuable online learning resources Front cover image: © Getty Images CVR_ELLI4443_14_SE_CVR.indd www.pearson-books.com 18/8/10 11:29:35 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 Openmirrors.com 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 13 12 11 10 Typeset in 10/12 Ehrhardt MT by 35 Printed by Ashford Colour Press Ltd., Gosport Openmirrors.com Brief contents Preface and acknowledgements Guided tour of MyAccountingLab xx xxv Part INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 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 22 40 59 Part REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY 99 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 Part STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE 10 11 12 13 14 15 16 17 18 19 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 101 129 156 186 223 Openmirrors.com 255 257 283 312 343 375 404 441 461 497 523 vi • Brief Contents Part 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 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 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 INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 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 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 3 4 5 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 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 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 REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY Financial reporting – evolution of global standards 5.1 5.2 5.3 5.4 Introduction Why we need financial reporting standards? Why 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 reporting requirements differ for non-publicly accountable entities? Evaluation of effectiveness of mandatory regulations Move towards a conceptual framework Summary Review questions Exercises References 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 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? 104 105 106 106 108 109 113 117 118 119 119 123 125 125 126 127 127 129 129 130 134 137 138 149 150 152 153 154 156 156 156 158 159 161 163 164 165 168 169 172 174 178 888 • Index EBITDA (earnings before interest, tax, depreciation and amortisation) 453, 454, 467, 707, 720 –1, 764, 822 Eco-Management and Audit Scheme (EMAS) 853 – economic income 49 –53 economic value added (EVA) 758–9, 763 economists income and asset value measurement 47–53, 132 emissions trading 477–9 empirical inductive approach 131–2 employees 170, 804, 805 bonuses 117, 200, 356, 357, 358, 376, 697 disclosure of benefits 238, 347, 356, 361, 363, 364 –7 goodwill 484 information needs/provided to 5, 139, 197 pensions and other long-service benefits 343 –57, 364 –7 principles–based approach 162, 164 share-based payments 261, 275, 346, 359 – 64, 382 short-term benefits 357– social reporting 862–3, 864 stakeholders 6, 165 termination benefits 358 EnBW Energie Baden-Württemberg AG 554, 555 Eni 527 Enron 105, 107, 114, 124, 149, 160, 162, 170, 175, 304, 737, 804, 808, 810, 811 entity approach 150 reporting 140 –1 environmental auditing 853 – 4, 858 – 60 environmental liabilities provision for 295, 305, 848 environmental reporting 164 –5, 838 –9, 857–8, 861, 869 –70 ACCA award schemes 850 –2 accountant’s role 844 –5 background 846 –7 Connected Reporting Framework 840 –2, 843–4 corporate social responsibility (CSR) 159, 165, 807, 839, 843, 849–50, 866 – 8, 871 economic consequences 856 –7 European Commission 847–8 evolution of stand-alone reports 848–50 Global Reporting Initiative (GRI) 843, 870 –2 IFAC Framework 842–4 international charters and guidelines 852–4 self-regulation schemes 854 –6 triple bottom line (TBL) 839 –40, 843–4, 850, 870 –2 Openmirrors.com equity capital 45 investors see shareholders equity compensation plans see share-based payments equity method associates 604 –6 joint ventures 609, 610 errors 391, 510, 512, 513–14, 526, 555 estimates 44, 49, 67, 108, 145, 201 depreciation 200 ethical behaviour 804 accounting profession: meaning of 159 –61 accounting standard setting process 164 –5 company code of ethics 172– corporate governance 158 –9, 803 – corporate social responsibility 159, 165 ICAS research report 168 –9, 171 IFAC Code of Ethics for Professional Accountants 165 – impact on financial reports 169 –72 law 158 maximisation of profits 161 meaning of 156 – 61 norms of society 161 principles-based approach 162– rules-based approach 162 Sarbanes–Oxley Act (SOX) 160 superfairness 158, 163, 179 training in 178 –9 whistle-blowing 174 – Europe 172, 806, 851, 853 – 4, 859 stewardship reporting 85 European Home Retail 752 European Union 113, 313, 477, 839 corporate governance 806 credit rating agencies 766 Eighth Directive 114 environmental reporting 847– 8, 858 financial instruments 314 Fourth Directive 109, 112, 113 –14, 848 historical cost accounting 82 IFRSs 115, 381 Parliament 229 –30 segment reporting 225 Seventh Directive 114, 848 sources of finance 110 taxation 379, 385 XBRL 787 Eurovestech 205 events after reporting period 235–7, 572 Excel 783, 791, 792 exceptional items 42, 194 size, nature or incidence: require disclosure (IAS 1) 206 eXtensible Business Reporting Language see XBRL eXtensible Mark-up Language (XML) 784 externalities 807 extraordinary items 42 Eybl International 550 failure prediction models, corporate 749 –55 fair value accounting 85, 86, 119, 147, 267 biological assets 515, 516, 517 deferred tax 390 emissions trading certificates 478 finance leases 446, 447 financial instruments 195, 313 –14, 321–2, 323–5, 326 –7, 328, 330, 334 –5 foreign operations, consolidation of 628, 632 goodwill 466, 552–5 held for sale assets 233, 604 intangible assets 466, 477, 537– investment properties 428, 444 leases of land 444 non-controlling interests 556, 558 non-current assets held for sale 424 parent company accounts 578 pension schemes 349, 352, 366 property, plant and equipment 406, 417 public–private partnerships 537– purchase method of consolidating 552, 558 – 60 share-based payments 360, 361–3, 364 see also market value fairness 164 –5, 179, 803, 807 fair override 204 –5 fair view 202, 203, 206 superfairness 158, 163, 179 true and fair 16, 150, 162, 203 – 4, 205 faithful representation 15, 141, 143, 150, 285 FAME (Financial Analysis Made Easy) 717 fees accountants 166 –7 audit 166, 193 fiduciary duties directors 267 FIFO (first-in-first-out) 198 –9, 202 filing of accounts 787, 792 finance costs 188, 318 –20, 323 finance leases 446 –7 finance leases see under leases Financial Accounting Standards Board (FASB) 108, 129 accrual accounting 24, 26 –7, 32 Concepts Statements 133, 134 – 6, 149 conceptual framework developments 85 – 6, 149 –50, 152 convergence project 391–2, 469 –70, 659 fair value 86, 147 IFRSs 118 –19 negative pressures on standard setters 160 –1 objective of financial reporting 85 – 6, 149 operating leases 454 revenue recognition 523 segment reporting 224, 230 taxation 391, 392 Index • 889 financial accounting theory 112 historical overview 130 –3 Financial Action Task Force (FATF) 177– financial adaptability 140, 145 financial assets see financial instruments financial capital maintenance 30 –2, 53– 4, 62– 4, 79, 80, 145 financial crisis 313 –15, 322, 327, 820, 831 credit crunch 119, 748, 755 financial decision model – financial instruments 85, 132, 267, 312–13, 831 2008 financial crisis 313–15, 322, 327 amortised cost 313 –14, 322, 323, 324 –5, 326, 327–8, 334 –5 available-for-sale financial assets 191, 323–5, 327, 537 compound instruments 258, 317–18, 364, 391 definitions 315–16, 321– 4, 32708 derecognition of financial assets 325– 6, 336 developments 333 – disclosure and presentation 315 –20, 330 –3, 335 emissions trading certificates 478 fair value 195, 313 –14, 321–2, 323 –5, 326 –7, 328, 330, 334 –5 finance costs on liabilities 188, 318 –20 four categories of 321– 4, 334 hedge accounting 313, 329 –30, 382, 625 impairment of financial assets 335 – inter-company balances 571 investment in subsidiaries 578 measurement 326 –9, 334 – offsetting 320 perpetual debt 318 public–private partnerships 536 –7 recognition of 325 – 6, 336 rules versus principles 313 scope of standards 315, 321 financial leverage multiplier 698, 700, 701, 703, 705 financial reporting financial statements 134, 150 fraudulent 510 history of 40 –1 Internet see separate entry national differences 109 –13, 129 –30 need for mandatory standards 101–3, 104, 123–5, 129 non-publicly accountable entities 119 –23 objectives 22–3, 85 – 6, 134, 149 regulatory framework 105 – standardise, efforts to 113 –19 tax and 111–12 Financial Reporting Council (FRC) 16, 104, 105, 151, 204, 812, 823, 831 Financial Reporting Review Panel (FRRP) 106 – 8, 129, 151 fair override 205 segment reporting 230 tangible assets 477 Financial Reporting Standard for Smaller Entities (FRSSE) 121–2, 123 Financial Reporting Standards (FRS) 106 Cash Flow Statements 684 Accounting for Subsidiary Undertakings 121 Reporting Financial Performance 83, 762–3 Reporting the Substance of Transactions 122, 304, 536 Acquisitions and Mergers 142 Related Party Disclosures 122 10 Goodwill and Intangible Assets 122 15 Tangible Fixed Assets 30, 407 16 Current Tax 122, 375, 384 18 Accounting Policies 122 19 Deferred Tax 122, 375, 392–3 20 Share-based Payment 382 22 Earnings per Share 121 financial risks 820 Financial Services Authority 150 financial statements 150 contents for external users 23 elements of 134 – 6, 143 FASB Concept Statements 134 – IAS Presentation of Financial Statements 131, 186, 187, 191, 194, 201, 202, 203, 204, 206, 210, 376 IASC/IASB Framework see under International Accounting Standards Board measurement in 136, 145–7 objectives 22–3, 86, 137, 138 – 40 recognition in 136, 143 –5 see also individual statements Findel plc 207, 331–3 FINRA (Financial Industry Regulatory Authority) 175 – first-in-first-out (FIFO) 44, 499, 500 Fisher, Irving 49 –50, 132 Fisons 762 fixed assets PPE see property, plant and equipment public–private partnerships 536 –7 FLS Industries A/S 550 football sector 178, 236, 261 Ford 474 foreign exchange 391, 623–33 conversion distinguished from translation 623 definition of foreign currency transaction 623 functional currency 624, 625, 627, 632 monetary and non-monetary items 624, 625 presentation currency 624, 627–8, 632 France 114, 117, 314, 462 bearer shares 110 –11 equity investment 110 legal system 109 tax and accounting rules 111 fraud 170 –1, 175, 506, 510, 511, 718, 803, 804, 810, 811 audit and detection of 812, 813, 831 free cash flow (FCF) 682–3, 757 freehold land 409 –10 Friedman, Milton 161 FRSSE (Financial Reporting Standard for Smaller Entities) 121–2, 123 G20 313, 314 Gamma Holdings NV 714 gearing 706 –9, 707, 740, 754 brands 475, 476 corporate governance 829 –30 goodwill 467 leases 442, 452–3, 454 off balance sheet finance 283 – 4, 289, 304, 305, 442, 452, 719 preference shares 316 –17 property, plant and equipment 417, 428 –9 shariah compliant companies 746 GEC/AEI 102–3 general or current purchasing power 60 – 6, 112, 132–3 General Electric 394 Germany 40, 113, 114, 462 banks 110 –11 bearer shares 110 –11 corporate governance 805 fair override 204 legal system 109 sources of finance 110 tax and accounting rules 111 XBRL 793 Getronics 262 Geveke NV 758 Gibraltar 379 GKN 261, 550 –1 Global Reporting Initiative (GRI) 843, 870 –2 Go-Ahead 426 going concern 16, 30, 46 –7, 67, 119, 125, 131, 164, 201, 510, 696 events after reporting period 237 failure prediction 754 –5 Goldfields 409 –10 goodwill 170, 205, 466 –70, 471, 477, 483 – definition 466 equity depletion and brands 475 foreign operations 628, 632 impairment 421–2, 466, 467, 469, 470, 483, 554 negative 470, 554 –5 purchase method of consolidating 552–5, 560 SMEs 122 governments grants 425 – 6, 517 income measurement 41–2 information needs 139 investments in companies 805 protectionism 718 public–private partnerships (PPPs) 532– 890 • Index governments (continued) related party disclosures 240 –1 social reporting 866 grants 205 Great Portland Estates plc 395 Greenbury Report 756 gross profit 200 –1 groups accounts see consolidated accounts definition 549 GUS 394 H-scores 752–3, 763 Harris Queensway 510 Hart plc 348 hedge accounting 313, 329 –30, 382, 625 held-for-trading investments 321 held-to-maturity investments 322, 323, 324 –5, 327 Hicks, John 50, 132 Higgs report (2003) 825 historical cost accounting (HCA) 23– 4, 32, 43 – 4, 54, 84 –5, 131, 195 accounting base 201 ASB approach 81, 82, 83, 145 – CCA statements and 79 – 80 example 61–5 IASB Framework 137, 138, 503 intellectual property 482 modified 44, 46, 84 –5, 130, 137, 145, 146, 152 problems of 59 – 60, 429 historical overview accounting scandals 102–3, 112–13 financial accounting theory 130 –3 Holman AB 515 Hong Kong 821, 851 Hooker Chemical Corporation 845 – horizontal analysis 741–2, 743 – hotels 410 HSBC 708 HTML (Hyper Text Mark-up Language) 783, 784, 791 Hugo Boss 147, 476 human rights 840, 869 hyperinflation 83 – IBM 474 ICAEW (Institute of Chartered Accountants in England and Wales) 103, 142, 267, 392, 395, 482, 669, 738 ethical behaviour 171–2, 176, 177 ICAS (Institute of Chartered Accountants of Scotland) 149, 168, 171, 737 ICI 408 – 9, 420 impairment 416, 472, 483, 719 brands 477 emissions trading certificates 478 events after reporting period 236 financial assets 335 – goodwill 421–2, 466, 467, 469, 470, 483, 554 held for sale assets 233 property, plant and equipment 416, 418 –23 public–private partnerships 538 Openmirrors.com income gearing 283, 289, 707 as means of control 41–2 as means of prediction 42 see also gearing income and asset value measurement accountant’s view 43 –7, 132 changing price levels 53 – conceptual framework 136, 137 economist’s view 47–53, 132 role and objective 40 –3 summary 55 India 115 indirect control 141 inflation 24, 54, 65, 83, 84, 644, 763 inflation accounting 24, 112, 130, 866 ASB approach 81–3, 145 –7 borrowings 75 – critique of CCA statements 79 – 81 current entry cost or replacement cost 42, 53 – 4, 60, 61–3, 64, 65, 66 –7, 132–3, 138, 146 current exit cost or net realisable value 60, 61–3, 64, 65, 66, 67– 8, 85, 132–3, 138, 146 current or general purchasing power 60 – 6, 112, 132–3 depreciation 412, 428 examples 61–5, 68 –79 future developments 84 – IASC/IASB approach 83 – 4, 138 non-monetary assets 72–3 profit adjustments 70 –2 restating opening position 69 –70 value to the business model 82, 83, 146 –7 Informa plc 552 information needs 22, 110 conceptual framework 85 – 6, 132–3, 134, 138 – 40, 149 –50, 151–2 employees 5, 139, 197 environmental reporting 848 internal users – managers 3, –5 shareholders – 4, 42, 110, 111, 124, 133, 134, 138, 139, 149, 151–2, 164, 206 –10, 736 – 8, 817, 848 users of SME accounts 121, 123 initial public offerings (IPOs) 719 insider information/trading 512, 719, 802, 804, 813, 818 Institute of Chartered Accountants in England and Wales (ICAEW) 103, 142 ethical behaviour 171–2, 176, 177 Institute of Chartered Accountants of Scotland (ICAS) 149, 168, 171, 737 Institute of Investment Management and Research (IIMR) 657 institutional investors 111, 260 insurance brands 476 claims 300 –1, 303 firms 818 intangible assets 170, 471– 4, 482– brand accounting 474 –7, 482– 4, 560 emissions trading certificates 478, 479 goodwill see separate entry intellectual property 479 – 82 public–private partnerships 536 – R&D see research and development small and medium-sized enterprises (SMEs) 763 Intel 474 intellectual property 479 – 82 inter-company balances 571–2 interest capitalisation 406 –7 cover 680, 744 financial instruments: implicit rate of 319 –20 present value calculations 49, 53 internal control systems 509 –10, 807 internal rate of return (IRR) 7, 756 International Accounting Standards Board (IASB) 114 –15 conceptual framework developments 85 – 6, 149–50, 152 construction contracts 523 – convergence project 391–2, 469 –70, 659 discontinued operations 233 fair value 86, 147, 327 financial instruments 313, 314, 322, 327, 333, 334, 335, 336 financial statements 23, 85 – Framework for the Presentation and Preparation of Financial Statements 28, 32, 86, 115, 125, 133, 137– 8, 141, 150, 201, 203, 284 –5, 297, 298, 300, 303, 376, 387, 395 – 6, 410, 427, 443, 453, 462–3, 464 –5, 469, 470, 471, 503, 517 government grants 427 inflation accounting 83 – 4, 138 joint ventures 609 objectives of financial reporting 85 – 6, 149 operating leases 454 performance statement 382 principles–based approach 162 revenue recognition 523 – segment reporting 224, 230 SME reporting 123 taxation 391–2, 395 – United States: adoption of IFRSs 118 –19 XBRL and 786 International Accounting Standards Committee (IASC) 112, 114, 151, 152, 312, 463, 669 accrual accounting 24, 32 objective of financial statements 22–3 International Accounting Standards (IAS) 115, 116 Presentation of Financial Statements 131, 186, 187, 191, 194, 201, 202, 203, 204, 206, 210, 376 Inventories 131, 195, 406, 427, 464, 497– 8, 499 –509, 511, 513 –14, 517 Index • 891 International Accounting Standards (IAS) (continued) Cash Flow Statements 32– 4, 669 –79, 680, 683 –5 Accounting Policies, Changes in Accounting Estimates and Errors 202, 203, 382, 383, 391 10 Events after the Reporting Period 235 –7, 283, 375, 572 11 Construction Contracts 118, 523, 524 –32, 538 12 Income Taxes 118, 234, 375, 382–92, 393, 395, 426 14 Segment Reporting 118, 224, 225, 227, 229, 230 15 Information Reflecting the Effects of Changing Prices 83 16 Property, Plant and Equipment 29–30, 146, 195, 385, 391, 405, 406, 407, 408, 410, 411, 412, 415, 416, 417, 427, 430, 517, 569 17 Leases 133, 284, 427, 441, 442–56 18 Revenue 25, 26, 328, 523, 538 19 Employee Benefits 238, 343, 344, 346, 347–58, 359 20 Accounting for Government Grants and Disclosure of Government Assistance 405, 425–7, 517 21 The Effects of Changes in Foreign Exchange Rates 391, 623–33 22 Business Combinations 467 23 Borrowing Costs 118, 405, 406 –7 24 Related Party Disclosures 237– 41 26 Accounting and Reporting by Retirement Benefit Plans 364 –7 27 Consolidated and Separate Financial Statements 315, 549 –51, 572, 577, 578 28 Investments in Associates 118, 315, 536, 603 – 4, 610 29 Financial Reporting in Hyperinflationary Economies 83 – 30 Disclosures in the Financial Statements of Banks 330 31 Interests in Joint Ventures 315, 608 –10 32 Financial Instruments: Presentation 297, 298, 312, 313, 315 –20, 330, 333, 571 33 Earnings per Share 641, 642–3, 644 –58, 659 35 Discontinuing Operations 424 36 Impairment of Assets 233, 405, 416, 418 –23, 472, 554 37 Provisions, Contingent Liabilities and Contingent Assets 195, 283, 289 –304, 344, 358, 406, 560 38 Intangible Assets 300, 461–2, 463–6, 469, 471– 4, 476, 477, 538 39 Financial Instruments: Recognition and Measurement 195, 267, 297, 312, 313–14, 315, 316, 320 –30, 331, 333, 334, 335 – 6, 382, 478, 537, 578, 625 40 Investment Property 405, 427–30, 444 41 Agriculture 427, 515 –17 true and fair 204 International Auditing and Assurance Standards Board (IAASB) 812 International Chamber of Commerce (ICC) 855–6 International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants 165 – Sustainability Framework 842– International Financial Reporting Interpretations Committee (IFRIC) 12 Service Concession Arrangements 537– 14 Limit on a Defined Benefit Asset 349 International Financial Reporting Standards (IFRS) 115–17, 267 Share-based Payments 315, 343, 346, 359 – 64, 382 Business Combinations 85, 390 –1, 466, 467, 469 –70, 477, 482– 4, 551, 555– 60 Non-current Assets held for Sale and Discontinued Operations 232–5, 405, 424 –5, 550, 604 Exploration for and Evaluation of Mineral Resources 410 Financial Instruments Disclosures 330 –3 Operating Segments 118, 224 –32, 551, 677 Financial Instruments 333, 334 –5 additional disclosures 203 advantages and disadvantages 119 corporate social responsibility 165 Framework and 137 impact of changing to 117, 305 –6, 316 –17, 352, 359, 381–2, 394 –5 principles–based approach 162 small and medium-sized enterprises (SMEs) 121, 122–3 International Forum on Accountancy Development (IFAD) 130 International Organization for Standardization (ISO) 856 International Valuation Standards Council 476 Internet 763, 782– Excel 783, 791, 792 eXtensible Business Reporting Language see XBRL HTML (Hyper Text Mark-up Language) 783, 784, 791 inventories 118, 718 agricultural activity 514 –17 audit of year-end count 510, 512–13 consignment 286 – control 509 –10 cost 44, 503 – 6, 507–9 cut-off procedures 509, 510 definition 497 disclosure 499, 513–14 errors, impact on profits of 513 –14 net realisable value 44, 137, 195, 200, 236, 506 –7, 511, 513 obsolete 511–12, 749 SMEs 122 subjectivity and creative accounting 499, 510 –12 turnover ratio 711–12, 715, 719, 742 unrealised profit on inter-company sales 572– 4, 575, 577 valuation 44, 131, 195, 198 –200, 236, 497–509, 511–12 work-in-progress 507–9 investment companies distributable profits 266 –7 investment firms 164, 818 investment properties 205, 427–8 investment ratios 706, 713 –14 dividend cover 706, 714 dividend yield 706 EPS see earnings per share operating return on equity 698, 700, 701, 703, 705 price/earnings (PE) ratio 41, 259, 641–2, 714, 760 investments available-for-sale 191 short-term 145 Ireland 109, 114, 379 Islam see Muslim countries Islamic societies 157 Italy 806 ITOCHU Corporation 200 –1 iXBRL (inline XBRL) 787, 791–2 James Hardie Group 170 Japan 114, 462 corporate governance 806 IFRSs 115 legal system 109 non-voting shares 261 sources of finance 110 Jarvis 749 JD Wetherspoon 703 – Jenoptik AG 147 Johnson Matthey 101–2, 526 –7 joint ventures 608 –10 segment reporting 228 journal adjustments 511 key performance indicators (KPIs) 208 –9, 210 Kier Group 710 Kingfisher 484, 866 –7 knowledge management 480 –1 KPMG 379 Kuoni Travel Holding AG 294 land and buildings 44, 46, 429 agricultural land 517 freehold land 409 –10 leases 444, 451–2 see also property, plant and equipment language 113 last-in-first-out (LIFO) 44, 499, 501–2, 503 892 • Index leases 130, 427, 441– definitions 441, 442–3 depreciation 415, 446, 448, 455 ethical behaviour 161 finance 130, 284, 442–3, 444, 445, 446 –52, 455 of land and buildings 444, 451–2 lessors 442, 455 new approach 453 – off balance sheet finance 441, 442, 452–3 operating 284, 442–3, 444, 445– 6, 451–2, 455 substance over form 130, 133, 284, 443, 444 legal claims 292, 297, 300 legal profession 159, 444, 804 legal and regulatory risks 819 –20 legal systems, national 109 Lehman Brothers 808, 810 Lexmark 512 liabilities 40 contingent 144, 197, 296, 297, 298 –300, 301, 470, 749, 845 – definitions 28, 285 – 6, 298, 300, 470 events after reporting period 236 financial see financial instruments hidden 170 non-financial 297–304 prescribed format 194 –5 segment 227, 228, 229 trade creditors see separate entry limited liability companies 264 Linde AG 551 liquidity 305, 683 problems 262 liquidity ratios 698, 706, 709, 720 current ratio 698, 700, 702–3, 705, 706, 719, 720, 740, 741, 745, 748, 749 loan creditors 257 convertible loans 317, 326 debt exchanged for shares 262 information needs 138, 151–2 leases 444 principles–based approach 162 protection of 258, 263–5, 269 –71, 273, 276 reconstruction: debenture holders 271–3 see also credit rating agencies long-term contracts 44, 46 see also construction contracts SMEs 122 losses unrealised 46 machine-hour method of depreciation 413, 415 macroeconomics 41–2, 49 maintainable earnings/profits 42, 162, 206, 467, 643 – 4, 760 –1 maintenance costs 293 Majestic Metals Inc 861 Malaysia 821, 851 IFRSs 115 Openmirrors.com MAN 405 management 697, 762, 817–18 accounting system 117 buy-outs 200 by objectives 172–3 choice of accounting policies and EPS 644 decisions and brands 476 inflation accounting 65, 80 performance 81 remuneration 101–2, 200, 210, 238, 748 –9, 756 –9, 804, 814 –17 reporting to 3, –5 Manchester United plc 236, 296 market forces and corporate governance 817–18 market position and share 208 market value 147, 195, 205 financial assets 85 IASB Framework 137 see also fair value Marks & Spencer 394, 757, 867– 8, 869 –70 matching principle 16, 27, 29, 44, 131, 143 – 4, 404, 408, 425, 468, 499, 509 materiality 136, 137, 142, 150, 201, 405, 551 inter-company balances 572 measurability 136 measurement 55, 136, 145 –7, 195, 503, 848 accountant’s view 43 –7, 132 biological assets 515 –17 changing price levels 53 – conceptual framework 136, 137 contingent assets 300 contingent liabilities 299, 300, 301 economist’s view 47–53, 132 employee benefits 349 –52, 357, 358, 360, 361–3, 364 financial instruments 326 –9, 334 – non-current assets held for sale 424 non-financial liabilities 299, 300, 301, 303– provisions 291–3 role and objective 40 –3 share-based payments 360, 361–3, 364 see also historical cost accounting; inflation accounting; net realisable value; present values; replacement cost mergers suppliers 170 Merrill Lynch 175 Mexico 114 Microsoft 261, 474 Middle East 805 mineral resources 409 –10, 415, 427 Miniscribe Corporation 510 Molins plc 467, 470 money laundering 177– Moody’s Investor Services 764, 765 Morgan Crucible 762 MSCI Islamic indices 746 –7 multinational companies ethical behaviour 164, 173 Muslim countries corporate governance 805 shariah compliant companies 745–7 Myners report 825 national differences ethics and principles–based approach 164 financial reporting 109 –13, 129–30 National Grid plc 577 Nemetschek AC 625 Nestlé Group 202, 345– 6, 450 –1, 855 –6 net assets and borrowing powers 475 net present value (NPV) 7, 9, 319 –20 net realisable value (NRV) current value accounting 60, 61–3, 64, 65, 66, 67– 8, 85, 132–3, 138, 146 emissions trading certificates 478 IASB Framework 137, 138 inventories 44, 137, 195, 200, 236, 506 –7, 511, 513 Netherlands 117, 849 accounting profession 112, 114 inflation accounting 112, 130 tax and accounting rules 111 true and fair 204 XBRL 793 neutrality 15, 142, 164 –5 operating and financial review 208 New Zealand 752 IFRSs 115 legal system 109 XBRL 793 Nike 172 Nissan 551 Nokia 345, 474 non-cumulative preference shares 262 non-current assets 404 –5, 718 capitalisation of own work 187 cash flow concept 14 –15 consolidation adjustments 586 –7 cost of PPE 406 –7, 416 definition of PPE 405 depreciated replacement cost 85 depreciation of PPE 408 –16 disclosure of PPE 424 –5 fair override 205 government grants 425 –7 held for sale 232–3, 405, 424, 550, 604 impairment 416, 418 –23 interpretation of accounts 428 –30 investment properties 205, 427–8 prescribed format 194 –5 ratio analysis 709 –10, 719 revaluation of 44, 46, 85, 130, 137, 146, 152, 191, 268 – 9, 388, 390, 391, 393, 395, 408, 417–18, 569, 587 non-distributable reserves 258, 259, 263, 274 non-executive directors (NEDs) 749, 824, 825, 826 – non-financial liabilities 297–304 Index • 893 normalised earnings 162, 206 see also maintainable earnings North America 851 see also individual countries Norwalk Agreement 118 Norway 113, 849 objectives financial reporting 22–3, 85 – 6, 134, 149 financial statements 22–3, 86, 137, 138 – 40 income measurement 40–3 objectivity 11, 23– 4, 43, 44, 46 CPP model 65 IFAC Code of Ethics for Professional Accountants 165, 167, 168 Occidental 845– OECD (Organisation for Economic Cooperation and Development) 481, 806, 831 off balance sheet finance 210, 283, 737, 808 contingent assets 296, 297, 300 –1, 303 contingent liabilities 144, 197, 296, 297, 298 –300, 301, 303, 470, 749, 845 – gearing 283 – 4, 289, 304, 305, 442, 452, 719 IFRS, impact of converting to 305 – leases 441, 442, 452–3 non-financial liabilities 297–303 provisions see separate entry ratio analysis 283 – 4, 304, 305, 719 special purpose entities (SPEs) 304 –5, 808, 810, 831 substance over form 130, 133, 284 –9, 443, 444 oil 502–3 pipeline 609 onerous contracts 294, 301 OneSource 716, 717 operating capital maintenance 53, 54, 64, 66, 68 –79, 80, 133 operating and financial review 208 –9 operating leases see under leases operating margin ratio 698, 700, 702, 705 operating return on equity 698, 700, 701, 703, 705 operational risks 819 opportunity costs 8, 53, 61, 67 options pricing models 361, 363 put 326, 659 share 197, 261, 275, 346, 359, 361–3, 364, 653, 659, 816, 817 ordinary shares 258, 259 – 61, 272–3, 274 organic growth 710 Orkla Group 759 Palfinger AG 508 parent company consolidated accounts see separate entry statement of comprehensive income 587 statement of financial position 578, 587– Parmalat 114, 810, 827 participating preference shares 258, 262 partnerships 375 PDF files 782–3, 791, 792 Pearson 682–3, 846 pension schemes 343 – deferred tax 390 defined benefit 191, 345 – 6, 347–56, 365 –7 defined contribution 344 –5, 346 –7, 365, 366 –7 disclosure 347, 356, 364 –7 ex gratia 344 example: defined benefit 353 –5 impact of IFRS 352 multi-employer plans: defined benefit 355 – Pergamon Press 103 perpetual debt 318 plant see property, plant and equipment power base, world 164 preference/preferred shares 258, 259, 262, 271, 274, 316 –18 inter-company balances 571 prepayments 189 –90 present values (PV) 45, 47–9, 50, 53, 138, 195 finance leases 446, 447, 449 impairment of assets 416 intangible assets 473 provisions 195, 292–3, 301 presentation of financial information 147– price level changes 53– 4, 59 inflation accounting see separate entry problems of historical cost accounting 59 – 60 price-fixing cartels 174 price/earnings (PE) ratio 41, 259, 641–2, 714, 760 principal–agent issue 8, 159 principles-based approach 149, 162– 4, 313 private companies 259, 265, 266 reduction in capital 267–8, 276 Private Finance Initiative (PFI) 532, 533–5 profit-sharing plans employees 356, 357, 358 profitability ratios 706, 714, 754 operating margin ratio 698, 700, 702, 705 profits 44, 698 capital 46, 259 distributable 258, 259, 265 –7 ethical behaviour 161, 164 –5 maintainable 42 maximisation of 161 public–private partnerships 535 realised 266, 267 recognition in financial statements 145 segment 227, 230 unrealised 46, 267 unrealised on inter-company sales 572– 4, 575, 577 unrealised on inter-company sales: associates 606 property, plant and equipment (PPE) 404 –5 agricultural land 517 cost 406 –7, 416 definition 405 depreciation 408 –16 disclosure 424 –5 government grants 425 –7 impairment 416, 418 –23 interpretation of accounts 428 –30 investment properties 205, 427– leases of land and buildings 444, 451–2 non-current assets held for sale 232–3, 405, 424 revaluations 44, 46, 85, 130, 137, 146, 152, 191, 268 –9, 388, 390, 391, 393, 395, 408, 417–18, 428 –9, 569, 587 protectionism 718 provisions 406 constructive and legal obligations 301, 303, 344 definition 289, 303 disclosures 294 –5, 302–3 IAS 37 195, 283, 289 –95 ED IAS 37 Non-financial liabilities 297, 298, 300 –3 measurement of 195, 291–3, 301, 303 – onerous contracts 294, 301 present value 195, 292–3, 301 prudence 201 recognition of 290 –1 restructurings 294 –5, 302, 305, 560 scenarios 293 use of 295 prudence 15, 29, 46, 110, 125, 142, 143, 144 –5, 201 contingent assets 300 development costs 463 government grants 426 provisions 289, 292 taxation 376 termination payments 358 Prudential plc 261 Psion 261 public: information needs 139 public companies 259, 265, 266 borrowing powers and brands 475 fraudulent reporting 510 reduction in capital 267, 276 public goods 132, 133 public interest 165, 166, 176, 177 public–private partnerships (PPPs) 532–8 Punch Taverns plc 410 purchase of own shares 267, 274 – earnings per share 646 –7 purchasing power of money 54 quick ratio 709 ratios 696 – 8, 707 asset turnover 698, 700, 702, 705 cash debt coverage 680 cash dividend coverage 681 894 • Index ratios (continued) comparison with previous year 715 consolidated accounts 720 cost classification and 200 –1 current 305, 498, 514, 698, 700, 702–3, 705, 706, 719, 720, 740, 741, 745, 748, 749 EBITDA 720 –1 financial instruments 316 –17 financial leverage multiplier 698, 700, 701, 703, 705 free cash flow 683 gearing see separate entry inter-firm comparisons and industry averages 715 –17, 719 –20 inventory valuation 498, 514 investment see separate entry key 698 –706 limitations of 718 –20 liquidity see separate entry non-financial liabilities 304 off balance sheet finance 283 – 4, 289, 304, 305, 442, 452–3, 719 operating margin ratio 698, 700, 702, 705 operating return on equity 698, 700, 701, 703, 705 PPE, effect of accounting policy for 428 –30 production efficiency 200 –1 profitability 698, 700, 702, 705, 706, 714, 754 pyramid of 699, 705 return on capital employed (ROCE) 53, 145, 208, 429 –30, 453, 514, 550, 698, 700 –2, 703, 705, 707, 719 revaluations and 428 –9 subsidiary 706 –7 turnover see separate entry use of see analytical analysis receivables 323, 327, 479, 510 trade 43, 288 –9, 323, 712–13, 718, 719, 742, 749 recognition 848 ASB Statement of Principles 143 –5 biological assets 515 construction contracts 523 –5, 526 –32 criteria 136 financial instruments 325 – 6, 336 IASB Framework 137 intangible assets 466, 471 provisions 290 –1 revenue 25 – 6, 523 – share-based payments 359, 360 reconstructions write off of lost capital 267, 268 –73 redeemable preference shares 262, 274, 322 redundancy payments 358, 470 reimbursements insurance claims 300 –1, 303 related party disclosures 237– 41, 808 relevance 15, 121, 123, 136, 137 ASB Statement of Principles 141, 142, 143, 146, 147, 150 Openmirrors.com fair presentation 203 principles-based approach 163 reliability 15 –16, 119, 123, 136, 152 ASB Statement of Principles 141–2, 143, 144 –5, 146, 147, 150 fair presentation 203 IASB Framework 137, 284 –5 principles-based approach 163 prudence 201 religious ethics 157, 164 remuneration directors 41, 101–2, 261, 304, 359, 748 –9, 756 –9, 804, 814 –17 disclosures 238 inventory valuation 200 performance related 756 –9, 816 –17 replacement cost (RC) 42, 53 – 4, 60, 61–3, 64, 65, 66 –7, 82, 132–3 inventories 502–3 reporting entity 140 –1 research and development (R&D) 118, 719, 763 deferred tax 390 definitions 461–2 development costs 461, 462, 463 – research 305, 461, 462–3 reserves distributable 258, 259, 265 –7, 844 non-distributable 258, 259, 263, 274 retained earnings 362, 418 revaluation 258, 428 –9 share-based payments 362 restructuring 258, 261 provision for 294 –5, 302, 305, 560 retail method 501 return of capital 145 return on capital employed (ROCE) 53, 145, 208, 698, 700 –2, 703, 705, 707, 719 Reuters 394 revaluations assets 44, 46, 85, 130, 137, 146, 152, 191, 268 –9, 388, 390, 391, 393, 395, 408, 417–18, 428 –9, 569, 587 depreciation 408, 411 events after reporting period 236 impairment loss 421 intangible assets 472 ratio analysis 710 ratios and 428 –9 reserves 258 statement of total recognised gains and losses 83 taxation 388, 390, 393, 395 revenue 510 accrued 323 inflating total 26 –7 overstatement of 510 recognition 25 – 6, 523 – rights issue 261–2, 645 Rio Tinto 609 risk 683 analysis: Revenue Authorities 791 corporate failure prediction models 749 –55 corporate governance 803, 808, 818 –20, 830, 831 credit rating agencies 262, 317, 453, 764 – 6, 787 reporting 738 Rite Aid Corporation 511 Roche Group 396 –7 Roche Holdings 420 –1, 745 Rohan plc 317 Rolls Royce 274, 313, 465 Royal Mint 701 rules-based approach 149, 162, 313 Russia 806 SABMiller 473 – safe harbour provisions 210 Sainsbury 501 sale and repurchase agreements 288 sales incentives 26 –7 inter-company balances 572 unrealised profit on inter-company 572– 4, 575, 577 Sanitec International SA 572 Sarbanes–Oxley Act (SOX) 160, 807, 820 scandals, accounting 102–3, 112–13, 123 – deficient corporate climate 173 Enron 105, 107, 114, 124, 149, 160, 162, 170, 175, 304, 737, 804, 808, 810, 811 Parmalat 114, 810, 827 Scandinavia 112 Scottish Power 295, 846 Sea Containers Ltd 147 Securities and Exchange Commission (SEC) 108, 113, 118, 119, 129, 142, 510 credit rating agencies 766 environmental reporting 847 negative pressures on standard setters 160 –1 XBRL based statements 786 –7, 791–2, 795 segment reporting 122, 223 –7 cash flow statement 677, 683 consolidated accounts 551 disclosures 224, 227–9, 231–2, 677, 683 impact of IFRS 229 –30 self-constructed assets 406 sensitivity analysis 745 Sepracor 714 Severn Trent 394 share capital 65 minimum 265 reduction in 258, 267–76 writing off lost capital 267, 268 –73 share-based payments 197, 261, 275, 346, 359 – 64 corporation tax 382 shareholders 162, 838 –9, 850 agency costs 8, 159 audit client 166 corporate governance 801–2, 804, 805, 817, 818, 825, 828–31, 850 CPP model 65, 66 Index • 895 shareholders (continued) earnings per share, use of 643– ethics and principles–based approach 163, 164 expectation gap 124 Fisher/Hirshleifer separation theory going concern issue 47 inflation accounting 65, 66, 80 information needs 3–4, 42, 110, 111, 124, 133, 134, 138, 139, 149, 151–2, 164, 206 –10, 736 – 8, 817, 848 leases 444 limited liability 264 public–private partnerships 535 shareholder value (SV) 756, 816 shareholders’ funds 45, 65, 475 stewardship see separate entry taxation 375, 376 –7, 380 –1 total shareholder return (TSR) 756 –7, 763 voting 260 –1 shares 257– bearer 110 –11 bonus issues 644, 645 compound instruments 258, 317–18 convertible preference 262, 317–18 France 110 –11 Germany 110 –11 issue of 236, 258 –9, 261–3 issued after reporting date 236 options 197, 261, 275, 346, 359, 361–3, 364, 653, 659, 816, 817 ordinary 258, 259 – 61, 272–3, 274 participating preference 258, 262 preference/preferred 258, 259, 262, 271, 274, 316 –18, 571 premium 259, 263 price 26, 41, 104, 119, 169, 175, 259, 304, 512, 644, 749, 762 purchase of own 267, 274 – 6, 646 –7 redeemable preference 262, 274, 322 rights issues 261–2, 645, 647–50 share split 645, 646 –7 treasury 257, 274, 275 United Kingdom 110, 258 –9 unquoted companies: valuation of 760 – warrants 653 shariah compliant companies 745–7 Shell 632 silver 503 Singapore 463, 851 corporate governance 820, 821–3 IFRSs 115 purchase of own shares 276 XBRL 792 Sirius XM 262 Sketchley plc 123 – Slough Estates plc 395 small and medium-sized enterprises (SMEs) 15, 763 – definition 120, 122 disclosures 120, 122 environmental reporting 852 failure prediction models 752 FRSSE 121–2 IFRS for 122–3 national standards 120 –2 objectives of small firms 14 reconstruction 271 role in UK economy 119–20 segment reporting 122, 230 unquoted companies: share valuation 760 – Smith, Adam 161 Smith report (2003) 825 social reporting 164–5, 838–9, 861–2 accountability 862 background 863 – comparative data 868 –70 comprehensive coverage 862–3 corporate social responsibility (CSR) 159, 165, 807, 839, 843, 849–50, 866 – 8, 871 definition of social accounting 862 Global Reporting Initiative (GRI) 843, 870 –2 triple bottom line (TBL) 839 – 40, 843 – 4, 850, 870 –2 Sony 765 SORP (Statements of Recommended Practice) 106 South Africa 851 South East Asia 805 Spain 113, 177, 379, 806 special purpose entities (SPEs) 304 –5, 808, 810, 831 Sri Lanka 851 SSL International plc 262, 427 Stagecoach plc 148 stakeholders 6, 133, 147, 257 audit client 166 corporate governance 801–2, 804, 850 environmental and social reporting 838 –9, 843, 844, 847, 848, 850, 861–2 fairness to all 165 operating and financial review 208 principles–based approach 162 reconstruction 272 Standard & Poor 453, 764 Standard Chartered 483 standard cost 44, 501 start-ups 359 costs 305 statement of cash flows see cash flow statements statement of changes in equity (SOCE) 186, 191, 197–8 consolidated 586 corporation tax 382 statement of comprehensive income 40, 41, 108, 186, 669, 698 accrual accounting 27, 28, 30, 31 administrative expenses 188 associates 604, 606, 607–8, 720 available-for-sale financial assets 191, 323–5 biological assets 515 consolidated 555, 556, 560, 583–5, 586 –7, 588 –90, 625, 628, 631–2, 720 construction contracts 526, 528, 529 –30, 531 cost of sales 187, 198 –200 decision-useful 210 discontinued operations 234 –5 distribution costs 187– finance costs 188, 318 –20, 323, 325, 447, 448 –9 financial instruments 318 –20, 323–5, 325, 329, 330 –1, 334, 335 foreign operations 625, 628, 631–2 Format 187, 192–3 fundamental accounting principles 201 goodwill 467, 468, 470 government grants 425 – historical cost convention 24 identical transactions and formats 198 –201 impairment 421, 422 inflation accounting 62– 4, 70–2, 77, 80 inventories 512 IRFS, impact of converting to 117 joint ventures 608, 609 leases 443, 445, 446, 447, 448 –9, 452, 454 note to 193– other comprehensive income 191–2, 325, 329, 334, 335, 418, 587 other operating income or expense 188 parent company 587 past–defined period of time 44 pensions 191, 347– 8, 349, 352, 355 preference dividends 316 preparation of income statements 188 –92 prescribed formats 187–94 property, plant and equipment 405 public–private partnerships 535–8 revaluations 191, 418 share-based payments 359, 361–3 taxation 234, 382, 383, 384, 391 year end adjustments 189 –90 statement of financial position 40 –1, 108, 186, 698, 808 accrual accounting 28–9, 30, 31 asset valuation 195 assets, recognition of 286 associates 604 –5 biological assets 516 cash flow concept 12–15 conceptual framework 140, 145 consolidated 554, 556 –8, 560, 568 –70, 571, 573 –7, 625, 627, 628 construction contracts 527, 529, 530, 532 emissions trading certificates 477–9 equity capital 258 explanatory notes 196–7 financial instruments 319, 320, 324 –5, 330 –1 foreign operations consolidated 625, 627, 628 fundamental accounting principles 201 goodwill 467, 469, 470 impairment 423 896 • Index statement of financial position (continued) inflation accounting 61, 62–3, 66, 68 –70, 72–6, 77–9 intangible assets 467, 469, 470, 475, 477 inventories 499, 512, 513 IRFS, impact of converting to 117, 305 –6 joint ventures 608, 609 leases 448, 449 –50, 452, 454 liabilities, recognition of 286 non-current assets held for sale 232–3 parent company 578, 587–8 pensions 347–52, 355 prescribed formats 194 –7 present values 53 presentation 148 property, plant and equipment 232–3, 405, 429 public–private partnerships 535–8 recognition of assets and liabilities 286 share-based payments 362 taxation 383, 387, 395 unconsumed cost of assets 44 – statement of total recognised gains and losses 83 Statements of Financial Accounting Standards (SFAS)(US) 95 Statement of Cash Flows 669 109 Accounting for Income Taxes 388 128 Earnings per Share 659 131 Disclosures about Segments of an Enterprise and Related Information 224, 229 –30 141R Business Combinations 118 Statements of Recommended Practice (SORP) 106 Statements of Standard Accounting Practice (SSAP) 103, 106 Accounting for Value Added Tax 396 –9 Stocks and Long-Term Contracts 122 22 Accounting for Goodwill 467 25 Segmental Reporting 224 stewardship 12–13, 16, 22, 24, 41, 85 – 6, 123, 134, 149, 150, 186, 210 ASB Statement of Principles 138, 143 intangible assets 477 maintainable profit 42 stock see inventories straight-line method depreciation 30, 202, 411, 412–13, 414, 415 –16 goodwill amortisation 468 leases 415, 447, 455 strategic risks 818 –19 Structural Dynamics Research Corporation 811–12 subjectivity 25–7, 44, 49, 53, 54 discontinued operation 233 fair value accounting 119 inflation accounting 67 inventories 499, 510 –12 principles–based approach 163 progress, concept of 164 segment reporting 224, 229 Openmirrors.com subprime mortgages 808 substance over form 16, 110, 125, 133, 152, 844 accounting for 285 – deferred tax 396 examples 286 –9 financial instruments 316, 318 IASB Framework 284 –5, 396 leases 130, 133, 284, 443, 444 sum of the digits method depreciation 413, 414 finance leases 447, 448 superfairness 158, 163, 179 sustainability 838 –9 accountant’s role 844 –5 Connected Reporting Framework 840 –2, 843 – environmental reporting see separate entry Global Reporting Initiative (GRI) 843, 870 –2 IFAC Framework 842–4 social reporting see separate entry triple bottom line (TBL) 839 – 40, 843 – 4, 850, 870 –2 sustainable earnings 162, 206 Sweden 849, 850 synergies 484 Syskoplan 710 Taffler’s Z-score 751–2 tangible assets 480, 510, 710 PPE see property, plant and equipment public–private partnerships 536 –7 taxation 426 accounting for current 382– avoidance and evasion 377– 80 corporation tax 42–3, 111–12, 123, 375 – 82 deferred 384 –96, 844 discontinued operations 234 IFRS and 381–2 income measurement 42–3 iXBRL filing 787, 792 leases 441 purchase of own shares 274 reporting systems and 111–12, 123, 375 – share-based payments 359 stamp duty 261 value added tax (VAT) 396 –9, 787 XBRL based filing 787, 792, 793, 795 technical expertise Technotrans 294 termination benefits 358 terrorist financing 177–8 Tesco 702, 719 ThyssenKrupp 758 TI Group 394 timeliness 150 T.J Hughes 510 total shareholder return (TSR) 756 –7, 763 total shareholders’ funds 258– 62 trade creditors/suppliers 257 ethics 165, 170 information needs 139 protection of 258, 263–5, 269–71, 273, 276 turnover ratio 713, 742 trade receivables 323, 749 doubtful debts 43 factoring 288 –9, 719 turnover ratio 712–13, 718, 719, 742 trademarks 473, 479 transparency 314, 482, 737, 738, 765, 815, 825 non-financial liabilities 304 principles–based approach 149 special purpose entities (SPEs) 304 –5 Treadway Commission: COSO 510 treasury shares 257, 274, 275 trial balance 188–90 triple bottom line (TBL) 839 – 40, 843– true and fair 16, 150, 162, 203– 4, 205, 498, 510, 813, 831 off balance sheet finance 284, 442 Turkiye Petrol Rafinerileri 84 turnover 42 turnover ratios 706, 709 –13, 741–2 asset turnover 698, 700, 702, 705 inventory 711–12, 715, 719 trade receivables 712–13, 718, 719 Tyco 810, 811 UITF (Urgent Issues Task Force) 121, 122 uncertainty 144, 755 contingent assets 296, 300 contingent liabilities 296 proposed revenue recognition approach 523 provisions 289, 292, 298 understandability 142, 150, 163 fair presentation 203 operating and financial review 208 Unilever 233, 239 – 40, 757 unincorporated businesses 264 Uniq Group 627–8 United Kingdom 40, 104, 114, 117, 119, 462, 480 Accounting and Actuarial Disciplinary Board 176 banks: dormant accounts 326 cash flow statement 671, 672, 680, 684 corporate governance 805, 806, 812, 820, 822–31 corrupt practices 173 environmental and social reporting 857, 858, 863–6, 868–70 equity market 110 ethical behaviour 164, 173, 176, 178 fair value accounting 119 financial instruments 312 goodwill 467, 470, 475, 482–3 historical cost accounting 82, 84 –5, 130, 145, 151–2 institutional investors 111 interest costs capitalised 407 inventories 503 iXBRL filing 787, 792 joint ventures 610 Index • 897 United Kingdom (continued) legal system 109 mandatory standards 101–3, 113 minimum share capital 265 money laundering 177 off balance sheet finance 304 pensions 349 Private Finance Initiative (PFI) 532, 533–5 reduction in capital 267–76 regulatory framework 105 – 8, 129 share-based payments 359 small and medium-sized enterprises (SMEs) 119 –22 taxation 111, 375, 378, 379, 381–2, 384, 391, 392–3, 394 –5 total shareholders’ funds 258 – 62 Wider Markets Initiative (WMI) 532–3 XBRL 787, 792, 795 see also Company Acts United Nations 853 United States 152, 462 accounting profession 112, 114 corporate governance 805, 808, 820, 829 environmental reporting 854, 858, 861 equity market 110 ethical behaviour 164, 172, 173, 174, 175 – 6, 178 fair value accounting 86 FASB see Financial Accounting Standards Board financial instruments 313, 314 FINRA (Financial Industry Regulatory Authority) 175 – fraudulent reporting 510 GAAP 118, 313, 314, 322, 349, 424, 469 –70 historical cost accounting 82 IFRSs 118 –19 institutional investors 111 inventories 118, 502, 503 legal system 109 materiality 142 negative pressures on standard setters 160 –1 pensions 349 regulatory framework 108, 112–13, 129 rules-based approach 149, 162 Sarbanes–Oxley Act (SOX) 160, 807, 820 SEC see Securities and Exchange Commission segment reporting 224, 229 SME reporting 123 stewardship reporting 85, 134, 150 taxation 111, 379, 388 treasury shares, buyback of 275 XBRL 786 –7, 791–2, 793, 795 unquoted companies 760 – valuation accounting rules 195 emissions trading certificates 477–9 intangible assets 473, 476, 480, 483, 484 inventories 44, 131, 195, 198 –200, 236, 497–509, 511–12 true and fair override 205 unquoted company shares 760 – see also fair value; market value; net realisable value; present values; revaluations value added reports 864 –5 value added tax (VAT) 396 –9 iXBRL filing 787 Varia plc 226 –7 verifiability 143, 150 vertical analysis 738 – 41, 742–3 Virgin Atlantic 174 Visa 474 Vodafone 176 –7, 234 –5, 757 WACC (weighted average cost of capital) 759 Waddell & Reed, Inc 176 Wal-Mart Stores Inc 502 warrants, share 653 warranty provisions 291, 297, 301 Wartsila Corporation 551–2 Watford Leisure plc 261 weighted average inventories 499, 500 weighted average cost of capital (WACC) 759 Wessanen 117 whistle-blowing 174 –8, 803 Wider Markets Initiative (WMI) 532–3 Wienerberger 702 window dressing 718 Wolseley 201, 394 working capital 12, 13–14 World Health Alternatives Inc 804 World Intellectual Property Organisation (WIPO) 479 –80 WorldCom 160, 754 WPP 476 –7, 483 XBRL (eXtensible Business Reporting Language) 119, 737, 782– 4, 785, 794 –5 advantages of 785 IASB and 786 internal accounting 794 international use of 786 –7, 791–3 iXBRL 787, 791–2 processes to adopt 787–9 reasons to adopt 786 –9 receiving XBRL output information 789 –91 Revenue Authorities 787, 791, 793, 795 sharing data 793 – Xerox 718 XML (eXtensible Mark-up Language) 784 Xstrata 748 Z-scores 750 –2, 763 Zeta model 751 Openmirrors.com Openmirrors.com Openmirrors.com ... 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. .. Openmirrors.com Brief contents Preface and acknowledgements Guided tour of MyAccountingLab xx xxv Part INCOME AND ASSET VALUE MEASUREMENT SYSTEMS Accounting and reporting on a cash flow basis Accounting and. .. – 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