International financial reporting and analysis, 6th edition

www.allitebooks.com INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS sixth edition www.allitebooks.com International Financial Reporting and Analysis, 6th Edition David Alexander, Anne Britton, Ann Jorissen, Martin Hoogendoorn and Carien van Mourik Publishing Director: Linden Harris Publisher: Andrew Ashwin Development Editor: Abigail Jones Production Editor: Beverley Copland Manufacturing Buyer: Elaine Willis Marketing Manager: Amanda Cheung Typesetter: Cenveo Publisher Services Cover design: Adam Renvoize © 2014, Cengage Learning EMEA ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, or applicable copyright law of another jurisdiction, without the prior written permission of the publisher While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions from the book or the consequences thereof Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners The publishers and author/s make no claim to these trademarks The publisher does not endorse, and accepts no responsibility or liability for, incorrect or defamatory content contained in hyperlinked material All the URLs in this book are correct at the time of going to press; however the Publisher accepts no responsibility for the content and continued availability of third party websites For product information and technology assistance, contact emea.info@cengage.com For permission to use material from this text or product, and for permission queries, email emea.permissions@cengage.com British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-4080-7501-2 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire, SP10 5BE United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed in China by RR Donnelley 10 – 16 15 14 www.allitebooks.com BRIEF CONTENTS PART ONE FRAMEWORK, THEORY AND REGULATION Basics of Financial Reporting International Accounting Differences 19 The Process of Harmonization 39 Economic Valuation Concepts 61 Current Entry Value 81 Current Exit Value and Mixed Values 95 Current Purchasing Power Accounting 107 Fair Values 121 Accounting Theory and Conceptual Frameworks 133 10 Structure of Published Financial Statements 169 11 Corporate Governance, Corporate Social Responsibility and Ethics 195 12 Basics of Interpretation of Financial Statements 229 PART TWO ANNUAL FINANCIAL STATEMENTS 13 Fixed (Non-current) Tangible Assets 255 14 Intangible Assets 291 15 Impairment and Disposal of Assets 307 16 Leases 331 17 Inventories and Construction Contracts 353 iii www.allitebooks.com iv BRIEF CONTENTS 18 Accounting for Financial Instruments 381 19 Revenue 417 20 Provisions, Contingent Liabilities and Contingent Assets 435 21 Income Taxes 453 22 Employee Benefits 477 23 Changing Prices and Hyperinflationary Economies 521 24 Statements of Cash Flows 529 25 Disclosure Issues 563 PART THREE CONSOLIDATED ACCOUNTS AND THE MULTINATIONAL 26 Business Combinations 609 27 Consolidated Financial Statements 625 28 Alternative Concepts on Consolidation and Business Combinations 657 29 Accounting for Associates, Joint Arrangements and Related Party Disclosures 667 30 Foreign Currency Translation 699 PART FOUR FINANCIAL ANALYSIS 31 Interpretation of Financial Statements 733 32 Techniques of Financial Analysis 781 www.allitebooks.com CONTENTS Preface xi Acknowledgements xv Walk through tour xvi PART ONE FRAMEWORK, THEORY AND REGULATION Basics of Financial Reporting Objectives Introduction Users of Financial Reports Characteristics of Useful Information Need for Communication Coherent Framework 14 International Dimension 15 Terminology and the English Language 16 Summary 17 Exercises 17 International Accounting Differences 19 Objectives 19 Introduction 20 Origin of National Differences 22 Differences in Accounting Systems 28 Characteristics and Differences in National GAAP 30 Country Classification 32 National Differences: Evolutions at the End of the Twentieth Century 34 National Differences: Do They Still Play a Role in an Era of Globalized Accounting? 35 Summary 38 Exercises 38 The Process of Harmonization 39 Objectives 39 Introduction 39 EU Directives 40 International Accounting Standards 46 Structure of the IASB 50 IFRS for Small and Medium-sized Enterprises (SMEs) 58 The Future? 59 Summary 60 Exercises 60 Economic Valuation Concepts 61 Objectives 61 Introduction 61 v www.allitebooks.com vi CONTENTS The Basic Equation 62 Income and Capital 63 Wealth and Value 63 An Array of Value Concepts 66 Economic Value 68 Capital Maintenance 68 Criteria for Appraising Alternative Valuation Concepts 69 Fisher and Psychic Income 69 Hicks and Capital Maintenance 72 Calculation of Economic Income 74 Income Ex Ante and Income Ex Post 76 Summary 78 Exercises 78 Current Entry Value 81 Objectives 81 Introduction 81 Back to Basics 82 The Business Itself 83 Capital Maintenance 85 Replacement Cost Accounting and Depreciation 89 Current Entry Values: Preliminary Appraisal 89 Summary 91 Exercises 92 Current Exit Value and Mixed Values 95 Objectives 95 Introduction 95 Current Exit Value Accounting 96 Current Exit Values: Preliminaryappraisal 99 Mixed Values – Ad Hoc Methods 100 Mixed Values – Deprival Value 101 Deprival Value: Appraisal 102 Summary 103 Exercises 104 Current Purchasing Power Accounting 107 Objectives 107 Introduction 107 The Measuring Unit Problem 108 Current Purchasing Power 108 Combination of Methods 113 Current Purchasing Power – What Does it Really Mean? 115 Some International Practices and Traditions 115 Summary 117 Exercises 117 Fair Values 121 Objectives 121 Introduction 121 IFRS 13, Fair Value Measurement 122 Applying the Standard 124 The Measurement Process 127 Disclosure 129 Towards an Appraisal of Fair Value 129 Valuation and Income Measurement – Some Overall Considerations 130 Summary 132 Exercises 132 Accounting Theory and Conceptual Frameworks 133 Objectives 133 Introduction 134 Accounting Theory and a Comprehensive Theory of Accounting 134 Approaches to the Formulation of Accounting Theory 135 The IASB Conceptual Framework 140 IAS 1, Presentation of Financial Statements 153 Scope of IAS 154 Fair Presentation and Compliance with IFRSs 155 IAS 8, Accounting Policy Changes, Changes in Estimates and Errors 158 IFRS 1, First-time Adoption of IFRS 165 Summary 167 Exercises 168 10 Structure of Published Financial Statements 169 Objectives 169 Introduction 169 www.allitebooks.com CONTENTS Conceptual Issues in the Presentation of Financial Statements 170 Statement of Financial Position Under IAS 172 Statement of Profit or Loss and Other Comprehensive Income Under IAS 176 Statement of Changes in Equity Under IAS 183 Statement of Cash Flows Under IAS 183 Notes to the Financial Statements Under IAS 184 The Balance Sheet Under the Fourth Directive 186 The Income Statement Under the Fourth Directive 189 Summary 193 Exercises 193 11 Corporate Governance, Corporate Social Responsibility and Ethics 195 Objectives 195 Introduction 196 Corporate Governance 196 Financial Reporting and Corporate Governance 204 Additional Statements for External Reporting 207 XBRL and Electronic Dissemination 211 Corporate Social Responsibility (CSR) and CSR Reporting 212 Ethics in Accounting 223 Summary 227 Exercises 228 12 Basics of Interpretation of Financial Statements 229 Objectives 229 Introduction 229 Accounting Information and Users 230 Benchmarking 231 Technique of Ratio Analysis 232 Financial Status 240 Additional Information 244 Summary 245 Exercises 246 PART TWO ANNUAL FINANCIAL STATEMENTS 13 Fixed (Non-current) Tangible Assets 255 Objectives 255 Introduction 256 Principles of Accounting for Depreciation 256 Determining the Cost of a Fixed Asset 261 Government Grants 262 Borrowing Costs 267 Property, Plant and Equipment 271 Accounting for Investment Properties 278 Summary 286 Exercises 287 14 Intangible Assets 291 Objectives 291 Introduction 291 Intangible Assets 292 Accounting for Purchased Goodwill 301 Summary 305 Exercises 306 15 Impairment and Disposal of Assets 307 Objectives 307 Introduction 307 Impairment of Assets 308 Non-current Assets Held for Sale and Discontinued Operations 320 Summary 326 Exercises 326 16 Leases 331 Objectives 331 Introduction 331 Definitions of IAS 17 333 Lease Classification 336 Accounting and Reporting by Lessees – Finance Leases 339 Accounting and Reporting by Lessees – Operating Leases 342 www.allitebooks.com vii viii CONTENTS Accounting and Reporting by Lessors – Finance Leases 343 Accounting and Reporting by Lessors – Operating Leases 345 Sale and Leaseback Transactions 346 Summary 350 Exercises 351 17 Inventories and Construction Contracts 353 Objectives 353 Introduction 354 Inventories 354 Inventory Systems 358 IAS Requirements for Inventory 358 Contracts 364 IAS 11 366 Future for IAS 11 375 Summary 377 Exercises 377 18 Accounting for Financial Instruments 381 Objectives 381 Introduction 382 Short History of Accounting for Financial Instruments 382 Problems Identified 384 What is a Financial Instrument? 385 Distinction between Financial Liability and Equity 388 Recognition and Derecognition of Financial Instruments 390 Categories of Financial Assets and Liabilities 394 Measurement of Financial Instruments 395 Hedge Accounting 399 Disclosure 401 The Future for Financial Instruments: IFRS 402 IFRS 4, Insurance Contracts 408 Summary 413 Exercises 414 19 Revenue 417 Objectives 414 Introduction 417 What is Revenue? 418 From What Does Revenue Arise? 419 Recognition 421 How Should It Be Measured? 424 A Replacement for IAS 18? 428 Summary 430 Exercises 430 20 Provisions, Contingent Liabilities and Contingent Assets 435 Objectives 435 Introduction 435 Problems Identified 436 Provisions, Contingent Liabilities and Contingent Assets 437 Accounting for Provisions, Contingent Liabilities and Contingent Assets 440 Specific Application of Recognition and Measurement Rules 444 Fourth Directive and IAS 37 446 Future Developments 447 Summary 448 Exercises 449 21 Income Taxes 453 Objectives 453 Introduction 453 The Expense Question 454 The Deferred Tax Problem 454 IAS 12 and Tax 463 Summary 472 Exercises 473 22 Employee Benefits 477 Objectives 477 Introduction 478 Accounting for Short-term Employee Benefits 479 Accounting for Profit-sharing and Bonus Plans 480 Accounting for Equity Compensation Benefits 480 www.allitebooks.com CONTENTS Accounting for Long-term Employee Benefits: Pension Benefits 493 Termination Benefits 512 Accounting by the Pension Fund 513 Summary 514 Exercises 514 23 Changing Prices and Hyperinflationary Economies 521 27 Consolidated Financial Statements 625 Objectives 521 Introduction 521 EU Fourth Directive 521 IAS GAAP 522 Summary 527 Exercises 528 24 Statements of Cash Flows 529 Objectives 529 Introduction 529 Profit Versus Cash 530 Cash Flow Reporting 531 Funds Flow or Cash Flow? 531 Requirements of IAS 533 Format of Cash Flow Statement 536 Preparation of Statement of Cash Flows 541 The Future 546 Summary 547 Exercises 548 25 Disclosure Issues 563 Objectives 563 Introduction 564 Disclosure of Segment Information 564 Events after the Reporting Period 576 Earnings per Share 582 Interim Financial Reporting 595 Summary 599 Exercises 599 PART THREE CONSOLIDATED ACCOUNTS AND THE MULTINATIONAL 26 Business Combinations 609 Objectives 609 Introduction 609 Accounting for the Business Combination: The Basics 610 Specific Issues on Accounting for the Business Combination 614 Loss of Control 619 Disclosure Requirements of IFRS 619 Summary 622 Exercises 622 Objectives 625 Introduction 625 Control 626 Need for Consolidated Accounts 629 Preparation of Consolidated Statements of Financial Position 630 Preparation of Consolidated Statement of Comprehensive Income 641 Summary 645 Exercises 645 28 Alternative Concepts on Consolidation and Business Combinations 657 Objectives 657 Introduction 657 The Parent Concept 658 The Entity Concept 659 Proportional Consolidation 659 Comparison of the Three Concepts of Consolidation 660 Alternative Methods in Accounting for Business Combinations 661 Equity Accounting 664 Summary 665 Exercises 666 29 Accounting for Associates, Joint Arrangements and Related Party Disclosures 667 Objectives 667 Introduction 667 Equity Accounting and Associates 668 IAS 28, Investments in Associates 668 IFRS 11, Joint Arrangements 674 Accounting for Joint Arrangements 677 www.allitebooks.com ix 856 REFERENCES An international study’, Journal of Accounting Research 41(2):235–72 Hope, O.K (2003b) ‘Firm-level disclosures and the relative roles of culture and legal origin’, Journal of International Financial Management and Accounting 14(3):218–48 Horton, J., Serafeim, G and Serafeim, I (2012) ‘Does mandatory IFRS adoption improve the information environment’, Contemporary Accounting Research 30(1):388–423 Jackson, H and Roe, M (2009) ‘Public and private enforcement of securities laws: Resource-based evidence’, Journal of Financial Economics 93:207–38 Jiao, T., Koning, M., Mertens, G and Rosenboom, P (2012) ‘Mandatory IFRS adoption and its impact on analysts’ forecasts’, International Review of Financial 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23(4):589–609 Amir, E and Lev, B (1996) ‘Value-relevance of nonfinancial information: The wireless communications industry’, Journal of Accounting and Economics 22 (1–3):3–30 Dechow, P.M (1994) ‘Accounting earnings and cash flows as measures of firm performance: the role of accounting accruals’, Journal of Accounting and Economics 18(1): 3–42 Ittner, C.D and Larcker, D.F (2001) ‘Assessing empirical research in managerial accounting: A value-based management perspective’, Journal of Accounting and Economics 32(1–3):349–411 Kaplan, R and Norton, D (1992) ‘The balanced scorecard: Measures that drive performance’, Harvard Business Review (Jan–Feb):71–9 Rappaport, A (1998) Creating Shareholder Value: A Guide for Managers and Investors, New York, Free Press 861 INDEX AccountAbility’s Assurance Standard 219 accounting analysis 740–78 accounting estimates 162–3, 756–7, 785 accounting flexibility 20–1, 27 accounting harmonization 15–16, 20–1, 35, 39–59 accounting methods 756, 766–7, 785 accounting numbers management 755–8, 773–8 accounting periods 10 accounting policies 156–62, 753 accounting profession 29–30 accounting profit 455–6 accounting regulation 28–9, 785 accounting standards 752–5, 785 accounting systems 28–35 accounting theory 134–40 accruals convention 12–14 acid test ratio 241, 242, 801–2 acquisitions 784 see also business combinations adjusting events 579 advertising costs 15 advertising revenue 425 Aeroflot 525–7 Agency Theory 199 aggregation 157 Air France-KLM 791–2, 804–5 airline industry 801 Amazon 201 amortization of intangible assets 298–9 analyst-advisers Anheuser-Bush Inbev 573–4, 593–4 annual accounts management 741–58 assets 145, 146–7 see also financial assets recognition of 150 sale of 758 associates 668–74, 686–7 audit quality 755 bad debt allowances 756 balance sheet 115–17, 172–3, 186–9, 462, 630–41, 784–5 balanced scorecard 812 Barry-Callebaut 742–3 barter 425 basic earnings per share 583, 584–9, 804 behavioural paradigm 137 benchmarking 231–2 BEPS (basic earnings per share) 583, 584–9, 804 big bath accounting 748–9 biological assets 795–6 board characteristics 754 bonus plans 480 book value per share 243 borrowing costs 267–70 brewers 573–6 British Airways 766–7, 804–5 business combinations 609–21 acquirer identification 610–11 acquisition date 611 asset recognition 611–12 contingent consideration 617–18 control 610, 618 loss of 619 deferred taxes 466 disclosure 619–21 earn out liabilities 617–18 equity accounting 664–5 financial analysis 784 goodwill 612–14 liability recognition 611–12 measurement 611–12 non-controlling interests 614–15, 618 pooling of interests 661–4 staged achievement 615–16 business entities business strategy 737–9 Cadbury Report 200 capital 62–3, 151 capital maintenance 68–9, 72–4, 85–8, 151–3 capitalisation of borrowing costs 268–70 cash flow 530–3 cash flow hedge accounting 400–1 cash flow reporting 531 cash flow return on investment 807 cash flow statements see statement of cash flows cash value added 807–10 cash-settled share-based payment transactions 486–7 CFROI (cash flow return on investment) 807 Coca-Cola 481 code law systems 24–5 Code of Ethics for Professional Accountants (IESBA) 224–6 Combined Code of Corporate Governance (FRC) 200 common law systems 24–5 common size analysis 790–2 communication 8–14 company characteristics 754 company pension plans 494–508 current service cost 503 defined benefit cost 502–4 defined benefit liability 507 defined benefit plans 498–504 defined contribution plans 497–8 multi-employer 511 net defined benefit 504–7 past service cost 503–4 plan assets 507–8 settlements 504 company restructurings 784 comparability 8, 21–2, 144, 783–7 competition 750 competitors completeness of financial information compound financial instruments 389, 397–8 comprehensive theory of accounting 134–5 Conceptual Framework for Financial Reporting (IASB) 134–5, 140–53 conservatism see prudence consistency 11 863 864 INDEX consolidated financial statements 32, 625–44 control 626–8 entity concept 659 need for 629 non-controlling interests 628–9 parent concept 658–9 presentation currency 705–6 proportional consolidation 659–60 statement of comprehensive income 641–4 statement of financial position 630–41 construction contracts 364–76 constructive obligations 438 contingent assets 439–41 contingent liabilities 439–41 continuity 10, 14 contracts 364–76 control 610, 626–8 conventions 9–16 convergence 16, 40, 59 cookie jar reserves 749–50 corporate governance 196–207 Corporate Governance Code (UK) 196, 202–3, 204–7 corporate social responsibility 212–13 assurance 218–19 metrics 218–19 reporting 211, 213–23 example 220–3 corporate strategy 739–40 cost convention 10, 14 country classification of accounting systems 32–5 CPP (current purchasing power accounting) 107–17 creditors 6, 21 creditors’ ratio 238 critical paradigm 138 CSR see corporate social responsibility culture 26–8 currency conversion 700 currency transactions 706–21 currency translation 700–1 current assets 147, 233, 256 current entry value accounting 81–91 current exit value accounting 96–100 current liabilities 233 current purchasing power accounting 107–17 current ratio 240–1, 242, 801–2 current replacement cost 521–2 current service cost 503 customer loyalty programmes 423 customers CVA (cash value added) 807–10 Daimler-Benz 34 debt covenants 742–3 debt/equity ratio 24, 241–2 debtors’ ratio 238 deferral of transactions 758 deferred taxes 32, 454–62 see also taxation balance sheet 462 business combinations 466 discounting 471–2 flow through approach 459–60 full deferral 461 income statement 462, 467–8 investment 466 liability method 461–2 measurement 467 partial deferral 461 recognition 465–7 revaluation of assets 466 defined benefit cost 502–4 defined benefit liability 507 defined benefit pension plans 498–504, 511 defined contribution pension plans 497–8 depreciation 89, 256–61 arbitrary method 260 earnings mangement 757 intangible assets 298–9 output method 260 property, plant and equipment 276–7 reducing balance method 258–9 revaluation method 260 straight line method 258 sum of the digits method 260 usage method 260 deprival value accounting 101–3 DEPS (diluted earnings per share) 583–4, 589–94, 804 derivatives 387 diluted earnings per share 583–4, 589–94, 804 discontinued operations 323–6 dividend cover 243 dividends 424, 582 DSM 620–1 duality 9–10 DV (deprival value accounting) 101–3 EADS North America Inc 581–2 earnings management 36, 741–58 earnings per share 243, 582–94 easyJet 790, 791, 792 economic benefit probability of 150 economic income 74–8 economic value 68 economic value added 806–7 EECS (European Enforcement Coordination Sessions) 44 EFRAG (European Financial Reporting Advisory Group) 42–3 electronic dissemination of financial statements 211 Emirates Group 767 employee benefits 478–513 bonus plans 480 cash-settled share-based payment transactions 486–7 company pension plans 494–508 current service cost 503 defined benefit cost 502–4 defined benefit liability 507 defined benefit plans 498–504, 511 defined contribution plans 497–8 net defined benefit 504–7 past service cost 503–4 plan assets 507–8 settlements 504 disclosure 488–93, 508–10 equity-based compensation 480–93 equity-settled share-based payment transactions 483–6 group cash-settled share-based payment transactions 488 long-term 493–511 multi-employer plans 511 pension benefits 493–511 profit-sharing 480 projected benefit obligation 501 share-based payment transactions with cash alternatives 487–8 short-term 479 on termination 512 employees 6, 21 employment reports 209–10 Enron 48 entity analysis 758–67 entity concept 659 Entity Theory 199 entity-wide disclosures 572–6 EPS (earnings per share) 243, 582–94 INDEX equity 146, 148 and financial liabilities 388–9 presentation of 171–2 equity accounting 664–5, 668–74 equity change statements 183 equity investors 5–6 equity-settled share-based payment transactions 485–6 errors 164–5 ESMA (European Security and Markets Authority) 44–5 ethics 223–37 EU see European Union Euro Disney SCA 743 European Commission Accounting Strategy 42 European Financial Reporting Advisory Group 42–3 Financial Services Action Plan 42 Standards Advice Review Group 43 European Enforcement Coordination Sessions 44 European Financial Reporting Advisory Group 42–3 European Security and Markets Authority 44–5 European Union corporate governance 203–4 Directives 40–6 Fourth Company Law Directive 41–2, 45–6, 117, 170, 186–92, 446–7 current replacement cost 521–2 investment property 285 International Accounting Standards 42–6 International Financial Reporting Standards 42–6, 47 Regulation (EC) No 1606/2002 42 Seventh Company Law Directive 41, 45–6 EVA 806–7 events after the reporting period 577–82 ex ante income 76–8 ex post income 76–8 executive turnover 748 executory contracts 437 expenses 149, 151, 454 extensible business reporting language 211 fair presentation 155–6 fair value 283 fair values 121–31 faithful representation 143–4 finance leases 333, 337–45, 348–9 finance provision 23–4 financial accounting conventions 9–16 Financial Accounting Standards Board (US) 48–50 financial accounting theory 139–40 financial analysis 781–815 financial assets 394–5, 402–4 see also assets financial concept of capital 151 financial guarantee contracts 411 financial instruments 382–412 amortized costs 396 compound 389 definitions 385–8 derecognition 391–4 disclosure 401–2 effective interest method of amortization 396 and financial liabilities 388–9 impairment 397, 405 measurement 384–5, 395–8 offsetting 391 recognition 390–1 financial leases 387 financial liabilities 388–9, 395, 404 see also liabilities financial reporting see also financial statements corporate governance 204–7 cost constraints 144 desirable attributes of 7–8 national differences 22–8, 34–7 quality 35 users of 4–7, 230–1 Financial Reporting Council (UK) 196, 200, 202–3 financial statements see also financial reporting articulation of 170–1 cohesiveness of 547 comparability of 783–7 consolidated see consolidated financial statements date of authorization for issue 578 electronic dissemination 211 elements of 145–51 interpretation of 229–45 non-financial data 812–13 notes 184–5 performance 148–9 presentation 153–8, 787 structure of 169–92 financial status 801–4 financial year 783 fixed assets see non-current assets flexibility 27 foreign currency conversion 700 foreign currency transactions 706–21 foreign currency translation 700–1 foreign entities 715 Fourth Company Law Directive (EU) 41–2, 45–6, 170 balance sheet 186–9 current replacement cost 521–2 income statement 189–92 investment property 285 prudence 446–7 FRC (Financial Reporting Council (UK)) 196, 200, 202–3 functional currency 702–5 funds flow 531–3 FV (fair values) 121–31 GAAP (generally accepted accounting principles) 30–2, 785 gain 85 gearing ratios 241–2 generally accepted accounting principles 30–2, 785 Germany 753 Global Compact (UN) 212–13 Global Reporting Inititative 215–16 going concern 10, 14, 145, 582 goodwill 291–2, 301–5, 612–14, 670, 715 Google 201 government grants 262–7 governments 7, 21 Greenbury Report 200 GRI (Global Reporting Inititative) 215–16 gross dividend yield 243–4 group cash-settled share-based payment transactions 488 group entity concept 659 Hampel Report 200 harmonization 15–16, 20–1, 35, 39–59 HBU (highest and best use) 125–6 HC (historical cost accounting) 10, 14, 116, 811 hedge accounting 399–401, 405–6, 713–14 Heineken 218, 573, 575–6, 716–21 Herz, Robert 48 Higgs Report 200 865 866 INDEX highest and best use 125–6 historical cost accounting 10, 14, 116, 811 horizontal analysis 788–90 hyperinflation 117, 522–7, 715–16 IAG 791 IAS see International Accounting Standards IASB see International Accounting Standards Board IASC (International Accounting Standards Committee) 46–7 IESBA (International Ethics Standards Board for Accountants) 224–6 IFAC (International Federation of Accountants) 224 IFRIC see International Financial Reporting Standards Interpretations Committee IFRS see International Financial Reporting Standards IIRC ( International Integrated Reporting Council) 216 impairment of assets 308–20 disclosure 320 earnings mangement 757, 775 identification 310–12 measurement 312–20 recognition 313–20 income 62–3, 74–8, 149, 151 income measurement 130–1 income statement 189–92, 462, 467–8 income taxes 453–72 individualism 26 industry analysis 735–40 industry-specific ratios 801 inflation 521–7 see also hyperinflation informational paradigm 137 institutional characteristics 754 institutional paradigm 137–8 insurance contracts 408–12 intangible assets 291–305 amortization 298–9 depreciation 298–9 disclosure 301 disposals 301 internally generated 295–7 leases 349 measurement 297–8 retirements 301 revaluation 298–9 subsequent expenditure 297 useful life 299–301 interest 424 interest costs 267–70 interest cover ratio 241–2 interim financial reporting 595–9 International Accounting Standards 46–50 IAS (Presentation of Financial Statements) 153–8, 170–85 IAS (Inventories) 359–64 IAS (Accounting Responses to Changing Prices) 522 IAS (Statements of Cash Flow) 529–30, 533–47 IAS (Accounting Policy Changes, Changes in Estimates and Errors) 158–65 IAS (Research and Development Costs) 293 IAS 10 (Contingencies and Events Occurring after the Balance Sheet Date) 577–82 IAS 11 (Construction Contracts) 354, 366–76, 428–9 IAS 12 (Income Taxes) 463–72 IAS 14 (Segment Reporting) 793 IAS 15 (Information Reflecting the Effects of Changing Prices) 522 IAS 16 (Property, Plant and Equipment) 271–8, 283, 284 IAS 17 (Leases) 333–9 IAS 18 (Revenue) 417–29 IAS 18 (Revenue From Contracts with Customers) 354 IAS 19 (Employee Benefits) 478–513 IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) 262–7 IAS 21 (The Effects of Changes in Foreign Exchange Rates) 701–6, 715–16 IAS 22 (Business Combinations) 661 IAS 23 (Borrowing Costs) 268–70 IAS 24 (Related Party Disclosures) 681–4 IAS 25 (Accounting for Investments) 279 IAS 26 (Accounting and Reporting by Retirement Benefit Plans) 513 IAS 28 (Investment in Associates) 668–74, 678–9 IAS 29 (Financial Reporting in Hyperinflationary Economies) 522–5, 715–16 IAS 32 (Financial Instruments: Presentation) 382–3 IAS 33 (Earnings Per Share) 583–4, 586, 590–2 IAS 34 (Interim Financial Reporting) 595–9 IAS 36 (Impairment of Assets) 297, 308–20 IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) 435–48 IAS 38 (Intangible Assets) 292–301 IAS 39 (Financial Instruments: Recognition and Measurement) 382–3, 384, 402–4, 411, 413 IAS 40 (Investment Property) 271, 279–84, 285 International Accounting Standards Board 15–17 Conceptual Framework for Financial Reporting 134–5, 140–53 convergence 59 Monitoring Board 53 objectives 54–5 standard setting 55–7 structure 50–3 International Accounting Standards Committee 46–7 International Ethics Standards Board for Accountants 224–6 International Federation of Accountants 224 International Financial Reporting Standards 37, 42–50, 58–9, 753 IFRS (First-time Adoption of IFRS) 165–7 IFRS (Share-based Payment) 478 IFRS (Business Combinations) 301–4, 609–21, 661–2 IFRS (Insurance Contracts) 408–12 IFRS (Non-current Assets Held for Sale and Discontinued Operations) 320–6 IFRS (Financial Instruments: Disclosures) 382–3 IFRS (Operating Segments) 564–76, 793 INDEX IFRS (Financial Instruments) 383–4, 402–4 IFRS 10 (Consolidated Financial Accounts) 626–9 IFRS 11 (Joint Arrangements) 674–7 IFRS 13 (Fair Value Measurement) 122–4, 129, 283 International Financial Reporting Standards Advisory Council 53 International Financial Reporting Standards Foundation 51–2 International Financial Reporting Standards Interpretations Committee 53 IFRIC (Changes in Existing Decommissioning, Restoration and Similar Liabilities) 276 IFRIC (Determining Whether an Arrangement Contains a Lease) 339 International Integrated Reporting Council 216 International Organization of Securities Commissions 47 interpretive paradigm 138 inventories 354–64 base inventories 357, 358 cost assumptions 355–8 cost of 360–3 disclosure 363–4 earnings mangement 757 first-in, first-out (FIFO) 355, 358, 363 last-in, first-out (LIFO) 356, 358, 363 net realizable value 363 periodic systems 358 perpetual systems 358 turnover of 799–800 unit costs 355, 358, 363 weighted averages 357, 358 investment property 271, 278–86 investment ratios 242–4, 804–10 investor information 209 investor protection 36–7 IOSCO see International Organization of Securities Commissions ISO 26000 (Social Responsibility) 213 joint arrangements 674–81, 686–7 joint operations 677–8 joint ventures 678, 679–81 Kensey Nash Corporation 620–1 labour unions 750 leases 331–50 classification of 336–9 disclosure 345 finance leases 333, 337–9, 339– 42, 343–5 intangible assets 349 land and buildings 338–9 off-balance sheet 758 operating leases 333, 342–3, 345 legal systems 24–5 liabilities 145–6, 147–8, 150, 438 see also financial liabilities liquidity 240–2, 801–2 liquidity ratios 240–1 loan creditors Louis Vuitton Moet Hennessy 796 Lufthansa 757, 791, 804–5, 807–10 management commentary 207–9 management compensation 744–8 masculinity 27 matching convention 12–14, 15 materiality 11–12, 15, 157 McDonald’s 218 measurement reliability of 150 measuring units 108 merger accounting 661–4 mergers see business combinations mixed valuation model 795–6 mixed value accounting 100–3 monetary measurement 10 money exchanges with government statements 210 multi-employer pension plans 511 multivariate analysis 811–12 national differences in financial reporting 22–8, 34–7 Nestle´ 792, 798–800, 802–3, 826– 33 net assets 62 net current assets 233 net defined benefit 504–7 net dividend 243 net profit margin 235 net realizable value 363 new institutional paradigm 137–8 non-adjusting events 579–82 non-current assets 147, 233, 256–86 cost determination 261–70 held for sale 320–3 investment property 278–86 property, plant and equipment 271–8 non-current liabilities 233 non-financial data 812–13 NRV (net realizable value) 363 objectivity of financial information 8, 12, 14 obligations 147–8, 438 OECD (Organization for Economic Co-operation and Development) 196, 201–3 off-balance sheet leasing 758 offsetting 157–8 onerous contracts 441, 444 operating leases 333, 342–3, 345, 348–9, 387 operating segments 566–72 Organization for Economic Co-operation and Development 196, 201–3 parent concept 658–9 past service cost 503–4 PAT (positive accounting theory) 137 PBO (projected benefit obligation) 501 PE ratio see price/earnings ratio pension benefits 493–511 see also company pension plans pension funds 513 performance 148–9, 171–2, 179–82, 796–801 philanthropy 217–18 physical concept of capital 151 PIR (post-implementation reviews) 564 pooling of interests 661–4 positive accounting theory 137 post-implementation reviews 564 power distance 26 PPE see property, plant and equipment presentation currency 705–6 price/earnings ratio 244, 583–4, 804–5 Principles of Corporate Governance (OECD) 196, 202–3 prior period errors 164–5 probability of future economic benefit 150 professionalism 27 profit 62, 151–3, 455–6, 530–1 profit-sharing 480 projected benefit obligation 501 867 868 INDEX property, plant and equipment 271–8 proportional consolidation 659–60 proprietary concept 658–9 provisions 437–8, 440–8 disclosure 446 earnings mangement 757, 773–4 future operating losses 444 measurement 442–4 onerous contracts 441, 444 restructuring 444–5 prudence 11, 14, 15, 27, 31, 446–7 psychic income 69–72 purchased goodwill 292, 301–5 quality of accounting standards 752–5 quality of disclosure 765–7 quick ratio 241, 242 ratio analysis 232–45, 793–812 RC (replacement cost accounting) 14, 89 R&D costs 292–3, 295–6 real transactions 758 realization of revenue 12–13 recognition 149–51 reconciliation statements 546 regulation 743 Regulation (EC) No 1606/2002 42 related party disclosures 681–5 relevance of financial information 7, 143 reliability of financial information reliability of measurement 150 rendering of services 421–3 replacement cost accounting 14, 89 replacement costs 83–5 reportable segments 567–9 research and development (R&D) costs 292–3, 295–6 residual value 757 return on assets 235–6, 239–40, 796–9, 803–4 return on capital employed 234–40, 796 return on equity 239, 796–7, 803–4, 804–5 revenue 417–29 disclosure 427–8 measurement 424–7 transactions made up of parts 426–7 revenue recognition 420–4 ROA (return on assets) 235–6, 239–40, 796–9, 803–4 ROCE (return on capital employed) 234–40, 796 ROE (return on equity) 239, 796–7, 803–4, 804–5 royalties 424 Ryanair 304–5, 757, 789, 791–2, 804–5 Sabena 768–74, 775–8, 783, 788, 815–25 sale and leaseback 346–50 sale of assets 758 sale of goods 420–2 Samsung LED 581 SARG (Standards Advice Review Group) 43 SEC 581 segmental analysis 792–3 segmental reporting 564–76 services rendered 421–3 Seventh Company Law Directive (EU) 41, 45–6 SFAS 123 (Accounting for Stock-based Compensation) 481–2 SFAS 144 (Accounting for the Impairment or Disposal of Long-lived Assets) 320 share-based payment transactions with cash alternatives 487–8 shareholder value 805–10 shareholders 21 Shell 220–3 SIC 31 (Barter Transactions Involving Advertising Services) 425 small and medium-sized enterprises (SMEs) 58–9 small loss avoidance 741–2 SMEs (small and medium-sized enterprises) 58–9 Smith Report 200 social reporting see corporate social responsibility solvency ratios 241–2 SSAP 19 (accounting for investment properties) 285 stakeholder information 209–11 standardization 40 Standards Advice Review Group (EC) 43 Starbucks 201 statement of cash flows 183–4, 529–47 cash ledger approach 546 direct method 546 disclosure 544–5 financial analysis 813–15 financial statement approach 546 format 536–41 preparation 541–4, 546 statement of changes in equity 183 statement of comprehensive income 176–82, 641–4 statement of financial position see balance sheet statement of money exchanges with government 210 statement of profit or loss 176–82 statutory control 27 suppliers 6, 21 sustainability reports 813 see also corporate social responsibility Swissair 784 takeovers see business combinations tax base 464–5 taxable profit 455–6 taxation 25–6, 743 see also deferred taxes current liabilities and assets 465 deferred taxes 32, 454–62 disclosure 469–71 as expenses 454 income taxes 453–72 presentation 469–71 terminology 16–17 timeliness of financial information 8, 144 total shareholder return 805–10 trade creditors transaction prices 127 transparency 21, 27–8 trend analysis 788–90 true and fair override 155–6, 285 TSR (total shareholder return) 805–10 Turnbull Report 200 turnover of inventory 799–800 uncertainty avoidance 27 understandability of financial information 7–8, 144 uniformity 27, 32 Unilever 406–8, 744–7, 785–7, 792, 795, 798–800, 802–3, 834–8 unions 750 unit revenue 801 United Kingdom goodwill 304 investment property 285 United Nations Global Compact 212–13 INDEX United States convergence 16 Financial Accounting Standards Board 48–50 goodwill 304 International Accounting Standards 48–50 International Financial Reporting Standards 48–50 investment property 285 leases 338 useful life 757 users of financial reports 4–7 valuation 130–1 value 63–6 value added statements 210 value concepts 66–9 value of capital 63 value relevance 36 verifiability 144 Vodaphone 669–70, 679–81, 685 volume of trade 235 wealth 63–6 XBRL 211 869 CREDIT LINES FOR THIRD PARTY ITEMS WHICH REQUIRED PERMISSIONS CLEARANCE Figure 3.1: Copyright ª IFRS Foundation All rights reserved Reproduced by Cengage Learning, EMEA with the permission of the IFRS FoundationÔ No permission granted to third parties to reproduce or distribute Figure 3.2: Copyright ª IFRS Foundation All rights reserved Reproduced by Cengage Learning, EMEA with the permission of the IFRS FoundationÔ No permission granted to third parties to reproduce or distribute 870 .. .INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS sixth edition www.allitebooks.com International Financial Reporting and Analysis, 6th Edition David Alexander, Anne Britton,... Distinction between Financial Liability and Equity 388 Recognition and Derecognition of Financial Instruments 390 Categories of Financial Assets and Liabilities 394 Measurement of Financial Instruments... tailored to the sixth edition of International Financial Reporting and Analysis, including: xviii ● Solutions to selected exercises ● Interactive eBook ● A glossary of Accounting and Finance definitions