Issues in financial accounting (15/e): Part 2

Part 2 ebook “Issues in financial accounting” has contents: the statement of comprehensive income and further financial reporting issues, industry accounting standards, international accounting, accounting and the community.

part The statement of comprehensive income and further financial reporting issues Chapter 16 The statement of comprehensive income 502 Chapter 17 The statement of cash flows 530 Chapter 18 Financial reporting: Segment reporting, statements of value added, highlights statements and future-oriented financial information 549 Chapter 19 Further financial reporting issues 589 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 501 10/07/13 1:53 PM Chapter 16 The statement of comprehensive income 16.1 Introduction 16.2 Measurement of profit 16.3 Accounting standards 16.3.1 The form and content of the performance statement 16.3.2 Revenue 16.3.3 Classification of expenses 16.3.4 Unusual items LEARNING OBJECTIVES After studying this chapter you should be able to: understand different approaches to profit measurement; understand the approach adopted in Australia; apply the requirements for the preparation of a statement of comprehensive income in AASB 101 ‘Presentation of Financial Statements’; apply the requirements of AASB 118 ‘Revenue’ for the recognition and measurement of revenue in the statement of comprehensive income; calculate interest revenue using the effective interest method; apply the requirements of AASB 101 ‘Presentation of Financial Statements’ for the classification of expenses; and understand the required treatment of unusual items in AASB 101 ‘Presentation of Financial Statements’ Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 502 10/07/13 1:53 PM C HAP T E R 16 T H E S TAT EM EN T O F C O M P R EH EN S I V E I NC O M E 503 16.1 Introduction The statement of profit or loss and other comprehensive income is one of four financial statements that comprise the components of a complete set of financial statements (AASB 101, para 10) The other three are the statement of financial position, the statement of changes in equity and the statement of cash flows, discussed in Chapters 6, 15 and 17, respectively In Australia, the financial statement that reports the profit or loss for a reporting period was originally called the ‘profit and loss statement’ However, over the years, other titles have been employed, including the ‘statement of financial performance’ and the ‘income statement’ As part of the process of issuing Australian Accounting Standards equivalent to the International Accounting Standards Board (IASB) Accounting Standards, the AASB has issued AASB 101 ‘Presentation of Financial Statements’ In the most recent version of the Standard, the title of the performance statement is ‘statement of profit or loss and other comprehensive income’ However, paragraph 10 of AASB 101 provides that ‘an entity may use titles for the statements other than those used in this Standard For example, an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’ As a result of the choice allowed in paragraph 10, we have chosen to use the title ‘statement of comprehensive income’ because of its relative brevity Note, however, that both the titles referred to in paragraph 10, like a number of their predecessors, remain inconsistent with the title used in the Corporations Act 2001 – ‘the profit and loss statement’ This chapter discusses the form and content of the statement of comprehensive income It reviews the background to the statement and considers the requirements of the accounting standards that affect it 16.2 Measurement statement of profit or loss and other comprehensive income A financial statement that reports all components of income and expense recognised during a reporting period of profit There is little doubt that many financial statement preparers and users regard the statement of comprehensive income as the most important of the four financial statements Profit is the overriding goal of business entities and it is the reported profit figure that generally attracts the most attention It is hardly surprising, therefore, that accounting standard setters have tended to concentrate their attention on improving the measurement and reporting of profit In many cases, however, these ‘improvements’ have been achieved at the expense of the statement of financial position For example, tax-effect accounting was originally introduced to give a more relevant profit figure, but it resulted in statement of financial position items of doubtful validity Traditionally, profit measurement has been a process of matching the revenues for a period with the expenses incurred in earning those revenues Revenues for a period were identified, the expenses incurred in generating those revenues were then identified and the two were matched to measure profit This characterisation is no longer appropriate, for the following reasons Changes in the categorisation and labelling of financial statement elements The Conceptual Framework for Financial Reporting 2010 (Framework 2010) identifies the two financial statement elements related to the measurement of profit as income and expenses This is more than a simple change in labelling, as Framework 2010 notes that both income and expenses consist of two components Income is made up of revenues and gains Revenues arise in the course of the ordinary activities of the entity, whereas gains may be within or outside the ordinary activities of the entity and are often reported net of related expenses For example, revenue A component of income that represents the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 503 10/07/13 1:53 PM PA R T T HE S TAT E M E N T O F C O M P R EH ENS I V E I N C O M E A N D F U RT H ER F I N A NC I A L R EP O RT I N G I S SU ES 504 when property is disposed of, if the proceeds of sale exceed the carrying amount of the property, the net difference would be recognised as ‘gain on disposal of property’ Likewise, expenses consist of expenses and losses Expenses arise in the course of the ordinary activities of the entity, whereas losses may be within or outside the ordinary activities of the entity and are often reported net of related income Framework 2010 notes that ‘distinguishing between items of income and expense and combining them in different ways also permits several measures of entity performance to be displayed These have different degrees of inclusiveness’ (para 4.28) Reduced emphasis on matching With the development and adoption of Framework 2010, less reliance is placed on matching as a basis for periodic profit measurement Instead, accounting problems relating to the measurement of profit are resolved by reference to the definitions of, and recognition criteria for, income and expenses Framework 2010 does not require an association of particular expenses with particular items of income Periodic income and expenses are identified and recognised independently Profit is then measured as the difference between the income and expenses for the reporting period LEARNING OBJECTIVE Understand different approaches to profit measurement operating-profit approach An approach to profit measurement in which profit is measured as income from operations minus expenses from operations Accounting standards have used several different approaches to the definition and measurement of profit and hence to the content of the statement of comprehensive income This raises the issue of how we should evaluate possible approaches to periodic profit measurement According to SAC ‘Objective of General Purpose Financial Reporting’, the objective of general purpose financial statements is to ‘provide information useful to users for making and evaluating decisions about the allocation of scarce resources’ (para 43) Framework 2010 outlines two fundamental qualitative characteristics (para QC5) that make information useful to users – relevance and faithful representation – and four enhancing qualitative characteristic (para QC19) that enhance the usefulness of information that is relevant and faithfully represented – comparability, verifiability, timeliness and understandability We use these characteristics to assess three possible approaches to measuring periodic profit – the operating-profit approach, the all-inclusive approach and the comprehensive income approach Under the operating-profit approach, profit is measured as income from operations minus expenses from operations Profit is the result of ‘ordinary’ operations for the reporting period This approach excludes income and expenses that relate to prior periods (such as corrections of priorperiod errors or revisions to accounting estimates) and those resulting from events outside ‘ordinary’ operations, such as the effects of extraordinary transactions and events, and changes in accounting policy Non-operating items bypass the statement of comprehensive income and are reported in the statement of changes in equity (see section 15.3) The operating-profit approach is supported by arguments that report users require a profit figure that can be used as a basis for predicting future profits – that is, the most relevant measure of profit focuses on income and expenses that are related to the ordinary operations of the reporting period and are likely to recur The inclusion of other income and expenses could distort the results of ordinary operations, which are the ‘best’ basis for assessing the current period’s performance and predicting future performance Furthermore, it is argued that the inclusion of items that are outside ordinary operations in the measurement of profit may destroy the utility of inter-period and inter-firm comparisons The inclusion of these other items could materially affect the results of some entities in some periods, making inter-period and inter-firm comparisons difficult Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 504 10/07/13 1:53 PM C HAP T E R 16 T H E S TAT EM EN T O F C O M P R EH EN S I V E I NC O M E Against the operating-profit approach it is argued that allowing many items to bypass the statement of comprehensive income may lead to profit manipulation and profit ‘smoothing’ For example, management may have incentives to classify some income items as within operations (operating) but some expense items as outside of operations (non-operating), with a resulting overstatement of reported profit If the distinction between ‘operating’ and ‘non-operating’ is vague, then reported operating profit could be manipulated in any year or smoothed over time by the judicious classification of income and expense items The operating-profit approach arguably results in information that is not a faithful representation of the transaction It has also been asserted that non-operating expenses are, over several years, likely to exceed non-operating income If this is correct, even with no deliberate manipulation, reported profits would be consistently higher from the use of the operating-profit approach Under the all-inclusive approach, profit for the period is measured as the result of ordinary operations plus income and expenses relating to prior periods, the effects of some accounting policy changes and the result of extraordinary transactions and events The all-inclusive approach is broader than the operating-profit approach, but still allows certain items to bypass the statement of comprehensive income For example, upward asset revaluations arguably satisfy the definition and recognition criteria for income but bypass the statement of comprehensive income and are recognised in the statement of changes in equity The all-inclusive approach is supported on several grounds The all-inclusive approach restricts opportunities for profit manipulation and/or profit smoothing because, compared to the operating-profit approach, fewer items bypass the statement of comprehensive income Hence, this approach arguably produces more relevant information An allinclusive statement of comprehensive income is easier to prepare because it avoids the need for an accountant to exercise judgement in deciding whether an item is ‘operating’ or ‘non-operating’ In some cases, the need to make a choice between operating and non-operating income and expenses may lead to disputes among management, accountants, auditors and regulators If all items for a reporting period are included in the calculation of profit, this classification difficulty is avoided Against the all-inclusive approach, it is argued that some items still bypass the statement of comprehensive income, indicating that the potential for profit manipulation still exists Further, in an effort to increase comparability, the all-inclusive approach may result in the labelling of certain included items as extraordinary or unusual This process may also be open to manipulation Under the comprehensive income approach,1 profit for the period includes all income and expenses as defined in Framework 2010 All changes in net assets or equity, other than transactions with owners, are included in the measurement of profit The comprehensive income approach requires that all recognised changes in the carrying amount of assets and liabilities be included in the measurement of profit Under the comprehensive income approach, no income or expense items bypass the statement of comprehensive income The comprehensive income approach has some benefits First, the contents of the statement of comprehensive income are determined conceptually, not arbitrarily Second, no items that satisfy the definition and recognition criteria for income or expenses bypass the statement of comprehensive income Taken together, this reduces the potential for manipulation and bias in reporting periodic profit, and may result in a more faithful representation of the information The problem with this approach is that many income and expense items included in the statement of comprehensive income may arise from non-operating activities – that is, activities that 505 all-inclusive approach An approach to periodic profit measurement in which profit for the period is measured as the result of ordinary operations plus income and expenses relating to prior periods, the effects of some accounting policy changes and the result of extraordinary transactions and events comprehensive income approach An approach to periodic profit measurement in which profit for the period includes all income and expenses as defined in Framework 2010 All changes in net assets or equity, other than transactions with owners, are included in the measurement of profit Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 505 10/07/13 1:53 PM PA R T T HE S TAT E M E N T O F C O M P R EH ENS I V E I N C O M E A N D F U RT H ER F I N A NC I A L R EP O RT I N G I S SU ES 506 LEARNING OBJECTIVE Understand the approach adopted in Australia are unusual and outside the entity’s ordinary activities and hence not provide a good basis for predicting future profits A further problem is that some items of income and expense included in comprehensive income, such as non-current asset revaluation increments and decrements, may not yet be confirmed by an arm’s-length transaction between independent parties This may result in a profit figure of lower verifiability under the comprehensive income approach The comprehensive income approach is consistent with Framework 2010 definitions of the elements of financial statements, but its use in practice is relatively recent In June 1997 the Financial Accounting Standards Board (FASB) in the US issued Statement of Financial Accounting Standards No 130 (SFAS 130) ‘Reporting Comprehensive Income’ The Standard requires the disclosure of all components of comprehensive income As a result, US companies have to disclose two profit figures First is the profit or loss after tax, as would be calculated and displayed after applying all other accounting standards Second is the comprehensive income figure, which includes income and expenses that have previously bypassed the calculation of profit or loss after tax and have been taken directly to equity As we outline in section 16.3.1, the current accounting standard governing the preparation of the performance statement (AASB 101) adopts the title ‘statement of profit or loss and other comprehensive income’, which seems to clearly indicate adoption of a comprehensive income approach AASB 101 contains provisions similar to those of SFAS 130 in that items of other comprehensive income, such as changes in asset revaluation surplus, remeasurement of defined benefit superannuation plans, and gains and losses arising from translating the financial statements of a foreign operation are included in the statement of comprehensive income and the reported total comprehensive income for the period In the past, under operating-profit or all-inclusive approaches, such items would have bypassed the performance statement Further evidence in support of the use of a comprehensive income approach is that AASB 101 forbids use of the term ‘extraordinary’ to describe items of income or expense that arise outside ordinary activities (para 87) Despite the apparent adoption of the comprehensive income approach, some issues and uncertainties remain AASB 101 endorses the provisions of AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ for the retrospective treatment of the effects of errors and changes in accounting policies The income and expense effects of such items are to be included in the statement of changes in equity and bypass the statement of comprehensive income This seems inconsistent with the comprehensive income approach in which the effects of all recognised changes in net assets (other than transactions with owners as owners) are to be included in the statement of comprehensive income This treatment is apparently justified by the definition of total comprehensive income in AASB 101 as ‘the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners’ (para 7, emphasis added) As the income and expense effects of errors and changes in accounting policies relate to earlier periods, they are not part of total comprehensive income of this period (as defined in the Standard) Nevertheless, such prior-period effects are, arguably, part of comprehensive income in the comprehensive income approach outlined earlier in this section A further uncertainty is that AASB 101 currently allows preparers the option of preparing a single statement of comprehensive income or preparing two statements – a statement displaying components of profit or loss for the period, and a statement displaying components of other comprehensive income This second option seems somewhat inconsistent with a comprehensive income approach However, if the proposals contained in the IASB Discussion Paper ‘Preliminary Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 506 10/07/13 1:53 PM C HAP T E R 16 T H E S TAT EM EN T O F C O M P R EH EN S I V E I NC O M E 507 Views on Financial Statement Presentation’ issued in October 2008 are adopted, this second option will be removed The Discussion Paper proposes fundamental changes in the presentation of published financial statements in that the structure of each of the statements of financial position, comprehensive income and cash flows will be aligned so that they contain the same categories, line items and order of presentation The Discussion Paper proposes the presentation of a single statement of comprehensive income that would include a subtotal for profit or loss and a total for comprehensive income It is for this reason that the analysis of Australian Accounting Standards on the performance statement in section 16.3.1 concentrates on the option of presenting a single statement of comprehensive income The measurement of total comprehensive income can be summarised as follows: Statement of comprehensive income Income Less: Expenses = Profit or loss for the period +/– Items of other comprehensive income = Total comprehensive income for the period 16.3 Accounting 16.3.1 The standards form and content of the performance statement The form and content of the performance statement is specified in AASB 101, the most recent version of which is compiled to September 2011 and applies to reporting periods commencing on or after July 2012 but before January 2013.2 Paragraph 10A provides an option for an entity to either: ◆ present a single statement of comprehensive income with profit or loss and other comprehensive income presented in two sections, where profit or loss is presented first followed by components of other comprehensive income; or ◆ present the profit or loss section in a separate statement of profit or loss to be followed by a statement of comprehensive income which shall begin with profit or loss The approach to profit measurement adopted in AASB 101 is indicated in paragraph 88, which requires that ‘an entity shall recognise all items of income and expense in a period in profit or loss unless an Australian Accounting Standard requires or permits otherwise’ Paragraph 89 identifies correction of prior-period errors and the effects of changes in accounting policies as two circumstances in which particular items are recognised outside profit or loss in the current period (AASB 108) This paragraph also refers to components of other comprehensive income that meet Framework 2010 definitions of income and expense but are required by other Australian Accounting Standards to be excluded from profit or loss Paragraph 87 prohibits the presentation of any item of income or expense in the statement of comprehensive income as an extraordinary item AASB 101 also specifies the information that must be contained in the statement of comprehensive income Paragraph 81B states that an entity shall present the following items, in addition to the profit or loss and other comprehensive income sections, as allocation of profit or loss and other comprehensive income for the period: LEARNING OBJECTIVE Apply the requirements for the preparation of a statement of comprehensive income in AASB 101 ‘Presentation of Financial Statements’ Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 507 10/07/13 1:53 PM 508 PA R T T HE S TAT E M E N T O F C O M P R EH ENS I V E I N C O M E A N D F U RT H ER F I N A NC I A L R EP O RT I N G I S SU ES (a) profit or loss for the period attributable to: (i) non-controlling interest, and (ii) owners of the parent (b) comprehensive income for the period attributable to: (i) non-controlling interest, and (ii) owners of the parent If an entity presents profit or loss in a separate statement it shall present (a) in that statement Paragraph 82 states that, in addition to items required by other Australian Accounting Standards, the profit or loss section shall include line items that present the following amounts for the period: (a) (aa) (b) (c) (ca) revenue; gains and losses arising from the recognition of financial assets measured at amortised cost; finance costs; share of the profit or loss of associates and joint ventures accounted for using the equity method; if a financial asset is reclassified so that it is measured at fair value, any gain or loss arising from a difference between the previous carrying amount and its fair value at the reclassification date (as defined in AASB 9); (d) tax expense; (e) [deleted by the IASB]; (ea) a single amount for the total discontinued operations (see AASB 5); (f) – (i) [deleted by the IASB] Paragraph 82A goes on to indicate the information to be presented in the other comprehensive income section and states that an entity ‘shall present line items for amounts of other comprehensive income in the period, classified by nature (including share of the other comprehensive income of associates and joint ventures accounted for using the equity method) and grouped into those that, in accordance with other Australian Accounting Standards: (a) will not be reclassified subsequently to profit or loss; and (b) will be reclassified subsequently to profit or loss when specific conditions are met.’ A simplified example of how a statement of comprehensive income might appear under AASB 101 is shown opposite The item ‘other comprehensive income’ requires explanation Paragraph of AASB 101 defines it as follows: Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards The components of other comprehensive income include: (a) changes in revaluation surplus (see AASB 116 ‘Property, Plant and Equipment’ and AASB 138 ‘Intangible Assets’); (b) remeasurement of defined benefit plans (see AASB 119 ‘Employee Benefits’); (c) gains and losses arising from translating the financial statements of a foreign operation (see AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’); (d) gains and losses from investments in equity instruments measured at fair value through other comprehensive income in accordance with paragraph 5.7.5 of AASB ‘Financial Instruments’ Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 508 10/07/13 1:53 PM C HAP T E R 16 T H E S TAT EM EN T O F C O M P R EH EN S I V E I NC O M E 509 Henson Ltd Statement of Comprehensive Income for year ended Revenue Expenses, excluding finance costs Finance costs Share of profit of associates Profit before income tax Income tax expense Profit from continuing operations Profit (loss) from discontinued operations Profit for the period Profit attributable to non-controlling interests Profit attributable to owners of the parent Other comprehensive income Increase in revaluation surplus Share of other comprehensive income of associates Total other comprehensive income for the period Other comprehensive income attributable to non-controlling interests Total comprehensive income attributable to owners of the parent Total comprehensive income for the period Basic earnings per share Diluted earnings per share 30 June 2012 $000 30 June 2011 $000 21 540 (18 453) (876) – 211 (642) 569 – 569 – 569 19 866 (17 195) (931) – 740 (509) 231 – 231 – 231 480 – 480 – 480 049 – – – – – 231 15.8¢ 15.8¢ 12.3¢ 12.3¢ (e) the effective portion of gains and losses on hedging instruments in a cash flow hedge (see AASB ‘Financial Instruments’); and (f) for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability’s credit risk (see para 5.7.7 of AASB 9) These items had previously bypassed the performance statement but, under the current standard, they must be included in the other comprehensive income component of the performance statement Paragraphs 90 and 91 require the entity to disclose the amount of income tax relating to each item of other comprehensive income either in the statement of comprehensive income or in the notes The inclusion of these items of other comprehensive income in the statement of comprehensive income raises the potential for double counting, as other Australian Accounting Standards specify whether and when items previously recognised in other comprehensive income are reclassified to profit or loss When reclassification adjustments arise, paragraph 92 requires that they be disclosed and paragraph 94 allows them to be presented either in the statement of comprehensive income or in the notes Paragraph 95 notes that reclassification adjustments arise in relation to the disposal of foreign operations (AASB 121) and when a cash flow hedged forecast transaction affects profit or loss (AASB 9) However, paragraph 96 notes that reclassification adjustments not arise in relation to changes in revaluation surpluses (AASB 116, AASB 138) or on remeasurements of defined benefits plans (AASB 119) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 509 10/07/13 1:53 PM PA R T T HE S TAT E M E N T O F C O M P R EH ENS I V E I N C O M E A N D F U RT H ER F I N A NC I A L R EP O RT I N G I S SU ES 510 We now turn to the general format of the statement of comprehensive income and to specific disclosures required by AASB 101 The simplified example of a statement of comprehensive income presented on page 509 included only those line items mandated by paragraphs 81A, 81B, 82 and 82A of AASB 101 Paragraph 85 requires entities to present additional line items, headings and subtotals ‘when such presentation is relevant to an understanding of the entity’s financial performance’ This is a vague instruction However, paragraph 86 provides additional explanation that focuses on the users’ need for information to assist in understanding the entity’s current financial performance and in making projections of its future performance Preparers are urged to consider materiality and the nature and function of items in deciding on additional line items, headings and subtotals While the sentiment is clear, these requirements have little operational content A more specific requirement is contained in paragraph 97 of AASB 101 ‘When items of income or expense are material, an entity shall disclose their nature and amount separately.’ The term ‘material’ is defined in AASB 101 as follows: Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances The size or nature of the item, or a combination of both, could be the determining factor (para 7) Paragraph 98 of AASB 101 provides examples of circumstances that are considered to result in items requiring separate disclosure: (a) write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs; (b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring; (c) disposals of items of property, plant and equipment; (d) disposals of investments; (e) discontinued operations; (f) litigation settlements; and (g) other reversals of provisions LEARNING OBJECTIVE Apply the requirements of AASB 118 ‘Revenue’ for the recognition and measurement of revenue in the statement of comprehensive income A further specific requirement is contained in paragraph 99 of AASB 101 ‘An entity shall present an analysis of expenses recognised in profit or loss using a classification based on either their nature or their function within the entity, whichever provides information that is reliable and more relevant.’ This requirement is discussed in section 16.3.3 Aspects of the statement of comprehensive income that warrant further comment are as follows: revenue; classification of expenses; and treatment of unusual items 16.3.2 Revenue Revenue is a subset of income and is an important component of profit measurement in the statement of comprehensive income The treatment of revenue in the statement of comprehensive income is dealt with in AASB 118 ‘Revenue’, the most recent version of which is compiled to October 2010 AASB 118 defines revenue as follows: Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e M16_HEND1175_15_LT_C16.indd 510 10/07/13 1:53 PM 1000 S UB J E C T IN DE X employee benefits continued non-monetary 138, 395 post-employment see post-employment benefits; superannuation plans profit-sharing plans see share-based payments recognition of 393 short-term 393, 395 tax issues 391 termination 408, 408–410 types of 392 wages and salaries 395–396 endowment insurance 800 energy use reporting 925, 937–938 ‘enhancement’ of an asset 60 enhancing qualitative characteristics 50–52 enlightened self-interest 914–915 Enron Corporation 859, 950, 962 entities classification of 592 disclosing 592, 619 jointly controlled 293, 294 legal 36, 554 not-for-profit see not-for-profit sector present obligation to 56–57 reporting see reporting entities types of 36 environmental issues 916–919, 925, 935–943 environmental performance 931 ‘Environmental Profit and Loss Account’ (PUMA) 929–930 Epictetus 968 Epicurus 968 equally proportionately unperformed agreements 55–56, 58 equipment see property, plant and equipment equitable obligation 57 equity 58 overview 476 accounting standards 495–497 bonus plans based on see share-based payments changes in, statement of 32, 496–497, 506 classification of 496 components of 476–495 decreases in see losses disclosure requirements 496 framework definition of 31–32, 52, 58–59, 97, 476 increases in see gains versus liabilities 59 measurement of 97 in public sector 837 rate of return on 576 recognition of 58 residual 58, 476 share capital 477, 478 see also share(s) in statement of financial position 138 equity accounting 285 cost-based 285, 287 hybrid 285, 287–289 pure 285–287 equity instruments 431 see also share(s) as fair value instruments 283 versus financial liabilities 432–433 equity-settled share-based payment transactions 480 errors 144, 145 faithful representation and 49 prior-period 144–145, 613–617, 615 profit measurement and 506 estimation 49 see also accounting estimates ethical egoism 968 ethical elitism 968–969 ethical parochialism 969 ethical relativism 954–955 ethical universalism 969 ethics overview 950–951 accounting issues 962–963 accounting profession 957–960 competence in 956–962 decision making 960–962 defined 951–952 foundational principles 954–956 judgement 952–954 in policy setting 962 theories of 950, 967–971 European Commission 849 European type options 448 European Union Emissions Trading Scheme (EUETS) 919, 936–943 international harmonisation 856 evaluation phase see exploration and evaluation events disclosure of 116 future, estimates or predictions of 116 insured 784 events after the reporting period 601, 601–606 accounting standards 602–606 adjusting 602, 603 examples of 604–606 non-adjusting 603, 603–606 types of 601–602 excess on acquisition 329 exchange rates 869, 870 see also foreign currency translation executives see managers executory contracts 55–56 exercise (strike) price 448 exit price 105, 107 expected losses, on construction contracts 719–721 expected realisation 150–151 expense(s) 63 adding back of 541 bank 815–818 classification of 516–517 essential characteristics of 63–64 framework definition of 31–32, 52, 61–64, 99 income tax 234 current 237, 238 deferred 238, 239, 249–255 in insurance accounting 795–797, 802 intangible assets 307–308 inventory loss 155 lease payments as 363, 366 versus losses 63–64 matching income to see matching measurement of 100, 503–504 recognition of 99–100 superannuation plans 776 expense-and-reinstate method 316, 679 in extractive industries 678–679, 694 research and development valuation 315–316 expense method 316, 678 in extractive industries 678–679, 694–696 research and development valuation 315–316 expense (rental) method 356 expenses, accrued 217 explanatory notes see notes to financial statements exploration and evaluation 654–656 accounting methods 658–661 historical cost-based accounting 677–681 illustrations of 694–698 reserve recognition accounting 681, 681–683, 696–698 measurement of 659–663 exploration and evaluation assets 658, 660–662 exposure drafts development of 851–852 ED 43 ‘Financial Reporting of General Insurance Activities’ 794 ED 59 ‘Financial Instruments’ 434 ED 179 ‘Superannuation Plans and Approved Deposit Funds’ 758 ED 220 ‘Investment Entities’ 777 ED 223 ‘Superannuation Entities’ 753, 758, 759–760, 774–777 ED 238 ‘Consolidated Financial Statements-Australian Implementation Guidance for Not-for-Profit Entities’ 831 on global harmonisation 854 An improved Conceptual Framework for Financial Reporting 596–598 on lease accounting 362–363, 378–380 on real estate development 711 on segment reporting 556 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1000 10/07/13 1:52 PM S U B J EC T I ND EX expulsion from professional bodies 960 external claimants 58 externally managed superannuation plans 754 extractive industries overview 653–654 accounting issue in 656 accounting standards 657–677 amortisation/depreciation in 664, 669–675 ASX Listing Rules development and construction 655–656, 663 disclosure requirements 676–677 exploration and evaluation see exploration and evaluation inventory valuation 663, 669 Minerals Resource Rent Tax 262 removal and restoration 664–668, 671–675 revenue recognition 669 stripping costs 654, 663–664, 671–675 extraordinary items 517–520 face value 89–92, 138 see also historical cost fair value 71 of bank assets 811–812 of biological assets 736, 738–741 of equity instruments 484, 489 of financial instruments 282–284, 434–437, 466–467 framework definition of 105, 190, 201 of goodwill 328 in insurance accounting 797, 802–803 of intangible assets 308, 312–313 of investment properties 707 of land under roads 835 of leased assets 364, 376–378 measurement of 105–108, 190–191 disclosure of 107–108 political debate over 72 of property, plant and equipment 189–191 increments and decrements 191–193 recoverable amount 201–202 in public sector accounting 839 related-party transactions and 618 of trade-ins 179–180 fair value hedges 436, 442, 446, 468, 888–894 faithful representation 31, 49–50, 77 family trusts 37 FASB see Financial Accounting Standards Board FBM (Foundation Board of Management) 23 Federal Court challenges 112 fees, bank 816–817 Fe Ltd 919 fiduciary relationship 950 FIFO (first-in, first-out) 158–161, 159 finance leases 355 accounting for 367–370 in banking industry 806 classification of 363–366 for lessee 356–359, 379–380 for lessor 359–360, 371–374, 379–380 on-balance-sheet items 355, 361, 379 sale-and-leaseback agreements 375 finance method 359 Financial Accounting Standards Board (FASB) 27 attitude toward user groups 34 conceptual framework 28, 71 expense method 316 on financial instrument valuation 439–440 international convergence 163, 852 on lease accounting 361–362 on real estate development 710 on reserve recognition accounting 683 on segment reporting 551, 552, 555–556 SFAC series see Statements of Financial Accounting Concepts Financial Administration and Audit Act 1977 (Queensland) 4, 16 financial assets 152–153, 175, 176 amortised cost 282–283 available-for-sale 282, 809, 811–812 carbon permits as 939–940 categories of 434 classification of 282–283 fair value of 282–284 framework definition of 430 of insurers 791–794 measurement of at amortised cost 282–283, 435 at fair value 282–284, 435–436 offsetting of 434 Financial Forecasts and Projections (AICPA) 578 financial futures 443–446 financial information confirmatory role of 48 need for 38–40 predictive role of 48, 116 see also future-oriented financial information quality of 39 in reports 39–40 financial institutions 783 see also bank(s); insurance financial instruments 282 see also specific instrument overview 429–430 accounts receivable as 153 classification of 431–432, 436–441 compound 432, 491–495 in currency risk hedging 883 derivative (secondary) 431, 432, 438, 464, 811–812 1001 disclosure 459–461, 464–474 equity see equity instruments; share(s) framework definition of 282, 430–434 as liabilities 89–96 offsetting 434 primary 431, 432, 438 recognition and measurement of 434–442 risk from 460–461, 466–474 simple 432 financial liabilities 430, 431 categories of 435 versus equity instruments 432–433 measurement of, at fair value 436 offsetting of 434 financial literacy 34–35, 51, 561 Financial Management Act 1990 (Tasmania) 16 Financial Management Amendment Act 1998 (Victoria) financial markets, regulation of 22, 429 financial performance see performance statement of see statement of profit or loss and other comprehensive income financial position assessment of 78–79 statement of see statement of financial position financial reporting choice in see choice of accounting policies concise 638–640, 639 cost constraint 31 differential see differential reporting entity see reporting entities framework for see conceptual framework general purpose see general purpose financial reporting interim 50, 577, 636, 636–638 legal obligations for 3–4 materiality see materiality objective of 38–40, 47, 234, 504 presentation of see presentation of financial information qualitative characteristics 31, 47–52, 504 see also specific characteristic scope of 31, 35–36 by segments see segment reporting subject of 36–37 voluntary see voluntary reporting Financial Reporting Council (FRC) overview 7–8 convergence period 113 on Government Finance Statistics 837, 841–843 on international harmonisation 855, 856 on role of accounting 804–805 Financial Reporting Panel (FRP) 15–16 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1001 10/07/13 1:52 PM 1002 S UB J E C T IN DE X Financial Reporting Standard No ‘Presentation of Financial Reports’ (NZ) 560 Financial Reporting Standards Board (NZ) 555–556 Financial Services Reform (FSR) Act 2002 (Cth) 758–759 Financial Stability Board (FSB) 438–440 Financial Stability Forum (FSF) 438–440 financial statements see also specific type of statement complete set of 637–638 condensed 637–638 consolidated see consolidated financial statements elements of 31–32, 52–64 see also specific element profit measurement and 503–504 general purpose see general purpose financial statements highlights 35 for life insurance 801–803 notes to see notes to financial statements preparation of see financial reporting public sector 836–843 segment data in 555–556 special purpose 26, 33, 36, 591, 829–830 from superannuation plans 755–759, 775–777 defined benefit 765–771 defined contribution 762–765 users of see user groups financial structure of an entity 135 financial summaries see highlights statements financing activities 539 cash flows from 537, 539–540 reporting objectives 40 finished goods inventory 153 firm commitment 440, 441, 895 First Corporate Law Simplification Act 1995 (Cth) 592 first-in, first-out (FIFO) 158–161, 159 fixed assets 150 see also non-current assets fixed-fee service contracts 784, 785 fixed-for-floating interest rate swaps 453–455 fixed-format financial statements 136, 139 fixed manufacturing overhead 182–183 fixed-price contracts 712 fixed price phase (CPM) 936, 938–941 flexible format 136 flexible price phase (CPM) 936, 941–943 flow versus stock approach 60, 99 FOB (free on board) shipping 154 Focus Groups (AASB) 10 forecasts see future-oriented financial information forecast transaction 441, 895 foreign-based operations 877 disposal of 902 financial statement translation see foreign currency translation hedge of net investment in 442, 471, 888 foreign currency translation overview 866 accounting standards 866–868, 879–883 alternative methods 877–879 disclosure requirements 903 exchange rates 869–870 foreign currency transactions 870, 870–877 hedging 883–902 see also hedge hyperinflationary economies 902 reserves 495 unit of measurement 866–868 foreign currency translation reserve 878, 902 foreign exchange rate 869 forestry industry 151, 733–735 form method 411–412 for-profit sector conceptual framework for 28, 36, 38 donated assets 181 Forrest v Australian Securities and Investments Commission 635 Fortescue Metals Group Ltd v Australian Securities and Investments Commission [2012] 635 forward exchange contracts 455–457, 470–471 forward rate 869 forward rate agreement 443, 870, 884–885 Foster’s Group Limited 325–326, 332–335 Foundation Board of Management (FBM) 23 Framework for the Preparation and Presentation of Financial Statements (AASB) 28 adoption of 28–29 on income tax 234 on qualitative characteristics 47–52 on recognition 73, 76–78, 87–88, 97–98 symmetrical recognition rules 735 on tax-effect accounting 266 fraud 618, 963 FRC see Financial Reporting Council free on board (FOB) shipping 154 frequency of reporting 50 see also reporting periods; timing fringe benefits tax 391 FRP (Financial Reporting Panel) 15–16 FSB (Financial Stability Board) 438–440 FSF (Financial Stability Forum) 438–440 full capacity 182 ‘Full Cost Environmental Accounting’ project (Canada) 929 full-cost method 679, 680, 682, 694–696 full cost reporting 927, 927–931 functional currency 867, 868, 870–877, 879 function-of-expense method 516 fund accounting 827–828 fundamentals of financial reporting 47 qualitative characteristics 31, 47–52, 504 see also specific characteristic funds meaning of 532–534 public sector 823–824, 826 funds statement 531–532 cash-based see statement of cash flows total resources concept 531, 534 working-capital-based 533–534 future economic benefits 54 asset recognition 76–80, 305, 309, 318 asset valuation 86–87 control of 54–55, 154 of goodwill 328 of heritage assets 833–834 of property, plant and equipment 176, 219 research and development 316 sacrifice of 57 future events, estimates or predictions of 48, 116 ‘The Future of Company Reports’ (Department of Trade) 560 future-oriented financial information 550, 576–580 accounting methods used in 116 advantages and disadvantages of 579 in general purpose financial statements 579 international use of 577–578 predictive role of financial reports 48, 116 purpose of 577 future sacrifice of economic benefits 57 futures contracts 442 accounting for 445–448 financial futures 443–446 nature of 442–444 versus option contracts 449–450 G20 London Summit 438–440 GAAPs see generally accepted accounting principles gains 60 see also income; revenues actuarial 395, 419 from currency exchange 869–874, 902 on disposal of assets 193–194 framework definition of 52, 60–61 in insurance accounting 794 versus revenues 60–61 gas industry 126 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1002 10/07/13 1:52 PM S U B J EC T I ND EX general insurance accounting standards 112, 794–799 contracts 785 investments 793–794 nature of 785–786 underwriting activities 786, 786–793 generally accepted accounting principles (GAAPs) versus Government Finance Statistics 837, 841–843 international convergence 162–163, 852, 857, 859 manager behaviour and 123–124, 127 on stripping costs 664 versus tax treatments 233–234 general purpose financial reporting conceptual framework for 7, 30–31 objective of 38, 47, 234, 504, 559 scope of 35–36 timing of 50–51 general purpose financial statements 33 see also specific type of statement entities that must prepare 37 for life insurance 801–803 projections in 579 public sector 836–843 from superannuation plans 755–759, 775–777 defined benefit 765–771 defined contribution 762–765 user groups 34–35 geographical area, segmentation by 550, 554 GFS (Government Finance Statistics) 824, 826, 837–838, 841–843 global financial crisis ethical issues 950 fair value measurement and 107–108 financial instruments reclassified during 438 regulatory response to 438–440, 804–805 Global Fortune 250 921 global harmonisation 854 see also harmonisation of standards globalisation 849 Global Reporting Initiative (GRI) Guidelines 921–923, 922, 931–932 GN series (guidance notes) 14, 635–636 going concern basis 603–604 Golden Rule 955, 970 good/bad perspective 952–954 goods under hire purchase 154 inventory see inventories merchandise in transit 154 revenue from provision of 60 see also revenues goods sold cost of 155, 158 revenues from 513 goodwill 327 accounting standards 330–335 amortisation of 328–329, 331–332 asset valuation and 84 in banking industry 808–809, 812 cash-generating units and 212–214, 331–332 disclosures 332–335 impairment testing 205, 328–332 versus intangible assets 306, 309–310, 330 nature and measurement of 327 negative 329 as permanent difference 242–243 recognition of 328, 330–331 subsequent measurement of 331–335 Governance Review Implementation (AASB and AUASB) Bill 2008 10 government accounting see public sector government departments 825 government equity see equity Government Finance Statistics (GFS) 824, 826, 837–838, 841–843 government grants 745, 746 government legislation see legislation; specific law government trading enterprises (GTEs) 824–825 grant date 484–485 grants, government 745, 746 green consumerism 918–919 greenhouse gas emissions 918–919, 935–943 Green Papers (Aus) 558 Green Papers (UK) 560 GRI (Global Reporting Initiative) Guidelines 921–923, 922, 931–932 gross method of accumulated depreciation 196–198 gross value added 560 Group of 100 harmonisation of standards 113 on sustainability reporting 920, 931 GTEs (government trading enterprises) 824–825 guidance notes (GN series) 14, 635–636 half-yearly reports 50 harmonisation of standards overview 849 Australia 853–860 additional disclosures 640–641 ‘Aus’ paragraphs 828, 838, 856 GFS and 837–838, 841–843 IFRS adoption 9, 11–13, 28, 113, 856 benefits of 857 costs of 857–858 European Union 856 history of 113 principles-based approach 858–860 United States 162–163, 849, 852–853, 857, 859 1003 Harvey Norman Holdings Ltd 169 hedge 883 cash flow 442, 468, 470, 888, 894–901 fair value 436, 442, 446, 468, 888–894 foreign operations investments 442, 471, 888 hedge accounting 440, 886 accounting standards 886–902 disclosure requirements 901–902 firm commitment 440, 441 forecast transaction 441 foreign currency transactions 883–902 futures contracts 444, 446–448 option contracts for 450–452 swaps for 457–459 hedged items 887, 894 hedge effectiveness 887 hedge ratio 441–442, 888 hedgers 444 hedging instruments 438, 440–441, 886–887, 895 hedging relationship 441–442, 886–888 hedonism 968 held-for-sale assets 214–215, 222 held-to-maturity investments 282 heritage assets 832–834, 833, 839 Herz, Robert 163 highlights statements 35, 550, 562 see also performance indicators advantages and disadvantages of 562–563 example of 588 HIH Insurance 950 hire purchase 154, 380 historical cost 32, 81 of assets 79, 81–82 for biological assets 733–734 compounded 734 equity in 58–59 in foreign currency translation 877–878 of liabilities 89–92 of property, plant and equipment 176, 217 Hobbes, Thomas 970 holding costs 701–702 holding gains 159–161 human resources use 925 hybrid equity accounting 285, 287–289 hyperinflationary economies 902 IAS ‘Presentation of Financial Statements’ 138, 598 IAS ‘Statement of Cash Flows’ 536 IAS 11 ‘Accounting for Construction Contracts’ 711, 863 IAS 12 ‘Accounting for Taxes on Income’ 244, 863 IAS 18 ‘Revenue’ 722–723 IAS 19 ‘Employee Benefits’ 392 IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ 866 IAS 24 ‘Related Party Disclosures’ 624 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1003 10/07/13 1:52 PM 1004 S UB J E C T IN DE X IAS 26 ‘Accounting and Reporting by Retirement Benefit Funds’ 758 IAS 32 ‘Financial Instruments: Disclosure and Presentation’ 429, 886 IAS 34 ‘Interim Financial Reporting’ 636 IAS 36 ‘Impairment of Assets’ 329 IAS 39 ‘Financial Instruments: Recognition and Measurement’ 429, 438 IAS 41 ‘Agriculture’ 737 IASB see International Accounting Standards Board IASC (International Accounting Standards Committee) 849, 863–864 ICAA see Institute of Chartered Accountants in Australia ICM (Investigating Case Manager) 959 identifiability of assets 305–306 idle capacity 183 IFRIC see International Financial Reporting Interpretations Committee IFRSs see International Financial Reporting Standards impairment bank assets 806–811 carbon permits 941 cash-generating units 211–214, 331–332 extractive industries 663–664 financial instruments 435 foreign currency transactions 875 goodwill 205, 328–332 intangible assets 309, 314, 318 property, plant and equipment 189, 198–214 impairment losses 199 recognition of 202–204, 213 reversal of 204–205, 209–212 imputed rate of interest 512 incentives, in lease accounting 361–362 income 61 see also gains; revenues bank 815–818 comprehensive 52, 506–507 see also profit statement of see statement of profit or loss and other comprehensive income essential characteristics of 61 framework definition of 31–32, 59–60, 97, 736 matching expenses to see matching measurement of 98–99, 503–504 psychological nature of 64–65 in public sector accounting 838–839 realisation of 98 recognition of 61, 97–98 superannuation plans and 774 taxable 233, 307–308 income approach to fair value 107 income-smoothing hypothesis 117–118 income statement see statement of profit or loss and other comprehensive income income tax company see company income tax personal 391 public sector funding by 824, 839 Income Tax Assessment Act 1936 (Cth) 57, 233, 354, 678 income tax expense 234 current 237, 238 income tax payable 234 independence 962 indirect costs, in real estate development 701 indirect method of cash flow presentation 541 individually assessed provisions 809 industry, segmentation by 554 infrastructure assets 832, 832–834 Inquiry Into the Collapse of Trio Capital (PJC) 755–756 insolvency, technical 793 instalment sales 380 Institute of Chartered Accountants in Australia (ICAA) APES 205 adoption 7, 14, 590 attitude toward standards 14, 20 code of ethics 957 Joint Standing Committee 23 Institute of Chartered Accountants in England and Wales 47 Institute of Chartered Accountants of Scotland 577 Institute of Public Accountants (IPA) 7, 590, 957 insurable interest 783–784 insurance 783–784 accounting standards 784–785 general see general insurance life 800–803 in superannuation plans 776 types of 783 Insurance Act 1973 (Cth) 793 insurance contracts 783, 784 fixed-fee service 784, 785 general 785 insurance policy 783 insurance risk 784, 796 insured event 784 intangible assets 137, 175 overview 305 accounting standards 309–327 amortisation of 310, 313, 318 in bank accounting 808–809 brand names 323–326 carbon permits as 939–940 computer software 326–327 depreciation of 310, 318 disclosure 318–319 in extractive industries 663–664 framework definition of 305–306, 310 versus goodwill 306, 309–310, 330 see also goodwill impairment testing 309, 314, 318 internally developed 307–312 nature of 305–306 patents 307–309, 319–323 purchased 307 recognition of 307–312, 315–317 research and development 311–312, 315–322 subsequent measurement of 309, 312–313, 318 trademarks 323–326 useful life of 222, 313–314, 318, 364 website costs 326–327 integrity 959, 962 interbank cash-rate contract 443 interest-bearing liabilities current cost of 92–93 face value of 89–92 market value of 95–96 interest expenses in bank accounting 815–818 in lease accounting 357–359 interest income 514–515 in bank accounting 806, 815–818 interest rate risk 461, 467–468 interest rates see also borrowing costs implicit in lease 367 imputed 512 interest rate swaps 453, 453–455, 458–459 Interface Europe 928 interim financial report 50, 577, 636, 636–638 internal claimants 58 internalisation of social costs 917–918 internally generated assets 137, 307–312 internal-yield method 90–92, 95 International Accounting Standards Board (IASB) 9, 849 accounting standards see International Financial Reporting Standards; under IAS advisory groups 851 on carbon accounting 938 conceptual framework see Conceptual Framework for Financial Reporting 2010 convergence period 113, 162–163 Discussion Paper ‘Leases – Preliminary Views’ 378 Discussion Paper ‘Preliminary Views on Financial Statement Presentation’ 506–507 Due Process Handbook 851 Exposure Draft ‘Leases’ 362–363, 379–380 on fair value measurement 107–108 on financial instrument valuation 439–440 harmonisation period see harmonisation of standards history of 849 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1004 10/07/13 1:52 PM S U B J EC T I ND EX Interpretations 13, 851 on lease accounting 362–363, 378–380, 953–954 on materiality 596–598 principles-based approach 858–860 on real estate development 711 on segment reporting 556 structure of 849–851 International Accounting Standards Board (IASB) Foundation 850, 853 International Accounting Standards Committee (IASC) 849, 863–864 International Auditing and Assurance Standards Board 935 International Congress of Accountants 849 international convergence 855 see also harmonisation of standards International Federation of Accountants, Public Sector Committee 855 International Financial Reporting Interpretations Committee (IFRIC) 11, 13, 654, 851 IFRIC 10 ‘Interim Reporting and Impairment’ 637 IFRIC 15 ‘Agreements for the Construction of Real Estate’ 722 Interpretation ‘Emission Rights’ 938, 941–943 International Financial Reporting Standards (IFRSs) Advisory Council (IASB) 851 Australian adoption 9, 11–13, 28, 113, 856 development of 849, 851–852 IFRS ‘Exploration for and Evaluation of Mineral Resources’ 654, 657 IFRS ‘Financial Instruments: Disclosures’ 429, 886 IFRS ‘Financial Instruments’ 429–430, 886 IFRS for Small and Medium-sized Entities 593–594 Interpretations 13, 851 inventory valuation 162–163 US convergence with 162–163 international harmonisation 855 see also harmonisation of standards internationalisation 854 International Organisation of Securities Commissions (IOSCO) 849, 863–864 International Public Sector Accounting Standards Board (IPSASB) 11, 855 International Standard on Assurance Engagements 3000 (ISAE 3000) 935 International Stock Exchange (London) 577 Internet, financial reporting via 639 inter-period allocation of amounts 116 Interpretation Advisory Panels (AASB) 10, 13 Interpretations development of 12–13 enforcement of 14–16 AASB 1003 ‘Australian Petroleum Resources Rent Tax’ 262 AASB 1015 ‘Acquisition of Assets’ 15 AASB 1048 ‘Interpretation of Standards’ 13 Accounting Interpretation ‘Amortisation of Identifiable Intangible Assets’ 310, 313 Interpretation ‘Changes in Existing Decommissioning, Restoration and Similar Liabilities’ 665 Interpretation ‘Emissions Rights’ 938, 941–943 Interpretation 10 ‘Interim Financial Reporting and Impairment’ 637 Interpretation 13 ‘Customer Loyalty Programmes’ 12 Interpretation 15 ‘Agreements for the Construction of Real Estate’ 722 Interpretation 20 ‘Stripping Costs in the Production Phase of a Surface Mine’ 654, 663–664 Interpretation 132 ‘Intangible Assets – Web Site Costs’ 326–327 Revised AASB Interpretation 1038 ‘Contributions by Owners made to Wholly-Owned Public Sector Entities’ 836 interval scales 74 intra-working capital transactions 533 inventories 153 as assets 155, 158 classification of 153 held for distribution 168 holding gains on 159–161 items included in 154 measurement of see inventory valuation inventory approach 924–925 inventory loss expense 155 inventory valuation absorption costing 157 accounting standards 155–156 biological assets 729, 731, 735 cost components 156–158 cost-flow assumptions 158–163 current cost in 83 direct costing 158 disclosure 168–169 in extractive industries 663, 668–669 first-in, first-out (FIFO) 158–161, 159 foreign currency transactions 875 income recognition and 98–99 last-in, first-out (LIFO) 158–163, 159 lower of cost and net realisable value rule 164, 164–169 not-for-profit entities 155, 168 periodic inventory method 155 perpetual inventory method 155 in real estate development 705–706 1005 specific identification method 161 taxation and 160–163 investees 280 control of 291 investor relationships with 280–284, 291 Investigating Case Manager (ICM) 959 investing activities 539 cash flows from 537, 539, 542 investment(s) 537 overview 280 in foreign operations, hedge of 442, 471, 888 held-to-maturity 282 by insurers 791–794 by owners 52 reporting objectives 40 in shares of other companies see share(s) underinvestment 122 investment activities, of insurers 786, 801 investment properties 297 accounting standards 296–300, 706–707 framework definition of 295, 297 purpose of 295–296 investment risk 412 investor(s) 280 see also owner; shareholder investee relationships with 280–284, 291 as user group 830 Invitation to Comment (ITC) 37, 378, 531–532 invoice amount 151 inwards reinsurance 792 IOSCO (International Organisation of Securities Commissions) 849, 863–864 IPA (Institute of Public Accountants) 7, 590, 957 IPSASB (International Public Sector Accounting Standards Board) 11, 855 ISAE 3000 (International Standard on Assurance Engagements 3000) 935 issued capital 477–478 see also share(s) ITC (Invitation to Comment) 37, 378, 531–532 Japanese Financial Services Agency 849 joint arrangements 292, 292–295 joint control 294, 619 jointly controlled assets 292, 293 jointly controlled entities 293, 294 jointly controlled operation 292 Joint Standing Committee (CPAA-ICAA) 23–24 Judaeo–Christian ethics 969–970 judgement 49 in accounting estimates 613 in accounting policy choice 608 on borrowing costs 184 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1005 10/07/13 1:52 PM 1006 S UB J E C T IN DE X judgement continued in creative accounting 114–115, 607 in differential reporting 592 ethical 952–956 in expense recognition 100 in insurance accounting 791 in lease accounting 361–362, 364 manager behaviour and 124 on materiality 599–600 tax-effect accounting 267–268 in useful life determination 313–314, 364 justice 955–956 Kant, Immanuel 970 Kenley, John 27 key management personnel 620 see also managers employee benefits for 409, 621–632 KPMG 920, 921, 923 Kyoto Protocol 918–919, 935 land see also property, plant and equipment; real estate development biological assets attached to 740 leases of 366 owned by insurers 794 under roads 834–836, 840 Landcare Research New Zealand 928 large proprietary companies 592 last-in, first-out (LIFO) 158–163, 159 lease(s) 354 overview 354 accounting standards 361–378 new approaches to 378–380, 953–954 capital 362 classification of 363–366 disclosure 366–367, 370, 371 in extractive industries 664 finance see finance leases hire purchase 380 instalment sales 380 interest rates implicit in 367 leveraged 355, 359 nature of 354–355, 361 operating see operating leases in real estate development 702–703 sale-and-leaseback agreements 355, 374–378 short-term 380 lease capitalisation 357 lease receivable 371 lease term 354 leave annual 396–398, 397 long-service 248, 392, 394, 400, 400–405 sick 392, 398–400 legal entity 36, 554 legal fees 702–703 legal form, versus economic substance 115 legal obligation 56–57 legislation see also specific law overview 3–4 compliance 4–6, 14–16, 37 environmental 918–919, 936–938 versus ethics 953 political issues reduced by 111–112 on public sector accounting 838 superannuation plans 758–759, 774 Legislation Review Board (LRB) 23 Legislative Instruments Act 2003 (Cth) 15 legislative solvency requirement 793–794 legitimacy gaps 916, 917 lenders, as user group 830 lending fees 816 lessees and lessors see lease(s) leveraged lease 355, 359 Leviathan (Hobbes) 970 liabilities 56 bank 813–815 carbon emissions as 940–942 classification of 138, 140 contingent 88, 331 current 140, 813 deferred tax see deferred tax liabilities versus equity 59 essential characteristics of 56 fair value of see fair value financial see financial liabilities framework definition of 31–32, 52, 56–58, 87, 243, 790 heritage assets as 833–834, 839 insurance adequacy test 785, 799, 803 claims 788–791, 795–797 fixed-fee service contracts 784–785 life insurance 802–803 interest-bearing see interest-bearing liabilities in lease accounting 357–359 measurement of 89–97, 138 non-current 140, 813 post-employment benefits as 416 premiums 788–791 recognition of 57–58, 87–88 in statement of financial position 138, 140 superannuation plan 760–761, 773–774 tax base of 237, 247–249 liability adequacy test 785, 799, 803 liability claims 789 liability revaluation surplus 92–94 life insurance 800–803 LIFO (last-in, first-out) 158–163, 159 liquidity of assets 137 in insurance accounting 793 working capital and 533 liquidity ratios 572 liquidity risk 460, 471–473 Listing Rules see Australian Securities Exchange Ltd (ASX) Listing Rules loans 282 see also borrowing costs; debt bank 806–811, 815 on statement of financial position 140 local government 823 see also public sector longevity of assets 137 of liabilities 138 long-service leave 248, 392, 394, 400, 400–405 long-tail business 786, 790–791 long-term consumables 731 long-term employee benefits 393–394, 400 losses 63 actuarial 395, 419 from currency exchange 869–873, 902 on disposal of assets 193–194 expected, on construction contracts 719–721 versus expenses 63–64 framework definition of 52, 63 impairment see impairment losses on purchase commitments 166–167 statement of see statement of profit or loss and other comprehensive income unused tax 256–260 lower of cost and net realisable value rule 164, 164–166 of biological assets 735 foreign currency transactions 875 in real estate development 706 LRB (Legislation Review Board) 23 maintenance cost approach 928 maintenance expenditure 218 Making Corporate Reports Valuable (Institute of Chartered Accountants of Scotland) 577 Malayan Banking Berhad (Maybank) 560 management analysis, in concise financial reports 640 management approach to segment reporting 556 Manager Professional Conduct (MPC) 959 managers bonus plans see share-based payments choice of accounting methods see choice of accounting policies highlights statements and 563 incentives, in lease accounting 361–362 key management personnel 620 employee benefits for 409, 621–632 motivations for social responsibility 913–919 opportunistic behaviour by 121–127, 268 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1006 10/07/13 1:52 PM S U B J EC T I ND EX owner relationship with 120–122 service contracts 409 tax-effect accounting 267–268 mandated changes in accounting policy 608–611 manufacturer leases 371–374 manufacturing inventory 153, 157 manufacturing overhead 182–183 Marathon Resources 659 margin call 444 market approach to fair value 106–107 market buying price see current cost market risk 460 market value see realisable value marking-to-market 443 mark-to-market accounting 283 Martin Group 429 matching 64 depreciation costs and 219–221 in statement of comprehensive income 504, 513 tax-effect accounting and 266 materiality 48, 594–601 accounting standards 595–601 assessment of 599–601 choice of accounting policy and 116 comprehensive income and 510 in depreciation accounting 221–222 events after the reporting period 602 framework definition of 48–49, 595, 596 of intangible asset costs 308 in liability recognition 88 overrides 144, 595 quantitative thresholds 595–596, 599–600 in segment reporting 555 mature biological assets 745 maturity, short period to 537 measurement of assets 78–87 see also specific type of asset intangible 309, 311–312, 315–317, 318 basis of 71–73 of employee benefits 393, 417 of equity 97 of expenses 100, 503–504 of fair value 105–108 of income 98–99, 503–504 inventory see inventory valuation in lease accounting 357–359 of liabilities 89–97, 138 see also specific type of liability of profit 82–83, 503–507 quality of 75 of recoverable amounts 201–202 revaluation see revaluation techniques of 71–76 unit of, in foreign currency transactions 866–868 media 830 merchandise in transit 154 merchandise inventory 153 Meridian Energy 293 Mill, John Stuart 969 Minerals Resource Rent Tax (MRRT) 262 mining industry see extractive industries Ministerial Council for Companies and Securities 21–23, 32 miscellaneous inventory 153 Miscellaneous Professional Statements (APS series) 14, 21 modified grant date method 486 monetary assets 137 monetary items 870, 871–877 monetary liabilities 138 money scale 75 money, time value of 90, 92, 99, 201, 332, 665, 803 Monitoring Board (IASB) 849 monitoring of managers 121–122 most advantageous market 106–107 MPC (Manager Professional Conduct) 959 MRRT (Minerals Resource Rent Tax) 262 multi-employer plans 414, 415 see also defined benefit plans multiple measures of assets 87 mutual life insurers 801 Namoi Cotton Co-Operative Ltd 867, 885 National Companies and Securities Commission (NCSC) 22, 23, 558 see also Australian Securities and Investments Commission National Greenhouse and Energy Reporting Act 2007 (NGER Act) 937–938, 940 National Greenhouse and Energy Reporting (Measurement) Determination 2008 (Cth) 937 National Greenhouse and Energy Reporting (Audit) Determination 2009 (Cth) 937 National Greenhouse and Energy Reporting (Auditor Registration) Instrument 2010 (Cth) 937 National Greenhouse and Energy Reporting Regulations 2008 (Cth) 937 National Greenhouse and Energy Reporting System (NGERS) 919, 937–938, 940 nature of assets 137 of liabilities 138 materiality based on 599 nature-of-expense method 516 NCSC (National Companies and Securities Commission) 22, 23, 558 see also Australian Securities and Investments Commission negative goodwill 329 negative taxable income 256 1007 neoclassical economic theory 119–121, 124, 126 net assets 136, 138 see also equity net interest cost 418 net interest income net method of accumulated depreciation 196–198 net operating balance 843 net-present-value method 734–735 net realisable value 164, 738 application of 164–166 of biological assets 732–733, 735, 739–740 defining and measuring 166 in foreign currency transactions 875 in real estate development 706 of superannuation plan assets 760, 772–776 net-revenue-contributions depreciation method 219–221 net value added 560–561 ‘Net Value Added’ experiment 928 net-worth method 411–412 neutral depiction 49 New Public Management (NPM) 823, 825 New South Wales Corporate Affairs Commission 22 New South Wales Greenhouse Gas Reduction Scheme (GGAS) 919 New South Wales Treasury 832–833 ‘new’ transactions 26 New Zealand Financial Reporting Standard No ‘Presentation of Financial Reports’ 560 Financial Reporting Standards Board 555–556 sector neutrality policy in 831 Single Economic Market Initiative 856 ‘Sustainable Cost’ experiment 928 Trans-Tasman convergence project 640–641, 856 NFP sector see not-for-profit sector NGERS (National Greenhouse and Energy Reporting System) 919, 937–938, 940 nominal basis measurement of employee benefits 393 nominal scales 73–74 non-accumulating sick leave 398 non-adjusting events after the reporting period 603, 603–606 non-compensatory options plans 481–482 non-contributory superannuation plans 754 non-current assets 137, 140, 175, 305 basis of classification 150 biological assets as 730–731, 736 held for sale 214–215, 222 intangible 305 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1007 10/07/13 1:52 PM 1008 S UB J E C T IN DE X non-current assets continued property, plant and equipment see property, plant and equipment public sector 833–834 in real estate development 707 revaluation of see revaluation tangible 305 useful life of see useful life non-current liabilities 140, 813 non-monetary items 874 assets 137, 305 in bank accounting 808–809 in currency transactions 870, 874–877 employee benefits 138, 395 in extractive industries 676–677 fair value of 105–106 liabilities 138 omitted from cash flow statement 542 non-reciprocal transfer 838 non-redeemable preference shares 59, 490–491 non-vesting sick leave entitlements 399 normal operations 61 see also operating activities normative ethical theories 967 Norwalk Agreement (2002) 852 Norwich Park Mine 653 notes to financial statements see also disclosure additional disclosure requirements 641 in concise financial reports 640 on exploration and evaluation assets 662 financial instruments 459–461, 464–474 goodwill 333–335 in interim reports 638 in public sector 842–843 on recognition 76, 98 on removal and restoration costs 668 statement of cash flows 542 in statement of financial position 140–142, 262–263 on tax treatments 262–263 Not-for-Profit Focus Group (AASB) 10 not-for-profit (NFP) sector conceptual framework for 28, 38, 50, 838 donated assets 181 government see public sector international harmonisation and 856 inventory valuation 155, 168 property, plant and equipment 181, 191–193 not ordinarily interchangeable 161 NPM (New Public Management) 823, 825 NRMA Insurance Ltd 112 objectives of financial reporting 38–40, 47, 234, 504 of tax treatments 234 Objectives and Concepts of Financial Statements (AARF) 27 objectivity 959, 962 obligations to another entity 56–57 of insurers 789 lease liabilities as 379–381 legal 3–4 obsolescence 216, 313 Occupational Superannuation Standards Regulations 759, 766 off-balance-sheet items in bank accounting 809 lease accounting 355, 361–362, 379 Office of Regulation Review 12 offsetting of cash flows 542 deferred tax assets and liabilities 260 financial assets and liabilities 434 oil industry 126, 177 Omnibus series (AASB standards) on-balance-sheet items 355, 361, 379 on-costs of employees 393 one-line consolidation 289 One Person Tribunal (OPT) 959–960 Ontario Hydro 929 operating activities 537 cash flows from 537–542 operating assets, of insurers 791–794 operating cycle 140, 141, 150–151, 731 operating leases 355 accounting for 355–356, 366–367 classification of 363–366 off-balance-sheet items 355, 361–362, 379 sale-and-leaseback agreements 375–378 operating-profit approach 504, 505, 517 operating statement 837 opportunistic behaviour by managers 121–127, 268 OPT (One Person Tribunal) 959–960 option(s) 448 call 448, 449 put 448, 449 trigger test 568–569 option contracts accounting for 450–452 versus futures contracts 449–450 for hedging purposes 450–452 nature of 448–449 for trading purposes 452 option price 448, 450 order-of-liquidity presentation format 139, 142 ordinal scales 74 ordinarily interchangeable 161 ordinarily interchangeable items 161 ordinary activities 511, 517 see also operating activities ordinary shares 477 dilutive potential 571 earnings per see earnings per share organisational divisions, segmentation by 554 Orica 916–917 other-services approaches to depreciation 221 outwards reinsurance 792 overheads, fixed manufacturing 182–183 oversight bodies, information needs of 39 owner(s) see also investor; shareholder distributions to 52, 63 see also dividends investments by 52 managers’ relationship with 120–122 value to 85–87, 97 owner-occupied property 297 ownership see also control control defined by 54–55, 154 investor-investee relationship 291 in lease accounting 363 revenue and 513 rights to equity 476, 496 paid-up capital 477–478 see also share(s) Paper No ‘Accounting Standards’ (ASRB) 32–33 Parliament 827, 829 Parliamentary Joint Committee on Corporations and Financial Services (PJC) 639, 755–756 partners’ capital see equity partnerships 37 parts inventory 153 par value 477 past events assets resulting from 55–56, 305 liabilities resulting from 57–58 past service cost 405, 411, 418 patents 307–309, 319–323 pay-off of option contracts 449 PCO (Professional Conduct Officer) 959 pension plans see post-employment benefits; superannuation plans performance assessment of 78 economic 931 environmental 931 social 931 performance indicators 550, 562–576 ASX Listing Rules 563–564 descriptive performance reporting 924, 925 earnings per share see earnings per share financial ratios 572–576 reporting objectives 40 in sustainability reporting 931–932 performance obligation approach 379–381 performance statement see statement of profit or loss and other comprehensive income periodic disclosure Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1008 10/07/13 1:52 PM S U B J EC T I ND EX periodic inventory method 155 permanent differences 242, 243 perpetual inventory method 155 Perpetual Limited 478 personal income tax 391 Petroleum Resources Rent Tax 262 physical basis for construction contracts 716 physical deterioration, depreciation as 216 physical (periodic) inventory method 155 PJC (Parliamentary Joint Committee on Corporations and Financial Services) 639, 755–756 plant see property, plant and equipment plants, as biological assets 733–735 point of sale, profit recognition at 708 Policy Discussion Paper No ‘Towards International Comparability of Financial Reporting’ 853–854 Policy Statements PS4 ‘International Convergence and Harmonisation Policy’ 855, 856 PS5 ‘The Nature and Purpose of Statements of Accounting Concepts’ 29, 32 PS6 ‘International Harmonisation Policy’ 854–855 political influences on accounting standards 72, 111–112 on choice of accounting methods 125, 127 portable benefits 754 possession, control defined by 55 post-employment benefits 392, 394, 410 see also superannuation plans accounting for 412–422 background 411–412 framework definition of 410–411 power relationships 955–956 pre-acquisition costs 700 preconditional period for long-service leave 400 predictive role of financial information 48, 116 see also futureoriented financial information preference shares 59, 477, 490, 491 convertible 491–495, 569 trigger test 569–570 premium(s) 783–784, 786–788, 795 premium deficiency 789 prepayments 176, 217 pre-production phase 654, 654–656 accounting methods 658–661 historical cost-based accounting 677–681 illustrations of 694–698 reserve recognition accounting 681, 681–683, 696–698 presentation currency 867, 868, 870, 879–883 presentation of financial information 32 present obligation 56–57 present value 32 of defined benefit obligation 416 of employee benefits 393–394 of leased assets 367, 371 as measurement system 86–87, 138, 219 price(s) exercise (strike) 448 exit 105, 107 fall in, depreciation as 215–216 general level of 72 option 448, 450 price–earnings ratio 572 price risk 461 PricewaterhouseCoopers 913, 935 primary financial instruments 431, 432, 438 principal–agent relationships 119–121, 124, 126 principal market 106–107 principal payments, in lease accounting 357–359 principles-based approach 858–860 Principles of Good Corporate Governance Practice and Best Practice Recommendations (ASX) prior-period errors 144–145, 613–617, 615 privatisation 825 probabilistic estimates, forecasts based on 579 probability criterion asset recognition 54, 76–77 expense recognition 99–100 income recognition 97–98 liability recognition 57–58, 88 procyclicality 439, 804–805 product contribution 925 production of goods and services 60 production phase 654, 654–656 product obsolescence 216 product, segmentation by 554 professional behaviour 959 professional competence 959 Professional Conduct Officer (PCO) 959 profit 65 in bank accounting 815–818 distribution of, income tax as 234 framework definition of 64–65, 503 in insurance accounting 793–794 inventory valuation and 159–160 measurement of 82–83, 503–507 public attitude toward 125 recognition of 65 in real estate development 708–710 versus taxable income 308 underlying 518–520 profit and loss statement see statement of profit or loss and other comprehensive income profit-sharing plans see share-based payments 1009 profit-smoothing hypothesis 117–118 Project Advisory Panels (AASB) 10, 851 Projected Unit Credit Method 401, 416 projections see future-oriented financial information project proposals 11 pronouncement, issuance of 12 property see buildings; land investment see investment properties leased see lease(s) plant and equipment 175 overview 175–176 depreciation of 176, 215–223 accounting standards 222–223 cost allocation 216–221 fall in price 215–216 fall in value 216 implementation problems 217–222 physical deterioration 216 summary of 217 not-for-profit entities 181, 191–193 recognition of 176–188 assets acquired by exchange 179–181 components with different lives 177, 221–222 donated assets 181 impairment loss 202–204 self-constructed assets 181–188 revaluation of 188–215 accumulated depreciation 196–198, 204 assets held for sale 214–215, 222 cost model 193–196, 198, 202–204, 206–212 disposal of assets 193–196, 201 impairment of assets 198–214 increments and decrements 191–193 revaluation model 189–198, 202–205, 208–212 tax treatment of 255–258 real estate see real estate development property claims 788–789 proprietorship see equity prospective changes in accounting estimates 615 ‘Prospective Financial Statements’ (AICPA) 578 provision 138 prudence 957 PSASB (Public Sector Accounting Standards Board) 9, 21, 23–24, 836 PSC (Public Sector Committee) of the International Federation of Accountants 855 psychological nature of income 64–65 public accountability 593, 594 public comment on accounting standards 12, 37, 110–111 impact on accounting policies 125 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1009 10/07/13 1:52 PM 1010 S UB J E C T IN DE X public companies 592 see also companies public equity see equity Public Finance and Audit Act 1987 (SA) public sector accounting in 827–828, 831–836 heritage assets 832–834, 833, 839 infrastructure assets 832, 832–834 land under roads 834–836, 840 sector neutrality 823, 825, 831–832 accounting standards 836–841 financial statements 838–841 government departments 825 Government Finance Statistics 824, 826, 837–838, 841–843 government trading enterprises 824–825 international harmonisation and 856 nature of 823–826 reporting entities 828–831, 836–837 whole of government 826, 830–831, 842–843 Public Sector Accounting Standards Board (PSASB) 9, 21, 23–24, 836 Public Sector Committee (PSC) of the International Federation of Accountants 855 PUMA Corporation 929–930 purchase commitments, anticipated loss on 166–167 pure equity accounting 285–287 purpose-led measurement 434 put options 448, 449 Qantas 263, 413 QBE Insurance Group 112 qualifying assets 184, 184–188 in real estate development 701–702 qualifying hedged items 887, 894 qualifying hedging instruments 440–441, 886–887, 895 qualitative characteristics 31, 47–52, 504 see also specific characteristic quality of financial information 39 of measurement 75 quantitative CSR reporting 925, 926 quantitative thresholds, for materiality 595–596, 599–600 quarterly reporting 634–635 Queensland legislation 4, 16, 916 Orica cyanide leaks in 916–917 rate of return on equity 576 rate of return on total assets 575 rating agencies 830 rationalism 970 ratio scales 74–75 Rawls, John 970–971 raw materials inventory 153 RDR (Reduced Disclosure Requirements) 593–594 real estate development 700–711 accounting standards 710–711 possible changes in 722–723 asset classification 705–707 asset measurement 703–705 construction contracts see construction contracts costs carried forward 700–703 profit recognition 708–710 realisable (market) value 32, 71 of assets 79, 82–87 biological 732–733, 736 of liabilities 95–96 net see net realisable value realisation 98 expected 150–151 receivables (accounts receivable) 151, 151–153, 282 banks 806–811 lease receivable 371 recipients of goods and services, information needs of 39 reciprocity 824 reclassification on disposal of foreign operations 902 of exploration and evaluation assets 662 recognition 73 of assets 54, 76–78, 150–151, 175 see also specific type of asset intangible 307–312, 315–317 basis of 71, 73 of changes in accounting estimates 615 versus definition 53 derecognition 193, 193–196, 380 of employee benefits 393, 416–417 of equity 58 of events after reporting period 605–606 of expenses 99–100 in extractive industries 660–661, 664–669 of impairment losses 202–204, 213 of income 61, 97–98 of liabilities 57–58, 87–88 see also specific type of liability of profit 65, 708–710 symmetrical rules for 735 ‘Recommendations for Addressing Procyclicality in the Financial System’ (FSF) 439 reconciliations in agricultural activity accounting 746 international standards and 852 in public sector accounting 843 in segment reporting 558 recoverable amount 201, 202 recovered debts 152 redeemable preference shares 59, 490–491 Reduced Disclosure Requirements (RDR) 593–594 regulation of banking industry 803 conceptual framework as 31 costs of 125 of financial markets 22, 429 government see legislation; specific law since global financial crisis 438–440, 804–805 sources of of superannuation plans 758–759, 774 Regulation Impact Statement (RIS) 12, 51–52 Regulatory Guide 230 ‘Disclosing non-IFRS financial information’ (ASIC) 518–520 reinsurance 785, 792, 793 The Reject Shop Ltd 626–632 related parties 617 identification of 619–621 related-party transactions 618 accounting standards 619–625 Corporations Act on 618, 624–632 disclosure of 618, 621–632 uses of 617–618 Release 100 ‘Criteria for the Evaluation of Accounting Standards’ (ASRB) 32 relevance 31, 48–49, 595 of asset valuation 83–84, 732 choice of accounting method and 115, 606 of concise financial reports 639 framework definition of 596 reliability in asset recognition 76–78 in asset valuation 82–83, 732, 740 choice of accounting method and 115, 606 construction contracts 716–719 of continuous disclosure 635 in expense recognition 100 of income recognition 98 of segment reporting 552–553, 556 of sustainability reporting 934–935 relief value 97 religious ethics 969 removal and restoration costs 664–668, 671–675 remuneration reports see employee benefits renewal of insurance 788 rental (expense) method 356 repairs and maintenance expenditure 218 replacement cost see current cost replication 75 reporting entities 36 adaptive capacity of 83–85, 135 classification of 592 financial structure of 135 framework definition of 28, 31, 37, 591–592 present obligation 56–57 in public sector 828–831, 836–837 resources controlled by 135 see also asset(s) Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1010 10/07/13 1:52 PM S U B J EC T I ND EX reporting periods depreciation costs allocated to 210–221 events after see events after the reporting period in insurance business 787, 795 interim 50, 577, 636–638 for share-based payments 487–488 timeliness of 50–51, 625 research and development 315 in extractive industries see exploration and evaluation intangible assets deriving from 311, 315–322 reserve(s) 495 cash flow hedge 895 economically recoverable 658 foreign currency translation 878, 902 reserve base 669–670 reserve recognition accounting 681, 681–683, 696–698 residual equity holders 58, 476 residual value 217 leases 364, 367, 371 resources controlled by an entity 135 see also asset(s) respect for persons 955–956 restoration costs 664–668, 671–675 restricted egoism 968 retail inventory method 161–162 retained earnings 495 retirement see superannuation plans retrocession 785 retrospective application of accounting policy 608–611 retrospective corrections 144–145, 497, 615–617 revaluation 188 of biological assets 735 cost model see cost model of property, plant and equipment see property, plant and equipment tax treatment of 255–258 revaluation model 189–198, 202–205, 208–212 in extractive industries 661 intangible assets 312–313, 318 tax treatment 255–258 revaluation surplus 191, 195, 495 revenues 503 see also gains; income accrued 356 in bank accounting 815–818 disclosure requirements 515–516 in extractive industries 669 framework definition of 52, 59–60 versus gains 60–61 in insurance accounting 786–787, 794–795 in real estate development 706–707, 711, 722 received in advance 249–250 recognition and measurement of 512–515 in statement of comprehensive income 510–516 superannuation plans and 774 reversal of impairment losses 204–205, 209–212 review bodies, information needs of 39 Ricoh Group 925–926 right-of-use assets 379 rights 969 right/wrong perspective 952–954 Rio Tinto 932–935 RIS (Regulation Impact Statement) 12, 51–52 risk actuarial 412 credit 457, 460, 473, 888 currency 461, 469–470, 884–885 in employee remuneration 407 in extractive industries 653 from financial instruments 460–461, 466–474 insurance 784, 796 interest rate 461, 467–468 investment 412 liquidity 460, 471–473 market 460 price 461 roads, land under 834–836, 840 roadworks 834 royalties, revenue from 514–515 rules-based standards 858–859, 952–954 SACs see Statements of Accounting Concepts safe-harbour rule 578, 960 salaries 395–396 see also employee benefits sale-and-leaseback agreements 355, 374–378 sale of goods, revenue from 513 sales commissions 702–703 sales price, versus fair value 376–378 Sandilands Committee 87 scales of measurement 73–75 Schedule (Corporations Regulations) 136 scope of financial reporting 31, 35–36 scrap value 217 leases 364, 367, 371 seasonal patterns 634–635 secondary (derivative) financial instruments 431, 432, 438, 464, 811–812 sector neutral accounting 757, 823, 825, 831–832 securities see also financial instruments bank assets 811–812 as equity or liabilities 59 Securities and Exchange Commission (US) on capitalisation of exploration costs 126 1011 on forecasting 577–578 international convergence 163–164, 849, 852–853 see also harmonisation of standards on lease accounting 362 on reserve recognition accounting 682 on segment reporting 551 segment 550 nature of 554–555 segment reporting 550–558 accounting standards 556–558 case against 552–554 case for 551–552 example of 586–587 implementation problems 554–556 Select Harvests Ltd 740 selective capitalisation method 315–317, 316 self-constructed assets 181–188 self-interest assumption of 119–120, 125, 126, 968 enlightened 914–915 self-managed superannuation plans 754 selling costs 702–703 selling price see realisable value separability of assets 305–306 service(s) public sector 825 revenue from 60, 513–514 segmentation by 554 service contribution 925 service cost current 405, 411, 418 past 405, 411, 418 service standard 13 set-offs see offsetting settlement costs, in insurance accounting 790 share(s) overview 280 earnings per see earnings per share issue of 477–478, 566–567 ordinary 477 dilutive potential 571 of other companies associates 284–291, 290 investor/investee relationships 280–284 joint arrangements 292, 292–295 subsidiaries 291–292 preference 59, 477, 490, 491 convertible 491–495, 569 trigger test 569–570 share-based payments accounting entries for 488–489 accounting standards 480–481 compensatory 481–483 disclosure requirements 489–490 as employee benefits 406–408 manager behaviour and 123–124 measurement approaches 483–484 non-compensatory 481–482 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1011 10/07/13 1:52 PM 1012 S UB J E C T IN DE X share-based payments continued reporting periods 487–488 timing of measurement 484–485 vesting conditions 485–487 share buyback scheme 478–480, 479 share capital 477, 478 shareholder(s) see also investor; owner choice of accounting method and 117–119 information needs of 39 managers’ relationship with 121–122 wealth maximisation for 119–120, 913–914 shareholder-owned life insurers 801 shareholders’ equity see equity Share Price Index contracts 443–446 share prices choice of accounting policy and 125–126 tax-effect accounting and 267 share splits 567 Sharp, Michael 113 shipped free on board (FOB) 154 short-tail business 786 short-term consumables 731 short-term employee benefits 393, 395 short-term leases 380 short-term money market investments 537 sick leave 392, 398–400 signalling 126, 268 significant influence 620 significant items 518 simple financial instruments 432 Single Economic Market Initiative (Aus-NZ) 856 SIRIS (Sustainable Investment Research Institute) 920 small businesses 593–594 small proprietary companies 592 Smith, Adam 968 social contract 916, 916–918, 970–971 social performance 931 social responsibility see corporate social responsibility Society Bulletin No ‘Accounting for Long-Term Land Development Projects’ (ASA)` 711 socioeconomic operating statement 927 sole traders 37 solvency 135 in insurance accounting 793–794 solvency ratios 572, 574–575 source of assets 137 South Australia mining industry 659 public sector accounting 838 S&P/All Ordinaries Index special interest groups 829–830 special purpose financial statements 26, 33, 36, 591, 829–830 specific identification method 161, 703 speculators 444 see also hedge accounting SPI 200 contracts 443–446 spot rate 869 SSAP13 ‘Accounting for Research and Development’ 316 stage-of-completion method 514, 709, 712, 712–717 stakeholders 915, 916 see also user groups standard cost 161–162 standards see accounting standards; specific standard standard value 732 stand method 734 Starbucks Coffee Australia 914–915 state and territory governments 823, 838 see also specific state or territory financial reporting by see public sector legislation 4, 16 A Statement of Australian Accounting Principles (AARF) 27 A Statement of Basic Accounting Theory (AAA) 47 statement of cash flows 532 overview 531 accounting standards 536–542 advantages of 534–536 cash flows 534 from financing activities 537, 539, 540 from investing activities 537, 539, 542 offsetting 542 from operating activities 537, 537–542 in conceptual framework 32 development of 531–532 disclosure requirements 532, 536, 542 empirical evidence on 535–536 examples of 538, 540 format of 539–540 funds, meaning of 532–534 projections in 579 in public sector 836–837, 840, 842–843 statement of changes in equity 32, 496–497, 506 statement of financial performance see statement of profit or loss and other comprehensive income statement of financial position 135 accounting standards 135–136, 138–145 attributes of 135 banking industry 805–809 in conceptual framework 32 elements of, presentation of 136–138 equity on 476 examples of 141, 143, 169, 805–809 financial instruments on 434 format of 135–136, 139–145 general insurance 799 leases on 361 notes 140–142, 262–263 projections in 579 in public sector 836–837, 839–840, 842–843 for superannuation plans 759 tax allocation in 236, 236–244, 262–263 statement of other economic flows 837 statement of profit or loss and other comprehensive income 503 bank accounting 811–812 biological assets on 739 in conceptual framework 32 disclosure requirements 515–517 earnings per share see earnings per share example of 509 expense classification 516–517 form and content of 507–510 insurance accounting 799, 802 leases on 361 profit measurement 503–507 projections in 579 in public sector 836–839, 842–843 revenues 510–516 versus statement of value added 558–559 for superannuation plans 759, 775 unusual items 517–520 statement of value added 550, 558–562 advantages and disadvantages of 561–562 example of 559 preparation issues 560–561 versus statement of comprehensive income 558–559 Statements of Accounting Concepts (SACs) 24, 29 SAC1 ‘Definition of the Reporting Entity’ 28, 31, 36 on differential reporting 591–594 on public sector 828–829 SAC2 ‘Objective of General Purpose Financial Reporting’ overview 28, 31, 36, 38–40 measurement basis 75, 78–79 on profit measurement 504 on stewardship function 81–82 SAC3 ‘Qualitative Characteristics of Financial Information’ 28, 31, 47 SAC4 ‘Definition and Recognition of the Elements of Financial Statements’ 28, 31–32 on research and development valuation 316 on separability criterion 305–306 Statements of Financial Accounting Concepts (FASB) 27 SFAC1 ‘Objectives of Financial Reporting by Business Enterprises’ 35–36, 47 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1012 10/07/13 1:52 PM S U B J EC T I ND EX SFAC2 ‘Qualitative Characteristics of Accounting Information’ 35–36, 47 SFAC6 ‘Elements of Financial Statements’ 52, 53, 56–65 SFAS 13 ‘Accounting for Leases’ 362 SFAS 69 ‘Disclosures about Oil and Gas Producing Activities’ 683 SFAS 87 ‘Employers’ Accounting for Pensions’ 412 SFAS 106 ‘Employers’ Accounting for Post-Retirement Benefits Other than Pensions’ 412 SFAS 109 ‘Accounting for Income Taxes’ 244 SFAS 130 ‘Reporting Comprehensive Income’ 506 SFAS 131 ‘Disclosures about Segments of an Enterprise and Related Information’ 555, 556 SFAS 142 ‘Goodwill and Other Intangible Assets’ 329 stewardship see accountability stock see inventories stock exchange see Australian Securities Exchange Ltd stock versus flow approach 60, 99 straight-line method 671 strike (exercise) price 448 stripping costs 654.663–664, 671–675 subsequent events see events after the reporting period subsidiaries 37 investments in 291–292 successful-efforts method 680, 681, 694–696 sufficient regularity 191 ‘Summary of Financial Transactions for the Year’ 531 sunk costs 833 Superannuation Industry (Supervision) Act 1993 (Cth) 758–759, 774 superannuation plans 392, 753 overview 753 accounting issues 753 accounting standards 757–777 on accrued benefits 760–761, 773–777 assessment of 772–774 defined benefit plans 765–771 defined contribution plans 761–765 on plan assets 760–761, 772–773 on plan liabilities 760–761, 773–774 proposed (ED223) 753, 758, 759–760, 774–777 defined benefit see defined benefit plans defined contribution see defined contribution plans entities establishing 753 nature of 754 regulation of 758–759, 774 reporting by 754–759, 775–777 supermajority vote 852 ‘Supplementary Economic Accounts’ experiment 928–929 supplies inventory 153 sustainability reporting 919, 919–923, 931–935 ‘Sustainable Cost’ experiment (NZ) 928 Sustainable Investment Research Institute (SIRIS) 920 sustained-yield method 733–734 swaps accounting for 457–459 currency 453, 455–457 interest rate 453, 453–455, 458–459 nature of 452–453 symmetrical recognition rules 735 tangible assets 137, 663 Tasmania, legislation in 16 Tassal Group Ltd 730, 739, 746 taxable temporary difference (TTD) 245–247, 249, 267 taxation company see company income tax evasion of 963 personal 391 public sector funding by 824, 839 tax-effect accounting 266–268 Tax Reform Act 1986 (US) 267 technical insolvency 793 technical issues, identification of 11 technical language, user’s understanding of 34–35, 51 technological obsolescence 216, 313 teleological theories 967, 967–969 temporal method 878 temporary differences 237, 245–247, 249–255, 267 termination benefits 408, 408–410 term insurance 800 theological ethics 969 third-party review of forecasts 580 Tier reporting requirements 593–594, 838 Tier reporting requirements 593–594 timeliness 31, 50–51, 625 times dividends earned ratio 576 times interest earned ratio 575 time value of money 90, 92, 99, 201, 332, 665, 803 time weighting factor 566 timing see also reporting periods of financial reports 50–51 in insurance business 787 of segment reporting 555 of share-based payments 484–485 of transactions 116–117 total assets 135 total resources concept of funds 531, 534 trade-in allowances 179–181 trademarks 323–326 trade receivables see accounts receivable 1013 trading purposes, financial instruments used for 438, 446–448, 452 in banking industry 811–812 transaction(s) cost of 106 disclosure of 116 new types of 26 related-party see related-party transactions timing of 116–117 transaction neutral policy 757, 823, 825, 831–832 transportation costs 740 Trans-Tasman convergence project (AASB) 640–641, 856 Transurban 200 Treasury Bond contracts 443 Treasury departments 838 trigger test 567–571 Trio Capital 755–756 triple bottom line reporting 919 true and fair view 3–4, 111–112, 136 Trueblood Committee (US) 47 trust 950 trust deeds 123 trustees’ reports 757, 772 TTD (taxable temporary difference) 245–247, 249, 267 UIG see Urgent Issues Group unclosed business 788–789 unconditional period for long-service leave 400 underinvestment 122 underlying profit 518–520 understandability 31, 35, 51 underwriting activities 786, 786–793 undrawn lending rights 815 unearned premium liability 799 unethical behaviour 950 United Kingdom ‘Aims and Scope of Company Reports’ (Department of Trade) 559 The Corporate Report 558–560, 562 ‘The Future of Company Reports’ (Department of Trade) 560 Institute of Chartered Accountants in England and Wales 47 Institute of Chartered Accountants of Scotland 577 SSAP13 ‘Accounting for Research and Development’ 316 statements of value added in 558–560, 562 United Nations Environment Programme (UNEP) 922 United States 1929 stock market crash 26 accounting bodies 27 see also specific body cash flow statements in 535–536 conceptual framework 26–27 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1013 10/07/13 1:52 PM 1014 S UB J E C T IN DE X United States continued international convergence 162–163, 849, 852–853, 857, 859 inventory valuation in 160–163 lease accounting in 362 reserve recognition accounting in 682 tax-effect accounting 267 Trueblood Committee 47 working capital concept in 533 units-of-production method 669–670 University of Amsterdam 921 unrecognised firm commitments 440–442 unused tax losses 256–260 unusual items 517–520 Urgent Issues Group (UIG) 10, 12–13, 23 Interpretation ‘Emission Rights’ 938, 941–943 Interpretation 132 ‘Intangible Assets – Web Site Costs’ 326–327 useful life 222 in extractive industries 670 of intangible assets 313–314, 318, 364 of leased assets 368 User Focus Group (AASB) 10 user groups comments on standards 12, 37, 110–111 financial literacy of 34–35, 51, 561 information needs of 38–40 input into standard setting 12, 13 in public sector 829–830 sustainability reporting 932 tax-effect accounting and 267–268 types of 33–34, 38 utilitarianism 968 valuation see measurement valuation approach to depreciation 221 value of assets 79–81 deprival 85, 85–87, 97 face 89–92 see also historical cost fair see fair value fall in, depreciation as 216 present see present value realisable see realisable value relief 97 residual (scrap) 217 leases 364, 367, 371 value added statement see statement of value added value-in-exchange 79–81 decline in 216 value-in-use 79–81, 86–87, 201 decline in 215–216 of intangible assets 314 value judgements 952–956 value method 703 values clarification 957–960 verifiability 31, 50 verification of sustainability reports 934–935 vest 485 vested benefits 754 vesting conditions 485–487 vesting sick leave entitlements 399 Victoria, legislation in virtue ethics 957 voluntary changes in accounting policy 608–611 voluntary reporting of corporate social responsibility 922–924 of forecasts 578 of segment data 552 as signalling 126 statement of value added 560 wages 395–396 see also employee benefits Wallis Committee 429 wealth maximisation 119–120, 913–914 websites company 326–327, 932 government legislation weighted average cost 158, 161 well-offness 64–65 Westpac Banking Corporation 143, 491–492 ‘where-got-where-gone’ statements 531 whole of government 826, 830–831, 842–843 whole-of-life insurance 800 wholly owned subsidiaries 37 wind farms (Victoria) 293 working capital 533, 534 working group reports (G20) 439 work-in-process inventory 153 workplace agreements 397 WorldCom 859, 950 write-downs excess on acquisition 329 goodwill 332 as impairment loss 213–215, 309 inventory 161, 165–168 matching and 64 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442561175 - Henderson/Issues in Financial Accounting 15e Z01_HEND1175_15_LT_Z01.indd 1014 10/07/13 1:52 PM ... 609 108 329 327 581 (15 623 ) 196 120 (10 24 4) (87 27 1) 22 4 687 (53 7 32) 1 32 144 (2 274) 64 22 2 413 1 32 208 – 654 – – – 22 2 413 $3 .29 $3 .29 (9 405) 897 146 1 32 354 $2. 03 $2. 03 (Underlying profit... $ Addition to principal $ 20 13 20 14 20 15 20 16 20 17 90 000 91 740 93 6 02 95 594 97 726 300 422 5 52 6 92 834 560 560 560 560 560 740 8 62 9 92 1 32 274 515 On 30 June 20 17 the following general journal... 22 24 6 20 99 ( 520 ) 5 52 (4 931) (576) 16 890 (11 147) (1 24 0) 981 (21 1) (23 8) (4 807) – (16 6 62) 80 118 (9 323 ) (1 333) 030 (85) (1 52) (508) (156) (10 527 ) 1 32 34 – (16 464) 376 (9 985) 374 22 2