Financial Accounting and Reporting.

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Front Cover Half Title Page Title Page Copyright Page Brief contents Contents Preface Publisher’s acknowledgements Part 1 INTRODUCTION TO ACCOUNTING ON A CASH FLOW AND ACCRUAL ACCOUNTING BASIS 1 Accounting and reporting on a cash flow basis 1.1 Introduction 1.2 Shareholders 1.3 What skills does an accountant require in respect of external reports? 1.4 Managers 1.5 What skills does an accountant require in respect of internal reports? 1.6 Procedural steps when reporting to internal users 1.7 Agency costs 1.8 Illustration of periodic financial statements prepared under the cash flow concept to disclose realised operating cash flows 1.9 Illustration of preparation of statement of financial position 1.10 Treatment of non-current assets in the cash flow model 1.11 What are the characteristics of these data that make them reliable? 1.12 Reports to external users Summary Review questions Exercises Notes 2 Accounting and reporting on an accrual accounting basis 2.1 Introduction 2.2 Historical cost convention 2.3 Accrual basis of accounting 2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 2.5 Reformatting the statement of financial position 2.6 Accounting for the sacrifice of non-current assets 2.7 Published statement of cash flows Summary Review questions Exercises Notes Part 2 PREPARATION OF INTERNAL AND PUBLISHED FINANCIAL STATEMENTS 3 Preparation of financial statements of comprehensive income, changes in equity and financial position 3.1 Introduction 3.2 Preparing an internal statement of income from a trial balance 3.3 Reorganising the income and expenses into one of the formats required for publication 3.4 Format 1: classification of operating expenses and other income by function 3.5 Format 2: classification of operating expenses according to their nature 3.6 Other comprehensive income 3.7 How non-recurring or exceptional items can affect operating income 3.8 How decision-useful is the statement of comprehensive income? 3.9 Statement of changes in equity 3.10 The statement of financial position 3.11 The explanatory notes that are part of the financial statements 3.12 Has prescribing the formats meant that identical transactions are reported identically? 3.13 Fair presentation 3.14 What does an investor need in addition to the primary financial statements to make decisions? Summary Review questions Exercises Notes 4 Annual report: additional financial disclosures 4.1 Introduction 4.2 IAS 10 Events after the Reporting Period 4.3 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 4.4 What do segment reports provide? 4.5 IFRS 8 Operating Segments 4.6 Benefits and continuing concerns following the issue of IFRS 8 4.7 Discontinued operations – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 4.8 Held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 4.9 IAS 24 Related Party Disclosures Summary Review questions Exercises Notes 5 Statements of cash flows 5.1 Introduction 5.2 Development of statements of cash flows 5.3 Applying IAS 7 (revised) Statements of Cash Flows 5.4 Step approach to preparation of a statement of cash flows – indirect method 5.5 Additional notes required by IAS 7 5.6 Analysing statements of cash flows 5.7 Approach to answering questions with time constraints 5.8 Preparing a statement of cash flows when no statement of income is available 5.9 Disclosure Initiative (Amendments to IAS 7) 5.10 Critique of cash flow accounting Summary Review questions Exercises Notes Part 3 REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY 6 Financial reporting – evolution of global standards 6.1 Introduction 6.2 Why do we need financial reporting standards? 6.3 Why do we need standards to be mandatory? 6.4 Arguments in support of standards 6.5 Arguments against standards 6.6 Standard setting and enforcement by the Financial Reporting Council (FRC) in the UK 6.7 The International Accounting Standards Board 6.8 Standard setting and enforcement in the European Union (EU) 6.9 Standard setting and enforcement in the US 6.10 Advantages and disadvantages of global standards for publicly accountable entities 6.11 How do reporting requirements differ for non-publicly accountable entities? 6.12 IFRS for SMEs 6.13 Why have there been differences in financial reporting? 6.14 Move towards a conceptual framework Summary Review questions Exercises Notes 7 Concepts – evolution of an international conceptual framework 7.1 Introduction 7.2 Different countries meant different financial statements 7.3 Historical overview of the evolution of financial accounting theory 7.4 Developing a Framework for the Preparation and Presentation of Financial Statements 7.5 Conceptual Framework for Financial Reporting 2018 7.6 Current developments – concept of materiality Summary and evaluation of position to date Review questions Exercises 8 Ethical behaviour and implications for accountants 8.1 Introduction 8.2 The meaning of ethical behaviour 8.3 The accounting standard-setting process and ethics 8.4 The International Code of Ethics for Professional Accountants 8.5 Implications of ethical values for the principles versus rules-based approaches to accounting standards 8.6 Ethics in the accountant’s work environment – a research report 8.7 Implications of unethical behaviour for stakeholders using the financial reports 8.8 The increasing role of whistle-blowing 8.9 Legal requirement to report – national and international regulation 8.10 Why should students learn ethics? Summary Review questions Exercises Notes Part 4 INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 9 Income and asset value measurement: an economist’s approach 9.1 Introduction 9.2 Role and objective of income measurement 9.3 Accountant’s view of income, capital and value 9.4 Critical comment on the accountant’s measure 9.5 Economist’s view of income, capital and value 9.6 Critical comment on the economist’s measure 9.7 Income, capital and changing price levels Summary Review questions Exercises Notes Bibliography 10 Accounting for price-level changes 10.1 Introduction 10.2 Review of the problems of historical cost accounting (HCA) 10.3 Inflation accounting 10.4 The concepts in principle 10.5 The four models illustrated for a company with cash purchases and sales 10.6 Critique of each model 10.7 Operating capital maintenance – a comprehensive example 10.8 Critique of CCA statements 10.9 Measurement bases 10.10 The IASB position where there is hyperinflation 10.11 Future developments Summary Review questions Exercises Notes Bibliography 11 Revenue recognition 11.1 Introduction 11.2 IAS 18 Revenue 11.3 The issues involved in developing a new standard 11.4 The challenges under both IAS 18 and IFRS 15 11.5 IFRS 15 Revenue from Contracts with Customers 11.6 Five-step process to identify the amount and timing of revenue 11.7 Disclosures Summary Review questions Exercises Notes Part 5 STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE 12 Share capital, distributable profits and reduction of capital 12.1 Introduction 12.2 Common themes 12.3 Total owners’ equity: an overview 12.4 Total shareholders’ funds: more detailed explanation 12.5 Accounting entries on issue of shares 12.6 Creditor protection: capital maintenance concept 12.7 Creditor protection: why capital maintenance rules are necessary 12.8 Creditor protection: how to quantify the amounts available to meet creditors’ claims 12.9 Issued share capital: minimum share capital 12.10 Distributable profits: general considerations 12.11 Distributable profits: how to arrive at the amount using relevant accounts 12.12 When may capital be reduced? 12.13 Writing off part of capital which has already been lost and is not represented by assets 12.14 Repayment of part of paid-in capital to shareholders or cancellation of unpaid share capital 12.15 Purchase of own shares Summary Review questions Exercises Notes 13 Liabilities 13.1 Introduction 13.2 Provisions – a decision tree approach to their impact on the statement of financial position 13.3 Treatment of provisions 13.4 The general principles that IAS 37 applies to the recognition of a provision 13.5 Management approach to measuring the amount of a provision 13.6 Application of criteria illustrated 13.7 Provisions for specific purposes 13.8 Contingent liabilities 13.9 Contingent assets 13.10 ED IAS 37 Non-financial Liabilities 13.11 ED/2010/1 Measurement of Liabilities in IAS 37 Summary Review questions Exercises References 14 Financial instruments 14.1 Introduction 14.2 Financial instruments – the IASB’s problem child 14.3 IAS 32 Financial Instruments: Disclosure and Presentation 14.4 IFRS 9 Financial Instruments 14.5 IFRS 7 Financial Instruments: Disclosure Summary Review questions Exercises Notes 15 Employee benefits 15.1 Introduction 15.2 Greater employee interest in pensions 15.3 Financial reporting implications 15.4 Types of scheme 15.5 Defined contribution pension schemes 15.6 Defined benefit pension schemes 15.7 IAS 19 (revised 2011) Employee Benefits 15.8 The asset or liability for pension and other post-retirement costs 15.9 Changes in the pension asset or liability position 15.10 Comprehensive illustration 15.11 Multi-employer plans 15.12 Disclosures 15.13 Other long-service benefits 15.14 Short-term benefits 15.15 Termination benefits 15.16 IFRS 2 Share-based Payment 15.17 Scope of IFRS 2 15.18 Recognition and measurement 15.19 Equity-settled share-based payments 15.20 Cash-settled share-based payments 15.21 Transactions which may be settled in cash or shares 15.22 IAS 26 Accounting and Reporting by Retirement Benefit Plans Summary Review questions Exercises Notes 16 Taxation in company accounts 16.1 Introduction 16.2 Corporation tax 16.3 Corporation tax systems – the theoretical background 16.4 Dividends pre and post 2016 16.5 Corporation tax systems – avoidance and evasion 16.6 IAS 12 – accounting for current taxation 16.7 Deferred tax 16.8 A critique of deferred taxation 16.9 Value added tax (VAT) Summary Review questions Exercises Notes 17 Property, plant and equipment (PPE) 17.1 Introduction 17.2 PPE – concepts and the relevant IASs and IFRSs 17.3 What is PPE? 17.4 How is the cost of PPE determined? 17.5 What is depreciation? 17.6 What are the constituents in the depreciation formula? 17.7 Calculation of depreciation 17.8 Measurement subsequent to initial recognition 17.9 IAS 36 Impairment of Assets 17.10 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 17.11 Disclosure requirements 17.12 Government grants towards the cost of PPE 17.13 Investment properties 17.14 Effect of accounting policy for PPE on the interpretation of the financial statements Summary Review questions Exercises Notes 18 Leasing 18.1 Introduction 18.2 Need for an accounting standard on leasing 18.3 Terms and conditions of a lease 18.4 Leases in the financial statements of lessees under IFRS 16 18.5 Leases in the financial statements of lessors 18.6 Sale and leaseback transactions Summary Review questions Exercises 19 Intangible assets 19.1 Introduction 19.2 Intangible assets defined 19.3 Accounting treatment for research and development 19.4 Why is research expenditure not capitalised? 19.5 Capitalising development costs 19.6 Disclosure of R&D 19.7 IFRS for SMEs’ treatment of intangible assets 19.8 Internally generated and purchased goodwill 19.9 The accounting treatment of goodwill 19.10 Critical comment on the various methods that have been used to account for goodwill 19.11 Negative goodwill/Badwill 19.12 Brands 19.13 Accounting for acquired brands 19.14 Intellectual capital disclosures (ICDs) in the annual report 19.15 Review of implementation of IFRS 3 19.16 Review of implementation of identified intangibles under IAS 38 Summary Review questions Exercises Notes 20 Inventories 20.1 Introduction 20.2 Inventory defined 20.3 The impact of inventory valuation on profits 20.4 IAS 2 Inventories 20.5 Inventory valuation 20.6 Work in progress 20.7 Inventory control 20.8 Creative accounting 20.9 Audit of the year-end physical inventory count 20.10 Published accounts 20.11 Agricultural activity Summary Review questions Exercises Notes 21 Construction contracts 21.1 Introduction 21.2 The need to replace IAS 11 Construction Contracts 21.3 Identification of contract revenue under IAS 11 21.4 Identification of contract costs under IAS 11 21.5 IFRS 15 treatment of construction contracts 21.6 An approach when a contract can be separated into components 21.7 Accounting for a contract – an example 21.8 Illustration – loss-making contract using the step approach 21.9 Public–private partnerships (PPPs) Summary Review questions Exercises Notes Part 6 CONSOLIDATED ACCOUNTS 22 Accounting for groups at the date of acquisition 22.1 Introduction 22.2 Preparing consolidated accounts for a wholly owned subsidiary 22.3 IFRS 10 Consolidated Financial Statements 22.4 Fair values 22.5 Illustration where there is a wholly owned subsidiary 22.6 Preparing consolidated accounts when there is a partly owned subsidiary 22.7 The treatment of differences between a subsidiary’s fair value and book value 22.8 The parent issues shares to acquire shares in a subsidiary 22.9 IFRS 3 Business Combinations treatment of goodwill at the date of acquisition 22.10 When may a parent company not be required to prepare consolidated accounts? 22.11 When may a parent company exclude or not exclude a subsidiary from a consolidation? 22.12 IFRS 13 Fair Value Measurement 22.13 What advantages are there for stakeholders from requiring groups to prepare consolidated accounts? Summary Review questions Exercises Notes 23 Preparation of consolidated statements of financial position after the date of acquisition 23.1 Introduction 23.2 Uniform accounting policies and reporting dates 23.3 Pre- and post-acquisition profits/losses 23.4 The Bend Group – assuming there have been no inter-group transactions 23.5 Inter-company transactions 23.6 The Prose Group – assuming there have been inter-group transactions Summary Review questions Exercises Notes 24 Preparation of consolidated statements of income, changes in equity and cash flows 24.1 Introduction 24.2 Eliminate inter-company transactions 24.3 Preparation of a consolidated statement of income – the Ante Group 24.4 The statement of changes in equity (SOCE) 24.5 Other consolidation adjustments 24.6 A subsidiary acquired part-way through the year 24.7 Published format statement of income 24.8 Consolidated statements of cash flows Summary Review questions Exercises Notes 25 Accounting for associates and joint arrangements 25.1 Introduction 25.2 Definitions of associates and of significant influence 25.3 The treatment of associated companies in consolidated accounts 25.4 The Brill Group – group accounts with a profit-making associate 25.5 The Brill Group – group accounts with a loss-making associate 25.6 The acquisition of an associate part-way through the year 25.7 Joint arrangements 25.8 Disclosure in the financial statements 25.9 Parent company use of the equity method in its separate financial statements Summary Review questions Exercises Notes 26 Introduction to accounting for exchange differences 26.1 Introduction 26.2 How to record foreign currency transactions in a company’s own books 26.3 Boil plc – a more detailed illustration 26.4 IAS 21 Concept of Functional and Presentation Currencies 26.5 Translating the functional currency into the presentation currency 26.6 Preparation of consolidated accounts 26.7 How to reduce the risk of translation differences 26.8 Critique of the use of presentational currency 26.9 IAS 29 Financial Reporting in Hyperinflationary Economies Summary Review questions Exercises Notes Part 7 INTERPRETATION 27 Earnings per share 27.1 Introduction 27.2 Why is the earnings per share figure important? 27.3 How is the EPS figure calculated? 27.4 The use to shareholders of the EPS 27.5 Illustration of the basic EPS calculation 27.6 Adjusting the number of shares used in the basic EPS calculation 27.7 Rights issues 27.8 Adjusting the earnings and number of shares used in the diluted EPS calculation 27.9 Procedure where there are several potential dilutions 27.10 Exercise of conversion rights during the financial year 27.11 Disclosure requirements of IAS 33 27.12 Enhanced disclosures Summary Review questions Exercises Notes 28 Review of financial ratio analysis 28.1 Introduction 28.2 Overview of techniques for the analysis of financial data 28.3 Ratio analysis – a case study 28.4 Introductory review 28.5 Financial statement analysis, part 1 – financial performance 28.6 Financial statement analysis, part 2 – liquidity 28.7 Financial statement analysis, part 3 – financing 28.8 Peer comparison 28.9 Report based on the analysis 28.10 Caution when using ratios for prediction Summary Review questions Exercises Note 29 Analysis of published financial statements 29.1 Introduction 29.2 Improvement of information for shareholders 29.3 Published financial statements – their limitations for interpretation purposes 29.4 Published financial statements – additional entity-wide cash-based performance measures 29.5 Ratio thresholds to satisfy Shariah compliance 29.6 Use of ratios in restrictive loan covenants 29.7 Investor-specific ratios 29.8 Predicting corporate failure 29.9 Professional risk assessors 29.10 Valuing shares of an unquoted company – quantitative process 29.11 Valuing shares of an unquoted company – qualitative process 29.12 Possible effect of ‘Brexit’ on financial statements Summary Review questions Exercises Notes 30 An introduction to digital financial reporting 30.1 Introduction 30.2 The objectives of financial reporting 30.3 Reports and the flow of information pre-XBRL 30.4 What are HTML, XML and XBRL? 30.5 Reports and the flow of information post-XBRL 30.6 Why are companies adopting XBRL? 30.7 What are the processes followed to adopt XBRL for outputting information? 30.8 What is needed when receiving XBRL output information? 30.9 Progress of XBRL development for internal accounting 30.10 Real-time reporting 30.11 Stakeholder interaction with XBRL data Summary Review questions Exercises Notes Part 8 ACCOUNTABILITY 31 Corporate governance 31.1 Introduction 31.2 A systems perspective 31.3 Different jurisdictions have different governance priorities 31.4 Pressures on good governance behaviour vary over time 31.5 Types of past unethical behaviour 31.6 The effect on capital markets of good corporate governance 31.7 Risk management 31.8 The role of internal control, internal audit and audit committees in corporate governance 31.9 External audits in corporate governance 31.10 Executive remuneration in the UK 31.11 Corporate governance, legislation and codes 31.12 Corporate governance – the UK experience Summary Review questions Exercises Notes 32 Integrated reporting: sustainability, environmental and social 32.1 Introduction 32.2 Environmental and social disasters, the adverse consequences that can follow and the lessons to be learnt 32.3 Management accountability for environmental and social responsibility 32.4 Integrated reporting concepts 32.5 The historical context of the evolution of integrated reporting including the drivers of this movement 32.6 The efforts on which integrated reporting builds 32.7 The contribution of accountants 32.8 Integrated reporting – its impact on the future development of financial reporting and accounting Review questions Exercises Notes Index Back Cover