Financial Accounting and Reporting, 20th edition

Full contents:

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
   • 1.13 Micro businesses

   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 profit or loss and other comprehensive income, changes in equity and financial position
   • 3.1 Introduction
   • 3.2 Preparing an internal statement of profit or loss 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 information to be presented in the profit or loss section
   • 3.7 Other comprehensive income
   • 3.8 Presentation of non-recurring items and their effect on operating income
   • 3.9 How decision-useful is the statement of profit or loss and other comprehensive income?
   • 3.10 Statement of changes in equity
   • 3.11 The statement of financial position
   • 3.12 The explanatory notes that are part of the financial statements
   • 3.13 Has prescribing the formats meant that identical transactions are reported identically?
   • 3.14 Fair presentation
   • 3.15 What does an investor need in addition to the primary financial statements to make decisions?
   • 3.16 IAS 1 ED General Presentation and Disclosures

   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 80
   • 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) Statement 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 Critique of cash flow accounting

   Summary

   Review questions

   Exercises

   Notes

6. Accounting for price-level changes
   • 6.1 Introduction
   • 6.2 Review of the problems of historical cost accounting (HCA)
   • 6.3 Inflation accounting
   • 6.4 The concepts in principle
   • 6.5 The four models illustrated for a company with cash purchases and sales
   • 6.6 Critique of each model
   • 6.7 Operating capital maintenance – a comprehensive example
   • 6.8 Critique of CCA statements
   • 6.9 Measurement bases
   • 6.10 The IASB position where there is hyperinflation
   • 6.11 Future developments

   Summary

   Review questions

   Exercises

   Bibliography

   Notes

PART 3 REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE UNIFORMITY

7. Financial reporting — evolution of global standards
   • 7.1 Introduction
   • 7.2 Why do we need financial reporting standards?
   • 7.3 Why do we need standards to be mandatory?
   • 7.4 Arguments in support of standards
   • 7.5 Arguments against standards
   • 7.6 The Financial Reporting Council (FRC) as a regulatory body
   • 7.7 The International Accounting Standards Board
   • 7.8 Standard setting and enforcement in the European Union (EU)
   • 7.9 Standard setting and enforcement in the US
   • 7.10 Advantages and disadvantages of global standards for publicly accountable entities
   • 7.11 How do reporting requirements differ for non-publicly accountable entities?
   • 7.12 IFRS for SMEs
   • 7.13 Why have there been differences in financial reporting?
   • 7.14 Move towards a conceptual framework

   Summary

   Review questions

   Exercises

   Notes

8. Concepts — evolution of an international conceptual framework
   • 8.1 Introduction
   • 8.2 Different countries meant different financial statements
   • 8.3 Historical overview of the evolution of financial accounting theory
   • 8.4 Developing the Framework for the Preparation and Presentation of Financial Statements
   • 8.5 Conceptual Framework for Financial Reporting 2018
   • 8.6 Current developments – concept of materiality

   Summary and evaluation of position to date

   Review questions

   Exercises

9. Revenue recognition
   • 9.1 Introduction
   • 9.2 The issues involved in developing the new standard
   • 9.3 IFRS 15 Revenue from Contracts with Customers
   • 9.4 Five-step process to identify the amount and timing of revenue
   • 9.5 Disclosures

   Summary

   Review questions

   Exercises

   Notes

PART 4 STATEMENT OF FINANCIAL POSITION — EQUITY, LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE

10. Share capital, distributable profits and reduction of capital
    • 10.1 Introduction
    • 10.2 Common themes
    • 10.3 Total owners' equity: an overview
    • 10.4 Total shareholders' funds: more detailed explanation
    • 10.5 Accounting entries on issue of shares
    • 10.6 Creditor protection: capital maintenance concept
    • 10.7 Creditor protection: why capital maintenance rules are necessary
    • 10.8 Creditor protection: how to quantify the amounts available to meet creditors’ claims
    • 10.9 Issued share capital: minimum share capital
    • 10.10 Distributable profits: general considerations
    • 10.11 Distributable profits: how to arrive at the amount using relevant accounts
    • 10.12 When may capital be reduced?
    • 10.13 Writing off part of capital which has already been lost and is not represented by assets
    • 10.14 Repayment of part of paid-in capital to shareholders or cancellation of unpaid share capital
    • 10.15 Purchase of own shares

    Summary

    Review questions

    Exercises

    Notes

11. Liabilities
    • 11.1 Introduction
    • 11.2 Provisions — a decision tree approach to their impact on the statement of financial position
    • 11.3 Treatment of provisions
    • 11.4 The general principles that IAS 37 applies to the recognition of a provision
    • 11.5 Management approach to measuring the amount of a provision
    • 11.6 Application of criteria illustrated
    • 11.7 Provisions for specific purposes
    • 11.8 Contingent liabilities
    • 11.9 Contingent assets
    • 11.10 Criticisms of IAS 37
    • 11.11 Future progress

    Summary

    Review questions

    Exercises

    Notes

12. Financial instruments
    • 12.1 Introduction
    • 12.2 Financial instruments – the IASB’s problem child
    • 12.3 IAS 32 Financial Instruments: Disclosure and Presentation
    • 12.4 IFRS 9 Financial Instruments
    • 12.5 IFRS 7 Financial Instruments: Disclosure

    Summary

    Review questions

    Exercises

    Notes

13. Employee benefits
    • 13.1 Introduction
    • 13.2 Greater employee interest in pensions
    • 13.3 Financial reporting implications
    • 13.4 Types of scheme
    • 13.5 Accounting for defined contribution pension schemes
    • 13.6 Accounting for defined benefit pension schemes
    • 13.7 IAS 19 Employee Benefits
    • 13.8 The asset or liability for pension and other post-retirement costs
    • 13.9 Changes in the pension asset or liability position
    • 13.10 Comprehensive illustration
    • 13.11 Multi-employer plans
    • 13.12 Disclosures
    • 13.13 Other long-service benefits
    • 13.14 Short-term benefits
    • 13.15 Termination benefits
    • 13.16 IFRS 2 Share-based Payment
    • 13.17 Scope of IFRS 2
    • 13.18 Recognition and measurement
    • 13.19 Equity-settled share-based payments
    • 13.20 Cash-settled share-based payments
    • 13.21 Transactions which may be settled in cash or shares
    • 13.22 IAS 26 Accounting and Reporting by Retirement Benefit Plans

    Summary

    Review questions

    Exercises

    Notes

14. Taxation in company accounts
    • 14.1 Introduction
    • 14.2 Corporation tax
    • 14.3 Corporation tax systems — the theoretical background
    • 14.4 Dividends pre- and post-2016
    • 14.5 Corporation tax systems – avoidance and evasion
    • 14.6 IAS 12 — accounting for current taxation
    • 14.7 Deferred tax
    • 14.8 A critique of deferred taxation
    • 14.9 Value added tax (VAT)

    Summary

    Review questions

    Exercises

    Notes

15. Property, plant and equipment (PPE)
    • 15.1 Introduction
    • 15.2 PPE — concepts and the relevant IASs and IFRSs
    • 15.3 What is PPE?
    • 15.4 How is the cost of PPE determined?
    • 15.5 What is depreciation?
    • 15.6 What are the constituents in the depreciation formula?
    • 15.7 Calculation of depreciation
    • 15.8 Measurement subsequent to initial recognition
    • 15.9 IAS 36 Impairment of Assets
    • 15.10 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
    • 15.11 Disclosure requirements
    • 15.12 Government grants towards the cost of PPE
    • 15.13 Investment properties
    • 15.14 Effect of accounting policy for PPE on the interpretation of the financial statements

    Summary

    Review questions

    Exercises

    Notes

16. Leasing
    • 16.1 Introduction
    • 16.2 Need for an accounting standard on leasing
    • 16.3 Terms and conditions of a lease
    • 16.4 Leases in the financial statements of lessees under IFRS 16
    • 16.5 Leases in the financial statements of lessors
    • 16.6 Sale and leaseback transactions

    Summary

    Review questions

    Exercises

    Notes

17. Intangible assets
    • 17.1 Introduction
    • 17.2 Intangible assets defined
    • 17.3 Accounting treatment for research and development
    • 17.4 Why is research expenditure not capitalised?
    • 17.5 Capitalising development costs
    • 17.6 Disclosure of R&D
    • 17.7 IFRS for SMEs' treatment of intangible assets
    • 17.8 Internally generated and purchased goodwill
    • 17.9 The accounting treatment of goodwill
    • 17.10 Critical comment on the various methods that have been used to account for goodwill
    • 17.11 Negative goodwill/badwill
    • 17.12 Brands
    • 17.13 Accounting for acquired brands
    • 17.14 Intellectual capital disclosures (ICDs) in the annual report
    • 17.15 Review of implementation of IFRS 3
    • 17.16 Review of the implementation of identified intangibles under IAS 38

    Summary

    Review questions

    Exercises

    Notes

18. Inventories
    • 18.1 Introduction
    • 18.2 Inventory defined
    • 18.3 The impact of inventory valuation on profits
    • 18.4 IAS 2 Inventories
    • 18.5 Inventory valuation
    • 18.6 Work in progress
    • 18.7 Inventory control
    • 18.8 Creative accounting
    • 18.9 Audit of the year-end physical inventory count
    • 18.10 Published accounts
    • 18.11 Agricultural activity

    Summary

    Review questions

    Exercises

    Notes

19. Construction contracts
    • 19.1 Introduction
    • 19.2 Construction contracts
    • 19.3 IFRS 15 treatment of construction contracts
    • 19.4 Accounting for a contract – an example
    • 19.5 Illustration — loss-making contract using the step approach
    • 19.6 Public & private partnerships
    • 19.7 Requirements of IFRIC 12 Service Concession Arrangements
    • 19.8 Worked example of service concession accounting

    Summary

    Review questions

    Exercises

    Notes

PART 5 CONSOLIDATED ACCOUNTS

20. Accounting for groups at the date of acquisition
    • 20.1 Introduction
    • 20.2 Preparing consolidated accounts for a wholly owned subsidiary
    • 20.3 IFRS 10 Consolidated Financial Statements
    • 20.4 Fair values
    • 20.5 Illustration where there is a wholly owned subsidiary
    • 20.6 Preparing consolidated accounts when there is a partly owned subsidiary
    • 20.7 The treatment of differences between a subsidiary's fair value and book value
    • 20.8 The parent issues shares to acquire shares in a subsidiary
    • 20.9 IFRS 3 Business Combinations treatment of goodwill at the date of acquisition
    • 20.10 When may a parent company not be required to prepare consolidated accounts?
    • 20.11 When may a parent company exclude or not exclude a subsidiary from a consolidation?
    • 20.12 IFRS 13 Fair Value Measurement
    • 20.13 What advantages are there for stakeholders from requiring groups to prepare consolidated accounts?

    Summary

    Review questions

    Exercises

    Notes

21. Preparation of consolidated statements of financial position after the date of acquisition
    • 21.1 Introduction
    • 21.2 Uniform accounting policies and reporting dates
    • 21.3 Pre- and post-acquisition profits/losses
    • 21.4 The Bend Group — assuming there have been no inter-group transactions
    • 21.5 Inter-company transactions
    • 21.6 The Prose Group — assuming there have been inter-group transactions

    Summary

    Review questions

    Exercises

    Notes

22. Preparation of consolidated statements of profit or loss, changes in equity and cash flows
    • 22.1 Introduction
    • 22.2 Eliminate inter-company transactions
    • 22.3 Preparation of a consolidated statement of profit or loss – the Ante Group
    • 22.4 The statement of changes in equity (SOCE)
    • 22.5 Other consolidation adjustments
    • 22.6 A subsidiary acquired part-way through the year
    • 22.7 Published format statement of profit or loss
    • 22.8 Consolidated statements of cash flows

    Summary

    Review questions

    Exercises

    Notes

23. Accounting for associates and joint arrangements
    • 23.1 Introduction
    • 23.2 Definitions of associates and of significant influence
    • 23.3 The treatment of associated companies in the financial statements of the investor
    • 23.4 The Brill Group — group accounts with a profit-making associate
    • 23.5 The Brill Group — group accounts with a loss-making associate
    • 23.6 The acquisition of an associate part-way through the year
    • 23.7 Joint arrangements
    • 23.8 Disclosure in the financial statements

    Summary

    Review questions

    Exercises

    Notes

24. Introduction to accounting for exchange differences
    • 24.1 Introduction
    • 24.2 How to record foreign currency transactions in a company's own books
    • 24.3 Boil plc — a more detailed illustration
    • 24.4 IAS 21 Concept of Functional and Presentation Currencies
    • 24.5 Translating the functional currency into the presentation currency
    • 24.6 Preparation of consolidated accounts
    • 24.7 How to reduce the risk of translation differences
    • 24.8 Critique of the use of presentational currency
    • 24.9 IAS 29 Financial Reporting in Hyperinflationary Economies

    Summary

    Review questions

    Exercises

    Notes

PART 6 INTERPRETATION

25. Earnings per share
    • 25.1 Introduction
    • 25.2 Why is the earnings per share figure important?
    • 25.3 How is the EPS figure calculated?
    • 25.4 The use to shareholders of the EPS
    • 25.5 Illustration of the basic EPS calculation
    • 25.6 Adjusting the number of shares used in the basic EPS calculation
    • 25.7 Rights issues
    • 25.8 Adjusting the earnings and number of shares used in the diluted EPS calculation
    • 25.9 Procedure where there are several potential dilutions
    • 25.10 Exercise of conversion rights during the financial year
    • 25.11 Disclosure requirements of IAS 33
    • 25.12 Enhanced disclosures

    Summary

    Review questions

    Exercises

    Notes

26. Review of financial ratio analysis
    • 26.1 Introduction
    • 26.2 Overview of techniques for the analysis of financial data
    • 26.3 Ratio analysis — a case study
    • 26.4 Introductory review
    • 26.5 Financial statement analysis, part 1 — financial performance
    • 26.6 Financial statement analysis, part 2 — liquidity
    • 26.7 Financial statement analysis, part 3 — financing
    • 26.8 Peer comparison
    • 26.9 Report based on the analysis
    • 26.10 Caution when using ratios for prediction

    Summary

    Review questions

    Exercises

27. Analysis of published financial statements
    • 27.1 Introduction
    • 27.2 Alternative performance measures
    • 27.3 EBITDA
    • 27.4 EBITDAR
    • 27.5 EBITDARM
    • 27.6 Regulators' reaction to use of an alternative management performance measure (APM)
    • 27.7 Use of ratios as thresholds
    • 27.8 Predicting corporate failure
    • 27.9 Investor-specific ratios
    • 27.10 Published financial statements — their limitations for interpretation purposes
    • 27.11 Improvement of information for shareholders
    • 27.12 Valuing shares of an unquoted company — quantitative process
    • 27.13 Valuing shares of an unquoted company — qualitative process
    • 27.14 Possible effects of a pandemic (Covid-19)
    • 27.15 Possible effects of Brexit

    Summary

    Review questions

    Exercises

    Notes

PART 7 ACCOUNTABILITY

28. Corporate governance
    • 28.1 Introduction
    • 28.2 A systems perspective
    • 28.3 Different jurisdictions have different governance priorities
    • 28.4 The effect on capital markets of good corporate governance
    • 28.5 Risk management
    • 28.6 The role of internal control, internal audit and audit committees in corporate governance
    • 28.7 External audits in corporate governance
    • 28.8 Detection of fraud
    • 28.9 The Regulator’s approach to promoting improved disclosures
    • 28.10 International perspective (IFIAR)
    • 28.11 The future of audit
    • 28.12 Executive remuneration in the UK
    • 28.13 Corporate governance — ways to make directors accountable

    Summary

    Review questions

    Exercises

    Notes

29. Ethical behaviour and implications for accountants
    • 29.1 Introduction
    • 29.2 The meaning of ethical behaviour
    • 29.3 The accounting standard-setting process and ethics
    • 29.4 The International Code of Ethics for Professional Accountants 2018
    • 29.5 Implications of ethical values for the principles — versus rules-based approaches to accounting standards
    • 29.6 Ethics in the accountant's work environment — a research report
    • 29.7 Implications of unethical behaviour for stakeholders using the financial reports
    • 29.8 The increasing role of whistle-blowing
    • 29.9 Legal requirement to report — national and international regulation
    • 29.10 Why should students learn ethics?

    Summary

    Review questions

    Exercises

    Notes

30. Integrated reporting: sustainability, environmental and social
    • 30.1 Introduction
    • 30.2 Environmental and social disasters, the adverse consequences that can follow and the lessons to be learnt
    • 30.3 Management accountability for environmental and social responsibility
    • 30.4 Integrated reporting concepts
    • 30.5 The historical context of the evolution of integrated reporting including the drivers of this movement
    • 30.6 The seriousness of current threats: sustainability — climate change and pollution
    • 30.7 The efforts on which integrated reporting builds
    • 30.8 The contribution of accountants
    • 30.9 Integrated reporting — its impact on the future development of financial reporting and accounting
    • 30.10 Reporting to stakeholders to account for stewardship
    • 30.11 Reporting to stakeholders to assist decision making
    • 30.12 Real-time reporting
    • 30.13 Other means of communication with stakeholders
    • 30.14 The way forward for improved sustainability disclosure

    Summary

    Review questions

    Exercises

    Notes

Publisher's acknowledgements

Index