Financial accounting and reporting

915 Pages·2008·6.89 MB·English

by  Barry Elliott

12th
BaRRy elliott and Jamie elliott
Edition
Revised annually, Financial Accounting & Reporting is the most up-to-date text on the market.
Now fully updated in its 12th edition, it includes extensive coverage of International Accounting
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Standards (IASs) and International Financial Reporting Standards (IFRSs).
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This market-leading text offers students a clear, well-structured and comprehensive treatment i
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of the subject. Supported by illustrations and exercises, the book provides a strong balance of
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theoretical and conceptual coverage. Students using this book will gain the knowledge and skills accounting
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to help them apply current standards, and critically appraise the underlying concepts and financial

reporting methods. a
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12th Edition
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Key features o
• Combines academic rigour with an engaging t
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and accessible style
new features for this edition
• Coverage of International Financial Reporting
Standards • Fully updated to May 2007
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• Illustrations taken from real published • Updated coverage of
accounts International Financial Reporting n in
Standards
• Excellent range of review questions d
• Selected chapters include a
• Numerous exercises, varying in level of
new additional questions and n
difficulty, with solutions where applicable R
exercises
• Extensive references e c
• Includes more examples of
• A section on the Analysis of Accounts
extracts from real financial p i
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• A section on Accountability – includes reports
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Corporate Governance issues, Environmental • Fully supported by a l
and Social Reporting and Ethics comprehensive set of multiple R
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choice questions online,
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covering all parts of the text c
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Barry elliott is a training consultant. He has extensive teaching experience at undergraduate, postgraduate
and professional level in China, Hong Kong, New Zealand and Singapore. He has wide experience as an
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external examiner both in higher education and at all levels of professional education.
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Jamie elliott is a Director with Deloitte & Touche. Prior to this he has lectured at university on i
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undergraduate degree programmes and as an assistant professor on MBA and Executive programmes at
the London Business School. g
Front cover image:
© Getty Images
Additional student support at
www.pearson-books.com
an imprint of www.pearsoned.co.uk/elliott-elliott
9780273712312_COVER.indd 1 25/7/07 15:28:23
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Financial Accounting
and Reporting
Visit the Financial Accounting and Reporting, twelfth edition,
Companion Website at www.pearsoned.co.uk/
elliott-elliott
to find valuable student learning material including:
• Extracts from the financial press.
• A selection of extended questions and answers.
• Additional case studies based on real companies.
FAAR_A01.QXP 25/7/07 11:29 Page ii
We work with leading authors to develop the
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FAAR_A01.QXP 25/7/07 11:29 Page iii
Financial Accounting
and Reporting
TWELFTH EDITION
Barry Elliott and Jamie Elliott
FAAR_A01.QXP 25/7/07 11:29 Page iv
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 1993
Second edition 1996
Third edition 1999
Fourth edition 2000
Fifth edition 2001
Sixth edition 2002
Seventh edition 2003
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
Twelfth edition published 2008
© Prentice Hall International UK Limited 1993, 1999
© Pearson Education Limited 2000, 2008
The rights of Barry Elliott and Jamie Elliott to be identified as authors of this
work have been asserted by them in accordance with the Copyright, Designs,
and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without either the prior
written permission of the Publishers or a licence permitting restricted copying
in the United Kingdom issued by the Copyright L icensing Agency Ltd, Saffron
House, 6–10 Kirby Street, London EC1N 8TS.
ISBN 978-0-273-71231-2
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
10 9 8 7 6 5 4 3 2 1
12 11 10 09 08
Typeset in 9/12pt Ehrhardt by 3.
Printed by Ashford Colour Press Ltd, Gosport.
The publisher’s policy is to use paper manufactured from sustainable forests.
FAAR_A01.QXP 25/7/07 11:29 Page v
Brief Contents
Preface and acknowledgements xx
Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
1 Accounting and reporting on a cash flow basis 3
2 Accounting and reporting on an accrual accounting basis 22
3 Income and asset value measurement: an economist’s approach 40
4 Accounting for inflation 59
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 97
5 Financial reporting – evolution of the regulatory framework in the UK 99
6 Financial reporting – evolution of international standards 134
7 Conceptual framework 158

8 Published accounts of companies 184
9 Preparation of published accounts 231
Part 3
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 257
10 Share capital, distributable profits and reduction of capital 259
11 Off balance sheet finance 284
12 Financial instruments 318
13 Employee benefits 342
14 Taxation in company accounts 372
15 Property, plant and eqiupment (PPE) 399
16 Leasing 433
17 R&D; goodwill and intangible assets; brands 453
18 Inventories 490
19 Construction contracts 516
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vi • Brief Contents
Part 4
CONSOLIDATED ACCOUNTS 533
20 Accounting for groups at date of acquisition 535
21 Preparation of consolidated balance sheets after the date of acquisition 552
22 Preparation of consolidated income statements and consolidated statements
of changes in equity 565
23 Accounting for associated companies 580
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 595
Part 5
INTERPRETATION 613
25 Earnings per share 615
26 Cash flow statements 642
27 Review of financial ratio analysis 664
28 Trend analysis and multivariate analysis 706
29 An introduction to Financial Reporting on the Internet 748
Part 6
ACCOUNTABILITY 763
30 Corporate governance 765
31 Environmental and social reporting 811
32 Ethics for accountants 848
Appendix: Outline solutions to selected exercises 871
Index 879
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Full Contents
Preface and acknowledgements xx
Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
1 Accounting and reporting on a cash flow basis 3
1.1 Introduction 3
1.2 Shareholders 3
1.3 What skills does an accountant require in respect of external reports? 4
1.4 Managers 4
1.5 What skills does an accountant require in respect of internal reports? 5
1.6 Procedural steps when reporting to internal users 5
1.7 Agency costs 8
1.8 Illustration of periodic financial statements prepared under the cash
flow concept to disclose realised operating cash flows 8
1.9 Illustration of preparation of balance sheet under the cash flow concept 12
1.10 Treatment of non-current assets in the cash flow model 14

1.11 What are the characteristics of these data that make them reliable? 15
1.12 Reports to external users 16
Summary 16
Review questions 17
Exercises 18
References 20
2 Accounting and reporting on an accrual accounting basis 22
2.1 Introduction 22
2.2 Historical cost convention 23
2.3 Accrual basis of accounting 24
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 24
2.5 Subjective judgements required in accrual accounting – adjusting cash
receipts in accordance with lAS 18 25
2.6 Subjective judgements required in accrual accounting – adjusting cash
payments in accordance with the matching principle 27
2.7 Mechanics of accrual accounting – the balance sheet 27
2.8 Reformatting the statement of financial position into a balance sheet 28
2.9 Accounting for the sacrifice of non-current assets 28
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viii • Full Contents
2.10 Reconciliation of cash flow and accrual accounting data 32
Summary 34
Review questions 34
Exercises 35
References 38
3 Income and asset value measurement: an economist’s
approach 40
3.1 Introduction 40
3.2 Role and objective of income measurement 40
3.3 Accountant’s view of income, capital and value 43
3.4 Critical comment on the accountant’s measure 46
3.5 Economist’s view of income, capital and value 47
3.6 Critical comment on the economist’s measure 53
3.7 Income, capital and changing price levels 53
Summary 55
Review questions 55
Exercises 56
References 57
Bibliography 58
4 Accounting for inflation 59
4.1 Introduction 59
4.2 Review of the problems of historical cost accounting (HCA) 59
4.3 Inflation accounting 60
4.4 The concepts in principle 60
4.5 The four models illustrated for a company with cash purchases and
sales 61
4.6 Critique of each model 65
4.7 Operating capital maintenance – a comprehensive example 68
4.8 Critique of CCA statements 79

4.9 The ASB approach 81
4.10 The IASC/IASB approach 83
4.11 Future developments 84
Summary 85
Review questions 86
Exercises 87
References 96
Bibliography 96
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 97
5 Financial reporting – evolution of the regulatory framework
in the UK 99
5.1 Introduction 99
5.2 Mandatory regulations 99
5.3 Arguments in support of standards 103
5.4 Arguments against standards 104
5.5 Structure of regulatory framework 105
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Full Contents • ix
5.6 The Operating and Financial Review (OFR) 106
5.7 The Financial Reporting Review Panel 114
5.8 The Financial Services Authority 117
5.9 The Revised Combined Code (June 2006) 117
5.10 Interim reports following Cadbury 120
5.11 Developments for small companies 122
5.12 Evaluation of effectiveness of mandatory regulations 130
Summary 131
Review questions 131
Exercises 132
References 133
6 Financial reporting – evolution of international standards 134
6.1 Introduction 134
6.2 National differences 134
6.3 Reasons for differences in financial reporting 135
6.4 Classification of national accounting systems 139
6.5 Attempts to reduce national differences 140
6.6 The work of international bodies in harmonising and standardising
financial reporting 141
6.7 US GAAP 153
Summary 155
Review questions 155
Exercises 155
References 156
7 Conceptual framework 158
7.1 Introduction 158
7.2 Historical overview of the evolution of financial accounting theory 159
7.3 IASC Framework for the Presentation and Preparation of Financial
Statements 162

7.4 ASB Statement of Principles 1999 164
7.5 AICPA Improving Business Reporting – A Customer Focus: Meeting the
Information Needs of Investors and Creditors 174
7.6 ICAS Making Corporate Reports Valuable 175
7.7 Conceptual Framework developments 176
Summary 177
Review questions 179
Exercises 180
References 182
8 Published accounts of companies 184
8.1 Introduction 184
8.2 A public company’s financial calendar 185
8.3 Criteria for information appearing in a published income statement
and balance sheet 186
8.4 The prescribed formats – the income statement 186
8.5 What information is required to be disclosed in Format 1 and
Format 2? 187
8.6 Cost of sales 188