Barry Elliott and Jamie Elliott
Financial Accounting,
Reporting and Analysis
International Edition 2nd Edition
Additional student support at
www.pearsoned.co.uk/elliott_elliott
, Financial Accounting, Reporting
and Analysis: International Edition
Visit the Financial Accounting, Reporting and Analysis:
International Edition (2nd Edition) Companion Website at
www.pearsoned.co.uk/elliott_elliott
to find valuable student learning material including:
• Extracts from the financial press
PR
• Multiple choice questions to test your learning
• Case studies with solutions
O
FD
O
C
,We work with leading authors to develop the
strongest educational materials in accounting,
bringing cutting-edge thinking and best learning
practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high-quality
print and electronic publications which help readers
to understand and apply their content, whether
PR
studying or at work.
To find out more about the complete range of our
publishing please visit us on the World Wide Web at:
www.pearsoned.co.uk
O
FD
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C
, Financial Accounting,
Reporting and Analysis:
International Edition
2nd Edition
PR
Barry Elliott and Jamie Elliott
O
FD
O
C
,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 2002
Second edition 2006
© Pearson Education Limited 2002, 2006
PR
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 Licensing Agency Ltd,
O
90 Tottenham Court Road, London W1T 4LP.
ISBN-13: 978-0-273-70253-5
ISBN-10: 0-27370-253-X
FD
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress.
10 9 8 7 6 5 4 3 2 1
10 09 08 07 06
O
Typeset in 9/12pt Ehrhardt by 25.
Printed by Ashford Colour Press Ltd., Gosport.
The publisher’s policy is to use paper manufactured from sustainable forests.
C
, Brief Contents
Preface and acknowledgements xviii
Part 1
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
PR
UNIFORMITY 1
1 Financial reporting – evolution of international standards 3
2 Conceptual framework 24
3 Published accounts of companies 49
4 Preparation of published accounts 94
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Part 2
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 117
FD
5 Share capital, distributable profits and reduction of capital 119
6 Off balance sheet finance 144
7 Financial instruments 171
8 Employee benefits 190
9 Taxation in company accounts 212
O
10 Property, plant and equipment (PPE) 239
11 Leasing 271
12 R&D; goodwill and intangible assets; brands 291
C
13 Inventories 322
14 Construction contracts 345
Part 3 CONSOLIDATED ACCOUNTS 361
15 Accounting for groups at the date of acquisition 363
16 Preparation of consolidated balance sheets after the date of acquisition 380
17 Preparation of consolidated income statements 392
18 Accounting for associated companies 410
19 Accounting for the effects of changes in foreign exchange rates under IAS 21 425
,vi • Brief Contents
Part 4 INTERPRETATION 443
20 Earnings per share 445
21 Cash flow statements 470
22 Review of financial ratio analysis 495
23 Trend analysis and multivariate analysis 537
24 An introduction to financial reporting on the Internet 577
Part 5 ACCOUNTABILITY 589
25 Corporate governance 591
26 Environmental and social reporting 622
27 Ethics for accountants 659
Appendix: Outline solutions to selected exercises 679
PR
Index 685
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FD
O
C
, Full Contents
Preface and acknowledgements xviii
Part 1
PR
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 1
1 Financial reporting – evolution of international
standards 3
1.1 Introduction 3
1.2 National differences 3
O
1.3 Reasons for differences in financial reporting 4
1.4 Classification of national accounting systems 8
1.5 Attempts to reduce national differences 9
FD
1.6 The work of international bodies in harmonising and standardising
financial reporting 9
1.7 Arguments in support of standards 16
1.8 Arguments against standards 17
1.9 US GAAP 18
1.10 Reconciliations and supplementary statements 20
O
Summary 21
Review questions 21
Exercises 21
References 22
C
2 Conceptual framework 24
2.1 Introduction 24
2.2 Historical overview of the evolution of financial accounting theory 25
2.3 IASC Framework for the Presentation and Preparation of Financial Statements 28
2.4 ASB Statement of Principles 1999 30
2.5 AICPA Improving Business Reporting – A Customer Focus:
Meeting the Information Needs of Investors and Creditors 40
2.6 ICAS Making Corporate Reports Valuable 41
Summary 42
Review questions 44
Exercises 45
References 48
,viii • Full Contents
3 Published accounts of companies 49
3.1 Introduction 49
3.2 A public company’s financial calendar 50
3.3 Criteria for information appearing in a published income statement
and balance sheet 51
3.4 The prescribed formats – the income statement 51
3.5 What information is required to be disclosed in Format 1 and
Format 2? 52
3.6 Cost of sales 53
3.7 Distribution costs 57
3.8 Administrative expenses 57
3.9 Other income 57
3.10 What costs and income are brought into account after calculating
the trading profit in order to arrive at the profit on ordinary activities
before tax? 57
3.11 Does it really matter under which heading a cost is classified in the
income statement provided it is not omitted? 58
PR
3.12 Discontinued operations disclosure in the income statement 58
3.13 Items requiring separate disclosure 61
3.14 The prescribed formats – the balance sheet 61
3.15 Statement of changes in equity 65
3.16 Reporting comprehensive income 67
3.17 Segment reporting 70
3.18 The fundamental accounting principles underlying the published income
O
statement and balance sheet 71
3.19 Disclosure of accounting policies 71
3.20 Fair view treatment 76
FD
3.21 Additional information in the annual report 78
3.22 What information do companies provide to assist comparison
between companies reporting under different reporting regimes? 80
Summary 84
Review questions 84
Exercises 86
O
References 93
4 Preparation of published accounts 94
C
4.1 Introduction 94
4.2 Stage 1: preparation of the internal income statement from a trial
balance 94
4.3 Stage 2: preparation of the income statement of Illustrious SpA in
Format 1 style 96
4.4 Stage 3: preparation of the balance sheet 99
4.5 Preparation of accounts in Format 1 following IAS 8 and IFRS 5 100
4.6 Additional information value of IFRS 5 104
4.7 Additional information value of IAS 24 105
Summary 107
Review questions 108
Exercises 109
References 116
, Full Contents • ix
Part 2
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 117
5 Share capital, distributable profits and reduction of capital 119
5.1 Introduction 119
5.2 Total owners’ equity: an overview 121
5.3 Total shareholders’ funds: more detailed explanation 122
5.4 Accounting entries on issue of shares 124
5.5 Creditor protection: capital maintenance concept 125
5.6 Creditor protection: why capital maintenance rules are necessary 126
5.7 Creditor protection: how to quantify the amounts available to meet
creditors’ claims 127
5.8 Issued share capital: minimum share capital 127
5.9 Distributable profits: general considerations 128
5.10 Distributable profits: how to arrive at the amount using relevant
accounts 129
PR
5.11 When may capital be reduced? 129
5.12 Writing off part of capital which has already been lost and is not
represented by assets 130
5.13 Repayment of part of paid-in capital to shareholders or cancellation
of unpaid share capital 136
5.14 Purchase of own shares 136
Summary 139
O
Review questions 140
Exercises 140
References 143
FD
6 Off balance sheet finance 144
6.1 Introduction 144
6.2 Primary financial statements: their interrelationship 144
6.3 Primary financial statements: changes in their interrelationship 145
6.4 Reasons that companies borrow 145
O
6.5 Capital gearing and its implications 146
6.6 Off balance sheet finance 148
6.7 Substance over form 149
6.8 Impact of converting to IFRS 152
C
6.9 Balance sheet as valuation document 155
6.10 Why companies take steps to strengthen their balance sheets 156
6.11 Definitions cannot remove uncertainty: IAS 10 and IAS 37 157
Summary 165
Review questions 166
Exercises 167
References 169
Financial Accounting,
Reporting and Analysis
International Edition 2nd Edition
Additional student support at
www.pearsoned.co.uk/elliott_elliott
, Financial Accounting, Reporting
and Analysis: International Edition
Visit the Financial Accounting, Reporting and Analysis:
International Edition (2nd Edition) Companion Website at
www.pearsoned.co.uk/elliott_elliott
to find valuable student learning material including:
• Extracts from the financial press
PR
• Multiple choice questions to test your learning
• Case studies with solutions
O
FD
O
C
,We work with leading authors to develop the
strongest educational materials in accounting,
bringing cutting-edge thinking and best learning
practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high-quality
print and electronic publications which help readers
to understand and apply their content, whether
PR
studying or at work.
To find out more about the complete range of our
publishing please visit us on the World Wide Web at:
www.pearsoned.co.uk
O
FD
O
C
, Financial Accounting,
Reporting and Analysis:
International Edition
2nd Edition
PR
Barry Elliott and Jamie Elliott
O
FD
O
C
,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 2002
Second edition 2006
© Pearson Education Limited 2002, 2006
PR
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 Licensing Agency Ltd,
O
90 Tottenham Court Road, London W1T 4LP.
ISBN-13: 978-0-273-70253-5
ISBN-10: 0-27370-253-X
FD
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress.
10 9 8 7 6 5 4 3 2 1
10 09 08 07 06
O
Typeset in 9/12pt Ehrhardt by 25.
Printed by Ashford Colour Press Ltd., Gosport.
The publisher’s policy is to use paper manufactured from sustainable forests.
C
, Brief Contents
Preface and acknowledgements xviii
Part 1
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
PR
UNIFORMITY 1
1 Financial reporting – evolution of international standards 3
2 Conceptual framework 24
3 Published accounts of companies 49
4 Preparation of published accounts 94
O
Part 2
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 117
FD
5 Share capital, distributable profits and reduction of capital 119
6 Off balance sheet finance 144
7 Financial instruments 171
8 Employee benefits 190
9 Taxation in company accounts 212
O
10 Property, plant and equipment (PPE) 239
11 Leasing 271
12 R&D; goodwill and intangible assets; brands 291
C
13 Inventories 322
14 Construction contracts 345
Part 3 CONSOLIDATED ACCOUNTS 361
15 Accounting for groups at the date of acquisition 363
16 Preparation of consolidated balance sheets after the date of acquisition 380
17 Preparation of consolidated income statements 392
18 Accounting for associated companies 410
19 Accounting for the effects of changes in foreign exchange rates under IAS 21 425
,vi • Brief Contents
Part 4 INTERPRETATION 443
20 Earnings per share 445
21 Cash flow statements 470
22 Review of financial ratio analysis 495
23 Trend analysis and multivariate analysis 537
24 An introduction to financial reporting on the Internet 577
Part 5 ACCOUNTABILITY 589
25 Corporate governance 591
26 Environmental and social reporting 622
27 Ethics for accountants 659
Appendix: Outline solutions to selected exercises 679
PR
Index 685
O
FD
O
C
, Full Contents
Preface and acknowledgements xviii
Part 1
PR
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 1
1 Financial reporting – evolution of international
standards 3
1.1 Introduction 3
1.2 National differences 3
O
1.3 Reasons for differences in financial reporting 4
1.4 Classification of national accounting systems 8
1.5 Attempts to reduce national differences 9
FD
1.6 The work of international bodies in harmonising and standardising
financial reporting 9
1.7 Arguments in support of standards 16
1.8 Arguments against standards 17
1.9 US GAAP 18
1.10 Reconciliations and supplementary statements 20
O
Summary 21
Review questions 21
Exercises 21
References 22
C
2 Conceptual framework 24
2.1 Introduction 24
2.2 Historical overview of the evolution of financial accounting theory 25
2.3 IASC Framework for the Presentation and Preparation of Financial Statements 28
2.4 ASB Statement of Principles 1999 30
2.5 AICPA Improving Business Reporting – A Customer Focus:
Meeting the Information Needs of Investors and Creditors 40
2.6 ICAS Making Corporate Reports Valuable 41
Summary 42
Review questions 44
Exercises 45
References 48
,viii • Full Contents
3 Published accounts of companies 49
3.1 Introduction 49
3.2 A public company’s financial calendar 50
3.3 Criteria for information appearing in a published income statement
and balance sheet 51
3.4 The prescribed formats – the income statement 51
3.5 What information is required to be disclosed in Format 1 and
Format 2? 52
3.6 Cost of sales 53
3.7 Distribution costs 57
3.8 Administrative expenses 57
3.9 Other income 57
3.10 What costs and income are brought into account after calculating
the trading profit in order to arrive at the profit on ordinary activities
before tax? 57
3.11 Does it really matter under which heading a cost is classified in the
income statement provided it is not omitted? 58
PR
3.12 Discontinued operations disclosure in the income statement 58
3.13 Items requiring separate disclosure 61
3.14 The prescribed formats – the balance sheet 61
3.15 Statement of changes in equity 65
3.16 Reporting comprehensive income 67
3.17 Segment reporting 70
3.18 The fundamental accounting principles underlying the published income
O
statement and balance sheet 71
3.19 Disclosure of accounting policies 71
3.20 Fair view treatment 76
FD
3.21 Additional information in the annual report 78
3.22 What information do companies provide to assist comparison
between companies reporting under different reporting regimes? 80
Summary 84
Review questions 84
Exercises 86
O
References 93
4 Preparation of published accounts 94
C
4.1 Introduction 94
4.2 Stage 1: preparation of the internal income statement from a trial
balance 94
4.3 Stage 2: preparation of the income statement of Illustrious SpA in
Format 1 style 96
4.4 Stage 3: preparation of the balance sheet 99
4.5 Preparation of accounts in Format 1 following IAS 8 and IFRS 5 100
4.6 Additional information value of IFRS 5 104
4.7 Additional information value of IAS 24 105
Summary 107
Review questions 108
Exercises 109
References 116
, Full Contents • ix
Part 2
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 117
5 Share capital, distributable profits and reduction of capital 119
5.1 Introduction 119
5.2 Total owners’ equity: an overview 121
5.3 Total shareholders’ funds: more detailed explanation 122
5.4 Accounting entries on issue of shares 124
5.5 Creditor protection: capital maintenance concept 125
5.6 Creditor protection: why capital maintenance rules are necessary 126
5.7 Creditor protection: how to quantify the amounts available to meet
creditors’ claims 127
5.8 Issued share capital: minimum share capital 127
5.9 Distributable profits: general considerations 128
5.10 Distributable profits: how to arrive at the amount using relevant
accounts 129
PR
5.11 When may capital be reduced? 129
5.12 Writing off part of capital which has already been lost and is not
represented by assets 130
5.13 Repayment of part of paid-in capital to shareholders or cancellation
of unpaid share capital 136
5.14 Purchase of own shares 136
Summary 139
O
Review questions 140
Exercises 140
References 143
FD
6 Off balance sheet finance 144
6.1 Introduction 144
6.2 Primary financial statements: their interrelationship 144
6.3 Primary financial statements: changes in their interrelationship 145
6.4 Reasons that companies borrow 145
O
6.5 Capital gearing and its implications 146
6.6 Off balance sheet finance 148
6.7 Substance over form 149
6.8 Impact of converting to IFRS 152
C
6.9 Balance sheet as valuation document 155
6.10 Why companies take steps to strengthen their balance sheets 156
6.11 Definitions cannot remove uncertainty: IAS 10 and IAS 37 157
Summary 165
Review questions 166
Exercises 167
References 169
