Table Of Content

This page intentionally left blank AccountingPrinciplesforNon-ExecutiveDirectors Goodqualitynon-executivedirectorsareessentialtogoodcorporategov- ernance.Theybringawealthofexperiencetotheboardroom,andtogether withtheirfellowboardmemberstheyareresponsibleforthecompany’s annualreportandaccounts.However,fewaretrainedaccountants. Thisvolumeexplainsthekeyelementsofalistedcompany’sannual report and accounts. Part I explains the difference between profit and cash flows, the accounting profession, the international harmonisation of accounting rules, the origins of the rules governing the preparation of accounts, the regulation of financial reporting and the overarching principles behind accounting rules. Part II discusses issues relevant to listedcompanies:mergersandacquisitions;earningspershare;realised and distributable profits; financial instruments; and other key topics. An appendix sets out 50 questions, linked to the chapters, which non- executivedirectorsmightliketoaskatmeetingsoftheboardandaudit committee. peterholgateissenioraccountingtechnicalpartnerwithPricewater- houseCoopersLLP.Assuch,heheadsthelargestaccountingconsulting team in the UK. A member of the ASB’s Urgent Issues Task Force, he is also chairman of the Institute of Chartered Accountants in England and Wales’ Centre for Business Performance management board and a member of the advisory board of the ICAEW’s Financial Reporting Faculty. elizabeth buckley is a consultant to PricewaterhouseCoopers LLP. She has worked in the accounting technical departments of two of the ‘Big 4’ accounting firms, and at the ICAEW. She is a member of the InstituteofCharteredAccountantsofScotlandandofthejointInstitutes’ workingpartyondistributableprofits. LawPractitionerSeries TheLawPractitionerSeriesofferspracticalguidanceincorporateandcommer- ciallawforthepractitioner.Itoffershigh-qualitycommentandanalysisrather thansimplyrestatingthelegislation,providingacriticalframeworkaswellas exploring the fundamental concepts which shape the law. Books in the series covercarefullychosensubjectsofdirectrelevanceandusetothepractitioner. The series will appeal to experienced specialists in each field, but is also accessibletomorejuniorpractitionerslookingtodeveloptheirunderstandingof particularfieldsofpractice. TheConsultantEditorsandEditorialBoardhaveoutstandingexpertiseinthe UKcorporateandcommercialarena,ensuringacademicrigourwithapractical approach. Consultanteditors CharlesAllen-Jones,retiredseniorpartnerofLinklaters Mr Justice David Richards, Judge of the High Court of Justice, Chancery Division Editors ChrisAshworth–LovellsLLP ProfessorEilisFerran–UniversityofCambridge TimothyPolglase–Allen&Overy StephenHancock–HerbertSmith JudithHanratty–BPCorporateLawyer,retired KeithHyman–CliffordChance KeithJohnston–AddleshawGoddard VanessaKnapp–FreshfieldsBruckhausDeringer CharlesMayo–Simmons&Simmons AndrewPeck–Linklaters RichardSnowdenQC–ErskineChambers WilliamUnderhill–Slaughter&May SandraWalker–RioTinto Foracompletelistoftitlesintheseriesseebackofbook Accounting Principles for Non-Executive Directors PETER HOLGATE AND ELIZABETH BUCKLEY PricewaterhouseCoopersLLP CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521509787 © Cambridge University Press 2009 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2009 ISBN-13 978-0-511-51778-5 eBook (NetLibrary) ISBN-13 978-0-521-50978-7 hardback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Contents Acknowledgements x Whichstandardsandlegislationhasthisbookbeenbasedon? xi Glossaryofterms xii PartI: Theaccountingenvironment 1. Introduction 3 Aimofthisbook 3 Whatisaccounting? 3 Thecomponentsofacompany’sannualreport 5 Thedifferencebetweenprofitandcashflow 7 Performancestatements 9 Theuseofaccountingtermsinagreements 12 WhatisGAAP? 12 2. AccountingintheUKandtheeffectsofinternational harmonisation 15 TheUK’sAccountingStandardsBoard 15 Internationalharmonisation 17 TheInternationalAccountingStandardsBoard 18 TheEURegulationforharmonisationwithinEurope 20 ConvergencewithUSGAAP 22 ImplicationsfortheUK 23 Inanutshellwherearewenow? 25 3. Thelegalframeworkforaccounting 26 Introduction:theCompaniesAct1985andtheCompaniesAct 2006 26 TheCompaniesAct2006:accountsandreports 27 ApplicationoftheCompaniesActtoIFRSandUKGAAPcompanies 28 AccountingprovisionsoftheActapplyingtoIFRSandUKGAAP companies 28 AccountingprovisionsofSI2008/410applyingtoUKGAAP companiesonly 32 v Contents 4. Theaccountancyprofessionandtheregulatoryframeworkfor accountingandauditing 35 Theaccountancyprofession 35 TheFinancialReportingCouncil 36 TheFinancialReportingReviewPanel 39 Auditreporting 40 Theroleofaccountantsincapitalmarketstransactions 42 5. Substanceoverform 44 Formv.substance 44 Earlyexamples 44 Emergenceoftheoff-balance-sheetindustryintheUK 45 FRS5‘Reportingthesubstanceoftransactions’ 45 ExamplesofFRS5inpracticeintheUK 47 ThefutureofFRS5inUKGAAP 50 DoessubstanceoverformhaveaplaceinIFRS? 50 6. Communicatingaccountinginformation 52 Background 52 Summaryfinancialstatements 53 Thecorporatereportingsupplychain 54 Therealityofthe‘earningsgame’ 55 Alternativeperformancemeasures 57 Usersandanalysisofaccountinginformation 58 7. Currenttrendsinaccounting 60 Whyallthechange? 60 Currenttrendsinthinking 62 PartII: Somespecifics 8. Individualentityandconsolidatedfinancialstatements 69 Thedistinctionbetweenindividualentityfinancialstatementsand consolidatedfinancialstatements 69 Whentoconsolidate 71 Whattoconsolidate 72 Exemptionreholdingcompanyincomestatement 74 Techniquesofconsolidation 75 Associatesandjointventures 77 9. Presentationoffinancialstatements 80 Introduction 80 Statementofcomprehensiveincome 81 Balancesheet 88 vi Contents Cashflowstatement 90 Accountingpolicies 91 Notes 93 Individualentityandconsolidatedfinancialstatements:combinedor separate 93 10. Earningspershare 95 Introduction 95 Summary 95 BasicEPS 96 DilutedEPS 97 AdjustedEPS 98 11. Mergersandacquisitions 100 Introduction 100 Overviewofacquisitionandmergeraccounting 101 ApplicationofIFRS3 104 Goodwillandotherintangibles 108 UKaccountinginoverview 110 Sharepremium,mergerreliefandgroupreconstructionrelief 112 12. Interactionofaccountingwithtax 115 Introduction 115 Accountingprofitanditsadjustment 115 Accountingforcurrentanddeferredtax 117 HMRevenue&CustomsandthemovetoIFRS 121 13. Assets 124 Introduction 124 Definitionofanasset 124 Recognitionofassets 124 Measurementofassets 125 Impairmentofassets 125 Classificationandpresentationofassets 126 Depreciation 127 Disclosure 129 14. Liabilities 130 Introduction 130 Definitionofaliability 130 Recognitionofliabilities 131 Measurementofliabilities 133 Presentationofliabilitiesonbalancesheets 133 Disclosure,includingcontingentliabilities 134 vii Contents 15. Leases 137 Introduction 137 LeasesunderIFRS 138 LeasesunderUKGAAP 145 Thewayforward 147 16. Pensions 148 Introduction 148 Definedcontributionanddefinedbenefitschemes 148 Accountingfordefinedbenefitschemes 149 IAS19 150 DifferencesbetweenIFRSandUKGAAP 153 Theeffectofpensionsonrealisedanddistributableprofits 154 17. Financialinstruments 156 Introduction 156 Background 156 Definitions 157 Debtandequity 158 Categoriesoffinancialinstrument 161 Amortisedcost 164 Fairvalue 165 Derivativesandembeddedderivatives 166 Hedgeaccounting 167 Recognitionandde-recognition 168 Othermatters 168 Disclosures 169 AccountingunderUKGAAP 169 18. Share-basedpayment 171 Introduction 171 AccountingunderIFRS 172 Trusts 177 Accountingforshare-basedpaymentunderUKGAAP 178 19. Realisedanddistributableprofits 179 Introduction 179 ‘Realised’and‘distributable’ 179 Generalrulesondistributions 180 Relevantaccounts 181 Relationshipwithreportingofperformance 183 TECH01/08 184 EffectsofTECH01/08 188 viii