Financial Accounting and Reporting

925 Pages·2019·19.58 MB·English

by  Elliott, Barry;Elliott, Jamie

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FINANCIAL ACCOUNTING
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N FINANCIAL
AND REPORTING
NINETEENTH EDITION
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A

The 19th edition of this market-leading text provides a comprehensive overview of financial accounting and reporting, with the R N
ACCOUNTING
aim of ensuring you are able to prepare and also critically discuss IFRS compliant financial statements. With balanced coverage
E C
of theoretical principles and up-to-date practical application of current international standards, the authors provide essential
knowledge for advancing your studies and career. P I
A
O AND REPORTING
New to this edition:
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• The evolution and completion of the Conceptual Framework is now reflected in Chapter 7, which has been re-written. R

• Chapter 18 ‘Leasing’ has been revised in response to IAS 17 being superseded T A
• Chapter 30 ‘An introduction to digital financial reporting’ has been revised to discuss further developments in financial BARRY ELLIOTT • JAMIE ELLIOTT
I C
reporting on the internet N
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• Chapter 31 ‘Corporate finance’ and Chapter 32 ‘Integrated reporting: sustainability, environmental and social’ have been
updated to reflect the growing interest in and importance of integrated reporting G O
NINETEENTH EDITION
• Updated and refreshed exercises
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• Fully updated coverage of IFRS and IAS including latest IFRS 9, 15 and 16
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Key features:
• Exercises of varying difficulty including questions from past examination papers of professional accounting bodies T
• Illustrations taken from real-world international company reports and accounts I
• Extensive references included at the end of chapters N
• For lecturers, complete solutions to exercises are available on the website
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Barry Elliott has extensive teaching experience at undergraduate, postgraduate and professional levels. He has wide experience
as an external examiner in higher education at all levels of professional education.
Jamie Elliott is a director who has worked for Deloitte, Huawei and Panasonic. Prior to that, he lectured on undergraduate
degree programmes and as Assistant Professor on MBA and Executive Education programmes at the London Business School. N E
I L
N L
E I
O
Join over 10 million students benefi ting from • Worked solutions showing you how to solve diffi cult T
problems E T
Pearson MyLabs E T
• Limitless opportunities to practise
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This title can be supported by MyLab Accounting™, an
online homework and tutorial system designed to test and Use the power of MyLab Accounting to accelerate your T &
build your understanding. MyLab Accounting provides learning. You need both an access card and a course ID to H
a personalised approach, with instant feedback and access MyLab Accounting: E
E L
numerous additional resources to support your learning.
1. Is your lecturer using MyLab Accounting? Ask your D L
• A personalised study plan lecturer for your course ID. I I
• Usable either following chapter-by-chapter structure or 2. Has an access card been included with the book? Check T O
by learning objective the inside back cover of the book. IO T
• Usable either New questions and case studies to help 3. If you have a course ID but no access card, go to http:// N T
you apply what you’ve learned www.pearson.com/mylab/accounting to buy access.
Cover image: © PM Images/Getty Images www.pearson-books.com
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Financial Accounting and Reporting
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F01 Financial Accounting and Repor 55996 Contents.indd 2 24/04/2019 20:21
Financial Accounting
and Reporting
NINETEENTH EDITION
Barry Elliott and Jamie Elliott
Harlow, England • London • New York • Boston • San Francisco • Toronto • SyHdnaerlyo w• D, Eunbgalia •n Sdi n• gLaopnodroen • •H Noenwg KYoonrkg • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong
Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • MadriTdo •k yAom •s Steerodual m• T •a Mipueni •ic Nhe •w P aDreislh •i M• Cilaanpe Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan
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PEARSON EDUCATION LIMITED
KAO Two
KAO Park
Harlow CM17 9SR
United Kingdom
Tel: [phone]
Web: www.pearson.com/uk
Publishing history: First published 1993 (print)
Second ed 1996, Third ed 1999, Fourth ed 2000, Fifth ed 2001, Sixth ed 2002, Seventh ed
2003, Eighth ed 2004, Ninth ed 2005, Tenth ed 2006, Eleventh ed 2007, Twelfth ed 2008,
Thirteenth ed 2009, Fourteenth ed 2011 (print) Fifteenth ed 2012, Sixteenth ed 2013,
Seventeenth ed 2015 (print and electronic) Eighteenth edition published 2017
(print and electronic)
Nineteenth edition published 2019 (print and electronic)
© Pearson Education Limited 2000, 2011 (print)
© Pearson Education Limited 2012, 2013, 2015, 2017, 2019 (print and electronic)
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.
The print publication is protected by copyright. Prior to any prohibited reproduction, storage
in a retrieval system, distribution or transmission in any form or by any means, electronic,
mechanical, recording or otherwise, permission should be obtained from the publisher or,
where applicable, a licence permitting restricted copying in the United Kingdom should be
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EC4A 1EN.
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All trademarks used herein are the property of their respective owners. The use of any
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rights in such trademarks, nor does the use of such trademarks imply any affiliation with or
endorsement of this book by such owners.
Pearson Education is not responsible for the content of third-party internet sites.
This publication contains copyright material of the IFRS® Foundation in respect of which all
rights are reserved. Reproduced by Pearson Education Ltd with the permission of the IFRS
Foundation. No permission granted to third parties to reproduce or distribute. For full access
to IFRS Standards and the work of the IFRS Foundation please visit http://eifrs.ifrs.org
The International Accounting Standards Board®, the IFRS Foundation, the authors and the
publishers do not accept responsibility for any loss caused by acting or refraining from acting
in reliance on the material in this publication, whether such loss is caused by negligence or
otherwise.
ISBN: 978-1-292-25599-6 (print)
978-1-292-25604-7 (PDF)
978-1-292-25602-3 (ePub)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalogue record for the print edition is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1
23 22 21 20 19
Front cover image © PM Images/Getty Images
Print edition typeset in 10/12 pt Ehrhardt MT Std by Pearson CSC
Printed in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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Brief contents
Preface xx
Publisher’s acknowledgements xxvi
Part 1
INTRODUCTION TO ACCOUNTING ON A CASH FLOW AND
ACCRUAL ACCOUNTING BASIS 1
1 Accounting and reporting on a cash flow basis 3
2 Accounting and reporting on an accrual accounting basis 21
Part 2
PREPARATION OF INTERNAL AND PUBLISHED FINANCIAL
STATEMENTS 31
3 Preparation of financial statements of comprehensive income,
changes in equity and financial position 33
4 Annual report: additional financial disclosures 72
5 Statements of cash flows 104
Part 3
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 133
6 Financial reporting – evolution of global standards 135
7 Concepts – evolution of an international conceptual framework 159
8 Ethical behaviour and implications for accountants 184
Part 4
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 211
9 Income and asset value measurement: an economist’s approach 213
10 Accounting for price-level changes 232
11 Revenue recognition 265
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vi • Brief contents
Part 5
STATEMENT OF FINANCIAL POSITION – EQUITY,
LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE 291
12 Share capital, distributable profits and reduction of capital 293
13 Liabilities 317
14 Financial instruments 340
15 Employee benefits 371
16 Taxation in company accounts 400
17 Property, plant and equipment (PPE) 425
18 Leasing 460
19 Intangible assets 485
20 Inventories 515
21 Construction contracts 542
Part 6
CONSOLIDATED ACCOUNTS 567
22 Accounting for groups at the date of acquisition 569
23 Preparation of consolidated statements of financial
position after the date of acquisition 590
24 Preparation of consolidated statements of income,
changes in equity and cash flows 603
25 Accounting for associates and joint arrangements 625
26 Introduction to accounting for exchange differences 651
Part 7
INTERPRETATION 673
27 Earnings per share 675
28 Review of financial ratio analysis 701
29 Analysis of published financial statements 736
30 An introduction to digital financial reporting 779
Part 8
ACCOUNTABILITY 805
31 Corporate governance 807
32 Integrated reporting: sustainability, environmental and social 843
Index 879
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Contents
Preface xx
Publisher’s acknowledgements xxvi
Part 1
INTRODUCTION TO ACCOUNTING ON A CASH FLOW AND
ACCRUAL ACCOUNTING BASIS 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 statement of financial position 13
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 17
Review questions 18
Exercises 19
Notes 20
2 Accounting and reporting on an accrual accounting basis 21
2.1 Introduction 21
2.2 Historical cost convention 22
2.3 Accrual basis of accounting 22
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 23
2.5 Reformatting the statement of financial position 24
2.6 Accounting for the sacrifice of non-current assets 24
2.7 Published statement of cash flows 27
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viii • Contents
Summary 28
Review questions 28
Exercises 29
Notes 30
Part 2
PREPARATION OF INTERNAL AND PUBLISHED FINANCIAL
STATEMENTS 31
3 Preparation of financial statements of comprehensive income,
changes in equity and financial position 33
3.1 Introduction 33
3.2 Preparing an internal statement of income from a trial balance 33
3.3 Reorganising the income and expenses into one of the
formats required for publication 36
3.4 Format 1: classification of operating expenses and other income
by function 37
3.5 Format 2: classification of operating expenses according to their nature 40
3.6 Other comprehensive income 40
3.7 How non-recurring or exceptional items can affect operating income 42
3.8 How decision-useful is the statement of comprehensive income? 44
3.9 Statement of changes in equity 44
3.10 The statement of financial position 45
3.11 The explanatory notes that are part of the financial statements 46
3.12 Has prescribing the formats meant that identical transactions are
reported identically? 49
3.13 Fair presentation 51
3.14 What does an investor need in addition to the primary financial
statements to make decisions? 53
Summary 58
Review questions 58
Exercises 60
Notes 70
4 Annual report: additional financial disclosures 72
4.1 Introduction 72
4.2 IAS 10 Events after the Reporting Period 72
4.3 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 75
4.4 What do segment reports provide? 77
4.5 IFRS 8 Operating Segments 77
4.6 Benefits and continuing concerns following the issue of IFRS 8 81
4.7 Discontinued operations – IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations 83
4.8 Held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations 84
4.9 IAS 24 Related Party Disclosures 86
Summary 91
Review questions 91
Exercises 92
Notes 103
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Contents • ix
5 Statements of cash flows 104
5.1 Introduction 104
5.2 Development of statements of cash flows 104
5.3 Applying IAS 7 (revised) Statements of Cash Flows 105
5.4 Step approach to preparation of a statement of cash flows –
indirect method 108
5.5 Additional notes required by IAS 7 111
5.6 Analysing statements of cash flows 112
5.7 Approach to answering questions with time constraints 118
5.8 Preparing a statement of cash flows when no statement of income is
available 120
5.9 Disclosure Initiative (Amendments to IAS 7) 122
5.10 Critique of cash flow accounting 123
Summary 123
Review questions 123
Exercises 124
Notes 132
Part 3
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 133
6 Financial reporting – evolution of global standards 135
6.1 Introduction 135
6.2 Why do we need financial reporting standards? 135
6.3 Why do we need standards to be mandatory? 136
6.4 Arguments in support of standards 138
6.5 Arguments against standards 138
6.6 Standard setting and enforcement by the Financial Reporting
Council (FRC) in the UK 139
6.7 The International Accounting Standards Board 142
6.8 Standard setting and enforcement in the European Union (EU) 143
6.9 Standard setting and enforcement in the US 146
6.10 Advantages and disadvantages of global standards for publicly
accountable entities 148
6.11 How do reporting requirements differ for non-publicly
accountable entities? 149
6.12 IFRS for SMEs 150
6.13 Why have there been differences in financial reporting? 151
6.14 Move towards a conceptual framework 154
Summary 154
Review questions 155
Exercises 156
Notes 157
7 Concepts – evolution of an international
conceptual framework 159
7.1 Introduction 159
7.2 Different countries meant different financial statements 159
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