International financial reporting: a practical guide

513 Pages·2018·11.012 MB·English

by  Melville, Alan

A L A N M E L V I L L E A L A N M E L V I L L E
International Financial Reporting International
A Practical Guide
Sixth Edition
Financial Reporting
“Like Beethoven’s sixth, perfectly pitched for the intermediate accounting student!”
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Raymond Holly, Galway-Mayo Institute of Technology (Ireland)
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“A practical, no-nonsense guide to IFRS, backed up by plenty of worked examples to re A Practical Guide
Sixth Edition
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Katherine Martin, Nottingham University Business School
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Reviews of the previous edition
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With more than 120 countries in the world now using international financial reporting standards (IFRS® Gn
Standards), knowledge of the standards issued by the International Accounting Standards Board (IASB®) ua
is vital to students’ success in financial accounting. Melville’s International Financial Reporting employs a idl
practical, applied approach in exploring and explaining the key international standards. With a focus on how
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to implement the standards, this text delivers a focused, user-friendly introduction to international financial
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reporting. n
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Renowned for clear and concise language, this sixth edition brings the book completely up-to-date with
international standards issued as of 1 January 2017. n
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Key features E a
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• Unique practical approach L
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• Class-tested by professional and degree students
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• Worked examples with solutions in every chapter
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Visit www.pearsoned.co.uk/melville for
• Chapter-end exercises featuring questions I
our suite of resources to accompany this o
from past exam papers of key professional accountancy
textbook, including a complete solutions L r
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guide, PowerPoint slides for each chapter t
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and opportunities for extra practice. n
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Alan Melville FCA BSc Cert Ed. is a best-selling author. Previously a Senior Lecturer at Nottingham Trent
University, he has many years’ experience of teaching accounting and financial reporting.
Sixth
Front cover image: © Butch Martin/Getty Images www.pearson-books.com
Edition
CVR_MELVILLE_06_AW2.indd 1 05/06/2017 10:27
International
Financial Reporting
Companion Website
ON THE
For open-access student resources specifi cally written WEBSITE
to complement this textbook and support your learning,
please visit www.pearsoned.co.uk/melville
Lecturer Resources
For password-protected online resources tailored to support
the use of this textbook in teaching, please visit
www.pearsoned.co.uk/melville
Melville_INT_FINANCv6.indd 1 31/05/2017 16:32
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International
Financial Reporting
A Practical Guide
Sixth edition
Alan Melville
FCA, BSc, Cert. Ed.
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First published 2008 (print)
Second edition published 2009 (print)
Third edition published 2011(print)
Fourth edition published 2014 (print and electronic)
Fifth edition published 2015 (print and electronic)
Sixth edition published 2017 (print and electronic)
© Pearson Professional Limited 2008, 2011 (print)
© Pearson Education Limited 2014, 2017 (print and electronic)
The right of Alan Melville to be identified as author of this work has been asserted
by him in accordance with the Copyright, Designs and Patents Act 1988.
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ISBN: 978-1-292-20074-3 (print)
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British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
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Front cover image: © Butch Martin/Getty Images
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NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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Contents

Preface ix General features 38
Acknowledgements x Structure and content of financial
List of international standards xi statements 40
The statement of financial position 41
The statement of comprehensive income 45
Part 1 Introduction to Financial Reporting
The statement of changes in equity 49
1 The regulatory framework 3 The notes to the financial statements 51
The need for regulation 4 Interim financial reporting 52
Sources of regulation 4 Management commentary 53
Generally accepted accounting practice 6
4 Accounting policies, accounting
The International Accounting Standards
estimates and errors 61
Board (IASB) 7
Accounting policies 61
The standard-setting process 9
Accounting estimates 66
The purpose of accounting standards 10
Prior period errors 66
Worldwide use of international standards 11
First-time adoption of international
Part 2 Financial Reporting in Practice
standards 11
2 The IASB conceptual framework 17 5 Property, plant and equipment 75
Purpose and scope of the IASB Definition of property, plant and
Conceptual Framework 18 equipment 76
Objective of general purpose financial Recognition of property, plant
reporting 19 and equipment 77
Qualitative characteristics of financial Initial measurement of property, plant
information 21 and equipment 79
Underlying assumption 24 Subsequent measurement of property,
Elements of financial statements 25 plant and equipment 80
Recognition of the elements of Depreciation 82
financial statements 27 Disclosure requirements 86
Measurement of the elements of Borrowing costs 87
financial statements 28 Government grants 89
Concepts of capital and capital Investment property 92
maintenance 28 IFRS13 Fair Value Measurement 95
Discounting and present value 32
6 Intangible assets 100
Completed version of the Conceptual
Definition of an intangible asset 101
Framework 33
Initial recognition and measurement
3 Presentation of financial statements 36 of intangible assets 102
Purpose of financial statements 37 Subsequent measurement of
Components of financial statements 37 intangible assets 106
v
Contents
Amortisation of intangible assets 108 Subsequent measurement of financial
Derecognition 110 liabilities 184
Disclosure requirements 110 Disclosure requirements 185
Goodwill 111
12 Provisions and events after the
IFRS3 Business Combinations 112
reporting period 190
7 Impairment of assets 118 Recognition of a provision 191
Indications of impairment 119 Measurement of a provision 193
Recoverable amount 120 Application of the recognition and
Recognition and measurement of an measurement rules 194
impairment loss 123 Contingent liabilities and contingent
Cash-generating units 124 assets 196
Reversal of impairment losses 128 Disclosure requirements 197
Disclosure requirements 129 Events after the reporting period 198
8 Non-current assets held for sale 13 Revenue from contracts with
and discontinued operations 134 customers 204
Classification of non-current assets Purpose and scope of IFRS15 205
as held for sale 135 The five-step model 205
Measurement of non-current assets Identifying the contract 206
held for sale 137 Identifying performance obligations 208
Presentation of non-current assets Determining the transaction price 209
held for sale 141 Allocating the transaction price 211
Discontinued operations 142 Satisfaction of performance obligations 212
Contract costs 213
9 Leases 148
Presentation and disclosure 214
Classification of leases (IAS17) 149
Guidance to the application of IFRS15 216
Accounting for operating leases 150
Accounting for finance leases 150 14 Employee benefits 220
Disclosure requirements 154 Short-term employee benefits 221
New leases standard (IFRS16) 155 Post-employment benefits 223
Lease accounting by lessees 155 Accounting for defined contribution
Lease accounting by lessors 159 plans 223
Accounting for defined benefit plans 224
10 Inventories 164
Other long-term employee benefits 229
Inventories 165
Termination benefits 229
Cost of inventories 165
Share-based payments 230
Cost formulas 167
Net realisable value 170 15 Taxation in financial statements 236
Disclosures relating to inventories 171 Current tax 237
Deferred tax 239
11 Financial instruments 175
The tax base concept 241
Definitions 176
IAS12 requirements with regard to
Classification of financial instruments 177
deferred tax 246
Recognition and measurement 180
Disclosure requirements 246
Initial measurement of financial assets
and liabilities 180 16 Statement of cash flows 251
Subsequent measurement of financial Cash and cash equivalents 252
assets 181 Classification of cash flows by activity 253
The effective interest method 182 Interest, dividends and taxes 254
vi
Contents
Reporting cash flows from Definition of related party and related
operating activities 255 party transaction 348
Disclosures 262 Disclosures required by IAS24 350
Foreign exchange accounting 351
17 Financial reporting in
Reporting foreign currency
hyperinflationary economies 272
transactions 352
Historical cost accounting and
Translation to a presentation currency 354
its weaknesses 273
Strengths of historical cost accounting 278
Alternatives to historical cost Part 4 Analysis of Financial Statements
accounting 279
22 Ratio analysis 361
Hyperinflationary economies 280
Accounting ratios 362
The restatement of financial statements 280
Profitability ratios 363
Disclosures required by IAS29 285
Liquidity ratios 367
Efficiency ratios 369
Part 3 Consolidated Financial Statements
Investment ratios 372
Limitations of ratio analysis 379
18 Groups of companies (1) 291
Multivariate ratio analysis 380
Requirement to prepare consolidated
financial statements 292 23 Earnings per share 388
Group statement of financial position Significance of EPS 388
at date of acquisition 293 Calculation of basic EPS 389
Group statement of financial position Shares issued during the accounting
in subsequent years 297 period 391
Partly-owned subsidiaries 300 Bonus issues 393
Preference shares 303 Rights issues 394
Elimination of intra-group balances 305 Calculation of diluted EPS 397
Unrealised profits 306 Presentation and disclosure
Reporting period and accounting requirements 399
policies 307
24 Segmental analysis 404
Disclosure requirements 307
Operating segments 405
19 Groups of companies (2) 316 Reportable segments 405
Group statement of comprehensive Disclosures required by IFRS8 407
income 317
Group statement of changes in equity 317
Part 5 Small and Medium-sized Entities
Subsidiary acquired part way through
an accounting period 323 25 The IFRS for SMEs Standard 417
Small and medium-sized entities 418
20 Associates and joint arrangements 331
Concepts and pervasive principles 419
Associates and significant influence 332
Financial statement presentation 420
The equity method 333
Statement of financial position 421
Application of the equity method 333
Statement of comprehensive income
Joint arrangements 340
and income statement 421
Disclosure requirements 341
Statement of changes in equity and
21 Related parties and changes in Statement of income and retained
foreign exchange rates 347 earnings 422
Related parties 348 Statement of cash flows 422
vii
Contents
25 The IFRS for SMEs Standard (cont.)
Notes to the financial statements 422 Borrowing costs 428
Consolidated and separate financial Share-based payment 428
statements 423 Impairment of assets 428
Accounting policies, estimates and Employee benefits 429
errors 423 Income tax 429
Financial instruments 424 Foreign currency translation and
Inventories 424 Hyperinflation 429
Investments in associates and Events after the end of the reporting
joint ventures 424 period 429
Investment property 425 Related party disclosures 430
Property, plant and equipment 425 Specialised activities 430
Intangible assets other than goodwill 426 Transition to the IFRS for SMEs
Business combinations and goodwill 426 Standard 430
Leases 426
Provisions and contingencies 426 Part 6 Answers
Liabilities and equity 427
Answers to exercises 433
Revenue 427
Government grants 428 Index 497

viii
Preface

The purpose of this book is to explain International Financial Reporting Standards (IFRS®
Standards) and International Accounting Standards (IAS® Standards) at a level which is
appropriate for students who are undertaking an intermediate course of study in financial
reporting. It is assumed that the reader has already completed an introductory accounting
course and is familiar with the basics of financial accounting. The book has not been
written with any particular syllabus in mind but should be useful to second-year under-
graduates studying for a degree in accounting and finance and to those who are preparing
for the examinations of the professional accounting bodies.
IFRS Standards and IAS Standards (referred to in this book as "international standards")
have gained widespread acceptance around the world and most accounting students are
now required to become familiar with them. The problem is that the standards and their
accompanying documents occupy over 4,000 pages of fine print and much of this content
is highly technical and difficult to understand. What is needed is a textbook which
explains each standard as clearly and concisely as possible and provides students with
plenty of worked examples and exercises. This book tries to satisfy that need.
The standards are of international application but, for the sake of convenience, most of
the monetary amounts referred to in the worked examples and exercises in this book are
denominated in £s. Other than this, the book contains very few UK-specific references and
should be relevant in any country which has adopted international standards.
Each chapter of the book concludes with a set of exercises which test the reader's grasp
of the topics introduced in that chapter. Some of these exercises are drawn from the past
examination papers of professional accounting bodies. Solutions to most of the exercises
are located at the back of the book but solutions to those exercises which are marked with
an asterisk (*) are intended for lecturers' use and are provided on a supporting website.
This sixth edition is in accordance with all international standards or amendments to
standards issued as at 1 January 2017.
Alan Melville
April 2017
ix