UK Gaap: Generally Accepted Accounting Practice in the United Kingdom

845 Pages·1992·251.36 MB·English

by  Mike Davies

I I
THIRD EDITION
THIRD EDITION
Generally Accepted Accounting Practice
in the United Kingdom
Mike Davies, Ron Paterson & Allister Wilson
of Ernst & Young
Ell
ERNST & YOUNG
©Ernst & Young, 1992
Softcover reprint of the hardcover 3rd edition 1992
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Second edition published 1992 by
MACMILLAN PUBLISHERS LTD
Distributed by Globe Book Services Ltd
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Basingstoke, Rants RG21 2XS, England
ISBN 978-1-349-13000-9 ISBN 978-1-349-12998-0 ( eBook)
DOl 10.1007/978-1-349-12998-0
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Foreword to the third edition
When I wrote the foreword to the first edition of this book, I said that I expected it
to become a standard work of reference for accountants, and people interested in
accounting, in all kinds of occupations. The success of the first two editions
shows that my expectations were well founded.
When the second edition went to press, the new Accounting Standards Board was
about to begin operations as successor to the Accounting Standards Committee.
The new body is now two years old - I have been its first Deputy Chairman. It
has focused a good deal of its initial effort on the development of fundamental
principles to guide decisions on individual standards - a British conceptual
framework for accounting. It has published drafts of statements on objectives, the
definitions of the elements of accounting statements (assets, liabilities and so on),
criteria for deciding when items should be recognised or changed, and on
presentation of accounting information. Other drafts are still to be published,
including the important one on measurement.
Many people are surprised when they learn that a long established subject such as
accounting does not already have an agreed statement of principles. Whatever the
reasons for this deficiency, its repair has increasingly been seen to be important,
as complex problems with current accounting practice are identified and exposed
to public scrutiny after company failures. Many accountants would take the view
that there are few areas of current practice where one can be confident that
standards are completely satisfactory. Improvements are urgent but, without
agreed fundamental principles, little basis exists for confidence that problems will
be well solved. Progress is complicated by the recent tendency of putting the
opinion of the moment into a requirement of a European Directive and/or British
Company Law, so that the law may impede improvements in practice.
Consequently, although new standards on detailed matters are urgent, the Board's
decision to allocate some of its time to the development of principles is to be
welcomed.
This book deals with purposes and concepts as well as more detailed reporting
rules. It synthesises an enormous body of literature, drawing on authoritative
international sources as well as British sources, research studies as well as legal or
professional requirements. It gives illustrations and discusses difficulties. Most
readers will disagree with some things that it says, but all should find it helps to
mark the path for improving accounting, as well as providing useful information.
I welcome the publication of this third edition and I wish the book continuing
success.
August 1992 Bryan Carsberg
Preface to the third edition
Two years have passed since we published the previous edition of UK GAAP. In
that time, the Accounting Standards Board has settled into its new rOle, and its
associated bodies, the Review Panel and the Urgent Issues Task Force, have also
become established. So far, the ASB has issued only two Financial Reporting
Standards, but more significantly it has released drafts of several other
pronouncements, including five chapters of its Statement of Principles which are
meant to guide the course of its future work. For its part, the UITF has published
five Abstracts to date. All of these are fully reflected in this edition of the book.
The economic climate has also altered dramatically since we wrote the second
edition, and to some extent the climate of financial reporting has changed with it.
Some of the accounting excesses of the Eighties are now looked upon with much
more jaundiced eyes in the early Nineties, and a reputation for steady
conservatism now seems more highly prized than a record of exponential growth.
There are signs of this in recent company accounts; a number of companies have
recently adopted more prudent accounting treatments even in advance of any
changes in accounting standards. In this edition, we have given even more
emphasis than before to extracts from company accounts, in order to show all
these developments in current accounting practice. The number of such extracts
included this time is nearly six hundred, a major increase compared with the
second edition.
We are once again grateful to a number of our colleagues in Ernst & Young for
their assistance with the publication of this edition, notably Guy Millward and
Trevor Pijper. However, as authors, we continue to take the responsibility for the
views expressed throughout the book and the blame for any shortcomings therein.
31 August 1992 Mike Davies
Ron Paterson
Allister Wilson
List of chapters
1 The development of UK GAAP ............................................... 1
2 The quest for a conceptual framework for financial reporting ......... 29
3 Revenue recognition ............................................................. 99
4 Group financial statements ................................................... 143
5 Foreign currencies ............................................................. 313
6 Fixed assets and depreciation ............................................... 437
7 Investment properties .......................................................... 525
8 Investments ...................................................................... 545
9 Research and development ................................................... 567
10 Capitalisation of borrowing costs ........................................... 587
11 Stocks and long-term contracts ............................................. 627
12 Capital instruments ............................................................. 677
13 Off balance sheet transactions ............................................... 74 5
14 Leases and hire purchase contracts ........................................ 805
15 Government grants ............................................................. 861
16 Segmental reporting ............................................................ 873
17 Pension costs ................................................................... 917
18 Taxation ......................................................................... 1001
19 Reporting of financial performance ........................................ 1067
20 Earnings per share ............................................................ l123
21 Post balance sheet events ................................................... 1161
22 Contingencies .................................................................. 1183
23 Cash flow statements ........................................................ 1203
24 Related parties ................................................................. 1269
25 Directors' and officers' loans and transactions ......................... 1303
26 Directors' remuneration ...................................................... 1343
Appendix: Specimen financial statements ...................................... 1387
Index of extracts from accounts .................................................. 1459
Index .................................................................................... 1465
Detailed contents
CHAPTER 1 THE DEVELOPMENT OF UK GAAP 1
What is UK GAAP? ............................................................................................... 1
1.1 'Principles' or 'practice'? ........................................................................... 1
1.2 What is 'generally accepted'? ...................................................................... 2
2 Accounting standards and the concept of 'true and fair' .................................................. 3
2.1 The introduction of the true and fair concept. ................................................. 3
2.2 The interaction of accounting standards and the law ........................................ .4
2.3 The role of International Accounting Standards .............................................. 6
2.4 The experience of other countries ................................................................ 7
us .......................................................................................
2.4.1 7
2.4.2 Canada .................................................................................. 8
2.4.3 Germany ................................................................................ 9
3 The development of Accounting Standards ................................................................ 10
3.1 The Accounting Standards Committee ........................................................ 10
3 .1.1 The creation of the ASC ......................................................... 10
3 .1. 2 The objects and terms of reference of the ASC ............................ 11
3.1.3 The Watts Report .................................................................. 11
3.1.4 The McKinnon Report ........................................................... 12
3 .1. 5 The Dearing Report ............................................................... 12
3.1.6 The implementation of the Dearing proposals ............................. 15
3.2 The Accounting Standards Board ............................................................... 16
4 GAAP for small companies ................................................................................... 17
4.1 The Big GAAP/Little GAAP debate .......................................................... 17
4.2 Exemptions for 'small companies' ............................................................ 18
4.3 What is the small company solution? ........................................................ 19
5 Summary financial statements ................................................................................ 20
5.1 The required form of a summary financial statement... ................................... 20
5.2 Commentary ......................................................................................... 25
6 Conclusion ......................................................................................................... 26
viii Generally Accepted Accounting Practice in the United Kingdom
CHAPTER 2 THE QUEST FOR A CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING 29
1 Introduction ........................................................................................................ 29
1.1 What is a conceptual framework? .............................................................. 29
1.2 Why is a conceptual framework necessary? .................................................. 29
1.3 Early attempts to establish a framework ..................................................... 31
2 The AICPA's initiatives in the United States ............................................................ 32
2.1 Accounting Research Studies .................................................................... 32
2.2 APB Statement No. 4 ............................................................................. 34
2.3 The Wheat and Trueblood Committees ....................................................... 34
3 The F ASB Conceptual Framework. ......................................................................... 35
3.1 Introduction .......................................................................................... 35
3.2 The objectives of fmancial reporting .......................................................... 37
3.3 The qualitative characteristics of accounting information ................................ 39
3.3.1 The decision-makers ................................................... .". .......... 40
3.3.2 The cost/benefit constraint ...................................................... 40
3.3.3 Understandability ................................................................... 41
3.3.4 Relevance and reliability ......................................................... 41
3.3.5 Comparability ...................................................................... 43
3.3.6 Materiality ........................................................................... 43
3.3. 7 Conservatism ....................................................................... 44
3.4 The elements of financial statements .......................................................... 44
3.4.1 Assets ................................................................................. 44
3.4.2 Liabilities ............................................................................ 45
3.4.3 Equity ................................................................................. 46
3.4.4 Investments by owners ........................................................... 46
3.4.5 Distributions to owners .......................................................... 46
3.4.6 Comprehensive income .......................................................... 46
3.4.7 Revenues, expenses, gains and losses ........................................ 47
3.5 Recognition and measurement .................................................................. 48
3.6 Conclusion ........................................................................................... 49
4 UK initiatives ..................................................................................................... 50
4.1 SSAP 2: Disclosure of accounting policies ................................................. 50
4.1.1 Fundamental accounting concepts ............................................. 50
4.1.2 Accounting bases .................................................................. 51
4.1.3 Accounting policies ............................................................... 52
4.2 The Corporate Report ............................................................................. 52
4.3 The Sandilands Report ............................................................................ 55
4.3.1 Current Purchasing Power accounting ....................................... 55
4.3.2 Value accounting ................................................................... 56
Detailed contents ix
4.3.3 Cash flow accounting ............................................................. 59
4.3.4 Current cost accounting (CCA) ................................................ 61
4.4 The Maeve Report. ................................................................................. 64
4.5 The Stamp Report. ................................................................................. 66
4.6 The ICAS discussion document: Making Corporate Reports Valuable .............. 67
4.6.1 Background to the study .......................................................... 67
4.6.2 Users and their needs .............................................................. 68
4.6.3 Valuation of assets and liabilities ............................................. 69
4.6.4 The proposed new information package ...................................... 70
4.6.5 Additional information ........................................................... 71
4.6.6 Conclusion .......................................................................... 72
4.7 The Solomons Report ............................................................................. 72
4.8 The Future Shape of Financial Reports ...................................................... 77
5 The ASB' s Statement of Principles ......................................................................... 78
5.1 Introduction .......................................................................................... 78
5.2 The objective of financial statements ......................................................... 79
5.3 The qualitative characteristics of financial information ................................... 79
5.4 The elements of financial statements .......................................................... 80
5.4.1 Assets ................................................................................. 80
5.4.2 Liabilities ............................................................................ 80
5.4.3 Equity ..... ············································································ 81
5.4.4 Gains .................................................................................. 81
5.4.5 Losses ................................................................................. 81
5.4.6 Contributions from owners ..................................................... 81
5.4.7 Distributions to owners .......................................................... 81
5.4.8 The overall approach .............................................................. 81
5.5 The recognition of items in financial statements .......................................... 82
5. 6 Presentation of financial information ......................................................... 85
5. 7 Conclusion ........................................................................................... 85
6 Other International framework projects ..................................................................... 85
6.1 The IASC conceptual framework ............................................................... 86
6.2 The CICA financial statement concepts ...................................................... 88
6.3 The Australian framework project.. ............................................................ 88
6.4 The New Zealand framework project .......................................................... 89
7 Conclusion ......................................................................................................... 91