Full contents
Part 1  Preparation of financial statements
 
Chapter 1  Accounting and reporting on 
a cash flow basis	2
1.1  Introduction	2
1.2  Shareholders	2
1.3  What skills does an accountant require
 in respect of external reports?	3
1.4  Managers	3
1.5  What skills does an accountant require 
in respect of internal reports?	3
1.6  Procedural steps when reporting to 
internal users	4
1.7  Agency costs2	6
1.8  Illustration of periodic financial 
statements prepared under the cash 
flow concept to disclose realised 
operating cash flows	6
1.9  Illustration of preparation of statement 
of financial position	10
1.10  Treatment of noncurrent assets in 
the cash flow model	11
1.11  What are the characteristics of these
      data that make them reliable?	12
1.12  Reports to external users	12
Summary	13
Review questions	14
References	14
Chapter 2  Accounting and reporting on 
an accrual accounting basis	15
2.1  Introduction	15
2.2  Historical cost convention	16
2.3  Accrual basis of accounting	16
2.4  Mechanics of accrual accounting
adjusting cash receipts and payments	17
2.5  Subjective judgements required in 
accrual accountingadjusting cash 
payments in accordance with the 
matching principle	17
2.6  Mechanics of accrual accountingthe 
statement of financial position	18
2.7  Reformatting the statement of financial 
position	18
2.8  Accounting for the sacrifice of 
noncurrent assets	19
2.9  Reconciliation of cash flow and 
accrual accounting data	22
Summary	23
Review questions	24
References	24
Chapter 3  Preparation of financial 
statements	25
3.1  Introduction	25
3.2  Preparing an internal statement of 
income from a trial balance	25
3.3  The format of statements of income 
for publication	27
3.4  Other comprehensive income	29
3.5  Accounting for current tax	31
3.6  Presentation using IAS 1 Alternative 
method (Format 2)	32
3.7  The statement of financial position	33
3.8  Statement of changes in equity	33
3.9  The accounting rules for asset valuation	34
3.10  The explanatory notes that accompany 
a statement of financial position	35
3.11  Has prescribing the formats meant 
that identical transactions are reported 
identically?	37
3.12  What does an investor need in addition
to the financial statements to make 
decisions?	39
3.13  ASB review of narrative reporting	44
3.14  What is meant by a fair view?	44
Summary	46
Review questions	46
References	47
Chapter 4  Annual Report: additional 
financial statements	48
4.1  Introduction	48
4.2  The value added by segment reports	48
4.3  Detailed review and evaluation of 
IRFS 8Operating Segments1	49
4.4  IFRS 5meaning of ‘held for sale’	55
4.5  IFRS 5implications of classification 
as held for sale	56
4.6  Meaning and disclosure of ‘discontinued 
operations’	56
4.7  IAS 10events after the reporting 
period4	58
4.8  Related party disclosures	59
Summary	62
Review questions	63
References	63
Chapter 5  Statements of cash flows	64
5.1  Introduction	64
5.2  Development of statements of cash 
flows	64
5.3  Applying IAS 7 (revised) Statements 
of Cash Flows	66
5.4  Step approach to preparation of a statement
of cash flowsindirect method	68
5.5  Statement of cash flowsdirect method	70
5.6  Additional notes required by IAS 7	70
5.7  Analysing statements of cash flows	71
5.8  Critique of cash flow accounting	75
5.9  Summary proposal for change in 
presentation of the financial statements	75
Summary	77
Review questions	77
References	78
 
Part 2  Income and asset value measurement systems
 
Chapter 6  Income and asset value 
measurement: an economist’s 
approach	80
6.1  Introduction	80
6.2  Role and objective of income 
measurement	80
6.3  Accountant’s view of income, capital 
and value	82
6.4  Critical comment on the accountant’s 
measure	85
6.5  Economist’s view of income, capital 
and value	86
6.6  Critical comment on the economist’s 
measure	91
6.7  Income, capital and changing price 
levels	91
Summary	93
Review questions	93
References	94
Bibliography	94
Chapter 7  Accounting for pricelevel 
changes	95
7.1  Introduction	95
7.2  Review of the problems of historical cost 
accounting (HCA)	95
7.3  Inflation accounting	95
7.4  The concepts in principle	96
7.5  The four models illustrated for a company 
with cash purchases and sales	97
7.6  Critique of each model	100
7.7  Operating capital maintenance
a comprehensive example	103
7.8  Critique of CCA statements	112
7.9  The ASB approach	113
7.10  The IASC/IASB approach	115
7.11  Future developments	116
Summary	118
Review questions	118
References	118
Bibliography	119
Chapter 8  Revenue recognition	120
8.1  Introduction	120
8.2  The issues	120
8.3  The challenge	121
8.4  Revenue definedIAS 18 Revenue	121
8.5  Proposed IFRS	124
Summary	128
Review questions	129
References	130
 
Part 3  Regulatory framework – an attempt to achieve uniformity
 
Chapter 9  Financial reportingevolution of
           global standards	132
9.1  Introduction	132
9.2  Why do we need financial reporting 
standards?	132
9.3  Why do we need standards to be 
mandatory?	133
9.4  Arguments in support of standards	134
9.5  Arguments against standards	135
9.6  Standard setting and enforcement in 
the UK under the Financial Reporting 
Council (FRC)	135
9.7  The Accounting Standards Board 
(ASB)	136
9.8  The Financial Reporting Review Panel 
(FRRP)	136
9.9  Standard setting and enforcement 
in the US	137
9.10  Why have there been differences in 
financial reporting?	139
9.11  Efforts to standardise financial 
reports	143
9.12  What is the impact of changing 
to IFRS?	145
9.13  Progress towards adoption by the USA 
of international standards	146
9.14  Advantages and disadvantages of global 
standards for publicly accountable 
entities	147
9.15  How do reporting requirements differ 
for nonpublicly accountable entities?	148
9.16  Does the need for standards and 
effective enforcement still exist in 
the 21st century?	151
9.17  Move towards a conceptual 
framework	151
Summary	152
Review questions	152
References	153
Chapter 10  Conceptsevolution of a global
            conceptual framework	155
10.1  Introduction	155
10.2  Historical overview of the evolution 
of financial accounting theory	156
10.3  FASB Concepts Statements	159
10.4  IASC Framework for the Preparation 
and Presentation of Financial 
Statements	162
10.5  ASB Statement of Principles 19999	163
10.6  Conceptual framework developments	170
Summary	171
Review questions	173
References	173
Chapter 11  Ethical behaviour and 
implications for accountants	175
11.1  Introduction	175
11.2  The meaning of ethical behaviour	175
11.3  The accounting standard setting process 
and ethics	176
11.4  The IFAC Code of Ethics for 
Professional Accountants	177
11.5  Implications of ethical values for the 
principles versus rulesbased 
approaches to accounting standards	179
11.6  Ethics in the accountants’ work 
environmenta research report	182
11.7  Implications of unethical behaviour 
for stakeholders using the financial 
reports	183
11.8  The increasing role of whistle
blowing	188
11.9  The role of financial reporting 
authorities	189
11.10  Why should students learn ethics?	191
Summary	192
Review questions	193
References	195
 
Part 4  Statement of financial positionequity, liability and asset
measurement and disclosure
 
Chapter 12  Share capital, distributable profits
 and reduction of capital	198
12.1  Introduction	198
12.2  Common themes	198
12.3  Total owners’ equity: an overview	199
12.4  Total shareholders’ funds: more 
detailed explanation	200
12.5  Accounting entries on issue of shares	203
12.6  Creditor protection: capital 
maintenance concept	204
12.7  Creditor protection: why capital 
maintenance rules are necessary	204
12.8  Creditor protection: how to quantify 
the amounts available to meet 
creditors’ claims	205
12.9  Issued share capital: minimum 
share capital	205
12.10  Distributable profits: general 
considerations	206
12.11  Distributable profits: how to arrive 
at the amount using relevant 
accounts	207
12.12  When may capital be reduced?	208
12.13  Writing off part of capital which 
has already been lost and is not 
represented by assets	208
12.14  Repayment of part of paidin capital 
to shareholders or cancellation of 
unpaid share capital	213
12.15  Purchase of own shares	213
Summary	215
Review questions	216
References	216
Chapter 13  Liabilities	217
13.1  Introduction	217
13.2  Provisionstheir impact on the 
statement of financial position	217
13.3  ED IAS 37 Nonfinancial Liabilities	225
13.4  ED/2010/1 Measurement of Liabilities 
in IAS 37	231
Summary	231
Review questions	231
References	232
Chapter 14  Financial instruments	233
14.1  Introduction	233
14.2  Financial instrumentsthe IASB’s 
problem child	233
14.3  IAS 32 Financial Instruments: 
Disclosure and Presentation1	235
14.4  IAS 39 Financial Instruments: 
Recognition and Measurement	240
14.5  IFRS 7 Financial Statement 
Disclosures6	249
14.6  Financial instruments developments	253
Summary	255
Review questions	256
References	256
Chapter 15  Employee benefits	257
15.1  Introduction	257
15.2  Greater employee interest in 
pensions	257
15.3  Financial reporting implications	258
15.4  Types of scheme	258
15.5  Defined contribution pension 
schemes	260
15.6  Defined benefit pension schemes	260
15.7  IAS 19 (revised) Employee Benefits	261
15.8  The liability for pension and 
other postretirement costs	261
15.9  The statement of comprehensive 
income	264
15.10  Comprehensive illustration	264
15.11  Plan curtailments and settlements	266
15.12  Multiemployer plans	266
15.13  Disclosures	267
15.14  Other longservice benefits	267
15.15  Shortterm benefits	268
15.16  Termination benefits8	268
15.17  Exposure draft of amendments 
to IAS 19	269
15.18  IFRS 2 ShareBased Payment	270
15.19  Scope of IFRS 2	271
15.20  Recognition and measurement	271
15.21  Equitysettled sharebased 
payments	271
15.22  Cashsettled sharebased payments	274
15.23  Transactions which may be settled 
in cash or shares	275
15.24  IAS 26 Accounting and Reporting 
by Retirement Benefit Plans	275
Summary	277
Review questions	278
References	278

Chapter 16  Taxation in company 
accounts	279
16.1  Introduction	279
16.2  Corporation tax	279
16.3  Corporation tax systemsthe theoretical 
background	280
16.4  Corporation tax systemsavoidance 
and evasion	281
16.5  Corporation taxthe system from 6 
April 1999	283
16.6  IFRS and taxation	285
16.7  IAS 12accounting for current 
taxation	286
16.8  Deferred tax	287
16.9  FRS 19 (the UK standard on 
deferred taxation)	294
16.10  A critique of deferred taxation	295
16.11  Examples of companies following 
IAS 12	298
16.12  Value added tax (VAT)	299
Summary	299
Review questions	300
References	300
Chapter 17  Property, plant and 
equipment (PPE)	302
17.1  Introduction	302
17.2  PPEconcepts and the relevant IASs 
and IFRSs	302
17.3  What is PPE?	303
17.4  How is the cost of PPE determined?	303
17.5  What is depreciation?	305
17.6  What are the constituents 
in the depreciation formula?	308
17.7  How is the useful life of an 
asset determined?	308
17.8  Residual value	309
17.9  Calculation of depreciation	309
17.10  Measurement subsequent to initial 
recognition	313
17.11  IAS 36 impairment of assets	315
17.12  IFRS 5 noncurrent assets held for 
sale and discontinued operations	320
17.13  Disclosure requirements	321
17.14  Government grants towards 
the cost of PPE	321
17.15  Investment properties	323
17.16  Effect of accounting policy for PPE 
on the interpretation of the financial 
statements	324
Summary	326
Review questions	326
References	327
Chapter 18  Leasing	328
18.1  Introduction	328
18.2  Background to leasing	328
18.3  Why was the IAS 17 approach 
so controversial?	330
18.4  IAS 17classification of a lease	331
18.5  Accounting requirements for operating 
leases	332
18.6  Accounting requirements for finance 
leases	333
18.7  Example allocating the finance charge 
using the sum of The digits method	333
18.8  Accounting for the lease of land 
and buildings	337
18.9  Leasinga form of off balance 
sheet financing	338
18.10  Accounting for leasesa new 
approach	339
18.11  Accounting for leases by lessors	341
Summary	342
Review questions	342
References	343
Chapter 19  R＆D; goodwill; intangible assets 
and brands	344
19.1  Introduction	344
19.2  Accounting treatment for research 
and development	344
19.3  Research and development	344
19.4  Why is research expenditure 
not capitalised?	345
19.5  Capitalising development costs	346
19.6  The judgements to be made when 
deciding whether to capitalise 
development costs	347
19.7  Disclosure of R＆D	348
19.8  IFRS for SMEs	348
19.9  Goodwill	349
19.10  The accounting treatment of goodwill	349
19.11  Critical comment on the various 
methods that have been used to 
account for goodwill	350
19.12  Negative goodwill	353
19.13  Intangible assets	353
19.14  Brand accounting	356
19.15  Justifications for reporting all 
brands as assets	357
19.16  Accounting for acquired brands	358
19.17  Emissions trading	359
19.18  Intellectual property	361
19.19  Review of implementation of IFRS 3	364
Summary	366
Review questions	366
References	368
Chapter 20  Inventories	370
20.1  Introduction	370
20.2  Inventory defined	370
20.3  The controversy	370
20.4  IAS 2 Inventories	372
20.5  Inventory valuation	372
20.6  Workinprogress	378
20.7  Inventory control	380
20.8  Creative accounting	380
20.9  Audit of the yearend physical 
inventory count	383
20.10  Published accounts	384
20.11  Agricultural activity	385
Summary	388
Review questions	388
References	389
Chapter 21  Construction contracts	390
21.1  Introduction	390
21.2  The need to replace IAS 11 Construction
      Contracts1	390
21.3  Identification of contract revenue	391
21.4  Identification of contract costs	392
21.5  Proposed new accounting rules	393
21.6  Approach when a contract can be 
separated into components	394
21.7  Accounting for a contract	395
21.8  Illustratedprofitable contract using 
step approach	396
21.9  Illustratedlossmaking contract using 
step approach	398
21.10  Developments in accounting for 
revenue	398
21.11  Publicprivate partnerships (PPPs)	399
Summary	405
Review questions	406
References	406
 
Part 5  Consolidated accounts
 
Chapter 22  Accounting for groups at 
the date of acquisition	408
22.1  Introduction	408
22.2  The definition of a group	408
22.3  Consolidated accounts and some reasons 
for their Preparation	408
22.4  The definition of control	410
22.5  Alternative methods of preparing 
consolidated accounts	411
22.6  The treatment of positive goodwill	413
22.7  The treatment of negative goodwill	413
22.8  The comparison between an acquisition 
by cash and an exchange of shares	413
22.9  Noncontrolling interests	414
22.10  The treatment of differences between 
a subsidiary’s fair value and book 
value	416
22.11  How to calculate fair values	417
22.12  IFRS 10summary of significant 
revisions	418
Summary	418
Review questions	419
References	420
Chapter 23  Preparation of consolidated 
statements of financial position
after the date of acquisition	421
23.1  Introduction	421
23.2  Preand postacquisition profits/
losses	421
23.3  Intercompany balances	423
23.4  Unrealised profit on intercompany 
sales	425
23.5  Provision for unrealised profit affecting 
a noncontrolling interest	429
23.6  Uniform accounting policies and 
reporting dates	429
23.7  How is the investment in subsidiaries 
reported in the parent’s own statement 
of financial position?	429
Summary	429
Review questions	429
References	430
Chapter 24  Preparation of consolidated 
statements of comprehensive 
income, changes in equity and 
cash flows	431
24.1  Introduction	431
24.2  Preparation of a consolidated statement 
of comprehensive incomethe Ante 
Group	431
24.3  The statement of changes in equity 
(SOCE)3	433
24.4  Other consolidation adjustments	434
24.5  Dividends or interest paid by 
the subsidiary out of preacquisition 
profits	435
24.6  A subsidiary acquired part of the 
way through the year	435
24.7  Published format statement of 
comprehensive income	437
24.8  Consolidated statements of cash 
flows	438
Summary	439
Review questions	439
References	439
Chapter 25  Accounting for associates 
and joint ventures	440
25.1  Introduction	440
25.2  Definitions of associates and of 
significant influence	440
25.3  The treatment of associated companies 
in consolidated Accounts	440
25.4  The Brill Groupthe equity method 
illustrated	441
25.5  The treatment of provisions 
for unrealised profits	443
25.6  The acquisition of an associate 
partway through the year	443
25.7  Joint arrangements	444
Summary	446
Review questions	447
References	447
Chapter 26  Accounting for the effects of
            changes in foreign exchange 
            rates under IAS 21	449
26.1  Introduction	449
26.2  The difference between conversion and 
translation and the definition of a 
foreign currency transaction	449
26.3  The functional currency	449
26.4  The presentation currency5	450
26.5  Monetary and nonmonetary items	450
26.6  The rules on the recording of foreign 
currency transactions carried out 
directly by the reporting entity	450
26.7  The treatment of exchange differences 
on foreign currency transactions	451
26.8  Foreign exchange transactions in 
the individual accounts of companies 
illustratedBoil plc	451
26.9  The translation of the accounts of 
foreign operations where the functional 
currency is the same as that of the 
parent	452
26.10  The use of a presentation currency 
other than the functional currency	453
26.11  Granby Ltd illustration	454
26.12  Granby Ltd illustration continued	455
26.13  Implications of IAS 21	457
26.14  Critique of use of presentation 
currency	457
Summary	457
Review questions	458
References	458
 
Part 6  Interpretation
 
Chapter 27  Earnings per share	460
27.1  Introduction	460
27.2  Why is the earnings per share figure
      important?	460
27.3  How is the EPS figure calculated?	461
27.4  The use to shareholders of the EPS	462
27.5  Illustration of the basic EPS 
calculation	463
27.6  Adjusting the number of shares used in 
the basic EPS calculation	463
27.7  Rights issues	466
27.8  Adjusting the earnings and number of 
shares used in the diluted EPS 
calculation	470
27.9  Procedure where there are several 
potential dilutions	472
27.10  Exercise of conversion rights during 
financial year	473
27.11  Disclosure requirements of IAS 33	473
27.12  The Improvement Project	475
27.13  Convergence project	476
Summary	476
Review questions	476
References	478
Chapter 28  Review of financial ratio 
analysis	479
28.1  Introduction	479
28.2  Initial impressions	479
28.3  What are accounting ratios?	480
28.4  Revision of key ratios	481
28.5  Key ratios for JD Wetherspoon	483
28.6  Comment on the current ratio	485
28.7  Interpreting the key ratiosJD 
Wetherspoon	486
28.8  Description of subsidiary ratios	488
28.9  Limitations of ratio analysis	497
28.10  Earnings before interest, tax, 
depreciation and amortization 
(EBITDA) used for management 
control purposes	500
Summary	501
Review questions	501
References	502
Chapter 29  Analytical analysisselective 
use of ratios	503
29.1  Introduction	503
29.2  Improvement of information for 
shareholders	503
29.3  Disclosure of risks and focus on relevant 
ratios	505
29.4  Shariah compliant companieswhy ratios 
are important	511
29.5  Ratios set by lenders in debt covenants	513
29.6  Predicting corporate failure	515
29.7  Performance related remuneration
shareholder returns	521
29.8  Valuing shares of an unquoted 
companyquantitative process	524
29.9  Professional risk assessors	528
Summary	530
Review questions	531
References	531