Fourteenth Edition
FINANCIAL ACCOUNTING
AND REPORTING
Barry Elliott
Jamie Elliott
18/8/10 11:29:35
, Financial Accounting
and Reporting
PR
O
FD
O
C
,We work with leading authors to develop the
strongest educational materials in business and finance
bringing cutting-edge thinking and best learning
practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall we craft high
quality print and electronic publications which help
readers to understand and apply their content,
whether studying or at work.
To find out more about the complete range of our
PR
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
O
FD
O
C
, Financial Accounting
and Reporting
FOURTEENTH EDITION
PR
Barry Elliott and Jamie Elliott
O
FD
O
C
,Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 1993
Second edition 1996
Third edition 1999
Fourth edition 2000
Fifth edition 2001
Sixth edition 2002
Seventh edition 2003
Eighth edition 2004
PR
Ninth edition 2005
Tenth edition 2006
Eleventh edition 2007
Twelfth edition 2008
Thirteenth edition 2009
Fourteenth edition 2011
© Prentice Hall International UK Limited 1993, 1999
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© Pearson Education Limited 2000, 2011
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.
FD
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without either the prior
written permission of the publisher or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron
House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners. The
O
use of any trademark in this text does not vest in the author or publisher any
trademark ownership rights in such trademarks, nor does the use of such
trademarks imply any affiliation with or endorsement of this book by such
owners.
C
Pearson Education is not responsible for the content of third party internet sites.
ISBN: 978-0-273-74444-3
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1
14 13 12 11 10
Typeset in 10/12 Ehrhardt MT by 35
Printed by Ashford Colour Press Ltd., Gosport
, Brief contents
Preface and acknowledgements xx
Guided tour of MyAccountingLab xxv
Part 1
PR
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
1 Accounting and reporting on a cash flow basis 3
2 Accounting and reporting on an accrual accounting basis 22
3 Income and asset value measurement: an economist’s approach 40
4 Accounting for price-level changes 59
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Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99
FD
5 Financial reporting – evolution of global standards 101
6 Concepts – evolution of a global conceptual framework 129
7 Ethical behaviour and implications for accountants 156
8 Preparation of statements of comprehensive income and financial position 186
9 Annual Report: additional financial statements 223
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Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY
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AND ASSET MEASUREMENT AND DISCLOSURE 255
10 Share capital, distributable profits and reduction of capital 257
11 Off balance sheet finance 283
12 Financial instruments 312
13 Employee benefits 343
14 Taxation in company accounts 375
15 Property, plant and equipment (PPE) 404
16 Leasing 441
17 R&D; goodwill; intangible assets and brands 461
18 Inventories 497
19 Construction contracts 523
,vi • Brief Contents
Part 4
CONSOLIDATED ACCOUNTS 547
20 Accounting for groups at the date of acquisition 549
21 Preparation of consolidated statements of financial position after the date
of acquisition 568
22 Preparation of consolidated statements of comprehensive income,
changes in equity and cash flows 583
23 Accounting for associates and joint ventures 603
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 623
Part 5
INTERPRETATION 639
25 Earnings per share 641
26 Statements of cash flows 668
27 Review of financial ratio analysis 696
28 Analytical analysis – selective use of ratios 736
PR
29 An introduction to financial reporting on the Internet 782
Part 6
ACCOUNTABILITY 799
30 Corporate governance 801
31 Sustainability – environmental and social reporting 838
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Index 884
FD
O
C
, Full contents
Preface and acknowledgements xx
Guided tour of MyAccountingLab xxv
Part 1
PR
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 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
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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
FD
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 12
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
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Summary 16
Review questions 17
Exercises 18
References 21
C
2 Accounting and reporting on an accrual accounting basis 22
2.1 Introduction 22
2.2 Historical cost convention 23
2.3 Accrual basis of accounting 24
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 24
2.5 Subjective judgements required in accrual accounting – adjusting cash
receipts in accordance with lAS 18 25
2.6 Subjective judgements required in accrual accounting – adjusting cash
payments in accordance with the matching principle 27
2.7 Mechanics of accrual accounting – the statement of financial position 28
2.8 Reformatting the statement of financial position 28
,viii • Full Contents
2.9 Accounting for the sacrifice of non-current assets 29
2.10 Reconciliation of cash flow and accrual accounting data 32
Summary 34
Review questions 34
Exercises 35
References 38
3 Income and asset value measurement: an economist’s
approach 40
3.1 Introduction 40
3.2 Role and objective of income measurement 40
3.3 Accountant’s view of income, capital and value 43
3.4 Critical comment on the accountant’s measure 46
3.5 Economist’s view of income, capital and value 47
3.6 Critical comment on the economist’s measure 53
3.7 Income, capital and changing price levels 53
Summary 55
Review questions 55
PR
Exercises 56
References 57
Bibliography 58
4 Accounting for price-level changes 59
4.1 Introduction 59
4.2 Review of the problems of historical cost accounting (HCA) 59
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4.3 Inflation accounting 60
4.4 The concepts in principle 60
4.5 The four models illustrated for a company with cash purchases
FD
and sales 61
4.6 Critique of each model 65
4.7 Operating capital maintenance – a comprehensive example 68
4.8 Critique of CCA statements 79
4.9 The ASB approach 81
4.10 The IASC/IASB approach 83
4.11 Future developments 84
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Summary 86
Review questions 87
Exercises 88
C
References 97
Bibliography 97
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO
ACHIEVE UNIFORMITY 99
5 Financial reporting – evolution of global standards 101
5.1 Introduction 101
5.2 Why do we need financial reporting standards? 101
5.3 Why do we need standards to be mandatory? 102
5.4 Arguments in support of standards 104
, Full Contents • ix
5.5 Arguments against standards 104
5.6 Standard setting and enforcement in the UK under the Financial
Reporting Council (FRC) 105
5.7 The Accounting Standards Board (ASB) 106
5.8 The Financial Reporting Review Panel (FRRP) 106
5.9 Standard setting and enforcement in the US 108
5.10 Why have there been differences in financial reporting? 109
5.11 Efforts to standardise financial reports 113
5.12 What is the impact of changing to IFRS? 117
5.13 Progress towards adoption by the USA of international standards 118
5.14 Advantages and disadvantages of global standards for publicly
accountable entities 119
5.15 How do reporting requirements differ for non-publicly accountable
entities? 119
5.16 Evaluation of effectiveness of mandatory regulations 123
5.17 Move towards a conceptual framework 125
Summary 125
Review questions 126
PR
Exercises 127
References 127
6 Concepts – evolution of a global conceptual framework 129
6.1 Introduction 129
6.2 Historical overview of the evolution of financial accounting theory 130
6.3 FASB Concepts Statements 134
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6.4 IASC Framework for the Presentation and Preparation of
Financial Statements 137
6.5 ASB Statement of Principles 1999 138
FD
6.6 Conceptual framework developments 149
Summary 150
Review questions 152
Exercises 153
References 154
7 Ethical behaviour and implications for accountants 156
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7.1 Introduction 156
7.2 The meaning of ethical behaviour 156
7.3 Financial reports – what is the link between law, corporate
C
governance, corporate social responsibility and ethics? 158
7.4 What does the accounting profession mean by ethical behaviour? 159
7.5 Implications of ethical values for the principles versus rules based
approaches to accounting standards 161
7.6 The principles based approach and ethics 163
7.7 The accounting standard-setting process and ethics 164
7.8 The IFAC Code of Ethics for Professional Accountants 165
7.9 Ethics in the accountants’ work environment – a research report 168
7.10 Implications of unethical behaviour for financial reports 169
7.11 Company codes of ethics 172
7.12 The increasing role of whistle-blowing 174
7.13 Why should students learn ethics? 178
FINANCIAL ACCOUNTING
AND REPORTING
Barry Elliott
Jamie Elliott
18/8/10 11:29:35
, Financial Accounting
and Reporting
PR
O
FD
O
C
,We work with leading authors to develop the
strongest educational materials in business and finance
bringing cutting-edge thinking and best learning
practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall we craft high
quality print and electronic publications which help
readers to understand and apply their content,
whether studying or at work.
To find out more about the complete range of our
PR
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
O
FD
O
C
, Financial Accounting
and Reporting
FOURTEENTH EDITION
PR
Barry Elliott and Jamie Elliott
O
FD
O
C
,Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 1993
Second edition 1996
Third edition 1999
Fourth edition 2000
Fifth edition 2001
Sixth edition 2002
Seventh edition 2003
Eighth edition 2004
PR
Ninth edition 2005
Tenth edition 2006
Eleventh edition 2007
Twelfth edition 2008
Thirteenth edition 2009
Fourteenth edition 2011
© Prentice Hall International UK Limited 1993, 1999
O
© Pearson Education Limited 2000, 2011
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.
FD
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without either the prior
written permission of the publisher or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron
House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners. The
O
use of any trademark in this text does not vest in the author or publisher any
trademark ownership rights in such trademarks, nor does the use of such
trademarks imply any affiliation with or endorsement of this book by such
owners.
C
Pearson Education is not responsible for the content of third party internet sites.
ISBN: 978-0-273-74444-3
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1
14 13 12 11 10
Typeset in 10/12 Ehrhardt MT by 35
Printed by Ashford Colour Press Ltd., Gosport
, Brief contents
Preface and acknowledgements xx
Guided tour of MyAccountingLab xxv
Part 1
PR
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
1 Accounting and reporting on a cash flow basis 3
2 Accounting and reporting on an accrual accounting basis 22
3 Income and asset value measurement: an economist’s approach 40
4 Accounting for price-level changes 59
O
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99
FD
5 Financial reporting – evolution of global standards 101
6 Concepts – evolution of a global conceptual framework 129
7 Ethical behaviour and implications for accountants 156
8 Preparation of statements of comprehensive income and financial position 186
9 Annual Report: additional financial statements 223
O
Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY
C
AND ASSET MEASUREMENT AND DISCLOSURE 255
10 Share capital, distributable profits and reduction of capital 257
11 Off balance sheet finance 283
12 Financial instruments 312
13 Employee benefits 343
14 Taxation in company accounts 375
15 Property, plant and equipment (PPE) 404
16 Leasing 441
17 R&D; goodwill; intangible assets and brands 461
18 Inventories 497
19 Construction contracts 523
,vi • Brief Contents
Part 4
CONSOLIDATED ACCOUNTS 547
20 Accounting for groups at the date of acquisition 549
21 Preparation of consolidated statements of financial position after the date
of acquisition 568
22 Preparation of consolidated statements of comprehensive income,
changes in equity and cash flows 583
23 Accounting for associates and joint ventures 603
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 623
Part 5
INTERPRETATION 639
25 Earnings per share 641
26 Statements of cash flows 668
27 Review of financial ratio analysis 696
28 Analytical analysis – selective use of ratios 736
PR
29 An introduction to financial reporting on the Internet 782
Part 6
ACCOUNTABILITY 799
30 Corporate governance 801
31 Sustainability – environmental and social reporting 838
O
Index 884
FD
O
C
, Full contents
Preface and acknowledgements xx
Guided tour of MyAccountingLab xxv
Part 1
PR
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 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
O
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
FD
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 12
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
O
Summary 16
Review questions 17
Exercises 18
References 21
C
2 Accounting and reporting on an accrual accounting basis 22
2.1 Introduction 22
2.2 Historical cost convention 23
2.3 Accrual basis of accounting 24
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 24
2.5 Subjective judgements required in accrual accounting – adjusting cash
receipts in accordance with lAS 18 25
2.6 Subjective judgements required in accrual accounting – adjusting cash
payments in accordance with the matching principle 27
2.7 Mechanics of accrual accounting – the statement of financial position 28
2.8 Reformatting the statement of financial position 28
,viii • Full Contents
2.9 Accounting for the sacrifice of non-current assets 29
2.10 Reconciliation of cash flow and accrual accounting data 32
Summary 34
Review questions 34
Exercises 35
References 38
3 Income and asset value measurement: an economist’s
approach 40
3.1 Introduction 40
3.2 Role and objective of income measurement 40
3.3 Accountant’s view of income, capital and value 43
3.4 Critical comment on the accountant’s measure 46
3.5 Economist’s view of income, capital and value 47
3.6 Critical comment on the economist’s measure 53
3.7 Income, capital and changing price levels 53
Summary 55
Review questions 55
PR
Exercises 56
References 57
Bibliography 58
4 Accounting for price-level changes 59
4.1 Introduction 59
4.2 Review of the problems of historical cost accounting (HCA) 59
O
4.3 Inflation accounting 60
4.4 The concepts in principle 60
4.5 The four models illustrated for a company with cash purchases
FD
and sales 61
4.6 Critique of each model 65
4.7 Operating capital maintenance – a comprehensive example 68
4.8 Critique of CCA statements 79
4.9 The ASB approach 81
4.10 The IASC/IASB approach 83
4.11 Future developments 84
O
Summary 86
Review questions 87
Exercises 88
C
References 97
Bibliography 97
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO
ACHIEVE UNIFORMITY 99
5 Financial reporting – evolution of global standards 101
5.1 Introduction 101
5.2 Why do we need financial reporting standards? 101
5.3 Why do we need standards to be mandatory? 102
5.4 Arguments in support of standards 104
, Full Contents • ix
5.5 Arguments against standards 104
5.6 Standard setting and enforcement in the UK under the Financial
Reporting Council (FRC) 105
5.7 The Accounting Standards Board (ASB) 106
5.8 The Financial Reporting Review Panel (FRRP) 106
5.9 Standard setting and enforcement in the US 108
5.10 Why have there been differences in financial reporting? 109
5.11 Efforts to standardise financial reports 113
5.12 What is the impact of changing to IFRS? 117
5.13 Progress towards adoption by the USA of international standards 118
5.14 Advantages and disadvantages of global standards for publicly
accountable entities 119
5.15 How do reporting requirements differ for non-publicly accountable
entities? 119
5.16 Evaluation of effectiveness of mandatory regulations 123
5.17 Move towards a conceptual framework 125
Summary 125
Review questions 126
PR
Exercises 127
References 127
6 Concepts – evolution of a global conceptual framework 129
6.1 Introduction 129
6.2 Historical overview of the evolution of financial accounting theory 130
6.3 FASB Concepts Statements 134
O
6.4 IASC Framework for the Presentation and Preparation of
Financial Statements 137
6.5 ASB Statement of Principles 1999 138
FD
6.6 Conceptual framework developments 149
Summary 150
Review questions 152
Exercises 153
References 154
7 Ethical behaviour and implications for accountants 156
O
7.1 Introduction 156
7.2 The meaning of ethical behaviour 156
7.3 Financial reports – what is the link between law, corporate
C
governance, corporate social responsibility and ethics? 158
7.4 What does the accounting profession mean by ethical behaviour? 159
7.5 Implications of ethical values for the principles versus rules based
approaches to accounting standards 161
7.6 The principles based approach and ethics 163
7.7 The accounting standard-setting process and ethics 164
7.8 The IFAC Code of Ethics for Professional Accountants 165
7.9 Ethics in the accountants’ work environment – a research report 168
7.10 Implications of unethical behaviour for financial reports 169
7.11 Company codes of ethics 172
7.12 The increasing role of whistle-blowing 174
7.13 Why should students learn ethics? 178
