BARRY ELLIOTT AND JAMIE ELLIOTT
FINANCIAL
ACCOUNTING
AND 13th Edition
REPORTING
8/7/09 14:12:16
, 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:
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,Openmirrors.com
Financial Accounting
and Reporting
THIRTEENTH EDITION
PR
Barry Elliott and Jamie Elliott
O
FD
O
C
,Openmirrors.com
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
PR
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
Twelfth edition published 2008
Thirteenth edition published 2009
© Prentice Hall International UK Limited 1993, 1999
© Pearson Education Limited 2000, 2009
O
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
ISBN: 978-0-273-72332-5
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
10 9 8 7 6 5 4 3 2 1
13 12 11 10 09
Typeset in 10/12 Ehrhardt MT by 35
Printed by Ashford Colour Press Ltd., Gosport
The publisher’s policy is to use paper manufactured from sustainable forests.
,Openmirrors.com
Brief Contents
Preface and acknowledgements xxi
Guided tour of MyAccountingLab xxvi
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 inflation 59
O
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99
FD
5 Financial reporting – evolution of the regulatory framework in the UK 101
6 Financial reporting – evolution of international standards 137
7 Conceptual framework 158
8 Published accounts of companies 184
9 Preparation of published accounts 229
O
Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY
AND ASSET MEASUREMENT AND DISCLOSURE 255
C
10 Share capital, distributable profits and reduction of capital 257
11 Off balance sheet finance 282
12 Financial instruments 317
13 Employee benefits 342
14 Taxation in company accounts 373
15 Property, plant and equipment (PPE) 402
16 Leasing 436
17 R&D; goodwill and intangible assets; brands 457
18 Inventories 498
19 Construction contracts 524
Openmirrors.com
,Openmirrors.com
vi • Brief Contents
Part 4
CONSOLIDATED ACCOUNTS 543
20 Accounting for groups at the date of acquisition 545
21 Preparation of consolidated statements of financial position after the date
of acquisition 562
22 Preparation of consolidated statements of comprehensive income and
consolidated statements of changes in equity 575
23 Accounting for associates and joint ventures 591
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 611
Part 5
INTERPRETATION 625
25 Earnings per share 627
26 Statements of cash flows 654
27 Review of financial ratio analysis 680
28 Trend analysis and multivariate analysis 724
PR
29 An introduction to financial reporting on the Internet 770
Part 6
ACCOUNTABILITY 783
30 Corporate governance 785
31 Sustainability – environmental and social reporting 838
O
32 Ethics for accountants 884
Appendix: Outline solutions to selected exercises 907
FD
Index 913
O
C
,Openmirrors.com
Full Contents
Preface and acknowledgements xxi
Guided tour of MyAccountingLab xxvi
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 balance sheet under the cash flow concept 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
2.9 Accounting for the sacrifice of non-current assets 29
,Openmirrors.com
viii • Full Contents
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
Exercises 56
PR
References 57
Bibliography 58
4 Accounting for inflation 59
4.1 Introduction 59
4.2 Review of the problems of historical cost accounting (HCA) 59
4.3 Inflation accounting 60
O
4.4 The concepts in principle 60
4.5 The four models illustrated for a company with cash purchases
and sales 61
FD
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
Summary 86
O
Review questions 87
Exercises 88
References 97
C
Bibliography 97
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO
ACHIEVE UNIFORMITY 99
5 Financial reporting – evolution of the regulatory framework
in the UK 101
5.1 Introduction 101
5.2 Mandatory regulations 101
5.3 Arguments in support of standards 105
5.4 Arguments against standards 106
, Openmirrors.com
Full Contents • ix
5.5 Structure of regulatory framework 107
5.6 The Operating and Financial Review (OFR) 110
5.7 The Financial Reporting Review Panel 116
5.8 The Financial Services Authority 119
5.9 The Revised Combined Code ( June 2008) 119
5.10 Interim reports following Cadbury 122
5.11 Developments for small companies 125
5.12 Evaluation of effectiveness of mandatory regulations 132
Summary 134
Review questions 134
Exercises 135
References 135
6 Financial reporting – evolution of international standards 137
6.1 Introduction 137
6.2 National differences 137
6.3 Reasons for differences in financial reporting 138
6.4 Classification of national accounting systems 142
PR
6.5 Attempts to reduce national differences 143
6.6 The work of international bodies in harmonising and standardising
financial reporting 144
6.7 US GAAP 151
Summary 155
Review questions 155
Exercises 155
O
References 156
7 Conceptual framework 158
FD
7.1 Introduction 158
7.2 Historical overview of the evolution of financial accounting theory 159
7.3 IASC Framework for the Presentation and Preparation of Financial
Statements 162
7.4 ASB Statement of Principles 1999 164
7.5 FASB Statements of Financial Accounting Concepts 174
7.6 Conceptual Framework developments 177
O
Summary 178
Review questions 180
Exercises 181
C
References 182
8 Published accounts of companies 184
8.1 Introduction 184
8.2 Introduction to published accounts 184
8.3 A public company’s financial calendar 186
8.4 Criteria for information appearing in a statement of comprehensive
income and statement of financial position 186
8.5 The prescribed formats – the statement of comprehensive income 187
8.6 What information is required to be disclosed in Format 1 and
Format 2? 188
8.7 Cost of sales 189
FINANCIAL
ACCOUNTING
AND 13th Edition
REPORTING
8/7/09 14:12:16
, 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
,Openmirrors.com
Financial Accounting
and Reporting
THIRTEENTH EDITION
PR
Barry Elliott and Jamie Elliott
O
FD
O
C
,Openmirrors.com
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
PR
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
Twelfth edition published 2008
Thirteenth edition published 2009
© Prentice Hall International UK Limited 1993, 1999
© Pearson Education Limited 2000, 2009
O
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
ISBN: 978-0-273-72332-5
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
10 9 8 7 6 5 4 3 2 1
13 12 11 10 09
Typeset in 10/12 Ehrhardt MT by 35
Printed by Ashford Colour Press Ltd., Gosport
The publisher’s policy is to use paper manufactured from sustainable forests.
,Openmirrors.com
Brief Contents
Preface and acknowledgements xxi
Guided tour of MyAccountingLab xxvi
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 inflation 59
O
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99
FD
5 Financial reporting – evolution of the regulatory framework in the UK 101
6 Financial reporting – evolution of international standards 137
7 Conceptual framework 158
8 Published accounts of companies 184
9 Preparation of published accounts 229
O
Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY
AND ASSET MEASUREMENT AND DISCLOSURE 255
C
10 Share capital, distributable profits and reduction of capital 257
11 Off balance sheet finance 282
12 Financial instruments 317
13 Employee benefits 342
14 Taxation in company accounts 373
15 Property, plant and equipment (PPE) 402
16 Leasing 436
17 R&D; goodwill and intangible assets; brands 457
18 Inventories 498
19 Construction contracts 524
Openmirrors.com
,Openmirrors.com
vi • Brief Contents
Part 4
CONSOLIDATED ACCOUNTS 543
20 Accounting for groups at the date of acquisition 545
21 Preparation of consolidated statements of financial position after the date
of acquisition 562
22 Preparation of consolidated statements of comprehensive income and
consolidated statements of changes in equity 575
23 Accounting for associates and joint ventures 591
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 611
Part 5
INTERPRETATION 625
25 Earnings per share 627
26 Statements of cash flows 654
27 Review of financial ratio analysis 680
28 Trend analysis and multivariate analysis 724
PR
29 An introduction to financial reporting on the Internet 770
Part 6
ACCOUNTABILITY 783
30 Corporate governance 785
31 Sustainability – environmental and social reporting 838
O
32 Ethics for accountants 884
Appendix: Outline solutions to selected exercises 907
FD
Index 913
O
C
,Openmirrors.com
Full Contents
Preface and acknowledgements xxi
Guided tour of MyAccountingLab xxvi
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 balance sheet under the cash flow concept 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
2.9 Accounting for the sacrifice of non-current assets 29
,Openmirrors.com
viii • Full Contents
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
Exercises 56
PR
References 57
Bibliography 58
4 Accounting for inflation 59
4.1 Introduction 59
4.2 Review of the problems of historical cost accounting (HCA) 59
4.3 Inflation accounting 60
O
4.4 The concepts in principle 60
4.5 The four models illustrated for a company with cash purchases
and sales 61
FD
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
Summary 86
O
Review questions 87
Exercises 88
References 97
C
Bibliography 97
Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO
ACHIEVE UNIFORMITY 99
5 Financial reporting – evolution of the regulatory framework
in the UK 101
5.1 Introduction 101
5.2 Mandatory regulations 101
5.3 Arguments in support of standards 105
5.4 Arguments against standards 106
, Openmirrors.com
Full Contents • ix
5.5 Structure of regulatory framework 107
5.6 The Operating and Financial Review (OFR) 110
5.7 The Financial Reporting Review Panel 116
5.8 The Financial Services Authority 119
5.9 The Revised Combined Code ( June 2008) 119
5.10 Interim reports following Cadbury 122
5.11 Developments for small companies 125
5.12 Evaluation of effectiveness of mandatory regulations 132
Summary 134
Review questions 134
Exercises 135
References 135
6 Financial reporting – evolution of international standards 137
6.1 Introduction 137
6.2 National differences 137
6.3 Reasons for differences in financial reporting 138
6.4 Classification of national accounting systems 142
PR
6.5 Attempts to reduce national differences 143
6.6 The work of international bodies in harmonising and standardising
financial reporting 144
6.7 US GAAP 151
Summary 155
Review questions 155
Exercises 155
O
References 156
7 Conceptual framework 158
FD
7.1 Introduction 158
7.2 Historical overview of the evolution of financial accounting theory 159
7.3 IASC Framework for the Presentation and Preparation of Financial
Statements 162
7.4 ASB Statement of Principles 1999 164
7.5 FASB Statements of Financial Accounting Concepts 174
7.6 Conceptual Framework developments 177
O
Summary 178
Review questions 180
Exercises 181
C
References 182
8 Published accounts of companies 184
8.1 Introduction 184
8.2 Introduction to published accounts 184
8.3 A public company’s financial calendar 186
8.4 Criteria for information appearing in a statement of comprehensive
income and statement of financial position 186
8.5 The prescribed formats – the statement of comprehensive income 187
8.6 What information is required to be disclosed in Format 1 and
Format 2? 188
8.7 Cost of sales 189
