11th Edition
Financial Accounting
and Reporting
Barry Elliott and Jamie Elliott
Additional student support at
www.pearsoned.co.uk/elliott_elliott
, Financial Accounting
and Reporting
Visit the Financial Accounting and Reporting, eleventh edition,
Companion Website at www.pearsoned.co.uk/
elliott-elliott
to find valuable student learning material including:
• Extracts from the financial press.
PR
• A selection of extended questions and answers.
• Over 500 multiple choice questions to test your learning.
• Additional case studies based on real companies.
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.
PR
To find out more about the complete range of our
publishing please visit us on the World Wide Web at:
www.pearsoned.co.uk
O
FD
O
C
, Financial Accounting
and Reporting
ELEVENTH EDITION
Barry Elliott and Jamie Elliott
PR
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
PR
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
© Prentice Hall International UK Limited 1993, 1999
© Pearson Education Limited 2000, 2006
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 Publishers or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1T 4LP.
ISBN-13 978-0-273-70870-4
ISBN-10 0-273-70870-8
O
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
10 9 8 7 6 5 4 3 2 1
C
10 09 08 07
Typeset in 9/12pt Ehrhardt by 25.
Printed by Ashford Colour Press Ltd, Gosport.
The publisher’s policy is to use paper manufactured from sustainable forests.
, Brief Contents
Preface and acknowledgements xx
Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
PR
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 60
Part 2
O
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99
5 Financial reporting – evolution of the regulatory framework in the UK 101
6 Financial reporting – evolution of international standards 137
FD
7 Conceptual framework 161
8 Published accounts of companies 186
9 Preparation of published accounts 233
Part 3
O
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 257
10 Share capital, distributable profits and reduction of capital 259
C
11 Off balance sheet finance 285
12 Financial instruments 319
13 Employee benefits 339
14 Taxation in company accounts 362
15 Property, plant and equipment (PPE) 389
16 Leasing 422
17 R&D; goodwill and intangible assets; brands 442
18 Inventories 478
19 Construction contracts 504
,vi • Brief Contents
Part 4 CONSOLIDATED ACCOUNTS 519
20 Accounting for groups at date of acquisition 521
21 Preparation of consolidated balance sheets after the date of acquisition 538
22 Preparation of consolidated income statements 550
23 Accounting for associated companies 568
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 583
Part 5 INTERPRETATION 601
25 Earnings per share 603
26 Cash flow statements 629
27 Review of financial ratio analysis 653
28 Trend analysis and multivariate analysis 694
29 An introduction to financial reporting on the Internet 734
Part 6 ACCOUNTABILITY 747
PR
30 Corporate governance 749
31 Environmental and social reporting 795
32 Ethics for accountants 831
Appendix: Outline solutions to selected exercises 855
O
Index 863
FD
O
C
, Full Contents
Preface and acknowledgements xx
Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
PR
1 Accounting and reporting on a cash flow basis 3
1.1 Introduction 3
1.2 Shareholders 4
1.3 What skills does an accountant require in respect of external reports? 4
1.4 Managers 5
1.5 What skills does an accountant require in respect of internal reports? 5
O
1.6 Procedural steps when reporting to internal users 6
1.7 Agency costs 8
1.8 Illustration of periodic financial statements prepared under the cash flow
FD
concept to disclose realised operating cash flows 9
1.9 Illustration of preparation of balance sheet under the cash flow concept 13
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
Summary 17
Review questions 18
O
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 balance sheet 27
2.8 Reformatting the statement of financial position into a balance sheet 28
2.9 Accounting for the sacrifice of non-current assets 29
,viii • Full Contents
2.10 Reconciliation of cash flow and accrual accounting data 32
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
References 58
Bibliography 59
PR
4 Accounting for inflation 60
4.1 Introduction 60
4.2 Review of the problems of historical cost accounting (HCA) 60
4.3 Inflation accounting 61
4.4 The concepts in principle 61
4.5 The four models illustrated for a company with cash purchases and sales 63
O
4.6 Critique of each model 66
4.7 Operating capital maintenance – a comprehensive example 69
4.8 Critique of CCA statements 80
FD
4.9 The ASB approach 82
4.10 The IASC/IASB approach 84
4.11 Future developments 86
Summary 86
Review questions 87
Exercises 88
References 97
O
Bibliography 97
Part 2
C
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 107
5.5 Structure of regulatory framework 107
5.6 The Operating and Financial Review (OFR) 110
, Full Contents • ix
5.7 The Financial Reporting Review Panel 116
5.8 The Financial Services Authority 119
5.9 The Revised Combined Code (July 2003) 120
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 143
6.5 Attempts to reduce national differences 143
PR
6.6 The work of international bodies in harmonising and standardising
financial reporting 145
6.7 US GAAP 156
Summary 158
Review questions 159
Exercises 159
References 160
O
7 Conceptual framework 161
7.1 Introduction 161
FD
7.2 Historical overview of the evolution of financial accounting theory 162
7.3 IASC Framework for the Presentation and Preparation of Financial
Statements 165
7.4 ASB Statement of Principles 1999 167
7.5 AICPA Improving Business Reporting – A Customer Focus:
Meeting the Information Needs of Investors and Creditors 177
7.6 ICAS Making Corporate Reports Valuable 178
O
Summary 179
Review questions 181
Exercises 182
C
References 185
8 Published accounts of companies 186
8.1 Introduction 186
8.2 A public company’s financial calendar 187
8.3 Criteria for information appearing in a published income statement
and balance sheet 188
8.4 The prescribed formats – the income statement 188
8.5 What information is required to be disclosed in Format 1 and
Format 2? 189
Financial Accounting
and Reporting
Barry Elliott and Jamie Elliott
Additional student support at
www.pearsoned.co.uk/elliott_elliott
, Financial Accounting
and Reporting
Visit the Financial Accounting and Reporting, eleventh edition,
Companion Website at www.pearsoned.co.uk/
elliott-elliott
to find valuable student learning material including:
• Extracts from the financial press.
PR
• A selection of extended questions and answers.
• Over 500 multiple choice questions to test your learning.
• Additional case studies based on real companies.
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.
PR
To find out more about the complete range of our
publishing please visit us on the World Wide Web at:
www.pearsoned.co.uk
O
FD
O
C
, Financial Accounting
and Reporting
ELEVENTH EDITION
Barry Elliott and Jamie Elliott
PR
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
PR
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
© Prentice Hall International UK Limited 1993, 1999
© Pearson Education Limited 2000, 2006
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 Publishers or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1T 4LP.
ISBN-13 978-0-273-70870-4
ISBN-10 0-273-70870-8
O
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
10 9 8 7 6 5 4 3 2 1
C
10 09 08 07
Typeset in 9/12pt Ehrhardt by 25.
Printed by Ashford Colour Press Ltd, Gosport.
The publisher’s policy is to use paper manufactured from sustainable forests.
, Brief Contents
Preface and acknowledgements xx
Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
PR
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 60
Part 2
O
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99
5 Financial reporting – evolution of the regulatory framework in the UK 101
6 Financial reporting – evolution of international standards 137
FD
7 Conceptual framework 161
8 Published accounts of companies 186
9 Preparation of published accounts 233
Part 3
O
BALANCE SHEET – EQUITY, LIABILITY AND ASSET
MEASUREMENT AND DISCLOSURE 257
10 Share capital, distributable profits and reduction of capital 259
C
11 Off balance sheet finance 285
12 Financial instruments 319
13 Employee benefits 339
14 Taxation in company accounts 362
15 Property, plant and equipment (PPE) 389
16 Leasing 422
17 R&D; goodwill and intangible assets; brands 442
18 Inventories 478
19 Construction contracts 504
,vi • Brief Contents
Part 4 CONSOLIDATED ACCOUNTS 519
20 Accounting for groups at date of acquisition 521
21 Preparation of consolidated balance sheets after the date of acquisition 538
22 Preparation of consolidated income statements 550
23 Accounting for associated companies 568
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 583
Part 5 INTERPRETATION 601
25 Earnings per share 603
26 Cash flow statements 629
27 Review of financial ratio analysis 653
28 Trend analysis and multivariate analysis 694
29 An introduction to financial reporting on the Internet 734
Part 6 ACCOUNTABILITY 747
PR
30 Corporate governance 749
31 Environmental and social reporting 795
32 Ethics for accountants 831
Appendix: Outline solutions to selected exercises 855
O
Index 863
FD
O
C
, Full Contents
Preface and acknowledgements xx
Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
PR
1 Accounting and reporting on a cash flow basis 3
1.1 Introduction 3
1.2 Shareholders 4
1.3 What skills does an accountant require in respect of external reports? 4
1.4 Managers 5
1.5 What skills does an accountant require in respect of internal reports? 5
O
1.6 Procedural steps when reporting to internal users 6
1.7 Agency costs 8
1.8 Illustration of periodic financial statements prepared under the cash flow
FD
concept to disclose realised operating cash flows 9
1.9 Illustration of preparation of balance sheet under the cash flow concept 13
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
Summary 17
Review questions 18
O
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 balance sheet 27
2.8 Reformatting the statement of financial position into a balance sheet 28
2.9 Accounting for the sacrifice of non-current assets 29
,viii • Full Contents
2.10 Reconciliation of cash flow and accrual accounting data 32
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
References 58
Bibliography 59
PR
4 Accounting for inflation 60
4.1 Introduction 60
4.2 Review of the problems of historical cost accounting (HCA) 60
4.3 Inflation accounting 61
4.4 The concepts in principle 61
4.5 The four models illustrated for a company with cash purchases and sales 63
O
4.6 Critique of each model 66
4.7 Operating capital maintenance – a comprehensive example 69
4.8 Critique of CCA statements 80
FD
4.9 The ASB approach 82
4.10 The IASC/IASB approach 84
4.11 Future developments 86
Summary 86
Review questions 87
Exercises 88
References 97
O
Bibliography 97
Part 2
C
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 107
5.5 Structure of regulatory framework 107
5.6 The Operating and Financial Review (OFR) 110
, Full Contents • ix
5.7 The Financial Reporting Review Panel 116
5.8 The Financial Services Authority 119
5.9 The Revised Combined Code (July 2003) 120
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 143
6.5 Attempts to reduce national differences 143
PR
6.6 The work of international bodies in harmonising and standardising
financial reporting 145
6.7 US GAAP 156
Summary 158
Review questions 159
Exercises 159
References 160
O
7 Conceptual framework 161
7.1 Introduction 161
FD
7.2 Historical overview of the evolution of financial accounting theory 162
7.3 IASC Framework for the Presentation and Preparation of Financial
Statements 165
7.4 ASB Statement of Principles 1999 167
7.5 AICPA Improving Business Reporting – A Customer Focus:
Meeting the Information Needs of Investors and Creditors 177
7.6 ICAS Making Corporate Reports Valuable 178
O
Summary 179
Review questions 181
Exercises 182
C
References 185
8 Published accounts of companies 186
8.1 Introduction 186
8.2 A public company’s financial calendar 187
8.3 Criteria for information appearing in a published income statement
and balance sheet 188
8.4 The prescribed formats – the income statement 188
8.5 What information is required to be disclosed in Format 1 and
Format 2? 189
