Financial accounting and reporting 14th ed (intro txt) b elliott, j elliott (pearson, 2011) BBS

Financial Accounting and Reporting is the most up to date text on the market. Now fully updated in its fourteenth
edition, it includes extensive coverage of International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS).

Financial Accounting and Reporting offers:
•
Academic rigour combined with an engaging and accessible style
•
Coverage of International Financial Reporting Standards
•
Illustrations taken from real published accounts
•
An excellent range of review questions
•
Extensive references
•
A section on the analysis of accounts
•
Chapters covering such issues as corporate governance, ethics and
sustainability: environmental and social reporting

New for this edition:
•
Fully updated to May 2010
•
Updated coverage of International
Financial Reporting Standards
•
More examples of extracts from real
financial reports
•

New, additional questions and exercises
in selected chapters

Substantial revisions to:
•
Published financial statements
•
Regulatory and conceptual
frameworks
•
Analysis of accounts
•
Corporate governance
•
Ethical behaviour and the implication
for accountants

Financial Accounting and Reporting comes with MyAccountingLab,, a state of the art online
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FINANCIAL ACCOUNTING
AND REPORTING

This market-leading text offers students a clear, well-structured and comprehensive treatment of the subject.

Supported by illustrations and exercises, the book provides a strong balance of theoretical and conceptual
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and critically appraise the underlying concepts and financial reporting methods.

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Fourteenth Edition

FINANCIAL ACCOUNTING
AND REPORTING
Barry Elliott
Jamie Elliott

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Jamie Elliott is a Director with Deloitte. Prior to this he has lectured at university on undergraduate degree
programmes and as an assistant professor on MBA and Executive programmes at the London Business School.

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Barry Elliott is a training consultant. He has extensive teaching experience at undergraduate, postgraduate
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Financial Accounting
and Reporting
FOURTEENTH EDITION

Barry Elliott and Jamie Elliott


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Pearson Education Limited
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and Associated Companies throughout the world
Visit us on the World Wide Web at:
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First published 1993
Second edition 1996
Third edition 1999
Fourth edition 2000
Fifth edition 2001
Sixth edition 2002
Seventh edition 2003
Eighth edition 2004
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
© 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.
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
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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
14

9 8 7 6
13 12 11

5 4

10

3

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1

Typeset in 10/12 Ehrhardt MT by 35
Printed by Ashford Colour Press Ltd., Gosport


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Brief contents

Preface and acknowledgements
Guided tour of MyAccountingLab

xx
xxv

Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS
1
2
3
4

1

Accounting and reporting on a cash flow basis
Accounting and reporting on an accrual accounting basis
Income and asset value measurement: an economist’s approach
Accounting for price-level changes

3
22
40
59

Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY

99

5
6
7
8
9

Financial reporting – evolution of global standards
Concepts – evolution of a global conceptual framework
Ethical behaviour and implications for accountants
Preparation of statements of comprehensive income and financial position
Annual Report: additional financial statements

Part 3

STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY
AND ASSET MEASUREMENT AND DISCLOSURE
10
11
12
13
14
15
16
17
18
19

Share capital, distributable profits and reduction of capital
Off balance sheet finance
Financial instruments
Employee benefits
Taxation in company accounts
Property, plant and equipment (PPE)
Leasing
R&D; goodwill; intangible assets and brands
Inventories
Construction contracts

101
129
156
186
223

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255
257
283
312
343
375
404
441
461
497
523


vi • Brief Contents

Part 4
CONSOLIDATED ACCOUNTS
20 Accounting for groups at the date of acquisition
21 Preparation of consolidated statements of financial position after the date
of acquisition
22 Preparation of consolidated statements of comprehensive income,
changes in equity and cash flows
23 Accounting for associates and joint ventures
24 Accounting for the effects of changes in foreign exchange rates under IAS 21

547
549
568
583

603
623

Part 5
INTERPRETATION

639

25
26
27
28
29

641
668
696
736
782

Earnings per share
Statements of cash flows
Review of financial ratio analysis
Analytical analysis – selective use of ratios
An introduction to financial reporting on the Internet

Part 6
ACCOUNTABILITY

799

30 Corporate governance
31 Sustainability – environmental and social reporting

801
838

Index

884


Full contents

Preface and acknowledgements
Guided tour of MyAccountingLab

Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS
1 Accounting and reporting on a cash flow basis
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10

1.11
1.12

Introduction
Shareholders
What skills does an accountant require in respect of external reports?
Managers
What skills does an accountant require in respect of internal reports?
Procedural steps when reporting to internal users
Agency costs
Illustration of periodic financial statements prepared under the cash
flow concept to disclose realised operating cash flows
Illustration of preparation of statement of financial position
Treatment of non-current assets in the cash flow model
What are the characteristics of these data that make them reliable?
Reports to external users
Summary
Review questions
Exercises
References

2 Accounting and reporting on an accrual accounting basis
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8

Introduction
Historical cost convention
Accrual basis of accounting
Mechanics of accrual accounting – adjusting cash receipts and payments
Subjective judgements required in accrual accounting – adjusting cash
receipts in accordance with lAS 18
Subjective judgements required in accrual accounting – adjusting cash
payments in accordance with the matching principle
Mechanics of accrual accounting – the statement of financial position
Reformatting the statement of financial position

xx
xxv

1
3
3
3
4
4
5
5
8
8
12
14
15
16
16

17
18
21

22
22
23
24
24
25
27
28
28


viii • Full Contents

2.9
2.10

Accounting for the sacrifice of non-current assets
Reconciliation of cash flow and accrual accounting data
Summary
Review questions
Exercises
References

3 Income and asset value measurement: an economist’s
approach
3.1

3.2
3.3
3.4
3.5
3.6
3.7

Introduction
Role and objective of income measurement
Accountant’s view of income, capital and value
Critical comment on the accountant’s measure
Economist’s view of income, capital and value
Critical comment on the economist’s measure
Income, capital and changing price levels
Summary
Review questions
Exercises
References
Bibliography

4 Accounting for price-level changes
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9

4.10
4.11

Introduction
Review of the problems of historical cost accounting (HCA)
Inflation accounting
The concepts in principle
The four models illustrated for a company with cash purchases
and sales
Critique of each model
Operating capital maintenance – a comprehensive example
Critique of CCA statements
The ASB approach
The IASC/IASB approach
Future developments
Summary
Review questions
Exercises
References
Bibliography

Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO
ACHIEVE UNIFORMITY
5 Financial reporting – evolution of global standards
5.1
5.2
5.3
5.4

Introduction
Why do we need financial reporting standards?
Why do we need standards to be mandatory?
Arguments in support of standards

29
32
34
34
35
38

40
40
40
43
46
47
53
53
55
55
56
57
58

59
59
59
60

60
61
65
68
79
81
83
84
86
87
88
97
97

99
101
101
101
102
104


Full Contents • ix

5.5
5.6
5.7
5.8
5.9
5.10

5.11
5.12
5.13
5.14
5.15
5.16
5.17

Arguments against standards
Standard setting and enforcement in the UK under the Financial
Reporting Council (FRC)
The Accounting Standards Board (ASB)
The Financial Reporting Review Panel (FRRP)
Standard setting and enforcement in the US
Why have there been differences in financial reporting?
Efforts to standardise financial reports
What is the impact of changing to IFRS?
Progress towards adoption by the USA of international standards
Advantages and disadvantages of global standards for publicly
accountable entities
How do reporting requirements differ for non-publicly accountable
entities?
Evaluation of effectiveness of mandatory regulations
Move towards a conceptual framework
Summary
Review questions
Exercises
References

6 Concepts – evolution of a global conceptual framework

6.1
6.2
6.3
6.4
6.5
6.6

Introduction
Historical overview of the evolution of financial accounting theory
FASB Concepts Statements
IASC Framework for the Presentation and Preparation of
Financial Statements
ASB Statement of Principles 1999
Conceptual framework developments
Summary
Review questions
Exercises
References

7 Ethical behaviour and implications for accountants
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10

7.11
7.12
7.13

Introduction
The meaning of ethical behaviour
Financial reports – what is the link between law, corporate
governance, corporate social responsibility and ethics?
What does the accounting profession mean by ethical behaviour?
Implications of ethical values for the principles versus rules based
approaches to accounting standards
The principles based approach and ethics
The accounting standard-setting process and ethics
The IFAC Code of Ethics for Professional Accountants
Ethics in the accountants’ work environment – a research report
Implications of unethical behaviour for financial reports
Company codes of ethics
The increasing role of whistle-blowing
Why should students learn ethics?

104
105
106
106
108
109
113
117
118
119

119
123
125
125
126
127
127

129
129
130
134
137
138
149
150
152
153
154

156
156
156
158
159
161
163
164
165
168

169
172
174
178


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x • Full Contents

Summary
Review questions
Exercises
References

8 Preparation of statements of comprehensive income and
financial position
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8

Introduction
The prescribed formats – the statement of comprehensive income
The prescribed formats – the statement of financial position
Statement of changes in equity
Has prescribing the formats meant that identical transactions are

reported identically?
The fundamental accounting principles underlying statements of
comprehensive income and statements of financial position
What is the difference between accounting principles, accounting
bases and accounting policies?
What does an investor need in addition to the financial statements
to make decisions?
Summary
Review questions
Exercises
References

9 Annual Report: additional financial statements
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8

Introduction
The value added by segment reports
Detailed review and evaluation of IRFS 8 – Operating Segments
IFRS 5 – meaning of ‘held for sale’
IFRS 5 – implications of classification as held for sale
Meaning and significance of ‘discontinued operations’
IAS 10 – Events after the reporting period
Related party disclosures

Summary
Review questions
Exercises
References

179
179
182
184

186
186
187
194
197
198
201
201
206
210
211
212
222

223
223
223
224
232
232

233
235
237
241
241
242
253

Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY,
LIABILITY AND ASSET MEASUREMENT AND
DISCLOSURE

255

10 Share capital, distributable profits and reduction of capital

257

10.1
10.2
10.3
10.4
10.5
10.6

Introduction
Common themes
Total owners’ equity: an overview
Total shareholders’ funds: more detailed explanation

Accounting entries on issue of shares
Creditor protection: capital maintenance concept

257
257
258
259
262
263


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Full Contents • xi

10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15

Creditor protection: why capital maintenance rules are necessary
Creditor protection: how to quantify the amounts available to meet
creditors’ claims
Issued share capital: minimum share capital
Distributable profits: general considerations
Distributable profits: how to arrive at the amount using

relevant accounts
When may capital be reduced?
Writing off part of capital which has already been lost and is not
represented by assets
Repayment of part of paid-in capital to shareholders or cancellation
of unpaid share capital
Purchase of own shares
Summary
Review questions
Exercises
References

11 Off balance sheet finance
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9

Introduction
Traditional statements – conceptual changes
Off balance sheet finance – its impact
Illustrations of the application of substance over form
Provisions – their impact on the statement of financial position
ED IAS 37 Non-financial Liabilities
ED/2010/1 Measurement of Liabilities in IAS 37

Special purpose entities (SPEs) – lack of transparency
Impact of converting to IFRS
Summary
Review questions
Exercises
References

12 Financial instruments
12.1
12.2
12.3
12.4
12.5
12.6

Introduction
Financial instruments – the IASB’s problem child
IAS 32 Financial Instruments: Disclosure and Presentation
IAS 39 Financial Instruments: Recognition and Measurement
IFRS 7 Financial Statement Disclosures
Financial instruments developments
Summary
Review questions
Exercises
References

13 Employee benefits
13.1
13.2
13.3

13.4

Introduction
Greater employee interest in pensions
Financial reporting implications
Types of scheme

264
264
265
265
267
267
268
273
274
277
277
277
282

283
283
283
284
286
289
297
303
304

305
306
307
308
311

312
312
312
315
320
330
333
336
337
338
342

343
343
343
344
344


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xii • Full Contents

13.5
13.6

13.7
13.8
13.9
13.10
13.11
13.12
13.13
13.14
13.15
13.16
13.17
13.18
13.19
13.20
13.21
13.22
13.23
13.24

Defined contribution pension schemes
Defined benefit pension schemes
IAS 19 (revised) Employee Benefits
The liability for pension and other post-retirement costs
The statement of comprehensive income
Comprehensive illustration
Plan curtailments and settlements
Multi-employer plans
Disclosures
Other long-service benefits
Short-term benefits

Termination benefits
IFRS 2 Share-Based Payment
Scope of IFRS 2
Recognition and measurement
Equity-settled share-based payments
Cash-settled share-based payments
Transactions which may be settled in cash or shares
Transitional provisions
IAS 26 Accounting and Reporting by Retirement Benefit Plans
Summary
Review questions
Exercises
References

14 Taxation in company accounts
14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.9
14.10
14.11
14.12

Introduction
Corporation tax

Corporation tax systems – the theoretical background
Corporation tax systems – avoidance and evasion
Corporation tax – the system from 6 April 1999
IFRS and taxation
IAS 12 – accounting for current taxation
Deferred tax
FRS 19 (the UK standard on deferred taxation)
A critique of deferred taxation
Examples of companies following IAS 12
Value added tax (VAT)
Summary
Review questions
Exercises
References

15 Property, plant and equipment (PPE)
15.1
15.2
15.3
15.4
15.5
15.6

Introduction
PPE – concepts and the relevant IASs and IFRSs
What is PPE?
How is the cost of PPE determined?
What is depreciation?
What are the constituents in the depreciation formula?

346
347
349
349
352
353
355
355
356
356
357
358
359
360
360
360
363
363
364
364
367
368
370
374

375
375
375
376
377

380
381
382
384
392
393
396
396
399
399
400
402

404
404
404
405
406
408
411


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Full Contents • xiii

15.7
15.8
15.9
15.10
15.11

15.12
15.13
15.14
15.15
15.16

How is the useful life of an asset determined?
Residual value
Calculation of depreciation
Measurement subsequent to initial recognition
IAS 36 Impairment of Assets
IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
Disclosure requirements
Government grants towards the cost of PPE
Investment properties
Effect of accounting policy for PPE on the interpretation of the
financial statements
Summary
Review questions
Exercises
References

411
412
412
416
418
424
424
425

427
428
430
430
431
440

16 Leasing

441

16.1
16.2
16.3
16.4
16.5
16.6
16.7

441
441
443
444
445
446

Introduction
Background to leasing
Why was the IAS 17 approach so controversial?
IAS 17 – classification of a lease

Accounting requirements for operating leases
Accounting requirements for finance leases
Example allocating the finance charge using the sum of the
digits method
16.8 Accounting for the lease of land and buildings
16.9 Leasing – a form of off balance sheet financing
16.10 Accounting for leases – a new approach
16.11 Accounting for leases by lessors
Summary
Review questions
Exercises
References

17 R&D; goodwill; intangible assets and brands
17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9
17.10
17.11
17.12
17.13

Introduction
Accounting treatment for research and development

Research and development
Why is research expenditure not capitalised?
Capitalising development costs
The judgements to be made when deciding whether to capitalise
development costs
Disclosure of R&D
Goodwill
The accounting treatment of goodwill
Critical comment on the various methods that have been used to
account for goodwill
Negative goodwill
Intangible assets
Brand accounting

447
451
452
453
455
456
456
457
460

461
461
461
461
462
463

464
465
466
466
468
470
471
474


xiv • Full Contents

17.14
17.15
17.16
17.17
17.18

Justifications for reporting all brands as assets
Accounting for acquired brands
Emissions trading
Intellectual property
Review of implementation of IFRS 3
Summary
Review questions
Exercises
References

18 Inventories
18.1

18.2
18.3
18.4
18.5
18.6
18.7
18.8
18.9
18.10
18.11

Introduction
Inventory defined
The controversy
IAS 2 Inventories
Inventory valuation
Work-in-progress
Inventory control
Creative accounting
Audit of the year-end physical inventory count
Published accounts
Agricultural activity
Summary
Review questions
Exercises
References

19 Construction contracts
19.1
19.2

19.3
19.4
19.5
19.6

497
497
497
498
499
500
507
509
510
512
513
514
517
518
519
522

523
523
523
525
525
526
532
538

538
539
545

Part 4
CONSOLIDATED ACCOUNTS

547

20 Accounting for groups at the date of acquisition

549

20.1
20.2
20.3
20.4
20.5
20.6
20.7

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Introduction
The accounting issue for construction contracts
Identification of contract revenue
Identification of contract costs
Recognition of contract revenue and expenses
Public–private partnerships (PPPs)
Summary

Review questions
Exercises
References

475
476
477
479
482
484
485
487
495

Introduction
The definition of a group
Consolidated accounts and some reasons for their preparation
The definition of control
Alternative methods of preparing consolidated accounts
The treatment of positive goodwill
The treatment of negative goodwill

549
549
549
551
552
554
554

Full Contents • xv

20.8

The comparison between an acquisition by cash and an exchange
of shares
20.9 Non-controlling interests
20.10 The treatment of differences between a subsidiary’s fair value and
book value
20.11 How to calculate fair values
Summary
Review questions
Exercises
References

21 Preparation of consolidated statements of financial position
after the date of acquisition
21.1
21.2
21.3
21.4
21.5
21.6
21.7

Introduction
Pre- and post-acquisition profits/losses
Inter-company balances
Unrealised profit on inter-company sales

Provision for unrealised profit affecting a non-controlling interest
Uniform accounting policies and reporting dates
How is the investment in subsidiaries reported in the parent’s own
statement of financial position?
Summary
Review questions
Exercises
References

22 Preparation of consolidated statements of comprehensive
income, changes in equity and cash flows
22.1
22.2
22.3
22.4
22.5
22.6
22.7
22.8

Introduction
Preparation of a consolidated statement of comprehensive income –
the Ante Group
The statement of changes in equity (SOCE)
Other consolidation adjustments
Dividends or interest paid by the subsidiary out of
pre-acquisition profits
A subsidiary acquired part of the way through the year
Published format statement of comprehensive income
Consolidated statements of cash flows

Summary
Review questions
Exercises
References

23 Accounting for associates and joint ventures
23.1
23.2
23.3
23.4
23.5
23.6
23.7

Introduction
Definitions of associates and of significant influence
The treatment of associated companies in consolidated accounts
The Brill Group – the equity method illustrated
The treatment of provisions for unrealised profits
The acquisition of an associate part-way through the year
Joint ventures

555
555
558
559
560
561
562
567

568
568
568
571
572
577
577
578
578
578
578
582

583
583
583
586
586
587
588
590
591
592
593
593
602

603
603

603
604
604
606
606
608


xvi • Full Contents

Summary
Review questions
Exercises
References

24 Accounting for the effects of changes in foreign exchange
rates under IAS 21
24.1
24.2
24.3
24.4
24.5
24.6
24.7
24.8
24.9
24.10
24.11
24.12
24.13

24.14

623
623
623
624
624
624
625
625
625
627
627
628
629
632
632
633
633
633
637

Part 5
INTERPRETATION

639

25 Earnings per share

641

25.1
25.2
25.3
25.4
25.5
25.6
25.7
25.8
25.9
25.10
25.11
25.12
25.13

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Introduction
The difference between conversion and translation and the definition
of a foreign currency transaction
The functional currency
The presentation currency
Monetary and non-monetary items
The rules on the recording of foreign currency transactions carried
out directly by the reporting entity
The treatment of exchange differences on foreign
currency transactions
Foreign exchange transactions in the individual accounts of companies
illustrated – Boil plc
The translation of the accounts of foreign operations where the

functional currency is the same as that of the parent
The use of a presentation currency other than the functional currency
Granby Ltd illustration
Granby Ltd illustration continued
Implications of IAS 21
Critique of use of presentation currency
Summary
Review questions
Exercises
References

610
610
611
622

Introduction
Why is the earnings per share figure important?
How is the EPS figure calculated?
The use to shareholders of the EPS
Illustration of the basic EPS calculation
Adjusting the number of shares used in the basic EPS calculation
Rights issues
Adjusting the earnings and number of shares used in the diluted
EPS calculation
Procedure where there are several potential dilutions
Exercise of conversion rights during financial year
Disclosure requirements of IAS 33
The Improvement Project
Convergence project

Summary
Review questions

641
641
642
643
644
645
647
652
654
656
656
659
659
659
660


Full Contents • xvii

Exercises
References

26 Statements of cash flows
26.1
26.2
26.3
26.4

26.5
26.6
26.7

Introduction
Development of statements of cash flows
Applying IAS 7 (revised) Statements of Cash Flows
IAS 7 (revised) format of statements of cash flows
Consolidated statements of cash flows
Analysing statements of cash flows
Critique of cash flow accounting
Summary
Review questions
Exercises
References

27 Review of financial ratio analysis
27.1
27.2
27.3
27.4
27.5
27.6
27.7
27.8
27.9

Introduction
Initial impressions
What are accounting ratios?

Six key ratios
Illustrating the calculation of the six key ratios
Description of subsidiary ratios
Comparative ratios: inter-firm comparisons and industry averages
Limitations of ratio analysis
Earnings before interest, tax, depreciation and amortisation (EBITDA)
used for management control purposes
Summary
Review questions
Exercises
References

28 Analytical analysis – selective use of ratios
28.1
28.2
28.3
28.4
28.5
28.6
28.7
28.8
28.9

Introduction
Improvement of information for shareholders
Disclosure of risks and focus on relevant ratios
Shariah compliant companies – why ratios are important
Ratios set by lenders in debt covenants
Predicting corporate failure
Performance related remuneration – shareholder returns

Valuing shares of an unquoted company – quantitative process
Professional risk assessors
Summary
Review questions
Exercises
References

29 An introduction to financial reporting on the Internet
29.1
29.2

Introduction
The reason for the development of a business reporting language

661
667

668
668
668
670
672
677
679
684
685
685
686
695

696
696
696
697
698
703
706
715
718
720
722
722
723
735

736
736
736
738
745
747
749
756
760
764
766
767
769
780

782
782
782


xviii • Full Contents

29.3
29.4
29.5
29.6
29.7
29.8
29.9
29.10
29.11

Reports and the flow of information pre-XBRL
What are HTML, XML and XBRL?
Reports and the flow of information post-XBRL
XBRL and the IASB
Why should companies adopt XBRL?
What is needed to use XBRL for outputting information?
What is needed when receiving XBRL output information?
Progress of XBRL development for internal accounting
Further study
Summary
Review questions
Exercises
References

Bibliography

Part 6
ACCOUNTABILITY

799

30 Corporate governance

801

30.1
30.2
30.3
30.4
30.5
30.6
30.7
30.8
30.9
30.10
30.11
30.12
30.13
30.14
30.15

Introduction
The concept
Corporate governance effect on corporate behaviour

Pressures on good governance behaviour vary over time
Types of past unethical behaviour
Different jurisdictions have different governance priorities
The effect on capital markets of good corporate governance
The role of accounting in corporate governance
External audits in corporate governance
Corporate governance in relation to the board of directors
Executive remuneration
Market forces and corporate governance
Risk management
Corporate governance, legislation and codes
Corporate governance – the UK experience
Summary
Review questions
Exercises
References

31 Sustainability – environmental and social reporting
31.1
31.2
31.3
31.4
31.5
31.6
31.7
31.8
31.9

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783
784
785
786
786
787
789
794
794
795
795
796
796
797

Introduction
How financial reporting has evolved to embrace
sustainability reporting
The Triple Bottom Line (TBL)
The Connected Reporting Framework
IFAC Sustainability Framework
The accountant’s role in a capitalist industrial society
The accountant’s changing role
Sustainability – environmental reporting
Environmental information in the annual accounts

801
801
802
803

804
805
806
807
809
814
814
817
818
820
822
832
832
834
836

838
838
838
839
840
842
844
844
845
845


Full Contents • xix

31.10 Background to companies’ reporting practices
31.11 European Commission’s recommendations for disclosures in
annual accounts
31.12 Evolution of stand-alone environmental reports
31.13 International charters and guidelines
31.14 Self-regulation schemes
31.15 Economic consequences of environmental reporting
31.16 Summary on environmental reporting
31.17 Environmental auditing: international initiatives
31.18 The activities involved in an environmental audit
31.19 Concept of social accounting
31.20 Background to social accounting
31.21 Corporate social responsibility
31.22 Need for comparative data
31.23 International initiatives towards triple bottom line reporting
Summary
Review questions
Exercises
References
Bibliography

Index

846
847
848
852
854
856
857

858
859
861
863
866
868
870
873
873
875
881
882

884


Preface and acknowledgements

Our objective is to provide a balanced and comprehensive framework to enable students
to acquire the requisite knowledge and skills to appraise current practice critically and to
evaluate proposed changes from a theoretical base. To this end, the text contains:
●
●
●
●
●

current IASs and IFRSs;
illustrations from published accounts;
a range of review questions;

exercises of varying difficulty;
extensive references.

Outline solutions to selected exercises can also be found on the Companion Website
(www.pearsoned.co.uk/elliott-elliott).
We have assumed that readers will have an understanding of financial accounting to a
foundation or first-year level, although the text and exercises have been designed on the
basis that a brief revision is still helpful.
Lecturers are using the text selectively to support a range of teaching programmes for
second-year and final-year undergraduate and postgraduate programmes. We have therefore
attempted to provide subject coverage of sufficient breadth and depth to assist selective use.
The text has been adopted for financial accounting, reporting and analysis modules on:
●

●

●
●
●

second-year undergraduate courses for Accounting, Business Studies and Combined
Studies;
final-year undergraduate courses for Accounting, Business Studies and Combined
Studies;
MBA courses;
specialist MSc courses; and
professional courses preparing students for professional accountancy examinations.

Changes to the fourteenth edition
Accounting standards

UK listed companies, together with those non-listed companies that so choose, have applied
international standards from January 2005.

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Preface and acknowlegements • xxi

For non-listed companies that choose to continue to apply UK GAAP, the ASB has stated
its commitment to progressively bringing UK GAAP into line with international standards.
For companies currently applying FRSSE, this will continue. The IASB issued IFRS
for SMEs in 2009.

Accounting standards – fourteenth edition updates
Chapters 5 and 6 cover the evolution of global standards and a global Conceptual
Framework.
Topics and International Standards are covered as follows:
Chapter 4
Chapter 8

Accounting for price-level changes
IAS 29
Preparation of statements of comprehensive IAS 1, IFRS
income and financial position
Chapter 9 Preparation of published accounts
IAS 8, IAS 10, IAS 24, IFRS 5
and IFRS 8
Chapter 11 Off balance sheet finance
IAS 37
Chapter 12 Financial instruments

IAS 32, IAS 39, IFRS 7 and
IFRS 9
Chapter 13 Employee benefits
IAS 19, IAS 26 and IFRS 2
Chapter 14 Taxation in company accounts
IAS 12
Chapter 15 Property, plant and equipment (PPE)
IAS 16, IAS 20, IAS 23,
IAS 36, IAS 40 and IFRS 5
Chapter 16 Leasing
IAS 17
Chapter 17 R&D; goodwill and intangible assets;
IAS 38 and IFRS 3
brands
Chapter 18 Inventories
IAS 2
Chapter 19 Construction contracts
IAS 11
Chapters 20 to 24 Consolidation
IAS 21, IAS 27, IAS 28,
IAS 31 and IFRS 3
Chapter 25 Earnings per share
IAS 33
Chapter 26 Statements of cash flows
IAS 7
Chapter 30 Corporate governance
IFRS 2

Income and asset value measurement systems
Chapters 1 to 4 continue to cover accounting and reporting on a cash flow and accrual basis,

the economic income approach and accounting for price-level changes.

The UK regulatory framework and analysis
UK listed companies will continue to be subject to national company law, and mandatory
and best practice requirements such as the Operating and Financial Review and the UK Code
of Corporate Governance.

UK regulatory framework and analysis – fourteenth edition changes
The following chapters have been retained and updated as appropriate:
Chapter 7 Ethical behaviour and implications for accountants
Chapter 10 Share capital, distributable profits and reduction of capital


xxii • Preface and acknowlegements

Chapter 11
Chapter 27
Chapter 28
Chapter 29
Chapter 30
Chapter 31
Chapter 32

Off balance sheet finance
Review of financial ratio analysis
Analytical analysis – selective use of ratios
An introduction to financial reporting on the Internet
Corporate governance
Sustainability – environmental and social reporting
Ethics for accountants (now Chapter 7)

Our emphasis has been on keeping the text current and responsive to constructive comments from reviewers.

Recent developments
In addition to the steps being taken towards the development of IFRSs that will receive
broad consensus support, regulators have been active in developing further requirements
concerning corporate governance. These have been prompted by the accounting scandals
in the USA and, more recently, in Europe and by shareholder activism fuelled by the
apparent lack of any relationship between increases in directors’ remuneration and company
performance.
The content of financial reports continues to be subjected to discussion with a tension
between preparers, stakeholders, auditors, academics and standard setters; this is mirrored
in the tension that exists between theory and practice.
●

Preparers favour reporting transactions on a historical cost basis which is reliable but does
not provide shareholders with relevant information to appraise past performance or to
predict future earnings.

●

Shareholders favour forward-looking reports relevant in estimating future dividend and
capital growth and in understanding environmental and social impacts.

●

Stakeholders favour quantified and narrative disclosure of environmental and social
impacts and the steps taken to reduce negative impacts.

●

Auditors favour reports that are verifiable so that the figures can be substantiated to avoid
them being proved wrong at a later date.

●

Academic accountants favour reports that reflect economic reality and are relevant in
appraising management performance and in assessing the capacity of the company to adapt.

●

Standard setters lean towards the academic view and favour reporting according to the
commercial substance of a transaction.

In order to understand the tensions that exist, students need:

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●

the skill to prepare financial statements in accordance with the historical cost and current
cost conventions, both of which appear in annual financial reports;

●

an understanding of the main thrust of mandatory and voluntary standards;

●

an understanding of the degree of flexibility available to the preparers and the impact of

this on reported earnings and the figures in the statement of financial position;

●

an understanding of the limitations of financial reports in portraying economic reality; and

●

an exposure to source material and other published material in so far as time permits.


Preface and acknowlegements • xxiii

Instructor’s Manual
A separate Instructors’ Manual has been written to accompany this text. It contains fully
worked solutions to all the exercises and is of a quality that allows them to be used as overhead transparencies. The Manual is available at no cost to lecturers on application to the
publishers.

Website
An electronic version of the Instructors’ Manual is also available for download at
www.pearsoned.co.uk/elliott-elliott.

Acknowledgements
Financial reporting is a dynamic area and we see it as extremely important that the text
should reflect this and be kept current. Assistance has been generously given by colleagues
and many others in the preparation and review of the text and assessment material. This
fourteenth edition continues to be very much a result of the authors, colleagues, reviewers
and Pearson editorial and production staff working as a team and we are grateful to all concerned for their assistance in achieving this.
We owe particular thanks to Ron Altshul, who has updated ‘Taxation in company
accounts’ (Chapter 14); Charles Batchelor formerly of FTC Kaplan for ‘Financial instruments’ (Chapter 12) and ‘Employee benefits’ (Chapter 13); Ozer Erman of Kingston

University, for ‘Share capital, distributable profits and reduction of capital’ (Chapter 10);
Paul Robins of the Financial Training Company for ‘Published accounts’ (Chapter 9) and
‘Earnings per share’ (Chapter 25); Professor Garry Tibbits of the University of Western
Sydney ‘Ethical behaviour and implications for accountants’ (Chapter 7) and ‘Corporate
governance’ (Chapter 30); Hendrika Tibbits of the University of Western Sydney for An
introduction to financial reporting on the Internet (Chapter 29); David Towers, formerly
of Keele University, for Consolidation chapters; and Martin Howes for inputs to financial
analysis.
The authors are grateful for the constructive comments received from the following
reviewers who have assisted us in making improvements: Iain Fleming of the University of
the West of Scotland; John Morley of the University of Brighton; John Forker of Queen’s
University, Belfast; Breda Sweeney of NUI Galway; Patricia McCourt Larres of Queen’s
University, Belfast; and Dave Knight of Leeds Metropolitan University.
Thanks are owed to A.T. Benedict of the South Bank University; Keith Brown formerly
of De Montfort University; Kenneth N. Field of the University of Leeds; Sue McDermott
of London Metropolitan Business School; David Murphy of Manchester Business School;
Bahadur Najak of the University of Durham; Graham Sara of University of Warwick; Laura
Spira of Oxford Brookes University.
Thanks are also due to the following organisations: the Accounting Standards Board,
the International Accounting Standards Board, the Association of Chartered Certified
Accountants, the Association of International Accountants, the Chartered Institute of
Management Accountants, the Chartered Institute of Securities and Investment, the
Institute of Chartered Accountants of Scotland, Chartered Institute of Public Finance and
Accountancy, Chartered Institute of Bankers and the Institute of Investment Management
and Research.


xxiv • Preface and acknowlegements

We would also like to thank the authors of some of the end-of-chapter exercises. Some of

these exercises have been inherited from a variety of institutions with which we have been
associated, and we have unfortunately lost the identities of the originators of such material
with the passage of time. We are sorry that we cannot acknowledge them by name and hope
that they will excuse us for using their material.
We are indebted to Matthew Smith and the editorial team at Pearson Education for active
support in keeping us largely to schedule and the attractively produced and presented text.
Finally we thank our wives, Di and Jacklin, for their continued good humoured support
during the period of writing and revisions, and Giles Elliott for his critical comment from
the commencement of the project. We alone remain responsible for any errors and for the
thoughts and views that are expressed.
Barry and Jamie Elliott

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