“The book has a clear approach and provides a good basis for intermediate financial courses. I am also
pleased to see more Dutch examples included in the new edition.”
Dr Erik van der Veer, Lecturer in Accounting, Business School, University of Amsterdam, The Netherlands
“The book is ideally suited for MBA courses in financial accounting and reporting, and a strength of the
new edition is that the end-of-chapter assignments now reflect a wider range of difficulty levels.”
Dr Jannis Bischof, Lecturer in Accounting and Taxation, Business School, University of Mannheim, Germany
Stolowy
Lebas
Ding
FOURTH
EDITION
“I use this book with my MSc students because it provides a detailed discussion of the topics with an
excellent use of examples. The new edition also contains more real-life examples which will really help
aid student understanding and application.” Dr Ioannis Tsalavoutas, Lecturer in Accounting, Division of
Accounting and Finance, University of Stirling, UK
Guidance across the complexities of financial
accounting is offered from an international
and ‘user’ perspective, based on the latest
IFRS standards. Its comprehensive coverage
incorporates original case studies, decisionmaking orientation and genuine financial
statements from across the globe, maximizing
topicality and relevance for a thorough
understanding of real-world business.
A fresh, contemporary presentation of text design
delivers user-friendly tables, figures and diagrams,
helping to make theoretical explanations such as
the technical aspects of accounting transactions
more approachable. End-of-chapter assignments
have also been enhanced, now targeting a
range of difficulty levels. This aids students with
independent practice and learning at their own
standard of ability.
About the Authors:
Hervé Stolowy, Professor, HEC Paris, France
Michel J. Lebas, Emeritus Professor,
HEC Paris, France
Yuan Ding, Professor, China Europe International
Business School (CEIBS), Shanghai, China
> Revised coverage on all the latest IFRS
developments and terminology
> New real-life case examples and studies
> Expanded coverage on international
accounting harmonization
> Extensive developments on fair value
in a completely rewritten Chapter 10 and
a major update of Chapter 13 on
consolidation
>
New independent assignments and endof-chapter problems across three levels
of complexity to aid independent
learning and depth of understanding
> Expanded glossary of key terms at the
end of the book
> Enriched provision of digital support
materials, which instructors can
share, as needed, with their students
Financial Accounting and Reporting:
a Global Perspective is suitable worldwide
for MBA, professional management and
undergraduate level modules in financial
accounting and reporting.
Accounting
and Reporting
New to this edition:
Financial Accounting
and Reporting
A GLOBAL PERSPECTIVE
Now in its fourth edition, the completely revised
version of Financial Accounting and Reporting:
A Global Perspective can be utilized worldwide
by business and management students seeking
an essential introduction to the field.
Financial
A GLOBAL PERSPECTIVE
Hervé Stolowy • Michel J. Lebas • Yuan Ding
FOURTH EDITION
For your lifelong learning solutions, visit www.cengage.co.uk
Purchase your next print book, e-book or e-chapter at www.cengagebrain.com
FINANCIAL
ACCOUNTING
AND REPORTING
A GLOBAL PERSPECTIVE
FOURTH EDITION
Herve
Herve´ Stolowy • Michel J. Lebas • Yuan Ding
Financial Accounting and Reporting:
A Global Perspective
Fourth edition
Hervé Stolowy, Michel Lebas and
Yuan Ding
Publishing Director: Linden Harris
Publisher: Andrew Ashwin
Commissioning Editor: Annabel
Ainscow
Content Project Editor: Alison Cooke
Production Controller: Eyvett Davis
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Cover design: Design Deluxe
© 2013 Hervé Stolowy, Michel J. Lebas and Yuan Ding
ALL RIGHTS RESERVED. No part of this work covered by the
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or mechanical, including but not limited to photocopying,
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1976 United States Copyright Act, or applicable copyright law
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While the publisher has taken all reasonable care in
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representation, express or implied, with regard to the
accuracy of the information contained in this book and
cannot accept any legal responsibility or liability for any
errors or omissions from the book or the consequences
thereof.
Products and services that are referred to in this book may
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Printed in Singapore by Seng Lee Press
1 2 3 4 5 6 7 8 9 10 – 15 14 13
To Nicole, Natacha, and Audrey
For their indefatigable renewed support and immense and lasting patience.
To my wife, Michael Adler, and to Alfie
Each one, in her and his way, provided their support, loving encouragement and the
serenity required by this project.
To Xiaowei and Dale
For giving me the serenity and optimism, essential for being an effective teacher and
productive researcher.
BRIEF CONTENTS
PART I INTRODUCTION TO FINANCIAL
ACCOUNTING
1
1
Accounting: The Language of Business
2
2
Introduction to Financial Statements
37
3
Financial Statements: Interrelations and Construction
88
4
Accounting Principles and End-of-period Adjustments
120
PART II MAJOR ACCOUNTING TOPICS
161
5
Regulation of Accounting and Financial Reporting
162
6
Revenue Recognition Issues
207
7
Tangible Fixed Assets
250
8
Intangible Fixed Assets
290
9
Inventories
321
10
Financial Instruments in the Statement of Financial Position and Fair Value
Accounting
348
11
Shareholders’ Equity
385
12
Liabilities and Provisions
421
13
Business Combinations
464
14
Statement of Cash Flows Construction
499
PART III FINANCIAL STATEMENT ANALYSIS
527
15
Analysis of the Statement of Financial Position/Balance Sheet
528
16
Analysis of the Income Statement
554
17
Analysis of the Statement of Cash Flows and Earnings Quality
574
18
Ratio Analysis, Financial Analysis and Beyond
600
Glossary of Key Terms
Index
iv
643
659
CONTENTS
List of Real Companies Referenced
About the Authors
Preface
Acknowledgements
Walk Through Tour
Digital Support Resources
PART 1 INTRODUCTION TO
FINANCIAL ACCOUNTING
1
3.1
3.2
Accounting
Financial accounting
4 Users of financial accounting
4.1
4.2
Presentation of the various users
Financial reporting standards: how
to satisfy the users’ needs
5 Introduction to the accounting process
6 Financial accounting and managerial
accounting
7 Qualitative characteristics of useful financial
statements
7.1
7.2
7.3
7.4
Relevance
Faithful representation
Comparability
Verifiability
9.1
9.2
9.3
9.4
9.5
1
2
4
3 Definition of financial accounting
Book value of shareholders’ equity
Market value of shareholders’ equity
The role of accounting in managing value
9 History of accounting: From Sumer to Luca
Pacioli
1 A model of business activity
2 Accounting: A language for business
2.2
2.3
8.1
8.2
8.3
xxvii
xxix
2
Business creates an agency relationship that
calls for reporting
Accounting is a living language
Accounting is a language with some
maneuvering room
Timeliness
Understandability
8 Book value of shareholders’ equity and
market value of the shares
xxv
Accounting: The Language of
Business
2.1
7.5
7.6
xiv
xix
xxi
5
7
8
10
10
10
12
12
14
15
21
21
21
23
23
24
Sumerian times
Accounting in Egypt
Accounting in Greece
Accounting in Rome
Accounting in the Middle-Ages
Key points
Review (Solutions are on the book website)
Review 1.1 Multiple-choice questions
Review 1.2 Discussion questions
Assignments
Assignment 1.1 Multiple-choice questions
Assignment 1.2 Discussion questions
Assignment 1.3 Xenakis
Assignment 1.4 Theodorakis
Assignment 1.5 Horn of Abundance
Assignment 1.6 Kalomiris Construction
Assignment 1.7 Nikopoulos
Assignment 1.8 Sheik Selim
References
Further readings
Additional material on the website
Notes
2
24
24
24
24
25
25
26
26
26
26
27
27
28
29
29
29
29
29
30
30
31
31
32
32
32
34
34
34
34
Introduction to Financial
Statements
37
1 Statement of financial position or balance
sheet
38
v
vi
CONTENTS
2 The basic business equation or balance sheet
equation
40
2.1
2.2
2.3
2.4
Basic principle: double entry accounting
Terminology
Transactions
Typical transactions
3 Income statement (or I/S or profit and loss
account, also known as P&L statement, or
simply P&L)
3.1
3.2
3.3
3.4
3.5
Business equation and income statement
Elements of the income statement
Application to Verdi
Impact of transactions on financial
statements
Balance sheet and value creation
4 Depreciation
4.1
4.2
Principle
Application to Verdi
5 Profit appropriation
5.1
5.2
5.3
Principle
Application to Verdi
Cash, profit and retained earnings
6 Consumption of resources and inventory
valuation
6.1
6.2
Goods purchased for resale (merchandise)
or for use in a transformation process (raw
materials, parts and consumables)
Inventory of goods manufactured
7 Financial statement analysis
7.1
7.2
7.3
Trend, common-size analysis and ratio
analysis
Financial situation ratios
Profitability ratios
Key points
Review (Solutions are on the book website)
Review 2.1 Vivaldi Company (1)
Review 2.2 Vivaldi Company (2)
Review 2.3 Albinoni Company
Appendix 1
Assignments
Assignment 2.1 Multiple-choice questions
Assignment 2.2 Vivaldi Company (3)
Assignment 2.3 Busoni Company
Assignment 2.4 Corelli Company (1)
Assignment 2.5 Corelli Company (2)
Assignment 2.6 adidas Group*
Assignment 2.7 Stora Enso*
References
Additional material on the website
Notes
3
1.1
1.2
1.3
40
41
43
53
2 The production process of accounting
information
2.1
53
54
54
57
58
59
59
59
60
61
61
63
63
64
65
69
71
73
73
76
77
78
78
79
79
80
80
80
81
81
81
82
83
84
86
86
86
Financial Statements:
Interrelations and Construction
88
1 Statement of cash flows
89
Accrual basis of accounting
Evolution
Links between statement of financial
position/balance sheet, incomestatement
and statement of cash flows
2.2
Double entry bookkeeping and the
recording of transactions
The accounting process
3 Organization of the accounting system:
The chart of accounts
3.1
3.2
3.3
Principles
Standardized chart of accounts
The importance of account codes
90
90
91
91
92
96
103
103
104
104
Key points
105
Review (Solutions are on the book website)
105
Review 3.1 Beethoven Company (1)
105
Review 3.2 Beethoven Company (2)
106
Review 3.3 Grieg Company (1)
106
Review 3.4 Grieg Company (2)
106
Assignments
107
Assignment 3.1 Multiple-choice questions
107
Assignment 3.2 Industry identification
107
Assignment 3.3 Schumann Company (1)
109
Assignment 3.4 Schumann Company (2)
109
Assignment 3.5 Bach Company
110
Assignment 3.6 Sibelius Company
116
Assignment 3.7 Internet-based exercise
116
Assignment 3.8 Accounting history
116
Assignment 3.9 Lavender Soap Company case 117
References
118
Further readings
118
Additional material on the website
119
Notes
119
4
Accounting Principles and
End-of-Period Adjustments
120
1 Accounting principles
121
1.1
Main objective of accounting principles:
give a true and fair view
Objectivity
Quality of information
Prudence
Periodicity
The entity concept
122
123
125
126
127
128
2 End-of-period entries
129
2.1 Adjusting entries
129
2.2 Value adjustments to fixed asset accounts 132
2.3 Value adjustments to current asset accounts 133
2.4 Reporting adjusting entries
134
3 Recording of adjusting entries in practice
136
3.1 Revenues earned but not recorded
136
3.2 Revenues recorded but unearned
137
1.2
1.3
1.4
1.5
1.6
CONTENTS
3.3
3.4
4
5
6
7
Expenses consumed but not recorded
Expenses recorded in advance
139
140
142
Correction of errors
Ending inventory
142
Closing entries
142
Limitations on the applicability of accounting
principles
142
Key points
Review (Solutions are on the book website)
Review 4.1 Adam
Review 4.2 Offenbach Company
Assignments
Assignment 4.1 Multiple-choice questions
Assignment 4.2 Roussel
Assignment 4.3 Gounod Company
Assignment 4.4 Lalo Company
Assignment 4.5 Electrolux*
Assignment 4.6 Poulenc Company
Assignment 4.7 Debussy Company
References
Further readings
Additional material on the website
Notes
143
143
143
145
145
145
150
150
151
155
156
157
158
158
159
159
PART 2 MAJOR ACCOUNTING
161
TOPICS
5
Regulation of Accounting and
Financial Reporting
1 Financial reporting standards
1.1
1.2
Necessity of financial reporting standards
The International Accounting Standards
Board
2 The content of the annual report
3 Financial statements presentation
3.1
3.2
Possible presentations of the statement of
financial position/balance sheet
Possible presentations of the income
statement
4 Notes to financial statements
5 Terminology variations
Key points
Review (Solutions are on the book website)
Review 5.1 Orkla*
Review 5.2 Holcim*
Assignments
Assignment 5.1 Multiple-choice questions
Assignment 5.2 Unilever*
Assignment 5.3 UMP-Kymmene* (usually
referred to as UPM)
Assignment 5.4 Nokia* and others
162
163
163
163
168
169
vii
References
Further readings
Additional material on the website
Notes
205
6
Revenue Recognition Issues
207
1 Revenue recognition
208
208
210
212
212
1.1
1.2
1.3
1.4
Sale of goods
Rendering of services
Interest, royalties, and dividends
Revenue recognition and reporting
2 Accounting for differences in net income
calculations originating from diverging
financial reporting and tax regulations
2.1
2.2
2.3
2.4
2.5
2.6
2.7
Pre-tax income and taxable income
Impact of permanent differences
Impact of temporary differences
Accounting for and reporting income taxes
Recognition of a net deferred tax asset
Accounting for net operating losses
Changes in tax rates
3 Long-term contracts
4 Reform of accounting standards on
revenue recognition and long-term
contracts
5 Instalment sales
6 Extraordinary and exceptional items
7 Reporting accounting changes
7.1
7.2
7.3
Changes in accounting policies
Changes in accounting estimates
Prior period errors
8 Reporting discontinued operations
9 Comprehensive income
9.1
9.2
Principles
Examples
10 Government assistance: grants and
subsidies
10.1 Grants related to assets
10.2 Grants related to income
10.3 Forgivable loans and repayable grants
205
205
206
214
215
217
217
223
224
224
226
226
227
227
227
228
228
229
229
230
232
232
233
234
234
236
236
169
176
181
184
186
186
186
187
187
187
188
189
189
Key points
237
Review (Solutions are on the book website)
237
Review 6.1 Schultz Accountancy Firm (1)
237
Review 6.2 Schall Company
238
Assignments
238
Assignment 6.1 Multiple-choice questions
238
Assignment 6.2 Schultz Accountancy Firm (2) 239
Assignment 6.3 Nielsen Company
239
Assignment 6.4 UBS AG* and UPM-Kymmene* 240
Assignment 6.5 Harmony Accountancy Firm
241
Assignment 6.6 Apple*: iPhone Revenue
Recognition Strategy
243
References
247
Further readings
248
viii
CONTENTS
Additional material on the website
Notes
248
7
250
Tangible Fixed Assets
249
1 General principles
251
1.1 Categories of fixed assets
251
1.2 Accounting issues relating to tangible assets 252
1.3 Definition of tangible fixed assets
253
1.4 Cost of acquisition
256
2 Depreciation
257
2.1 Components of a complex tangible asset
258
2.2 Residual value
258
2.3 Depreciable amount or depreciable base
258
2.4 Useful life (or service life) for accounting
purposes
259
2.5 Choice of a depreciation method
260
2.6 Depreciation schedule
268
2.7 Book value (also called ‘net book value’
or ‘carrying amount’)
268
2.8 Recording the depreciation expense
269
2.9 Summary of the income statement
impact of the different methods
269
2.10 Reporting depreciation policies
271
3 Impairment
271
3.1 Principle
271
4 Assets constructed by and for the
enterprise (internally generated assets)
4.1
4.2
4.3
Definition – Principle
Valuation
Recording of the transactions
5 Particular issues relating to reporting
land and buildings
5.1
5.2
Cases in which land is a depreciable
asset
Land and building
6 Costs subsequent to acquisition
7 Disposal of long-term assets
7.1
7.2
Recording of the sale of an asset
Classification in the income statement
8 Financial aspects of tangible assets
8.1
8.2
8.3
Depreciation and cash flow
Reporting movements in tangible assets
Financial statement analysis
Key points
Review (Solutions are on the book website)
Review 7.1: Gibbons
Assignments
Assignment 7.1: Multiple-choice questions
Assignment 7.2: Discussion questions
Assignment 7.3: Reporting in different sectors
of activity
Assignment 7.4: Reporting in the same
sector of activity
Assignment 7.5: Choice of depreciation
methods
Assignment 7.6: Tippett
Assignment 7.7: Britten Inc.
Assignment 7.8: Merck*
Assignment 7.9: Honda Motor Co.*
References
Further readings
Additional material on the website
Notes
284
8
Intangible Fixed Assets
290
1 Definition of intangibles
291
291
293
297
1.1
1.2
Principles
Main categories of intangibles
2 Recognition of intangible assets
3 Reporting of changes in intangible assets
value
3.1
3.2
Different possibilities exist of changes in
intangible assets value
Comparison of the approaches of the
IASB and the FASB (USA)
4 Accounting for research and development
4.1
4.2
4.3
Definition
Elements of the debate over capitalization
of R&D
Reporting R&D activity
5 Accounting for computer software
5.1
5.2
272
272
273
274
Accounting rules
Reporting computer software costs
6 Financial statement analysis
6.1
6.2
6.3
R&D intensity
Link between R&D and growth
Link between R&D and market value
285
286
288
288
289
289
299
299
300
304
304
304
306
308
308
309
310
310
312
312
275
275
275
276
277
277
277
278
278
279
280
282
282
282
283
283
283
Key points
Review (Solutions are on the book website)
Review 8.1 Turina
Review 8.2 De Falla
Assignments
Assignment 8.1 Multiple-choice questions
Assignment 8.2 Discussion questions
Assignment 8.3 Reporting of intangibles
Assignment 8.4 Searching for specific
intangibles
Assignment 8.5 R&D intensity
Assignment 8.6 CeWe Color*
Assignment 8.7 Granados Company
Assignment 8.8 Sanofi*
References
Further readings
Additional material on the website
Notes
312
9
Inventories
321
1 Classification of inventories
322
322
322
323
312
312
313
313
313
314
314
314
315
315
315
316
319
319
320
320
284
284
284
284
1.1
1.2
1.3
Definition
Different types of inventories
Weight of inventories in the balance sheet
CONTENTS
2 Inventory recording systems
2.1
2.2
2.3
2.4
Perpetual (or permanent) inventory system
Periodic inventory system
Comparison of recording
Presentation of inventories in the income
statement by nature
3 Inventory valuation and reported income
3.1
3.2
The basic issue
Methods for the valuation of inventory
outflows (costing formulae for
withdrawals)
4 Inventories and cash flow
5 Decline in value of items in inventories
(end of year adjustments)
6 Income statement by nature and income
statement by function
7 Disclosure of inventory valuation policies
8 Financial statement analysis pertaining to
inventories
326
326
327
328
328
328
328
331
334
334
334
335
337
Key points
339
Review (Solutions are on the book website)
340
Review 9.1 Ericsson*
340
Assignments
341
Assignment 9.1 Multiple-choice questions
341
Assignment 9.2 Discussion questions
341
Assignment 9.3 NorthWest Boards & Bikes
342
Assignment 9.4 WPP plc* and Irish Continental* 342
Assignment 9.5 Stravinsky
342
Assignment 9.6 Repsol*
343
Assignment 9.7 Tchaı¨kovsky
344
Assignment 9.8 McDonald’s* and others
344
Assignment 9.9 Toyota*
346
References
346
Further readings
346
Additional material on the website
347
Notes
347
10 Financial Instruments inthe
Statement of Financial Position
and Fair Value Accounting
1 Definition of financial assets and liabilities
2 Cash and cash equivalents
3 Financial asset and liability at fair value
through profit or loss
3.1
3.2
3.3
3.4
Definitions
Accounting for financial assets at fair
value through profit or loss
Reporting financial asset at fair value
through profit or loss
Evolution and debate over regulation
and practice
4 Held-to-maturity financial assets
5 Receivables
5.1
5.2
5.3
Accounts receivable or ‘receivables’
Notes receivable
Sales returns
6 Available-for-sale financial assets
6.1
6.2
6.3
6.4
Definition
Initial recognition
Recognition of the evolution of value
Special case of unlisted (untraded)
financial assets
7 Financial instrument recognition after 2015
8 Financial statement analysis
349
351
353
353
374
11 Shareholders’ Equity
385
1 Forms of business organization
1.1
1.2
1.3
Sole proprietorship
Partnership
Limited liability company
2 Share capital
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3.1
3.2
3.3
3.4
Definition
Nominal or par value
Payment of share capital
Different categories of shares
Share premium
Accounting for share capital
Reporting share capital
Dividends
Reserve accounts
Reporting retained earnings and reserves
Reporting and accounting for
shareholders’ equity
4 Accounting for the issuance of shares
granted for non-cash capital contributions
354
4.2
354
358
370
374
376
4.1
357
358
358
367
368
370
370
370
370
Key points
Review (Solutions are on the book website)
Review 10.1: Berg
Assignments
Assignment 10.1: Multiple-choice questions
Assignment 10.2: Mahler
Assignment 10.3: Bosch*
Assignment 10.4: Bayer*
Assignment 10.5: Holmen*
Assignment 10.6: Youngor*
References
Further readings
Additional material on the website
Notes
3 Profit appropriation
348
ix
4.3
377
377
377
377
378
378
379
380
381
383
383
383
384
386
387
387
387
388
388
388
389
389
391
391
392
393
393
394
394
395
397
Issuance of shares for capital contributions
in kind
398
Issuance of new shares due to
capitalization of retained earnings or
of some reserves
398
Issuance of shares resulting from an
increase in capital due to a conversion of
liabilities
399
x
CONTENTS
5 Accounting for share issuance costs
6 Capital reduction
7 Treasury shares (or own shares,
or treasury stock)
7.1
7.2
7.3
7.4
Why repurchase one’s own shares?
Purchase of treasury shares to reduce
the share capital
Purchase of treasury shares held by the
corporation
Reporting for treasury shares
8 Stock options plan (‘Share options plan’)
8.1
8.2
Definition
Accounting for stock options plan
9 Share dividend and dividend in kind
10 Comprehensive income
11 Changes in shareholders’ equity
11.1 The prescriptive content of IAS 1
11.2 Presentation of the changes in equity
12 Financial statement analysis
12.1 Impact on financial structure
12.2 Ratios
400
5.1
401
401
5.2
401
402
403
404
404
404
405
406
406
406
407
409
409
410
413
12 Liabilities and Provisions
421
1.1
1.2
1.3
1.4
Present obligation
Past events
Settlement of the obligation
The current/non-current distinction
2 Relative weight of liabilities in the balance
sheet
3 Non-current (long-term or financial)
liabilities
4 Accounting for current liabilities
4.1
4.2
4.3
4.4
4.5
Accounts payable
Notes payable
Income taxes payable
Sales tax and Value Added Tax (VAT)
collected
Current portion of long-term debt
413
413
414
414
414
415
415
416
416
417
417
419
419
419
420
422
422
422
422
422
425
425
427
428
428
428
428
429
No separation between short-term and
long-term liabilities on the balance sheet
Short-term and long-term liabilities
reported separately on the balance sheet
6 Liabilities, provisions and contingent
liabilities
6.1
Key points
Review (Solutions are on the book website)
Review 11.1 Copland Company
Review 11.2 Menotti Company
Assignments
Assignment 11.1 Multiple-choice questions
Assignment 11.2 Ives Company
Assignment 11.3 Bernstein Company
Assignment 11.4 Gilbert Company
Assignment 11.5 Gerry Weber*
Assignment 11.6 Holmen*
Assignment 11.7 Nokia*
References
Further readings
Additional material on the website
Notes
1 Definitions
5 Reporting liabilities
401
6.2
6.3
6.4
6.5
Provision versus liability (in the strict sense
of the word)
Provision versus accrued liabilities
Contingent liabilities
Provisions versus contingent liabilities
Environmental liability
7 Bonds
7.1
7.2
7.3
Definition
Interest, discount and premium
Accounting for bonds
8 Leased assets
8.1
8.2
8.3
8.4
8.5
8.6
8.7
Accounting recording of leased assets
Finance and operating leases
Capitalization of finance leased assets
Example of accounting for leased assets
Operating leases
Sale [of an asset] and leaseback
transactions
Reporting lease agreements to the users
of financial information
9 Employee benefits and pension
accounting
9.1
9.2
Short-term employee benefits
Post-employment benefits
10 Financial statement analysis
10.1 Capitalized leased assets
10.2 Ratios
Key points
Review (Solutions are on the book website)
Review 12.1 Stenborg
Review 12.2 Haeffner PLC (1)
Assignments
Assignment 12.1 Multiple-choice questions
Assignment 12.2 Reporting liabilities in
different sectors of activity
Assignment 12.3 Reporting liabilities in the
same sector of activity
Assignment 12.4 Club Me´diterrane´e*
Assignment 12.5 Haeffner PLC (2)
Assignment 12.6 Stora Enso*, Repsol YPF*,
Cobham* and Thales*
Assignment 12.7 Nilsson Company
Assignment 12.8 United Internet*
Assignment 12.9 Saint Gobain*
Assignment 12.10 ArcelorMittal*
References
Further readings
Additional material on the website
Notes
429
429
430
431
432
434
435
435
437
437
437
438
439
441
442
442
443
444
445
445
446
447
448
449
451
451
451
452
453
453
453
454
454
454
454
455
455
456
458
459
459
461
462
463
463
463
CONTENTS
13 Business Combinations
1 Types of investments
2 Business combinations: principles
2.1
2.2
2.3
Definition
Usefulness of consolidated financial
statements
Nature of relations between parent
company and group entities
3 Reporting the acquisition of a financial
interest: consolidation methods
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4
5
6
7
Impact of an acquisition on reporting
When no consolidation is required
When full consolidation is required
When equity method is required
When proportionate consolidation is
required
Reporting which method(s) was(were)
used in consolidation
Impact of each of the methods of
consolidation on reported group sales
revenue and net income
Synthesis: Interaction between
IFRS 10, 11, 12 and IAS 28
Consolidation process
Deferred taxation on consolidation
Foreign currency translations
Legal mergers
7.1
7.2
7.3
7.4
7.5
Determination of the value of both
companies
Determination of the rate of exchange of
shares
Determination of the number of shares
to issue in the merger
Determination of the merger premium
Accounting for the merger
Key points
Review (Solutions are on the book website)
Review 13.1 Mater & Filia
Assignments
Assignment 13.1 Multiple-choice questions
Assignment 13.2 Mutter & Tochter
Assignment 13.3 China International Marine
Container*, Honda Motors*, EVN* and
Recipharm*
Assignment 13.4 Bosmans and Badings
References
Further readings
Additional material on the website
Notes
14 Statement of Cash Flows
Construction
1 Structure of the statement of cash flows
464
2 Usefulness of the statement of cash flows
2.1
2.2
2.3
2.4
467
467
467
468
3 Definition of the three categories
of activities impacting cash flows
3.1
3.2
3.3
3.4
469
471
472
473
473
481
5
486
489
489
490
491
491
491
491
492
493
493
493
493
494
501
501
502
502
503
503
The direct method of calculating cash flows
from operating activities
504
4.2 The indirect method of calculating cash
flows from operating activities
504
4.3 Reporting cash flows from operating
activities
504
Cash and cash equivalents
505
5.1 Definitions
505
5.2 Disclosure
505
Example of a statement of cash flows
506
Construction of a statement of cash flows
507
7.1 Cash flows from operating activities
509
7.2 Cash flows from investing activities
516
7.3 Cash flows from financing activities
517
7.4 Full statement of cash flows
519
Reporting the statement of cash flows
519
4.1
485
489
Operating activities
Investing activities
Financing activities
Differences in classification
500
500
500
501
501
4 Calculating cash flows from operating
activities
483
487
488
The importance of cash
Cash is objective
A valuable forecasting tool
Developments in international practice
xi
6
7
8
9 Non-cash investing and financing
transactions
Key points
Review (Solutions are on the book website)
Review 14.1 Dvorak Company (1)
Assignments
Assignment 14.1 Multiple-choice questions
Assignment 14.2 Smetana Company (1)
Assignment 14.3 Haas Company
References
Further readings
Additional material on the website
Notes
519
520
521
521
522
522
523
524
525
525
526
526
495
496
496
497
PART 3 FINANCIAL
STATEMENT ANALYSIS
527
15 Analysis of the Statement of
Financial Position/Balance
Sheet
528
498
498
499
500
1 Trend analysis (also known as horizontal
or chronological analysis)
529
xii
CONTENTS
2 Common-size analysis (also known
as vertical analysis)
2.1
2.2
2.3
Definition
Usefulness of common-size analysis
Common-size statement of financial
position/balance sheet
3 Statement of financial position/balance
sheet structure and cash equation
3.1
3.2
3.3
Statement of financial position/Balance
sheet structure
Cash equation working capital, working
capital need and net cash
The statement of financial structure in
practice Comparative analysis of Exxon,
Sinopec and Total
Key points
Review (Solutions are on the book website)
Review 15.1 Dvorak Company (2)
Review 15.2 Chugoku Power Electric
Company* (1)
Assignments
Assignment 15.1 Multiple-choice questions
Assignment 15.2 Smetana Company (2)
Assignment 15.3 Club Me´diterrane´e*
Assignment 15.4 Aeroflot*
Assignment 15.5 Infosys Company* (1)
References
Further readings
Additional material on the website
Notes
16 Analysis of the Income
Statement
1 Trend analysis (also known as horizontal
or chronological analysis) applied to the
income statement
1.1
1.2
1.3
Principles and intent
Advantages and limitations of trend
analysis
Example of trend analysis
2 Common-size analysis (also known
as vertical analysis) of the income
statement
2.1
2.2
2.3
Principle and intent
Illustration
Common-size income statement
Key points
Review (Solutions are on the book website)
Review 16.1 Chugoku Power Electric
Company (2)*
Assignments
Assignment 16.1 Multiple-choice questions
Assignment 16.2 Smetana Company (3)
Assignment 16.3 Procter & Gamble* (1)
530
530
530
530
532
532
532
536
545
546
546
546
547
547
548
548
Assignment 16.4 Club Me´diterrane´e*
Assignment 16.5 Wipro Limited*
Assignment 16.6 China Communications
Construction*
References
Further readings
Additional material on the website
Notes
17 Analysis of the Statement
of Cash Flows and Earnings
Quality
1 Analysis of the statement of cash flows
1.1
1.2
1.3
2 Accounts manipulation and quality
of financial statements
2.1
2.2
549
2.3
2.4
551
552
2.5
552
552
552
554
555
555
555
556
557
557
557
558
566
567
567
568
568
569
569
Algebraic sign of cash flows
From excess cash flow to free cash flow
Analyzing the statement of cash flows
with ratios
Principles
The different forms of accounts
manipulation
Practices
Difference between cash-based or
accrual-based earnings management
Can accounts manipulation remove the
usefulness of financial statements?
3 Using the indirect method of operating
cash flow as a tool to analyze the earnings
quality of a company
Key points
Review (Solutions are on the book website)
Review 17.1 Mitsubishi Electric*
Review 17.2 Bartok Company (1)
Assignments
Assignment 17.1 Multiple-choice questions
Assignment 17.2 Smetana Company (4)
Assignment 17.3 Ericsson*
Assignment 17.4 Sinopec*
Assignment 17.5 Procter & Gamble* (2)
Assignment 17.6 The Wharf (Holdings) Limited*
References
Further readings
Additional material on the website
Notes
18 Ratio Analysis, Financial
Analysis and Beyond
1 Ratio analysis: searching for answers
to the ‘how’ question
1.1
1.2
1.3
Definition
Conditions of use of ratio analysis
Comparisons of ratios
569
570
571
572
573
573
573
574
575
575
575
577
579
579
580
581
582
583
583
585
585
585
587
588
588
588
589
590
592
594
597
598
598
599
600
601
601
602
604
CONTENTS
1.4
1.5
1.6
Some key ratios
Additional remarks about ratios
computation
Pyramids of ratios
2 Sources of information about business
entities
2.1
2.2
2.3
2.4
Annual report to shareholders
Business newspapers and magazines,
specialized magazines
Databases
Financial statements filed with tax
or judicial authorities
3 Measures of return to investors
3.1
3.2
Earnings per share and return on equity
Measures of return on capital invested
residual income and economic value
added (EVA)
4 Segment reporting
4.1
4.2
Definitions
Disclosure
5 Scoring models
5.1
5.2
Principles
Example: the Altman’s Z Score
6 Governance
6.1
6.2
Enterprise governance defined
Corporate governance and internal
controls, accountability and assurance
607
609
609
6.3
6.4
6.5
6.6
611
611
6.7
6.8
613
613
613
613
613
617
621
622
622
624
624
624
625
625
626
Business governance and value creation
Business governance metrics
Regulating enterprise governance
The causes of violations of the good
governance principles
Regulating ethics
Corporate social responsibility
xiii
626
626
627
627
628
628
Key points
Review (Solutions are on the book website)
Review 18.1 Bizerte Home Furniture
Company
Assignments
Assignment 18.1 Multiple choice questions
Assignment 18.2 ULMA Construccio´n
Polska SA*
Assignment 18.3 Agfa Gevaert*
Assignment 18.4 South Petrol and North Petrol
Assignment 18.5 Microsoft Corporation*
References
Further readings
Additional material on the website
Notes
629
Glossary of Key Terms
Index
643
629
629
632
632
633
634
635
639
640
640
641
641
659
LIST OF REAL COMPANIES
REFERENCED
Company name
Country
Chapter
Abercrombie & Fitch
USA
4, 8
Anheuser-Busch InBev
Belgium
13
adidas Group
Germany
2, 4
Aeroflot
Russia
5, 15
Agfa Gevaert
Belgium
18
Air Canada
Canada
5
Air Command Systems International SAS
France
13
Alliance Boots
UK
13
Alsbridge
USA
18
Aluminum Corporation of China
China
8, 9, 11
Amgen
USA
8
Apple
USA
1, 6, 8, 17
ArcelorMittal
Luxembourg
9, 11, 12
6, 7
Atos Origin
France
Bang & Olufsen
Denmark
8, 10, 12
Bayer
Germany
6, 7, 8, 10
Bayer CropScience
India (Germany)
5
Benetton
Italy
5
Benihana
USA
4, 9, 14
Best Buy
USA
10
Bosch
Germany
5, 7, 9, 10
Boston Consulting Group
USA
18
BP
UK
15
British Airways
UK
5, 7
Bulgari
Italy
4
Bull Group
France
6, 8
Cable and Wireless Worldwide
UK
13
Carrefour
France
2
Cegos
France
18
CeWe Color
Germany
8
China Communications Construction
China
5, 8, 16
China Dangdang Inc.
China
1
China Eastern Airlines
China
5, 13, 16
China International Marine Containers
China
13
China Petroleum & Chemical Corporation
China
7, 10
China Unicom
China
6
Chugoku Power Electric Company
Japan
5, 15, 16
Cimpor
Portugal
5
Citylink Telecommunications
UK
13
Club Me´diterrane´e
France
5, 7, 8, 11, 12, 15, 16
CNOOC (China National Offshore Oil Corporation)
China
13
(Continued)
xiv
LIST OF REAL COMPANIES REFERENCED
Company name
Country
Chapter
Cobham
UK
12, 14
Compagnie Ge´ne´rale des Eaux
France
16
Continental AG
Germany
18
Corona
Mexico
13
Daimler
Germany
7
Darden Restaurant, Inc.
USA
9, 10
DCNS
France
13
Dell
USA
13
Delta Air Lines
USA
5
Deutsche Bank
Germany
13
13
Deutsche Post Bank
Germany
Diageo
UK
13
Diedrich Coffee
USA
9
Diehl Avionik Systeme
Germany
13
Dr. Reddy’s Laboratories
India
5
DpiX LLC
USA
13
DuPont
USA
18
EADS
Netherlands
10
easyJet
UK
5, 10, 16
EDF
France
7, 17
Electrolux
Sweden
4
Elettronica
Italy
13
ENI
Italy
3, 11
EMI
UK
13, 14
EMIS
UK
8
xv
Ericsson
Sweden
9, 10, 11, 17, 18
EVN
Austria
8, 13
7, 15
ExxonMobil
USA
Facebook
USA
11
Fiat
Italy
10, 12
5
Fibria Celulose
Brazil
Ford Motor Company
USA
6
Fortis
Belgium
18
Fresenius
Germany
11
Frisch’s Retaurants
USA
9
General Electric
USA
13, 17, 18
Gerry Weber
Germany
11
Glencore
UK
13
Goodyear Tire and Rubber Company
USA
18
Google
USA
8, 9
Graphit Kropfmu¨hl
Germany
5
Guanshen Railway
China
5
H&M
Sweden
1, 2, 6
Hansen Medical
USA
6
Heineken
Netherlands
7, 10
Hellenic Petroleum
Greece
6
Holcim
Switzerland
5
Holmen
Sweden
5, 10, 11
Honda Motor Company
Japan
7, 13
HP (Hewlett Packard)
USA
9
(Continued)
xvi
LIST OF REAL COMPANIES REFERENCED
Company name
Country
Chapter
Iberia
Spain
5, 10, 12
1, 2, 3
Inditex
Spain
Infosys Technologies
India
15
Interbrew
Belgium
5
International Airlines Group (IAG)
UK
5, 7
International Commercial Television (ICTV)
USA
6
Irish Continental Group
Ireland
7, 9, 18
ISS International Service System
Denmark
7
Jana Partners
Canada
13
5
Jazztel
UK/Spain
Jet Airways
India
5
Johnson & Johnson
USA
3
Kerry
Ireland
9
Kmart
USA
2
14
Kodak
USA
Koninklijke Wessanen
Netherlands
5
KPN
Netherlands
4
L’Ore´al
France
9
LAN Airlines
Chile
1, 5
Linde
Germany
10
Lufthansa
Germany
12
McDonald’s
USA
9
Merck
Germany
7
Meta Abe Brewery
Ethiopia
13
Metro
Germany
5
Michelin
France
3, 11, 18
Microsoft
USA
6, 8, 10, 17, 18
Mitsubishi Electric
Japan
12, 17
Morton’s Restaurant Group
USA
9
Motorola Solutions
USA
18
Mountain Province Diamond
Canada
12
Nexen
Canada
13
Nippon Steel
Japan
9
1, 2, 5, 6, 8, 11, 18
Nokia
Finland
Norsk Hydro
Norway
9
NTPC Ltd.
India
1
Oerlikon
Switzerland
9
Ona
Morocco
5
Orkla
Norway
5, 10
Pernod Ricard
France
8, 10
Philips
Netherlands
4, 6, 8, 9, 10, 11, 14
Pirelli
Italy
7, 8, 9
Porsche
Germany
13
Procter & Gamble
USA
6, 15, 16, 17
Quest Software
USA
13
Recipharm
Sweden
13
Repsol YPF
Spain
5, 7, 8, 9, 11, 12
Richemont
Switzerland
9
Roche
Switzerland
8
Rottneros
Sweden
11
(Continued)
LIST OF REAL COMPANIES REFERENCED
Company name
Country
Chapter
Royal Ahold
Netherlands
13
RWE
Germany
11
Saint Gobain
France
8, 12
Sandvik
Sweden
5, 8, 11, 12
Sanofi
France
8
8
SAP
Germany
Satyam
India
5, 13
Sauer-Danfoss
USA
9
Scania
Sweden
7
Securitas
Sweden
7, 8
Sesa Goa
India
13
Shanghai Baosteel
China
13
14, 17
Shenzhen Expressway Limited
China
Siemens
Germany
8, 9, 10, 18
Sinopec
China
12, 15, 17, 18
SK Telecom
South Korea
5
Slovnaft
Slovakia
5
Sony Corporation
Japan
9, 10, 12, 18
Southwest Airlines
USA
5
Staples
USA
7
Sterlite
India
13
Stern-Stewart & Co
USA
18
Stora Enso
Finland
2, 10, 12, 13
Sulzer
Switzerland
10, 12
TCL
China
10
TDA Armements
France
13
Technicolor
France
11
Tech Mahindra
India
13
Telefo´nica
Spain
5, 9
Thales
France
12, 13
Thales Air Systems
France
13
Thales Australia
Australia
13
TNT
Netherlands
13
xvii
Toray Industries
Japan
9, 10, 11, 12, 18
Total
France
15
Toyota Motor Corp.
Japan
9, 18
Trigano
France
5
UBS
Switzerland
6
ULMA Construccio´n Polska SA
Poland
18
Unilever
UK/Netherlands
5
United Continental Holdings
USA
5
United Internet
Germany
12
Universal Music
USA
13
UPM-Kymmene
Finland
5, 6
UPS
USA
13
Vivendi
France
14, 16
Vivendi Universal
France
16, 17, 18
Vodafone
UK
13
Volkswagen
Germany
13, 18
Volvo Group
Sweden
8, 9
(Continued)
xviii
LIST OF REAL COMPANIES REFERENCED
Company name
Country
Chapter
Walgreens
USA
13
Walmart Group
USA
2, 3, 8
Wal-Mart Stores Inc.
USA
3, 8, 10
Washington Mutual
USA
18
Wesfarmers
Australia
14
Weyerhaeuser
USA
10, 12
Wharf (Holdings)
Hong Kong
17
Wipro
India
16
WPP
UK
7, 9
Xstrata
UK
13
Youngor
China
10
Ypioca
Brazil
13
Zymogenetics
USA
17
ABOUT THE AUTHORS
Herve´ Stolowy is Professor of Accounting at HEC Paris (Jouy-en-Josas, France). He holds a degree in business administration (ESCP – Paris Graduate School of Management), a master’s degree in private law (Universite´ Paris-Val de Marne), a BA in Russian and American studies (Universite´ Paris-Sorbonne), a PhD in
financial accounting (Universite´ Paris-Panthe´on-Sorbonne) and an ‘habilitation a` diriger des recherches’
(which certifies him as a qualified doctoral dissertation adviser). He is a certified ‘expert comptable’
(French equivalent of a chartered accountant or certified public accountant).
He has authored and co-authored ten books, chapters in 15 collective works and published over 75
articles in academic and applied journals, such as Abacus, Accounting Auditing & Accountability Journal,
Accounting, Organizations and Society, Advances in International Accounting, Comptabilite´ – Controˆle –
Audit, European Accounting Review, Finance – Controˆle – Strate´gie, The International Journal of
Accounting, Issues in Accounting Education, Journal of Accounting and Public Policy, the Journal of Business Ethics, Les Echos, the Review of Accounting and Finance, the Revue de Droit Comptable and the
Revue Française de Comptabilite´.
Professor Stolowy’s research and teaching interests span financial and international accounting, and
focus more specifically on IFRS/IAS, intangibles, accounts manipulation (including fraud), and design and
use of statement of cash flows. He is a member of the Association Francophone de Comptabilite´ (AFC), the
European Accounting Association (EAA), the American Accounting Association (AAA), and Canadian
Academic Accounting Association (CAAA). He is past president of AFC and current co-editor of Comptabilite´ – Controˆle – Audit. He has been a member of the ‘Standards Advice Review Group [SARG] created
to advise the [European] Commission on the objectivity and neutrality of the European Financial Reporting
Advisory Group’s (EFRAG’s) opinions’.
Herve´ Stolowy teaches financial accounting and financial statement analysis in the different graduate
programs of HEC Paris (HEC-MBA Program and HEC Master of Science in Management – Grande
Ecole).
Michel J. Lebas is Emeritus Professor of Management Accounting and Management Control at HEC Paris.
He was educated both in France (HEC) and in the United States (Tuck School at Dartmouth College and
Stanford University Graduate School of Business). After a brief career as an economic analyst for a US multinational company in Boston, and later as a staff consultant in the New York office of then Price Waterhouse, he joined the academic profession while maintaining an active freelance consulting practice. He is
now a freelance consultant and executive education trainer, working for multinational companies and various international Executive MBA programs in Europe, Asia, North America and Africa.
Professor Lebas’ field of interest and consulting concentrates on advanced practices in management
accounting and performance management systems. He was one of the academic research associates in the
Beyond Budgeting Round Table Program from 1989 until 2008; from July 1992 to July 2000 he represented the French Ordre des Experts Comptables and the Compagnie des Commissaires aux Comptes on
the then ‘Financial and Management Accounting Committee’ (FMAC) (currently ‘Accountant in Business
Committee’) of the International Federation of Accountants (IFAC). He is the founder, and was, from 1992
until 1996, co-editor of the management accounting section of the Revue Française de Comptabilite´. His
publications, in addition to this textbook, include chapters in major international collective works, coauthorship/editorship of a Glossary of Accounting English, co-authorship of a Management Accounting
Glossary, as well as a French language management accounting textbook. He co-authored a CAM-I
xix
xx
ABOUT THE AUTHORS
monograph on Best Practices in World Class Organizations with Ken Euske and C.J. McNair. His numerous articles have been published in many academic and professional journals including Administracio´n de
Empresas, Les Cahiers de l’ANACT, Cahiers Français, Comptabilite´ – Controˆle – Audit, De Accountant,
Les Echos, European Accounting Review, European Management Journal, The Financial Times, International Journal of Production Economics, Journal of Management Studies, Management Accounting
Research, Performances Humaines et Techniques, Problemi di Gestione, Revue Française de Comptabilite´,
Revue Française de Gestion Industrielle, Sviluppo & Organizzazione, Travail, and in the publications of
IFAC.
Professor Lebas has been Associate Dean for Academic Affairs of the HEC Grande Ecole (1986–1989).
He has held visiting appointments at Aalto School of Business (formerly Helsinki School of Economics), the
Aarhus Business School, SDA Bocconi in Milan, the Fletcher School of Law and Diplomacy at Tufts University, INSEAD, the Mediterranean School of Business in Tunis, the Darden Graduate School of Business
at the University of Virginia, and at the Foster School of Business of the University of Washington. Michel
Lebas is a member of the Association Francophone de Comptabilite´, the American Accounting Association,
and the Institute of Management Accountants. He lives in Seattle, Washington, USA.
Yuan Ding is Cathay Capital Chair Professor in Accounting at CEIBS (China Europe International Business
School). Prior to joining CEIBS, he was a tenured faculty member at HEC Paris, France. He received his
PhD in Accounting from the Universite´ Montesquieu (Bordeaux IV), France. He also holds a Master’s in
Enterprise Administration from the Universite´ de Poitiers, France.
Professor Ding’s research has been published in Accounting, Organizations and Society, Journal of
Accounting and Public Policy, European Accounting Review, Abacus, The International Journal of
Accounting, Review of Accounting and Finance, Advances in International Accounting, Issues in Accounting Education, the Journal of Business Ethics, Managerial Finance, Journal of Business Venturing, Journal
of International Business Studies, Management International Review, Corporate Governance: An International Review, International Journal of Disclosure and Governance and several leading French academic
journals.
Professor Ding is a member of the European Accounting Association, the Association Francophone de
Comptabilite´ and the American Accounting Association. He is Co-Editor of The International Journal of
Accounting and Associate Editor of China Journal of Accounting Research. He is also Editorial Board
Member of Journal of Accounting and Public Policy, Global Perspectives on Accounting Education Journal, and Research in Accounting in Emerging Economies. His current research is focused on intangibles,
international accounting harmonization, earnings management and accounting frauds, analyst forecasts,
corporate governance issues, IPO issues and accounting reform in China.
Professor Ding lectures in financial accounting, financial statement analysis, international accounting
and corporate governance in Master’s of Science in Management, MBA, EMBA and PhD programs in
Europe and in China. He designed and delivered in-company special and open executive education programs in China and in Europe. At CEIBS, he co-founded the first CFO open program in China in 2005 and
is involved in many top executive programs co-organized with Harvard, Wharton, INSEAD, New York
University, London School of Economics, IESE and HEC Paris. He frequently provides consulting services
for many multinational and Chinese companies in the areas of financial communication, corporate governance, cost control system design, investment and M&A. In May 2011, Prof. Ding launched ‘Ding Yuan
Index Neutral Fund’ in a share market and became the first accounting and finance professor in mainland
China running a hedge fund. He also serves on the Boards of Directors of several listed firms and financial
institutions in China, Europe and North America.
The author team is a reflection of the spirit and the tone of the text. Herve´ Stolowy and Yuan Ding bring
the accounting and reporting practitioner/researcher and external financial analyst viewpoint, while Michel
Lebas brings the internal and managerial preoccupations in the design of information systems and the interpretation of accounting information. Currently living and working in three different continents (Europe,
America and Asia), the team brings a unique combined global vision on current accounting issues and their
management implication.
PREFACE
This fourth edition comes out at a time of both turmoil and hope for financial accounting.
Turmoil because the convergence between IFRS (the standards on which this book is mainly based) and
US GAAP, after a fast track forward until the crisis, and many ups and downs since, seems not to be gaining
traction at the time of this writing.
Turmoil following the financial scandals and the economic crisis that started in mid 2008.
Turmoil, because that storm challenged both accounting rules and practices.
Hope, because accounting standards held fast, and helped the economic boat stay the course, even if
still showing some potential weak points (mainly around the concept of fair value).
Hope, because the importance of good accounting and reporting is now more evident than ever. Had
many of the disabled firms followed best accounting practices, shareholders showed some common sense
and less gullibility, and managers indulged in less greed, much of the misery created around the world
would not have taken place, even if accounting alone could not have prevented some form of crisis.
Hope, because the field of accounting, even at over 3,800 years of age, is more alive and full of the vitality of youth than ever, and still developing to serve the needs of businesses of all sizes and activities and
investors, small and large.
More people, business students and executives, see the usefulness of gaining an ability to read and understand financial statements, and rely on trained qualified professionals to produce them.
This fourth edition acknowledges the turmoil and offers tools to comfort and reinforce the hope, in line
with harmonization of best practices and respectful of local cultural differences.
A book to meet changing student and faculty expectations
The success of the first three editions of this award-winning textbook confirmed that the authors’ original
point of view remains correct: most students of and in business or management around the world want and
need, regardless of their career plans, to understand how accounting figures and documents are produced
in order to better decode them and extract their informational content for decision making.
The profile of executive, graduate and undergraduate business students in the programs where the
authors teach is more and more international, whether it is because programs have developed without reference to borders, or because executive trainees, students and faculty show increasing worldwide mobility.
To these students as to most managers, English is the lingua franca of business. More and more business
programs are being taught in part or completely in ‘International English’, regardless of the location of
their venue.
Most students or executive program participants in our target audience know their career is already, or
will be, in an international context, i.e., neither where they grew up, nor where they were educated.
The composition of the team of authors reflects this quasi supra-nationality of accounting. Herve´ Stolowy, based in France, brings a European viewpoint, Michel J. Lebas, based in the US, teaches and consults
on four continents, and Yuan Ding, based in China, teaches and consults in Asia and Europe. All three
authors teach in international programs, each one its own mini melting pot of cultures, of educational backgrounds, of diverse previous experiences, of a variety of firms from industrial, commercial or service sectors, of different professional responsibilities, and of individual career or professional objectives.
The book is written first and foremost for all managers and students of management, more than it is
conceived for future or existing professional accountants. The authors trust these, however, will find the
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PREFACE
user-orientation of the book a source of enlightenment and of improvements to their own practice. The
richness of the Web-based appendices and supplements extends the reach of the book to include advanced
accounting students and make it a life-long reference tool, regardless of career evolutions.
Students and managers want and need, in a context of continuous learning, to be trained to appreciate,
understand and analyze a variety of Financial Accounting and Reporting issues from a theoretical, universal
and generic point of view. They know the principles and tools they will have mastered through this textbook will allow them to adapt and apply their understanding of accounting and financial reporting to any
local circumstances they will face. The authors’ choice has been to provide many real-world case data from
a variety of contexts, industrial, commercial, distribution or services, variety of firm size (from the single
proprietorship to the multinational corporation), or variety of countries of operation in Europe, Asia,
America or Africa. These real-world cases are analyzed and used in illustrations in the chapters or are the
basis for well-focused and progressive assignments. The book’s content of principles, practices, tools and
techniques can be immediately applied to the rich and complex environment where our readers do work
and will work.
A book based on three simultaneous perspectives
The authors conceived their work to allow the teaching of Financial Accounting and Reporting to a nonspecialist audience with the following three perspectives in mind:
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First, it definitely takes a user-orientation position throughout, whether it is when explaining principles and their
implications for quality information, usable by decision makers, or in the practice of analyzing financial statements.
Second, it provides an a-national approach: the issues are explained as natural business and common sense
problems, with multiple possible solutions and positions. As much as possible, all likely solutions are examined
with their own logic and pros and cons. The accounting language is presented as a natural language rather than
as an esoteric jargon, reserved for the few and the brave. Accounting issues are created by business needs, and
by the ever increasing, and evolving, globalization of the economy. They transcend local politics and economic
upturns or downturns.
Third, it takes on an international point of view. Although unabashedly based on IFRS principles and rules, the
authors are aware of, and fully acknowledge and explain, the implications of the different positions other regulators may have taken on relevant issues. Our choice simply reflects the growing (even if slow) harmonization and
convergence between local rules and regulations and the leading international providers of principles, rules and
regulations.
Target audience for this text
This textbook is designed primarily for:
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Business and management graduate students, essentially MBA students, following their course of studies in institutions where knowledge of a single (national) accounting system is recognized as being insufficient preparation
for the world where the graduates will work;
Junior or senior undergraduate business students with minimal business experience;
Non-financial business executives, from any background or experience, who originate from functions distant from
financial techniques and information, who wish to understand the financial performance of the entities they interact
with and be able to decode their reporting to the outside world;
Intermediate courses on Financial Statement Analysis, Financial Reporting or International Accounting, when supplementing the text with the full power of the appendices on the dedicated website.
Our approach derives from the characteristics of our targeted audience
The book approach is based on the following ideas:
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As mentioned above, we adopted a user, rather than a preparer, perspective. Our choice results from our deeply
held belief that business ‘students’ (graduate, senior undergraduate, or executive trainees), regardless of the area
of specialization they have selected, or the career(s) they will embrace over their lifetime, will be, first and foremost,
and on a regular basis, users of financial statements.
PREFACE
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Whether they will use accounting and financial information as internal managers or executives, or as external
users (investors, credit analysts, etc.) they will need to interpret accounting data to be able to communicate and
decide.
Their knowledge of the preparation of accounting and reporting numbers needs only encompass enough
comprehension of key principles to allow the user to not be at the mercy of the information preparer. An old Chinese proverb says: ‘If you want to build a bridge, ask the river’. If a manager wants to make the right decision
about a business, she or he had better listen to what the firm says about itself, how it reports on its performance
or its cash flow. Understanding the past allows the decision maker to formulate, within the global economic context, a view of the future financial performance of the entity and of the risks inferred from the firm’s past behavior,
its business model and the decisions it can make or has made.
The book’s target audience is a mix of specialists and non-specialists. While helping non-specialists become
skilful in financial information understanding and use, our approach opens a new perspective for specialists to
review, from the user viewpoint, the information they prepare, and rethink their financial communication strategy
to more effectively satisfy the users’ needs.
The book is based on real-world examples and illustrations. It incorporates a profusion of extracts from the annual
reports of well-known firms and excerpts from the financial press. Some of these elements of annual reports are
commented on in detail, in order to prepare the students for reading and interpreting annual reports and articles
in the financial press.
Rather than providing a regulatory (technical) solution to a (simple or complex) reporting or measurement issue,
we have chosen to first examine the economic logic of the problem and second to identify generic possible solutions and what impact each might have on a company’s or decision-maker’s decisions. Accounting rules and regulations and practices result from well-reasoned arguments, which are dissected, when appropriate, in the
chapters.
Throughout the book and whenever appropriate, we cite and explain the latest International Accounting Standards Board (IASB) standards (i.e., IFRS/IAS). We strongly believe that, in many situations, the IASB recommendations, with the leeway and flexibility they contain, offer a good a-national approach, but we do not hesitate to
highlight the areas where the debate is still open, or where we feel in disagreement, with aspects of a currently
‘recommended’ solution, always taking the point of view of the user. We take into account all sources of good
accounting principles and practices: the IASB (which produces IFRS), the US-based Financial Accounting Standards Board (which produces SFAS), the Financial Market regulators such as IOSCO (International Organization of
Securities Commissions) or the US SEC (Securities and Exchange Commission) and their national or regional
partners or equivalents.
The body of each chapter is supplemented by five parts: (1) Key points, (2) Review problems with detailed analysis
and solutions, (3) Assignments, including Multiple Choice Questions on the key points, (4) References, and (5) Further readings.
A Glossary of Key Terms is provided at the end of the book, as well as a full index. All chapters are supplemented, on the dedicated book website, by appendices that deal with particularly technical issues or special
cases.
The authors have written this text with the intention of showing that quality accounting reports are essential to
decision makers. The ability to read and understand accounting statements is as essential to managers as their
ability to read newspapers, magazines and books, or to attend professional conferences. Good accounting, like
good journalism, follows rules and is limited only by professionalism, culture, ethics and tradition. The talent of the
accountant, like that of the journalist, rests in his or her ability to choose the right descriptors that will give a true
and fair view of events and of their implications. Accounting describes the economic reality of enterprises by using
a dedicated language. We hope, with this book, to help demystify the world of financial reporting.
A few practical considerations
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As the choice of currency unit has no bearing on the logic of our arguments or presentation, we use, throughout
the book, in keeping with our a-national editorial choice, and the current practice of the IASB, a generic Currency
Unit (or CU), except when we refer to real-life examples in which case the original currency is always used.
All assignments based on actual business organizations are identified, in the name of the assignment, with an
asterisk next to the name of the company to highlight the ‘real-world’ origin of the assignment.
In some tables, based on real-world examples, the use of parentheses is equivalent to a negative sign, as it is a
common practice in many countries.
Tables and figures are numbered by chapter. Those in web-based appendices are referred to with a letter A after
the number (For example: Table 12.1A would be in the web-based appendices to Chapter 12, while Table 12.1
would be in Chapter 12 in the textbook you hold in your hands, physically or in some electronic format).
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PREFACE
Web-based supplementary materials for students and instructors
Students have access to the following resources on Cengage’s interactive ‘CourseMate’ platform via the
printed access card in the front of the book, which contains access details and a unique access code:
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Solutions to the Review problems
Multiple-choice questions (Interactive multiple choice questions for self testing)
Excel files for selected assignments in the book
Excel file for book examples (excel elements corresponding to tables and examples in the book which are neither
reviews nor assignments)
Appendices for each chapter
Multilingual glossary of accounting terms (English, French, German, Italian, Spanish)
An interactive eBook version of the text.
Instructors have access to the following additional resources (via specific instructor login details which
they can request from the Cengage sales representative after adoption of the book):
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PowerPoint slides of the figures, tables and text summary corresponding to each chapter
End-of-chapter assignment solutions: Word files complete solutions. The authors have, when appropriate, written
special notes to the instructor, indicating frequently made mistakes, and alternative acceptable solutions
PowerPoint slides of the solutions for class use when appropriate
Excel files with all detailed calculations when useful
Additional assignments and their solution (Word files – and Excel files when appropriate)
ExamView Test bank.
New features of the fourth edition
In addition to updating the third edition throughout for the latest developments in the IFRS program and
bringing the IAS up-to-date (and quoting the relevant FASB pronouncements, when useful), and using the
most recently available company financial statements at the time of writing, the fourth edition offers:
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Conformity with current IFRS/IAS as of Autumn 2012.
New and updated real-life examples, included in both text and assignments, from companies operating in a range
of countries throughout the world, with a large development of cases about businesses headquartered in Asia.
Introduction to the distinction between the concepts of ‘book value’ and ‘market value’ as early as Chapter 1
and reference to the duality of valuations throughout the text.
Emphasis on the reasoning followed to link market value with book value: risk (or volatility) and time horizon of visibility (or life expectancy of the business model).
Extensive developments on ‘fair value’ in a completely rewritten Chapter 10 (IFRS 9 Financial instruments, IFRS
13 Fair value measurement).
Major update of Chapter 13 on consolidation (IFRS 10 Consolidated financial statements which replaces IAS 27
for the part related to consolidated financial statements and SIC 12 on Special Purpose Entities, IFRS 11 Joint
arrangements [replaces IAS 31 and SIC 13, replaces proportional integration by equity method for joint ventures
while a special technique is used for joint operations], IFRS 12 Disclosure of interests in other entities).
Enlarged financial analysis sections in almost all chapters before those specifically dedicated to financial statement
analysis.
Vastly expanded level of details of the many new review problems at the end of each chapter.
Expansion of the Glossary of key terms at the end of the book
More and updated exercises and case material at the end of each chapter (e.g. on revenue recognition in
Chapter 6).
Disclosure of a ‘level of difficulty’ for end of chapter review questions/problems and for assignments.
Further streamlining and simplification of bookkeeping (preparer technology) issues in Chapter 4.
An enriched provision of materials on the faculty website, which instructors can share, as needed, with their
students.