Advanced Financial Accounting

Cover

Advanced Financial Accounting, 7th ed.

ISBN 0273658492

Brief contents

Contents

Preface

PART 1 The framework of financial reporting

Chapter 1: The search for principles
Introduction
Accounting theory
The FASB conceptual framework project
o SFAC No. 1 Objectives of Financial Reporting by Business Enterprises
o SFAC No. 2 Qualitative Characteristics of Accounting Information
o SFAC No. 6 Elements of Financial Statements (superseded SFAC No. 3)
o SFAC No. 5 Recognition and Measurement in Financial Statements of Business Enterprises
o SFAC No. 7 Using Cash Flow Information and Present Value in Accounting Measurements
The IASC/IASB framework
The ASB's Statement of Principles
o The first attempt
o The revised exposure draft
o The Statement of Principles
# Chapter 1 The objective of financial statements
# Chapter 2 The reporting entity
# Chapter 3 The qualitative characteristics of financial information
# Chapter 4 The elements of financial statements
# Chapter 5 Recognition in financial statements
# Chapter 6 Measurement in financial statements
# Chapter 7 Presentation of financial information
# Chapter 8 Accounting for interests in other entities
o An evaluation of the ASB Statement of Principles
Summary
Chapter 2: Sources of authority: the United Kingdom
Introduction
Legislation
o Background
o The current position
Stock Exchange rules
Accounting concepts
o Recommendations and freedom of choice
Standardisation
o From 1970 to 1990
o The current regime - structure
o The current regime - progress
o Advantages and disadvantages of standardisation
The Government's proposals
Summary
Chapter 3: Sources of authority: the rise of international standards
International standardisation
o Introduction
o The International Accounting Standards Committee
o The International Accounting Standards Board
Harmonisation in the European Union
o The use of Directives
o The Fourth Directive
o The Seventh Directive
The EU Regulation of 2002 and the problems that it poses
o The EU Regulation of 2002
o The EU Regulation - some problems
# Lack of understanding
# Considerable differences and the need for convergence
# Differential enforcement
# The endorsement mechanism
# One or two sets of standards in each member state
# Conclusion
Summary
Chapter 4: What is profit?
Introduction
Present value of the business
Measurement of wealth by reference to the valuation of individual assets
o Historical cost
o `Adjusted' historical cost
o Replacement cost
o Net realisable value
o Present value
Capital maintenance
o Money financial capital maintenance
o Real financial capital maintenance
o Operating capital maintenance
# Different profit concepts
The usefulness of different profit measures
How do we choose?
The limitations of historical cost accounting
o Control
o Consumption
o Taxation
o Valuation
Interim summary
Distributable profits
Realised profits
o Do the provisions make sense?
o The ASB approach
Summary

PART 2 Financial reporting in practice

Chapter 5: Assets I
Introduction
o The nature of assets
o Tangible and intangible assets
o A multiplicity of standards
o The nature of the issues
The basis of valuation
o Value to the business
o Fair value
Tangible fixed assets
o The initial cost of a tangible fixed asset
o The capitalisation of borrowing costs
o FRED 29
o The writing down of new tangible fixed assets to their recoverable amounts
o Subsequent expenditure
o The revaluation of tangible fixed assets
o Classification of tangible fixed assets
o Frequency
o Who should make the valuations?
o Bases of valuation
# Assets other than properties
# Properties
# Valuation of specialised properties
# Valuation of non-specialised properties
o Reporting losses and gains on revaluation
o Reporting losses and gains on disposal
o Disclosures relating to revaluation
Depreciation
o FRS 15 and depreciation
# General principles
# Interest methods of depreciation
# Depreciation and materiality
# Changes in the method of depreciation
# Changes in estimated useful remaining life and residual value
# Combined assets
# Renewals accounting
# Disclosure requirements relating to depreciation
o FRED 29 and depreciation
# Compliance with International Accounting Standards
Investment properties
Intangible assets
o FRS 10 and its treatment of intangible assets
# The nature of intangible assets
# Initial carrying value
# Depreciation of intangible fixed assets
# Revaluation of intangible assets
# Disclosure requirements
# Compliance with international accounting standards
Differences in the treatment of tangible and intangible fixed assets
Impairment reviews
o FRS 11 Impairment of Fixed Assets and Goodwill
# When to perform an impairment review
# The calculation of recoverable amount
# Income-generating units
# The estimation of the cash flows
# Discount rate
# The allocation of impairment losses
# Subsequent monitoring of cash flows
# Disclosure requirements
# Compliance with international accounting standards
Summary
Chapter 6: Assets II
Introduction
Stocks and long-term contracts
o SSAP 9
# Stocks other than long-term contracts
# Stock valuation methods
# The writing down of stock
# The alternative accounting rules
# Long-term contracts
# Definition of long-term contracts
# Turnover, related costs and attributable profit
# Long-term contracts and the balance sheet
# Foreseeable losses
o FRED 28
# Revenue recognition
Research and development
o SSAP 13 Accounting for Research and Development
# Capitalisation of development expenditure
# Disclosure requirements
# Compliance with international standards
Government grants
o SSAP 4 The Accounting Treatment of Government Grants
# Revenue-related grants
# Capital-related grants
# Disclosure requirements
# Compliance with international standards
Summary
Chapter 7: Liabilities
Introduction
o The three sources of funding
# Grants and gifts
# Debt and equity
Liabilities
o The nature of liabilities
o The recognition of liabilities
o The measurement of liabilities
Provisions and contingencies
o FRS 12 Provisions, Contingent Liabilities and Assets
# The need for a standard
o Provisions
# Recognition of provisions
# The measurement of provisions
# Present values
# Changes in provisions
# Provisions and the recognition of assets
# Disclosure requirements
o Contingent assets and liabilities
o Contingent assets
# Contingent assets: disclosure requirements
# Contingent liabilities
# Contingent liabilities: disclosure requirements
o Compliance with international standards
Summary
Chapter 8: Financial instruments
Introduction
FRS 4 Capital Instruments
o Balance sheet presentation
o Allocation of finance costs
o Finance costs for non-equity shares
o Issue costs
o Use of the share premium account
o The distinction between shareholders' funds and liabilities
# Warrants
o The distinction between equity and non-equity
o The distinction between convertible and non-convertible liabilities
o Debt maturity
o FRS 4 and consolidated financial statements
o Disclosure requirements
o Application notes
Hedge accounting
o FRED 23 Financial Instruments: Hedge Accounting
# Hedges for net investment on foreign operations
# An ineffective hedge
# Terminated hedges
Derivatives
The valuation of financial instruments
o FRS 13 Derivatives and other Financial Instruments
# Disclosures
# Scope and objective
# Risks associated with financial instruments
# The structure of FRS 13
# Mode of presentation
# Main elements to be disclosed
FRED 30 and the convergence programme
o Changes to UK practice and remaining differences between UK and international standards
# Recognition
# Measurement, including hedge accounting
# Presentation (disclosure)
# Disclosure
# Conclusion
Summary
Chapter 9: Substance over form and leases
Introduction
Reflecting the substance of transactions
o FRS 5 Reporting the Substance of Transactions
# Scope of FRS 5
# The structure of FRS 5
# Summary of FRS 5
# FRS 5 application notes
# Compliance with international accounting standards
# Postscript to FRS 5
Leases
o Leasing and hire purchase agreements
o Basic accounting principles
# Operating leases
# Finance leases
# The principles illustrated
# An illustration of the basic principles of accounting for a finance lease in the accounting records of a lessee
# The impact of residual values
# Illustration of capitalisation of finance lease involving more frequent rental payments
o Barriers to the introduction of a standard
o SSAP 21 Accounting for Leases and Hire Purchase Contracts
# Scope
# Distinction between finance and operating leases
# Hire purchase contracts
# Accounting by lessees
# Disclosure requirements in the financial statements of lessees and hirers
# Accounting for finance leases by lessors - general principles
# The actuarial method after tax
# Alternative approaches to accounting for finance leases and hire purchase contracts
# Accounting for operating leases by lessors - general principles
# Disclosure requirements for the lessor in respect of finance and operating leases and hire purchase contracts
# Sale and leaseback transactions
o Compliance with international standards
Beyond SSAP 21
o Accounting for Leases: A New Approach (1996)
o Leases: Implementation of a New Approach (1999)
# The cash flows on which the capitalisation is based
# The discount rate to be used by the lessee
# The recognition of lease-related assets in the books of the lessor
# The next step
Summary
Chapter 10: Pension costs
Introduction
o The issues
# Actuarial gains and losses
o Valuation of pension fund assets and liabilities
o SSAP 24 and FRS 17- the differences in outline
SSAP 24 Accounting for Pension Costs
o The accounting principles underlying SSAP 24
o Bases of the actuarial methods
o Experience surpluses or deficiencies
o Changes in actuarial assumptions and methods and retroactive changes to the scheme
o Discretionary pension increases
o Related issues
# The effect of discounting
# Group schemes
# Foreign schemes
# Scope
o Disclosure requirements
From SSAP 24 to FRS 17
FRS 17 Retirement Benefits
o Actuarial methods
o Should account be taken of the time value of money in determining the current service charge?
o Should account be taken of salary increases to which the employer is not yet committed?
# Likely benefits
# Basis for the contributions
o At what rate should the liabilities be discounted?
o Frequency of actuarial valuations
o FRS 17 and the recognition of the costs of retirement benefits schemes
# The nature of the costs
# Where should the costs be recognised?
o Disclosure requirements
# Defined benefits schemes
o The rationale underpinning FRS 17
o The reaction to, and implementation of, FRS 17
o Compliance with the international standard
Summary
Chapter 11: Reporting financial performance
Part A Reconfiguring the financial statements Reporting financial performance
o SSAP 6 Extraordinary Items and Prior Year Adjustments
o FRS 3 Reporting Financial Performance
# Exceptional and extraordinary items
# Prior-period adjustments
# Prior-period adjustments and disclosure requirements
# Reflecting the results of discontinued operations
# Taxation
# Minority interests
# The statement of total recognised gains and losses
# Two additional notes
Review of FRS 3
o Reporting financial performance: proposals for change
o FRED 22 Revision of FRS 3
# Proposed performance statement
# Recycling
# Discontinued operations
# Extraordinary items
# Notes to the financial statements
o Compliance with international standards
o Post-FRED 22 developments
Segmental reporting
o The requirements of the Stock Exchange and company law
o SSAP 25 Segmental Reporting
o Compliance with the international standard
Part B Extending the financial reporting envelope Accounting for post balance sheet events
o SSAP 17 Accounting for Post Balance Sheet Events
o FRED 27 Events after the Balance Sheet Date
# Dividends no longer adjusting events
# Dividends from subsidiaries and associates declared after the balance sheet date
# Adverse events and prudence
o Compliance with the international standard
Earnings per share
o FRS 14 Earnings per Share
# Scrip issue
# Issue at full market price
# Rights issue
# Dilution
# Contingently issuable shares
o FRED 26 Earnings per Share
o Compliance with the international standard
Related party disclosures
o FRS 8 Related Party Disclosures
o The definition of related parties
# Materiality
o FRED 25 Related Party Transactions
o Compliance with the international standard
Part C Share-based payments
Different types of share-based payment
o Existing practice
o FRED 31 Share-based Payments
# Equity-settled share-based payment transaction
# Cash-settled share-based payment transactions
# Other aspects of FRED 31
o The response to the Discussion Paper and FRED 31
Summary
Chapter 12: Taxation: current and deferred
Introduction
Current taxation
o Corporation tax
o Tax credits
o Withholding tax
o Overseas taxation
o FRS 16 Current Tax
o IAS 12 Income Taxes
Deferred taxation
o Timing differences
o Attempts at standardisation: ED 11 to SSAP 15
o FRS 19 Deferred Tax
# Discounting
# Presentation and disclosure
o The international accounting standard: IAS 12
# Realised gains on disposal of fixed assets
# Unrealised gains on revaluation of fixed assets
# Unremitted earnings
Summary
Chapter 13: Business combinations and goodwill
Business combinations
o Introduction
o Some reasons for combining
# Purchase of undervalued assets
# Economies of scale
# Elimination or reduction of competition
# Reduction of risk
# Use of price/earnings ratios
# Managerial motives
o Methods of combining
# Combinations which result in a group structure
# Combinations not resulting in a group structure
# Preference for group structure
# Choice of consideration
o Accounting for business combinations
o Acquisition and merger accounting
o Development of an accounting standard
# The Companies Act 1981
# Criteria for use of the merger method
# The approach of SSAP 23
# Experience of SSAP 23
# FRS 6 Acquisitions and Mergers
o The international accounting standard
Goodwill
o Introduction
o Accounting for goodwill
# Some possibilities
# The approach of SSAP 22
# Experience of SSAP 22
# Towards a new standard
# ASB pronouncements
o FRS 10 Goodwill and Intangible Assets
# Impairment reviews
# Negative goodwill
# Disclosure requirements
o The international accounting standards
o Conclusion
Summary
Chapter 14: Investments and groups
Introduction
Investments
o Individual company financial statements
o The international accounting standards
Accounting for groups
o What is a group?
o The compass of group accounts
o Changes in the composition of a group
# Treatment of an acquisition
# Treatment of disposals
Summary
Chapter 15: Associates and joint ventures
Introduction
Possible methods of accounting
o Associates and acquisition accounting
# Date of acquisition
# Consistent accounting periods and policies
# Use of fair values
# Purchased goodwill and amortisation
# Unrealised intercompany profits
The regulatory framework in the United Kingdom
o The legal background
o FRS 9 Accounting for Associates and Joint Ventures
# Joint ventures and the gross equity method
# Approach where no consolidated financial statements are prepared
# Large investments in associates and joint ventures
o Summary of the UK position
The international accounting standards
o Associates
o Joint ventures
o Proposed changes
Summary
Chapter 16: Overseas involvement
Introduction: the problems identified
Accounting for foreign currency transactions
o Summary
# 1 Non-monetary assets shown on basis of historical cost
# 2 Non-monetary assets shown on basis of a revalued amount
# 3 Unsettled monetary items
# 4 Treatment of exchange gains and losses
Translation of the financial statements of an overseas subsidiary
o The SSAP 20 solution
o Closing rate/net investment method
o Temporal method
o A critical look at the two methods
# Some substantial differences
# Advantages and disadvantages
# One aspect of a larger problem
o A more complex example
# The closing rate/net investment method
The international accounting standard
The proposed new standards
Summary
Chapter 17: Expansion of the annual report
Introduction
Cash flow statements
o Background
o FRS 1 and the individual company
# Net cash flow from operating activities
# Dividends received from associates and joint ventures
# Returns on investments and servicing of finance
# Taxation
# Capital expenditure and financial investment
# Acquisitions and disposals
# Equity dividends paid
# Management of liquid resources
# Financing
o Groups, associates and joint ventures
# Groups
# Associates and joint ventures
o Foreign currency differences
o The international accounting standard
o Usefulness and limitations of the cash flow statement
The operating and financial review
o Exposure draft
o The White Paper, Modernising Company Law
The historical summary
Reporting about and to employees
Summary financial statements
Interim reports and preliminary announcements
o Interim reports
o Preliminary announcements
Summary
Chapter 18: Capital reorganisation, reduction chapter and reconstruction
Introduction
Redemption and purchase of shares
o Purchase not out of capital2
o Purchase out of capital5
# The permissible capital payment
# Further safeguards
Capital reduction
The proposed simplification of capital reduction
The legal background to other reorganisations
Capital reconstruction
o Distribution on liquidation
o Design of a capital reconstruction scheme
o Evaluation of a capital reconstruction scheme
Summary

PART 3 Accounting and price changes

Chapter 19: Accounting for price changes
Introduction
The progress of accounting reform
Current purchasing power accounting
o Introduction
o Monetary assets and liabilities
o The computation of gains and losses on a company's net monetary position
o The nature of the loss or gain on a company's net monetary position
o Strengths and weaknesses of the CPP model
Summary
Chapter 20: Current cost accounting
Introduction
Theoretical roots
o The distinction between holding and operating gains
o The distinction between realised and unrealised holding gains
o The relationship between historical cost profit and business profit
o Which `current value'?
o Deprival value/Value to the business
The basic elements of current cost accounting
o The current cost balance sheet
o The current cost profit and loss account
# Operating capital maintenance
# Monetary working capital adjustment (MWCA)
# The current cost operating profit and operating capability
# The gearing adjustment
# The current cost accounts
# Financial capital maintenance
Summary
Chapter 21: Beyond current cost accounting
The utility of current cost accounts
o Control
o Taxation
o Consumption
o Valuation
Interim summary
CPP and CCA combined
A real alternative - Making Corporate Reports Valuable
o More contextual information
o Market capitalisation
o A net realisable value accounting model
o MCRV's structure for financial statements
# Assets and liabilities statement
# Operations statement
# Statement of changes in financial wealth
# Distributions statement
# Additional statements
The evolution of the ASB's thinking
o Conclusion
Summary

Index