13th
EDITION

ELLIOTT AND ELLIOTT

Financial Accounting & Reporting is the most up-to-date text on the market. Now fully updated in
its 13th edition, it includes extensive coverage of International Accounting Standards (IASs) and
International Financial Reporting Standards (IFRSs).
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 coverage. Students using this book will gain the knowledge and skills
to help them apply current standards, and critically appraise the underlying concepts and financial
reporting methods.

Key features
l

FINANCIAL
ACCOUNTING
AND 13th Edition
REPORTING

New features for this edition
l
l


l


l

l


l




Fully updated to May 2009
Updated coverage of International
Financial Reporting Standards
Substantial revisions to Analysis of
Accounts and Accountability chapters
Selected chapters include new additional
questions and exercises
Includes more examples of extracts from
real financial reports
Fully supported by a comprehensive set
of multiple-choice questions online,
covering all parts of the text.

FINANCIAL ACCOUNTING
AND REPORTING

Combines academic rigour with an
engaging and accessible style
l Coverage of International Financial
Reporting Standards

l Illustrations taken from real published
accounts
l Excellent range of review questions
l Numerous exercises, varying in level of
difficulty, with solutions where applicable
l Extensive references
l A section on the Analysis of Accounts
l A section on Accountability – includes
Corporate Governance issues,
Sustainability - environmental and
social reporting and Ethics

BARRY ELLIOTT AND JAMIE ELLIOTT

Barry Elliott is a training consultant. He has extensive teaching experience at undergraduate,
postgraduate and professional level in China, Hong Kong, New Zealand and Singapore. He has
wide experience as an external examiner both in higher education and at all levels of professional
education.
Jamie Elliott is a Director with Deloitte & Touche. 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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Financial Accounting
and Reporting


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We work with leading authors to develop the
strongest educational materials in business and finance
bringing cutting-edge thinking and best learning
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Under a range of well-known imprints, including
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Financial Accounting
and Reporting
THIRTEENTH EDITION

Barry Elliott and Jamie Elliott


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Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 1993
Second edition 1996
Third edition 1999
Fourth edition 2000
Fifth edition 2001
Sixth edition 2002
Seventh edition 2003
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
Twelfth edition published 2008
Thirteenth edition published 2009
© Prentice Hall International UK Limited 1993, 1999
© Pearson Education Limited 2000, 2009
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
in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron
House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners. The
use of any trademark in this text does not vest in the author or publisher any
trademark ownership rights in such trademarks, nor does the use of such
trademarks imply any affiliation with or endorsement of this book by such
owners.
ISBN: 978-0-273-72332-5
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
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9 8 7 6
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5 4
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3

2

1

Typeset in 10/12 Ehrhardt MT by 35
Printed by Ashford Colour Press Ltd., Gosport
The publisher’s policy is to use paper manufactured from sustainable forests.



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Brief Contents

Preface and acknowledgements
Guided tour of MyAccountingLab

xxi
xxvi

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 inflation

3
22
40
59

Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY

99

5
6
7
8
9

Financial reporting – evolution of the regulatory framework in the UK
Financial reporting – evolution of international standards
Conceptual framework
Published accounts of companies
Preparation of published accounts

101
137
158

184
229

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

255

10
11
12
13
14
15
16
17
18
19

257
282
317
342
373
402
436
457
498
524


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 and intangible assets; brands
Inventories
Construction contracts

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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 and
consolidated statements of changes in equity
23 Accounting for associates and joint ventures
24 Accounting for the effects of changes in foreign exchange rates under IAS 21

543
545
562
575
591
611

Part 5
INTERPRETATION

625

25
26
27
28
29

627
654
680
724
770


Earnings per share
Statements of cash flows
Review of financial ratio analysis
Trend analysis and multivariate analysis
An introduction to financial reporting on the Internet

Part 6
ACCOUNTABILITY

783

30 Corporate governance
31 Sustainability – environmental and social reporting
32 Ethics for accountants

785
838
884

Appendix: Outline solutions to selected exercises

907

Index

913


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Full Contents

Preface and acknowledgements
Guided tour of MyAccountingLab

xxi
xxvi

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 balance sheet under the cash flow concept
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
2.9


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
Accounting for the sacrifice of non-current assets

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
29


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2.10

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 inflation
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 the regulatory framework
in the UK
5.1
5.2
5.3
5.4

Introduction
Mandatory regulations
Arguments in support of standards
Arguments against standards

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
105
106


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5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12

Structure of regulatory framework
The Operating and Financial Review (OFR)
The Financial Reporting Review Panel
The Financial Services Authority
The Revised Combined Code ( June 2008)
Interim reports following Cadbury
Developments for small companies
Evaluation of effectiveness of mandatory regulations
Summary
Review questions
Exercises
References


6 Financial reporting – evolution of international standards
6.1
6.2
6.3
6.4
6.5
6.6
6.7

Introduction
National differences
Reasons for differences in financial reporting
Classification of national accounting systems
Attempts to reduce national differences
The work of international bodies in harmonising and standardising
financial reporting
US GAAP
Summary
Review questions
Exercises
References

7 Conceptual framework
7.1
7.2
7.3
7.4
7.5
7.6


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

8 Published accounts of companies
8.1
8.2
8.3
8.4
8.5
8.6
8.7

Introduction
Introduction to published accounts
A public company’s financial calendar
Criteria for information appearing in a statement of comprehensive
income and statement of financial position
The prescribed formats – the statement of comprehensive income
What information is required to be disclosed in Format 1 and
Format 2?

Cost of sales

107
110
116
119
119
122
125
132
134
134
135
135

137
137
137
138
142
143
144
151
155
155
155
156

158
158

159
162
164
174
177
178
180
181
182

184
184
184
186
186
187
188
189


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8.8
8.9
8.10
8.11

8.12
8.13
8.14
8.15
8.16
8.17
8.18
8.19
8.20

8.21
8.22
8.23
8.24

Distribution costs
Administrative expenses
Other operating income or expense
What costs and income are brought into account after calculating
the trading profit in order to arrive at the profit on ordinary
activities before tax?
Does it really matter under which heading a cost is classified in the
statement of comprehensive income provided it is not omitted?
Discontinued operations disclosure in the statement of
comprehensive income

Items requiring separate disclosure
Other comprehensive income
The prescribed formats – the statement of financial position
Statement of changes in equity
US comprehensive income reporting
Segment reporting
The fundamental accounting principles underlying the published
statement of comprehensive income and statement of financial
position
Disclosure of accounting policies
Fair view treatment
Additional information in the annual report
What information do companies provide to assist comparison
between companies reporting under different reporting regimes?
Summary
Review questions
Exercises
References

9 Preparation of published accounts
9.1
9.2
9.3
9.4
9.5
9.6
9.7

Introduction
Stage 1: preparation of the internal statement of comprehensive

income from a trial balance
Stage 2: preparation of the statement of comprehensive income
of Illustrious SpA in Format 1 style
Stage 3: preparation of the statement of financial position
Preparation of accounts in Format 1 following IAS 8 and IFRS 5
Additional information value of IFRS 5
Additional information value of IAS 24
Summary
Review questions
Exercises
References

193
193
193

193
194
194
196
197
198
201
203
203

205
205
210
213

215
219
219
221
228

229
229
229
231
234
235
239
240
242
243
243
254

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


Introduction

257


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10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15


Common themes
Total owners’ equity: an overview
Total shareholders’ funds: more detailed explanation
Accounting entries on issue of shares
Creditor protection: capital maintenance concept
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
11.10
11.11

Introduction
Traditional statements – conceptual changes
Primary financial statements: their interrelationship
Primary financial statements: changes in their interrelationship
Reasons that companies borrow
Capital gearing and its implications
Off balance sheet finance – its impact
Substance over form
Impact of converting to IFRS
Statement of financial position as a valuation document
Why companies take steps to strengthen their statements of
financial position
11.12 Definitions cannot remove uncertainty: IAS 10 and IAS 37
11.13 ED IAS 37 Non-financial Liabilities
Summary
Review questions
Exercises
References

12 Financial instruments
12.1
12.2
12.3
12.4

12.5

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
Summary
Review questions

257
258
259
262
263
264
264
265
265
267
267
267
273
274
276
276
277
281

282

282
282
283
283
284
285
287
287
291
293
295
296
304
310
311
313
316

317
317
317
320
325
335
338
339


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Exercises
References

13 Employee benefits
13.1
13.2
13.3
13.4
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

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

339
341

342
342
342
343
343
345
346
348
348
351
352
354
354
355
355
356
357
358
359
359

359
362
362
363
363
366
366
369
372

373
373
373
374
375
378
379
380
382
390
391
394
396
397
397
398
400


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15 Property, plant and equipment (PPE)
15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8
15.9
15.10
15.11
15.12
15.13
15.14
15.15
15.16

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?
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

402
402
402
403
404
406
409
409
410
410
414

416
422
422
423
425
426
428
428
429
435

16 Leasing

436

16.1
16.2
16.3
16.4
16.5
16.6
16.7
16.8
16.9

436
436
438
440
442

447
448
449
451
452
452
454
456

Introduction
Background to leasing
IAS 17 (and its national equivalents) – the controversy
IAS 17 – classification of a lease
IAS 17 – accounting for leases by lessees
Accounting for the lease of land and buildings
Leasing – a form of off statement of financial position financing
Accounting for leases – a new approach
Accounting for leases by lessors
Summary
Review questions
Exercises
References

17 R&D; goodwill and intangible assets; brands
17.1
17.2
17.3
17.4
17.5
17.6

17.7
17.8
17.9
17.10
17.11

Introduction
Accounting treatment for research and development
Research and development
Introduction to goodwill and intangible assets
Accounting for goodwill under IFRS 3
Is there a correct treatment for amortising goodwill?
Accounting for intangible assets under IAS 38
Disclosure of intangible assets under IAS 38
Brand accounting
Emissions trading
Intellectual property

457
457
457
459
463
463
466
471
473
476
478
480



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17.12 Intellectual capital
17.13 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

498
498
498
499

500
501
508
510
511
513
514
515
518
519
519
523

524
524
524
525
525
526
529
535
535
535
542

PART 4
CONSOLIDATED ACCOUNTS

543


20 Accounting for groups at the date of acquisition

545

20.1
20.2
20.3
20.4
20.5
20.6
20.7
20.8
20.9

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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

483
484
486

486
488
496

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
The comparison between an acquisition by cash and an exchange
of shares
Non-controlling interests

545
545
545
547
548
550
550
550
550


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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 and consolidated statements of changes in equity
22.1
22.2
22.3
22.4
22.5
22.6

Introduction
Preparation of a consolidated statement of comprehensive income
– the Ante Group
The statement of changes in equity (SOCE)
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
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
Summary
Review questions
Exercises
References

553
554
555
555
556
561

562
562
562

565
566
570
570
570
571
571
571
574

575
575
575
578
578
579
581
582
582
582
590

591
591
591
592
592
594
594
596

598
598
599
610


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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

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
Summary
Review questions
Exercises
References

611
611
612
612
612

613
613
613
615
615
616
617
620
621
621
621
624

PART 5
INTERPRETATION

625

25 Earnings per share

627

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

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
Exercises
References

26 Statements of cash flows
26.1

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611

Introduction

627
627
628
629
630
631
633
638
640
642
642
645
645
645
646
647
653

654
654


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Full Contents • xvii

26.2
26.3
26.4
26.5
26.6
26.7

Development of statements of cash flows
Applying IAS 7 (revised) Cash Flow Statements
IAS 7 (revised) format of cash flow statements
Consolidated cash flow statements
Analysing a cash flow statement
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
27.10
27.11
27.12
27.13

Introduction
Initial impressions
Accounting ratios
Six key ratios
Description of the six key ratios
Description of subsidiary ratios
Application of pyramid of ratios to JD Wetherspoon plc
Segmental analysis
Inter-firm comparisons and industry averages
Ensuring true inter-firm comparisons
Sources of company information
Non-financial ratios
Interpretation problems when using ratios and consolidated
financial statements
Summary
Review questions
Exercises
References

28 Trend analysis and multivariate analysis
28.1

28.2
28.3
28.4
28.5
28.6
28.7
28.8
28.9
28.10
28.11
28.12
28.13
28.14
28.15
28.16
28.17
28.18

Introduction
Horizontal analysis between two periods
Trend analysis over a series of periods
Historical summaries
Vertical analysis – common size statements
Multivariate analysis – Z-scores
H-scores
A-scores
Combining cash flow and accrual data
Accounting polices
Balanced scorecards
Valuing shares of an unquoted company – quantitative process

Valuing shares of an unquoted company – qualitative process
Shareholder value analysis (SVA)
Measuring and reporting values in the annual report
Shareholder information needs
Professional risk assessors
Aggressive earnings management

654
656
657
662
664
668
670
670
671
679

680
680
680
681
682
684
686
695
698
705
707
708

708
708
711
711
712
723

724
724
724
726
727
728
730
733
733
735
735
736
737
740
741
742
747
750
755


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28.19 Impact of differences between IFRSs and national standards on
trend analysis
Summary
Review questions
Exercises
References

29 An introduction to financial reporting on the Internet
29.1
29.2
29.3
29.4
29.5
29.6
29.7
29.8
29.9
29.10
29.11
29.12

770

770
770
771
771
773
774
774
775
777
778
779
780
780
781
781
782

PART 6
ACCOUNTABILITY

783

30 Corporate governance

785

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
30.16
30.17
30.18
30.19

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Introduction
The reason for the development of a business reporting language
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 published financial statements
Progress of XBRL development for internal accounting
Further study

Summary
Review questions
Exercises
Bibliography

756
757
757
759
768

Introduction
What do we mean by corporate governance?
What do we mean by good corporate governance?
What are the constraints on good governance?
How to encourage directors to act in the best interest of
the shareholders
Corporate governance in different countries
Corporate governance codes and guidelines
Codes of Hong Kong, Malaysia and Singapore
UK – role of non-executive directors in corporate governance
Review of the contribution of NEDs
Directors’ remuneration – Code provisions
Directors’ remuneration – performance criteria
Directors’ remuneration – illustration from the Annual Report of
Diageo plc
Share options
IFRS 2 Share-Based Payment – a brief discussion of its principles
Directors’ remuneration – conclusion
Relations with shareholders

Institutional investors
The Myners Report

785
785
786
786
786
788
793
793
794
798
799
800
804
808
813
814
815
815
816


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Full Contents • xix

30.20
30.21
30.22
30.23
30.24
30.25
30.26
30.27

Corporate governance – directors’ remuneration summary
Audit committees and audit function
Principal qualities of an auditor
Current position on the auditor providing consultancy services
Future developments on auditors providing consultancy services
The Sarbanes–Oxley Act 2002
Review of corporate governance initiatives
How effective have the four pillars been in achieving good corporate
governance?
30.28 How effective have efforts been to control directors’ remuneration?
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
31.10
31.11
31.12
31.13
31.14
31.15
31.16
31.17
31.18
31.19
31.20
31.21
31.22
31.23

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
Background to companies’ reporting practices
European Commission recommendations for disclosures in annual
accounts
Evolution of stand-alone environmental reports
International charters and guidelines
Self-regulation schemes
Economic consequences of environmental reporting
Summary on environmental reporting
Environmental auditing: international initiatives
The activities involved in an environmental audit
Concept of social accounting
Background to social accounting
Corporate social responsibility
Need for comparative data
International initiatives towards triple bottom line reporting
Summary
Review questions
Exercises
References
Bibliography

32 Ethics for accountants
32.1
32.2

Introduction
What do we mean by ‘ethics’?


817
818
820
823
825
826
827
828
829
830
830
832
836

838
838
838
839
840
842
844
844
845
845
846
847
848
852
854

856
857
858
859
861
863
866
868
870
873
873
875
881
882

884
884
884


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32.3
32.4
32.5
32.6
32.7
32.8
32.9
32.10
32.11
32.12

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The nature of business ethics
Ethical codes for businesses
The background to business ethics
The role of ethics in modern business
International Accreditation Programme
The role of professional accounting ethics
National and international regulation
The role of the accountant as guardian of business ethics
Growth of voluntary standards
Conflict between Codes and Targets
Summary
Review questions
References
Bibliography

885
886

889
890
893
894
896
899
900
903
903
904
906
906

Appendix: Outline solutions to selected exercises

907

Index

913


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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,
outline solutions to selected exercises in an Appendix at the end of the book,
extensive references.

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


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xxii • Preface and acknowlegements

For companies currently applying FRSSE, this will continue. The IASB launched field
tests of an SME Exposure draft in June 2007 with an IFRS for non-publicly accountable/

private entities due in 2009.

Accounting standards – thirteenth edition updates
Chapters 5 and 6 cover the evolution of the regulatory framework in the UK and the evolution
of international standards.
Topics and International Standards are covered as follows:
Chapter 4
Chapter 8

Accounting for inflation
Published accounts of companies

Chapter 9
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15

Preparation of published accounts
Off statement of financial position finance
Financial instruments
Employee benefits
Taxation in company accounts
Property, plant and equipment (PPE)

Chapter 16 Leasing
Chapter 17 R&D; goodwill and intangible assets;
brands
Chapter 18 Inventories

Chapter 19 Construction contracts
Chapters 20 to 24 Consolidation
Chapter 25 Earnings per share
Chapter 26 Statements of cash flows
Chapter 30 Corporate governance

IAS 29
IAS 1, IAS 37, IFRS 1, IFRS 5
and IRFS 8
IAS 1, IAS 8, IAS 24 and IFRS 5
IAS 37
IAS 32, IAS 39 and IFRS 7
IAS 19, IAS 26 and IFRS 2
IAS 12
IAS 16, IAS 20, IAS 23, IAS 36,
IAS 40 and IFRS 5
IAS 17
IAS 38 and IFRS 3
IAS 2
IAS 11
IAS 21, IAS 27, IAS 28, IAS 31
and IFRS 3
IAS 33
IAS 7
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 changing price levels.


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 Combined Code.

UK regulatory framework and analysis – thirteenth edition changes
The following chapters have been retained and updated as appropriate:
Chapter 10
Chapter 11
Chapter 27
Chapter 28
Chapter 29
Chapter 30

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Share capital, distributable profits and reduction of capital
Off balance sheet finance
Review of financial ratio analysis
Trend analysis and multivariate analysis
An introduction to financial reporting on the Internet
Corporate governance


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Preface and acknowlegements • xxiii

Chapter 31 Sustainability – environmental and social reporting
Chapter 32 Ethics for accountants
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:

●

●
●

●

●

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.


Instructor’s Manual
A separate Instructor’s 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.


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xxiv • Preface and acknowlegements

Website
An electronic version of the 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
thirteenth 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 of Leeds Metropolitan University, who has
updated ‘Taxation in company accounts’ (Chapter 14); Bala Balachandran of South Bank

University ‘Corporate governance’ (Chapter 30); Charles Batchelor formerly of FTC
Kaplan for ‘Financial instruments’ (Chapter 12) and ‘Employee benefits’ (Chapter 13); Steve
Dungworth of De Montfort University, for ‘Ethics for accountants’ (Chapter 32), which
first appeared in the third edition; Ozer Erman of Kingston University, for ‘Share capital,
distributable profits and reduction of capital’ (Chapter 10), which first appeared in the
second edition; Paul Robins of the Financial Training Company for ‘Property, plant and
equipment (PPE)’ (Chapter 15) and Consolidation chapters; Professor Garry Tibbits of the
University of Western Sydney for Leasing (Chapter 16); 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 R&D; goodwill and intangible assets
(Chapter 17); and Martin Howes for inputs to financial analysis.
The authors are grateful for the constructive comments received from the following reviewers
which have assisted us in making improvements: Iain Fleming of the University of Paisley,
John Morley of the University of Brighton, John Forker of Queen’s University, Belfast, Breda
Sweeney of Cork University, 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 of De
Montfort University, Kenneth N. Field of the University of Leeds, Sue McDermott of
London Guildhall University, David Murphy of Manchester Metropolitan University,
Bahadur Najak of the University of Durham, Graham Sara of Coventry University, Laura
Spira of Oxford Brookes University, Ken Trunkfield, formerly of the University of Derby,
and Martin Tuffy formerly of the University of Brighton.
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 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.
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.

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