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FINANCIAL
ACCOUNTING AND
REPORTING
BARRY ELLIOTT
JAMIE ELLIOTT
EIGHTEENTH EDITION
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Financial Accounting and Reporting
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Financial Accounting
and Reporting
EIGHTEENTH EDITION
Barry Elliott and Jamie Elliott
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong
Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan
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Pearson Education Limited
Edinburgh Gate
Harlow CM20 2JE
United Kingdom
Tel: +44 (0)1279 623623
Web: www.pearson.com/uk
First published 1993 (print)
Second edition 1996 (print)
Third edition 1999 (print)
Fourth edition 2000 (print)
Fifth edition 2001 (print)
Sixth edition 2002 (print)
Seventh edition 2003 (print)
Eighth edition 2004 (print)
Ninth edition 2005 (print)
Tenth edition 2006 (print)
Eleventh edition 2007 (print)
Twelfth edition 2008 (print)
Thirteenth edition 2009 (print)
Fourteenth edition 2011 (print)
Fifteenth edition 2012 (print and electronic)
Sixteenth edition 2013 (print and electronic)
Seventeenth edition 2015 (print and electronic)
Eighteenth edition 2017 (print and electronic)
© Pearson Education Limited 2000, 2011 (print)
© Pearson Education Limited 2012, 2013, 2015, 2017 (print and electronic)
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.
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ISBN: 978-1-292-16240-9 (print)
978-1-292-16243-0 (PDF)
978-1-292-16242-3 (ePub)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
10 9 8 7 6 5 4 3 2 1
18 17 16 15 14
Front cover image: PM Images/GettyImages
Print edition typeset in 10/12 pt Ehrhardt MT Std by SPi Global
Printed and bound in Malaysia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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Brief contents
Preface xxi
Publisher’s acknowledgements xxvii
Part 1
IntRoDuCtIon to ACCountIng on A CAsh FLow AnD
ACCRuAL ACCountIng BAsIs 1
1 Accounting and reporting on a cash flow basis 3
2 Accounting and reporting on an accrual accounting basis 21
Part 2
PREPARAtIon oF IntERnAL AnD PuBLIshED FInAnCIAL
stAtEmEnts 31
3 Preparation of financial statements of comprehensive income,
changes in equity and financial position 33
4 Annual report: additional financial disclosures 70
5 Statements of cash flows 102
Part 3
REguLAtoRy FRAmEwoRk – An AttEmPt to AChIEvE
unIFoRmIty 129
6 Financial reporting – evolution of global standards 131
7 Concepts – evolution of an international conceptual framework 155
8 Ethical behaviour and implications for accountants 173
Part 4
InComE AnD AssEt vALuE mEAsuREmEnt systEms 199
9 Income and asset value measurement: an economist’s approach 201
10 Accounting for price-level changes 220
11 Revenue recognition 253
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vi • Brief contents
Part 5
stAtEmEnt oF FInAnCIAL PosItIon – EquIty,
LIABILIty AnD AssEt mEAsuREmEnt AnD DIsCLosuRE 277
12 Share capital, distributable profits and reduction of capital 279
13 Liabilities 303
14 Financial instruments 326
15 Employee benefits 359
16 Taxation in company accounts 386
17 Property, plant and equipment (PPE) 410
18 Leasing 443
19 Intangible assets 465
20 Inventories 493
21 Construction contracts 519
Part 6
ConsoLIDAtED ACCounts 543
22 Accounting for groups at the date of acquisition 545
23 Preparation of consolidated statements of financial
position after the date of acquisition 565
24 Preparation of consolidated statements of income,
changes in equity and cash flows 579
25 Accounting for associates and joint arrangements 601
26 Introduction to accounting for exchange differences 627
Part 7
IntERPREtAtIon 649
27 Earnings per share 651
28 Review of financial ratio analysis 677
29 Analysis of published financial statements 713
30 An introduction to digital financial reporting 755
Part 8
ACCountABILIty 779
31 Corporate governance 781
32 Integrated reporting: sustainability, environmental and social 817
Index 853
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Contents
Preface xxi
Publisher’s acknowledgements xxvii
Part 1
IntRoDuCtIon to ACCountIng on A CAsh FLow AnD
ACCRuAL ACCountIng BAsIs 1
1 Accounting and reporting on a cash flow basis 3
1.1 Introduction 3
1.2 Shareholders 3
1.3 What skills does an accountant require in respect of external reports? 4
1.4 Managers 4
1.5 What skills does an accountant require in respect of internal reports? 5
1.6 Procedural steps when reporting to internal users 5
1.7 Agency costs 8
1.8 Illustration of periodic financial statements prepared under the cash
flow concept to disclose realised operating cash flows 8
1.9 Illustration of preparation of statement of financial position 13
1.10 Treatment of non-current assets in the cash flow model 14
1.11 What are the characteristics of these data that make them reliable? 15
1.12 Reports to external users 16
Summary 17
Review questions 18
Exercises 18
Notes 20
2 Accounting and reporting on an accrual accounting basis 21
2.1 Introduction 21
2.2 Historical cost convention 22
2.3 Accrual basis of accounting 22
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 23
2.5 Reformatting the statement of financial position 24
2.6 Accounting for the sacrifice of non-current assets 24
2.7 Published statement of cash flows 27
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viii • Contents
Summary 28
Review questions 28
Exercises 29
Notes 30
Part 2
PREPARAtIon oF IntERnAL AnD PuBLIshED FInAnCIAL
stAtEmEnts 31
3 Preparation of financial statements of comprehensive income,
changes in equity and financial position 33
3.1 Introduction 33
3.2 Preparing an internal statement of income from a trial balance 33
3.3 Reorganising the income and expenses into one of the
formats required for publication 36
3.4 Format 1: classification of operating expenses and other income
by function 37
3.5 Format 2: classification of operating expenses according to their nature 40
3.6 Other comprehensive income 40
3.7 How non-recurring or exceptional items can affect operating income 41
3.8 How decision-useful is the statement of comprehensive income? 43
3.9 Statement of changes in equity 43
3.10 The statement of financial position 44
3.11 The explanatory notes that are part of the financial statements 45
3.12 Has prescribing the formats meant that identical transactions are
reported identically? 48
3.13 Fair presentation 51
3.14 What does an investor need in addition to the primary financial
statements to make decisions? 52
Summary 56
Review questions 57
Exercises 58
Notes 68
4 Annual report: additional financial disclosures 70
4.1 Introduction 70
4.2 IAS 10 Events after the Reporting Period 70
4.3 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 73
4.4 What do segment reports provide? 75
4.5 IFRS 8 Operating Segments 75
4.6 Benefits and continuing concerns following the issue of IFRS 8 79
4.7 Discontinued operations – IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations 82
4.8 Held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations 83
4.9 IAS 24 Related Party Disclosures 85
Summary 90
Review questions 90
Exercises 91
Notes 101
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Contents • ix
5 statements of cash flows 102
5.1 Introduction 102
5.2 Development of statements of cash flows 102
5.3 Applying IAS 7 (revised) Statements of Cash Flows 103
5.4 Step approach to preparation of a statement of cash flows –
indirect method 106
5.5 Additional notes required by IAS 7 109
5.6 Analysing statements of cash flows 110
5.7 Approach to answering questions with time constraints 116
5.8 Preparing a statement of cash flows when no statement of income is
available 118
5.9 Critique of cash flow accounting 120
Summary 120
Review questions 121
Exercises 121
Notes 128
Part 3
REguLAtoRy FRAmEwoRk – An AttEmPt to AChIEvE
unIFoRmIty 129
6 Financial reporting – evolution of global standards 131
6.1 Introduction 131
6.2 Why do we need financial reporting standards? 131
6.3 Why do we need standards to be mandatory? 132
6.4 Arguments in support of standards 134
6.5 Arguments against standards 135
6.6 Standard setting and enforcement by the Financial Reporting
Council (FRC) in the UK 135
6.7 The International Accounting Standards Board 138
6.8 Standard setting and enforcement in the European Union (EU) 139
6.9 Standard setting and enforcement in the US 142
6.10 Advantages and disadvantages of global standards for publicly
accountable entities 144
6.11 How do reporting requirements differ for non-publicly
accountable entities? 145
6.12 IFRS for SMEs 146
6.13 Why have there been differences in financial reporting? 146
6.14 Move towards a conceptual framework 150
Summary 151
Review questions 151
Exercises 152
Notes 153
7 Concepts – evolution of an international conceptual
framework 155
7.1 Introduction 155
7.2 Different countries meant different financial statements 155
7.3 Historical overview of the evolution of financial accounting theory 156
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