Seventh Edition Advanced Financial Accounting

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Advanced Financial AccountingRichard Lewis and David PendrillRigorous in its approach, Advanced Financial Accountingtackles the more complex issues of the subject in a livelyand engaging manner. Familiar in its structure andtreatment of basic concepts, this seventh edition has beenthoroughly revised and updated to reflect recent andplanned developments in financial reporting.This leading text continues to provide both clearexplanations and critical evaluations of current accountingpractice, especially as found in national and internationalaccounting standards, and relates them to the needs ofusers of financial statements.The seventh edition is accompanied by a downloadableSolutions Manual which is available to lecturers on thewebsite at As with theprevious edition, annual updates are also available online.Advanced Financial Accounting is written for second andthird year financial accounting students on accounting orbusiness studies degrees and is also suitable for MBAcourses. The book provides extensive coverage of thesyllabuses for the advanced papers in financial accountingand financial reporting of the ACCA, CIMA, ICAEW, ICAI andICAS.The new edition explains the considerable changes whichare scheduled to take place in the EuropeanUnion during the next few years examines the increasing importance of theIASB and international standards includes greater focus on internationaldevelopments provides in-depth discussion of allimportant areas, including controversialissues such as accounting for financialinstruments, goodwill and share options, aswell as exploring the impact of the majorchanges that have occurred in theaccounting treatment of pension costs includes numerous questions, now groupedtogether at the ends of chapterswww.pearson-books.comLewis and PendrillDavid Pendrill BSc(Econ), MSc, FCA, CTA, LTCL, is the Esmée Fairbairn Professor of Accounting and Financial Managementat the University of Buckingham, where he was Head of the Department of Accounting and Finance for more than a decade.He was formerly a Senior Lecturer in Accountancy at what is now Cardiff University and has taught at the London School ofEconomics as well as at universities in Canada, Singapore and the West Indies.Richard Lewis andDavid PendrillAdvancedFinancial Accountingseventh editionseventh editionRichard Lewis MSc, FCA, is Co-Director of the Centre for Higher Education Research and Information at the Open University.He was formerly a Pro-Vice-Chancellor of the Open University and Deputy Chief Examiner of the Council for NationalAcademic Awards. Prior to that, he was Sir Julian Hodge Professor of Accounting at the University of Wales, Aberystwyth,and Head of the Accountancy Department at what is now London Metropolitan imprint ofAdvanced Financial Accountingseventh edition

Advanced Financial Accounting

We work with leading authors to develop thestrongest educational materials in business and finance,bringing cutting-edge thinking and best learningpractice to a global market.Under a range of well-known imprints, includingFinancial Times Prentice Hall, we craft high qualityprint and electronic publications which helpreaders to understand and apply their content,whether studying or at work.To find out more about the complete range of ourpublishing please visit us on the World Wide Web

seventheditionAdvanced Financial AccountingRichard Lewis MSc, FCACo-Director of the Centre for Higher Education Research and Information,Open UniversityDavid Pendrill BSc(Econ), MSc, FCA, CTA, LTCLEsmée Fairbairn Professor of Accounting and Financial Management,University of Buckingham

Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEnglandand Associated Companies around the worldVisit us on the World Wide Web published under the Pitman imprint 1981Second edition published 1985Third edition published 1991Fourth edition published 1994Fifth edition published under the Financial Times Pitman Publishing imprint 1996Sixth edition published under the Financial Times Prentice Hall imprint 2000Seventh edition published 2004 Richard Lewis, David Pendrill and David S. Simon 1981, 1985 Richard Lewis and David Pendrill 1991, 1994, 1996, 2000, 2004The rights of Richard Lewis and David Pendrill to be identified as authorsof this work have been asserted by the authors in accordance with theCopyright, Designs, and Patents Act 1988.All rights reserved; no part of this publication may be reproduced, storedin a retrieval system, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording, or otherwise without either the priorwritten permission of the Publishers or a licence permitting restricted copyingin the United Kingdom issued by the Copyright Licensing Agency Ltd,90 Tottenham Court Road, London W1T 4LP.ISBN 0 273 65849 2British Library Cataloguing-in-Publication DataA catalogue record for this book can be obtained from the British Library.10 9 8 7 6 5 4 3 2 108 07 06 05 04Typeset in 10/12pt Minion by 30.Printed and bound in Great Britain by Bell and Bain Ltd, Glasgow.The publisher’s policy is to use paper manufactured from sustainable forests.

Brief contentsPrefacePart 1 · The framework of financial reporting1234The search for principlesSources of authority: the United KingdomSources of authority: the rise of international standardsWhat is profit?Part 2 · Financial reporting in practice56789101112131415161718Assets IAssets IILiabilitiesFinancial instrumentsSubstance over form and leasesPension costsReporting financial performanceTaxation: current and deferredBusiness combinations and goodwillInvestments and groupsAssociates and joint venturesOverseas involvementExpansion of the annual reportCapital reorganisation, reduction and 7359403447476526579Part 3 · Accounting and price changes61719 Accounting for price changes20 Current cost accounting21 Beyond current cost accounting619644666Index703

ContentsPrefacePart 1 · The framework of financial reporting1 The search for principlesOverviewIntroductionAccounting theoryThe FASB conceptual framework projectThe IASC/IASB frameworkThe ASB’s Statement of PrinciplesSummaryRecommended readingQuestions2 Sources of authority: the United KingdomOverviewIntroductionLegislationStock Exchange rulesAccounting conceptsStandardisationThe Government’s proposalsSummaryRecommended readingSome useful websitesQuestions3 Sources of authority: the rise of international standardsOverviewInternational standardisationHarmonisation in the European UnionThe EU Regulation of 2002 and the problems that it posesSummaryRecommended readingSome useful 13739393940424242465055555656

viiiContents4 What is profit?OverviewIntroductionPresent value of the businessMeasurement of wealth by reference to the valuation of individual assetsCapital maintenanceThe usefulness of different profit measuresHow do we choose?The limitations of historical cost accountingInterim summaryDistributable profitsRealised profitsSummaryRecommended readingA useful websiteQuestionsPart 2 · Financial reporting in practice5 Assets IOverviewIntroductionThe basis of valuationTangible fixed assetsDepreciationInvestment propertiesIntangible assetsDifferences in the treatment of tangible and intangible fixed assetsImpairment reviewsSummaryRecommended readingQuestions6 Assets IIOverviewIntroductionStocks and long-term contractsResearch and developmentGovernment grantsSummaryRecommended 146149149150

Contents7 ns and contingenciesSummaryRecommended readingQuestions8 Financial instrumentsOverviewIntroductionFRS 4 Capital InstrumentsHedge accountingDerivativesThe valuation of financial instrumentsFRED 30 and the convergence programmeSummaryRecommended readingQuestions9 Substance over form and leasesOverviewIntroductionReflecting the substance of transactionsLeasesBeyond SSAP 21SummaryRecommended readingQuestions10 Pension costsOverviewIntroductionSSAP 24 Accounting for Pension CostsFrom SSAP 24 to FRS 17FRS 17 Retirement BenefitsSummaryRecommended readingQuestions11 Reporting financial performanceOverviewPart A · Reconfiguring the financial statementsReporting financial 8248252259260271271271276276277277ix

xContentsReview of FRS 3Segmental reportingPart B · Extending the financial reporting envelopeAccounting for post balance sheet eventsEarnings per shareRelated party disclosuresPart C · Share-based paymentsDifferent types of share-based paymentSummaryRecommended readingQuestions12 Taxation: current and deferredOverviewIntroductionCurrent taxationDeferred taxationSummaryRecommended readingQuestions13 Business combinations and goodwillOverviewBusiness combinationsGoodwillSummaryRecommended readingQuestions14 Investments and groupsOverviewIntroductionInvestmentsAccounting for groupsSummaryRecommended readingQuestions15 Associates and joint venturesOverviewIntroductionPossible methods of accountingThe regulatory framework in the United 431431432447447447448453

ContentsThe international accounting standardsSummaryRecommended readingQuestions16 Overseas involvementOverviewIntroduction: the problems identifiedAccounting for foreign currency transactionsTranslation of the financial statements of an overseas subsidiaryThe international accounting standardThe proposed new standardsSummaryRecommended readingQuestions17 Expansion of the annual reportOverviewIntroductionCash flow statementsThe operating and financial reviewThe historical summaryReporting about and to employeesSummary financial statementsInterim reports and preliminary announcementsSummaryRecommended readingA useful websiteQuestions18 Capital reorganisation, reduction and reconstructionOverviewIntroductionRedemption and purchase of sharesCapital reductionThe proposed simplification of capital reductionThe legal background to other reorganisationsCapital reconstructionSummaryRecommended readingA useful 579579580591594595596605605606606xi

xiiContentsPart 3 · Accounting and price changes61719 Accounting for price changes619619619621624642OverviewIntroductionThe progress of accounting reformCurrent purchasing power accountingSummary20 Current cost accountingOverviewIntroductionTheoretical rootsThe basic elements of current cost accountingSummary21 Beyond current cost accountingOverviewThe utility of current cost accountsInterim summaryCCP and CCA combinedA real alternative – Making Corporate Reports ValuableThe evolution of the ASB’s thinkingSummaryRecommended 9669676686689689689703

PrefaceThis is undoubtedly a demanding time for practitioners and students of financial reporting.Accountants and business people in European Union countries need to master not only theirnational regulations but also the rules of the International Accounting Standards Board.Both sets of rules are voluminous, ever growing and presently undergoing a process of rapidchange as a consequence of the convergence programme designed to bring national andinternational standards into line with one another.The ASB, in the UK, has developed its Statement of Principles for Financial Reporting, aconceptual framework designed to underpin the development of accounting standardswhich adopts a rather different view from that of the accruals-based approach of traditionalfinancial accounting. However, some of the principles are inconsistent with present company law and several of the Financial Reporting Standards in issue are inconsistent with theStatement of Principles. Company law is presently under review, with the publication of aWhite Paper which proposes major changes to the mechanism for setting and enforcingaccounting rules in the UK. Once the law is changed, then it will be necessary to changenumerous Financial Reporting Standards. It can perhaps be seen that the failure in the pastto develop a generally-agreed theory underpinning financial accounting is not without itspractical costs.A 2002 EU Regulation requires all quoted companies in Europe to prepare their consolidated financial statements in accordance with international standards, rather than nationalstandards, by the year 2005. Accounting rule setters in the various member states areattempting, with varying degrees of enthusiasm, to achieve convergence between their ownstandards and those of the IASB, but this process is difficult to achieve because of considerable, often major, differences between the respective standards and because the IASB is itselfrevising a large number of standards as part of its improvements project. National standardsetters are therefore in the uncomfortable position of shooting at a moving target.The EU Regulation applies only to the consolidated financial statements of quoted companies, although member states may permit, or require, the use of international standards inthe single-entity financial statements of those companies as well as in both the single entityand consolidated financial statements of unquoted companies. At the time of writing it isunclear whether the various member states will require universal application of internationalstandards or whether two sets of standards, national and international, will co-exist forapplication to different financial statements in the same country. In the view of the authors,even the consolidated financial statements of quoted companies in different EU countriesare unlikely to be co

Advanced Financial Accounting Advanced Financial Accounting Richard Lewis and David Pendrill Richard Lewis and David Pendrill seventh edition seventh edition Rigorous in its approach, Advanced Financial Accounting tackles the more complex issues of the subject in a lively and engaging manner. Familiar in its structure and treatment of basic concepts, this seventh edition has been thoroughly .

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