Students' Guide to Accounting and Financial Reporting Standards

Students’ Guide to

Accounting

and Financial

Reporting Standards

Students’ Guide to Accounting and Financial Reporting Standards

ninth edition

Geoff Black Students’ Guide to

Accounting and Financial Reporting Standards

ninth edition

Geoff Black

Key Features

• New material on international standards with analysis of the surrounding debate making the text fully

up-to-date.

• New end of chapter self tests, further discussion questions and specially selected examination

questions, all with answers, are included to enable students to track and monitor their progress.

• New case studies featuring ‘real’ accounting policy choices and actual practice.

• Chapter summaries and numerous flow charts help to illustrate key features, processes and the

relationships between standards to assist students in their study.

• The text covers the main requirements of every standard at levels appropriate for all finance and

accounting students.

• Students' Guide to Accounting and Financial Reporting Standards is updated every other year to

ensure it remains current.

Geoff Black is a Chartered Accountant. He has been Senior Lecturer and Head of Professional Accounting

courses at Anglia Polytechnic University, Cambridge. Currently he is Senior Lecturer in Business Finance

at Harper Adams University College. He is the author of Introduction to Accounting, also published by

Financial Times/Prentice Hall.

"The book is ordered logically and is easy to navigate. Students

find the book to be a very helpful introduction to the issues."

Dr Kevin McMeeking, University of Exeter

Well established as the market leading text for students of accounting

standards, Students' Guide to Accounting and Financial Reporting Standards

is now in its 9th edition. The text has gained the reputation of having an up-to￾date, comprehensive and accessible coverage of accounting standards. This

new edition has been revised thoroughly to include an expanded review of

international accounting standards and the ‘convergence’ process. Many

actual company examples are used and the background to the standard setting

process is explained. This book is ideal for students of accounting and

business studies at undergraduate level or those who are taking professional

or technician level accounting courses. It is also suitable for postgraduate

students and professional accountants.

ninth

edition Black

an imprint of www.pearsoneduc.com

Includes extended coverage

of International Standards

Students’ Guide to

Accounting and

Financial Reporting

Standards

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Students’ Guide to

Accounting and

Financial Reporting

Standards

9th edition

GEOFF BLACK

Pearson Education Limited

Edinburgh Gate

Harlow

Essex CM20 2JE

England

and Associated Companies throughout the world

Visit us on the World Wide Web at:

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First published 1987

Second edition 1994

Third edition 1995

Fourth edition 1996

Fifth edition 1997

Sixth edition 1998

Seventh edition 2000

Eighth edition 2002

Ninth edition 2003

© Letts Educational Limited 1994, 1995, 1996, 1997, 1998

© Pearson Education Limited 2000, 2002, 2003

The right of Geoffrey Black to be identified as author of

this work has been asserted by him 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,

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written permission of the Publishers or a licence permitting restricted copying

in the United Kingdom issued by the Copyright Licensing Agency Ltd,

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ISBN 0 273 68350 0

British Library Cataloguing in Publication Data

A catalogue record for this book can be obtained from the British Library.

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Typeset by 35 in 10/12.5pt Sabon

Printed in Great Britain by Henry Ling Ltd., at the Dorset Press, Dorchester, Dorset

The publisher’s policy is to use paper manufactured from sustainable forests.

To Rachel, Susannah, Andrew and Michael

v

Contents

Index to standards x

Preface xi

Acknowledgements xiii

1 An introduction to standards 1

Introduction 1

The standard-setting process 2

Authority of standards 13

Smaller entities 14

Compliance with standards 15

New accounting standards and prior transactions 16

Standards and the law 16

UK standards and the European Union 17

UK standards and international standards 17

Summary of SSAPs and FRSs issued to date 22

Summary of abbreviations 23

Application in practice 24

Chapter summary 25

Multiple choice questions 25

Discussion questions 27

Examination questions 27

2 Principles and policies: the Statement of Principles and FRS 18 28

Introduction 28

Statement of Principles 28

FRS 18 Accounting Policies 35

International perspective 41

Application in practice 41

Chapter summary 45

Multiple choice questions 46

Discussion questions 48

Examination questions 48

3 Asset valuation (1): SSAPs 4 & 19 and FRS 15 49

Introduction 49

SSAP 4 Accounting for Government Grants 49

International perspective 52

Companies in conflict 52

FRS 15 Tangible Fixed Assets 54

Contents

vi

International perspective 62

SSAP 19 Accounting for Investment Properties 62

International perspective 65

Companies in conflict 65

Application in practice 66

Chapter summary 68

Multiple choice questions 68

Discussion questions 70

Examination questions 70

4 Asset valuation (2): SSAPs 13 & 21 and FRSs 10 & 11 72

Introduction 72

SSAP 13 Accounting for Research and Development 72

International perspective 78

SSAP 21 Accounting for Leases and Hire Purchase Contracts 78

International perspective 82

FRS 10 Goodwill and Intangible Assets 82

International perspective 86

FRS 11 Impairment of Fixed Assets and Goodwill 86

International perspective 91

Companies in conflict 91

Application in practice 92

Chapter summary 95

Multiple choice questions 96

Discussion questions 98

Examination questions 98

5 Asset valuation (3): SSAP 9 100

Introduction 100

SSAP 9 Stocks and Long-Term Contracts 100

Disclosure in financial statements 112

International perspective 113

Application in practice 113

Chapter summary 115

Multiple choice questions 115

Discussion questions 117

Examination questions 117

6 Capital instruments and derivatives: FRSs 4 & 13 120

Introduction 120

FRS 4 Capital Instruments 121

International perspective 126

FRS 13 Derivatives and Other Financial Instruments: Disclosures 126

International perspective 128

Contents

vii

Application in practice 128

Chapter summary 135

Multiple choice questions 135

Discussion question 137

Examination question 137

7 Taxation: SSAP 5 and FRSs 16 & 19 138

Introduction 138

SSAP 5 Accounting for Value Added Tax 138

International perspective 140

FRS 16 Current Tax 140

International perspective 142

FRS 19 Deferred Tax 143

International perspective 147

Application in practice 148

Chapter summary 150

Multiple choice questions 151

Discussion question 153

Examination questions 153

8 Reporting financial performance; earnings per share:

FRSs 3 & 14 155

Introduction 155

FRS 3 Reporting Financial Performance 156

How FRS 3 has changed company reporting 158

International perspective 165

FRS 14 Earnings per Share 165

International perspective 170

Companies in conflict 170

Application in practice 171

Chapter summary 176

Multiple choice questions 176

Discussion questions 178

Examination questions 179

9 The substance of transactions; related parties: FRSs 5 & 8 181

Introduction 181

FRS 5 Reporting the Substance of Transactions 182

International perspective 186

FRS 8 Related Party Disclosures 186

International perspective 188

Application in practice 189

Chapter summary 189

Multiple choice questions 190

Contents

viii

Discussion questions 192

Examination question 192

10 Segmental reporting: SSAP 25 193

Introduction 193

SSAP 25 Segmental Reporting 193

International perspective 196

Application in practice 196

Chapter summary 198

Multiple choice questions 198

Discussion question 200

Examination question 200

11 Post balance sheet events, provisions and contingencies:

SSAP 17 and FRS 12 201

Introduction 201

SSAP 17 Accounting for Post Balance Sheet Events 201

International perspective 205

FRS 12 Provisions, Contingent Liabilities and Contingent Assets 206

International perspective 209

Application in practice 209

Chapter summary 214

Multiple choice questions 214

Discussion questions 216

Examination questions 216

12 Cash flow statements: FRS 1 218

Introduction 218

FRS 1 Cash Flow Statements 219

International perspective 232

Application in practice 232

Chapter summary 235

Multiple choice questions 235

Discussion question 237

Examination question 237

13 Consolidated financial statements: FRSs 2, 6, 9 & 7 239

Introduction 239

FRS 2 Accounting for Subsidiary Undertakings 239

International perspective 246

FRS 6 Acquisitions and Mergers 246

International perspective 251

FRS 9 Associates and Joint Ventures 251

International perspective 254

Contents

ix

FRS 7 Fair Values in Acquisition Accounting 254

International perspective 257

Companies in conflict 257

Application in practice 258

Chapter summary 262

Multiple choice questions 263

Discussion questions 265

Examination questions 265

14 Foreign currency translation: SSAP 20 267

Introduction 267

SSAP 20 Foreign Currency Translation 267

International perspective 273

Application in practice 274

Chapter summary 275

Multiple choice questions 275

Discussion question 277

Examination questions 277

15 Retirement benefits: FRS 17 280

Introduction 280

FRS 17 Retirement Benefits 281

Defined contribution schemes 283

Defined benefit schemes 283

International perspective 287

Application in practice 287

Chapter summary 290

Multiple choice questions 290

Discussion question 292

Examination question 292

Appendix 1 Standards in transit 293

Appendix 2 Answers to multiple choice questions 298

Appendix 3 Outline responses to discussion questions 299

Appendix 4 Answers to examination questions 304

Index 331

Revision briefings 339

x

Index to standards

FRS Title Chapter

1 Cash Flow Statements 12

2 Accounting for Subsidiary Undertakings 13

3 Reporting Financial Performance 8

4 Capital Instruments 6

5 Reporting the Substance of Transactions 9

6 Acquisitions and Mergers 13

7 Fair Values in Acquisition Accounting 13

8 Related Party Disclosures 9

9 Associates and Joint Ventures 13

10 Goodwill and Intangible Assets 4

11 Impairment of Fixed Assets and Goodwill 4

12 Provisions, Contingent Liabilities and Contingent Assets 11

13 Derivatives and Other Financial Instruments: Disclosures 6

14 Earnings per Share 8

15 Tangible Fixed Assets 3

16 Current Tax 7

17 Retirement Benefits 15

18 Accounting Policies 2

19 Deferred Tax 7

SSAP

4 Accounting for Government Grants 3

5 Accounting for Value Added Tax 7

9 Stocks and Long-Term Contracts 5

13 Accounting for Research and Development 4

17 Accounting for Post Balance Sheet Events 11

19 Accounting for Investment Properties 3

20 Foreign Currency Translation 14

21 Accounting for Leases and Hire Purchase Contracts 4

24 Accounting for Pension Costs (superseded by FRS 17) Appendix 1

25 Segmental Reporting 10

xi

Preface

Accounting standards have been the subject of intense media interest since the

publication of the previous edition of this guide, primarily due to spectacular

corporate failures in the USA (including Enron and WorldCom). Also, the

perceived impact of a new UK pension standard, FRS 17, was cited as the

reason why many companies decided to abandon ‘final salary’ pension schemes.

Furthermore, the shifting focus on the adoption of International Accounting

Standards (IASs) across the European Union for listed companies from 2005

has caused national standard-setters, including the UK’s Accounting Standards

Board, to propose a mass of changes to existing standards. In writing this

edition, I have incorporated an international perspective by explaining how

the UK standards accord with (or diverge from) their international equivalents.

The standard-setting process is in an extreme state of flux at the time of

writing, with many ‘exposure drafts’ having been issued during 2002 but

not yet implemented. These proposed changes are also explained within

the text.

A new feature, ‘Points to Ponder’, has been introduced to get readers

thinking about specific aspects of each standard or to access a relevant website

– these complement the ‘Discussion Questions’ introduced in the last edition.

A short multiple choice ‘quick quiz’ is also given at the end of each chapter.

In addition to the company extracts showing ‘application in practice’,

I have included a number of sections headed ‘Companies in Conflict’ which

refer to companies whose annual reports have departed from accounting

standards.

‘Revision briefings’ (detachable mini-summaries of each standard) can be

found at the very end of the book to help with pre-examination revision.

Those readers following a specific degree or professional syllabus should

be aware that the depth of understanding required will vary depending upon

the syllabus content of the particular examination, and the intention of this

book is to cover the main requirements of every standard at levels which are

appropriate for students at any stage of their studies. Readers should look at

the full text of the actual standards where appropriate in relation to detailed

syllabus requirements.

The standard-setting process is dynamic and standards are being constantly

revised, updated and occasionally replaced completely. Because of this, it is

vital to keep abreast of developments by using the website linkages shown

below. In particular, students are recommended to look at their syllabuses for

information regarding those standards which are examinable at the time that

they are due to sit the paper.

Preface

xii

Internet links and free updates

This book states the position at 1 January 2003. It is possible to obtain further

information by accessing the Accounting Standards Board’s update service,

which is available on its website at http://www.asb.org.uk/. The service is free

of charge and will send notifications of latest ASB events to you by e-mail.

Other parts of the site are of interest to students, and a separate students’ section

answers ‘frequently asked questions’ and gives other information.

The following websites can also be referred to for current information on

UK and international standards and the standard-setting process:

Company Reporting – an independent business information research company

which monitors company compliance with best financial reporting practice

http://www.companyreporting.com/home.htm

The Financial Reporting Council

http://www.frc.org.uk/

The Financial Reporting Review Panel

http://www.frrp.org.uk/

The International Accounting Standards Board

http://www.iasb.co.uk/

IAS Plus (Deloitte Touche Tohmatsu)

http://www.iasplus.com/standard/standard.htm

xiii

Acknowledgements

Extracts from Statements of Standard Accounting Practice and Financial

Reporting Standards have been reproduced with the permission of the

Accounting Standards Board. The Financial Reporting Review Panel has

kindly granted permission to use extracts from their press notices.

The following professional bodies have kindly granted me permission to

reproduce past examination questions:

The Chartered Association of Certified Accountants

The Chartered Institute of Management Accountants

The Association of Accounting Technicians

The Institute of Chartered Secretaries and Administrators.

Answers to these questions have not been provided by the professional bodies,

but are the author’s responsibility.

I would like to thank Janey Webb of Pearson Education for her encourage￾ment, and my wife and family for their support.

Geoff Black

Publisher’s acknowledgements

We are grateful to the following for permissions to reproduce copyright

material:

Figure 2.3 from Notes to the financial statements, section 1 (Accounting

policies), Tate & Lyle plc annual report 2002, reproduced with permission

from Tate & Lyle plc; Figure 4.5 from Notes to the financial statements,

sections 25a and b (Financial commitments), Tate & Lyle plc annual report

2002, reproduced with permission from Tate & Lyle plc; Figure 4.5 from

Acquisitions, Pace Micro Technology plc annual report 2000, reproduced with

permission from Pace Micro Technology plc; Figure 5.4 from Notes to the

accounts, paragraph entitled Stocks in section 1 (Accounting policies) and

section 13 (Stocks), BAE Systems annual report 2001, reproduced with per￾mission from BAE Systems; Figure 5.4 from Accounting policy, section 10

(Stocks) and Notes to the accounts, section 11 (Stocks), Balfour Beatty plc

annual report 2000, reproduced with permission from Balfour Beatty plc;

Figure 6.1 from Section 17 (Borrowings), British American Tobacco annual

report 2001, reproduced with permission from British American Tobacco;

Figure 6.2 from Accounting policies and standards, section entitled Derivative

financial instruments, and Notes to the accounts, sections 22 to 28, Kingfisher

plc annual report 2002, reproduced with permission from Kingfisher plc;

Acknowledgements

xiv

Figure 7.4 from Consolidated profit and loss account, and Notes to the

accounts, sections 1, 9, 12 and 26, Pace Micro Technology plc annual report

2002, reproduced with permission from Pace Micro Technology plc; Figures

8.9, 8.10, 8.11, 8.12 and 10.1 from Group profit and loss account, note 11

(Earnings per share), Other primary statements and Reconciliation of move￾ments in shareholders’ funds, note 1 (Segmental analysis), Wembley plc annual

report 2001, reproduced with permission from Wembley plc; Figure 8.13

from Consolidated profit and loss account, Notes to the accounts, section 12,

Kingfisher plc annual report 2002, reproduced with permission from

Kingfisher plc; Figure 11.5 from Notes to the accounts, section 23 (Contingent

liabilities and financial commitments), British American Tobacco annual

report 2001, reproduced with permission from British American Tobacco;

Figure 12.4 from Consolidated cash flow statement, Note to the financial state￾ments, sections 26 and 27, extracted from Manchester United annual report

2002, reproduced with permission from Manchester United; Figure 13.2 from

Group profit and loss account, Notes to the financial statements, sections 13,

14 and 15, Tate & Lyle annual report 2002, reproduced with permission from

Tate & Lyle plc; Figure 15.1 from Balance sheets, Consolidated statement of

total recognised gains and losses, Reconciliation of movements in shareholders’

funds, Extract from note 1 (Accounting policies) and note 19, Renishaw plc

annual report 2002, reproduced with permission from Renishaw plc.