seventh edition Advanced Financial Accounting

1 AdvancedFinancial AccountingAdvanced Financial AccountingRichard Lewis andDavid PendrillRichard Lewis and David Pendrillseventh editionseventh editionRigorous 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.

2 The seventh edition is accompanied by a downloadableSolutions Manualwhich is available to lecturers on thewebsite at As with theprevious edition , annual updates are also available online. Advanced Financial Accountingis 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. Richard LewisMSc, FCA, is Co-Director of the Centre for Higher Education Research and Information at the Open was formerly a Pro-Vice-Chancellor of the Open University and Deputy Chief Examiner of the Council for NationalAcademic Awards.

3 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 PendrillBSc(Econ), MSc, FCA, CTA, LTCL, is the Esm e 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 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 imprint of Financial AccountingLewis and Pendrillseventh editionThe new edition explains the considerable changes which are scheduled to take place in the European Union during the next few years examines the increasing importance of the IASB and international standards includes greater focus on international developments provides in-depth discussion of all important areas, including controversial issues such as Accounting for Financial instruments, goodwill and share options, as well as exploring the impact of the major changes that have occurred in the Accounting treatment of pension costs includes numerous questions.

4 Now grouped together at the ends of chaptersAdvanced Financial AccountingWe work with leading authors to develop thestrongest educational materials in business and finance,bringing cutting-edge thinking and best learningpractice to a global 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 find out more about the complete range of ourpublishing please visit us on the World Wide Web Advanced Financial AccountingRichard LewisMSc, FCACo-Director of the Centre for Higher Education Research and Information,Open UniversityDavid PendrillBSc(Econ), MSc, FCA, CTA, LTCLEsm e Fairbairn Professor of Accounting and Financial Management,University of BuckinghamseventheditionPearson Education LimitedEdinburgh GateHarlow Essex CM20 2 JEEnglandand Associated Companies around the worldVisit us on the World Wide Web published under the Pitman imprint 1981 Second edition published 1985 Third edition published 1991 Fourth edition published 1994 Fifth edition published under the Financial Times Pitman Publishing imprint 1996 Sixth edition published under the Financial Times Prentice Hall imprint 2000 seventh edition published 2004 Richard Lewis, David Pendrill and David S.

5 Simon 1981, 1985 Richard Lewis and David Pendrill 1991, 1994, 1996, 2000, 2004 The rights of Richard Lewis and David Pendrill to be identified as authors of this work have been asserted by the authors in accordance with theCopyright, Designs, and Patents Act 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 2 British Library Cataloguing-in-Publication DataAcatalogue record for this book can be obtained from the British 9 8 7 6 5 4 3 2 1 08 07 06 05 04 Typeset in 10/12pt Minion by and bound in Great Britain by Bell and Bain Ltd, publisher s policy is to use paper manufactured from sustainable 1 The framework of Financial reporting11 The search for principles32 Sources of authority: the United Kingdom233 Sources of authority: the rise of international standards424 What is profit?

6 59 Part 2 Financial reporting in practice935 Assets I956 Assets II1337 Liabilities1608 Financial instruments1769 Substance over form and leases20510 Pension costs24811 Reporting Financial performance27612 Taxation: current and deferred33713 Business combinations and goodwill35914 Investments and groups40315 Associates and joint ventures44716 Overseas involvement47617 Expansion of the annual report52618 Capital reorganisation, reduction and reconstruction579 Part 3 Accounting and price changes61719 Accounting for price changes61920 Current cost accounting64421 Beyond current cost accounting666 Index703 Brief contentsPrefacexiiiPart 1 The framework of Financial reporting11 The search for principles3 Overview3 Introduction3 Accounting theory5 The FASB conceptual framework project8 The IASC/IASB framework11 The ASB s Statement of Principles12 Summary21 Recommended reading21 Questions222 Sources of authority.

7 The United Kingdom23 Overview23 Introduction 23 Legislation24 Stock Exchange rules27 Accounting concepts28 Standardisation31 The Government s proposals37 Summary39 Recommended reading39 Some useful websites39 Questions403 Sources of authority: the rise of international standards42 Overview42 International standardisation42 Harmonisation in the European Union46 The EU Regulation of 2002 and the problems that it poses50 Summary55 Recommended reading55 Some useful websites56 Questions56 ContentsviiiContents4 What is profit?59 Overview59 Introduction59 Present value of the business61 Measurement of wealth by reference to the valuation of individual assets61 Capital maintenance65 The usefulness of different profit measures71 How do we choose?

8 73 The limitations of historical cost accounting73 Interim summary77 Distributable profits77 Realised profits81 Summary86 Recommended reading87A useful website87 Questions87 Part 2 Financial reporting in practice935 Assets I95 Overview95 Introduction95 The basis of valuation98 Tangible fixed assets100 Depreciation110 Investment properties116 Intangible assets118 Differences in the treatment of tangible and intangible fixed assets122 Impairment reviews122 Summary127 Recommended reading127 Questions1286 Assets II133 Overview133 Introduction133 Stocks and long-term contracts134 Research and development144 Government grants146 Summary149 Recommended reading149 Questions150 Contentsix7 Liabilities160 Overview160 Introduction160 Liabilities162 Provisions and contingencies165 Summary171 Recommended reading171 Questions1718 Financial instruments176 Overview176 Introduction176 FRS 4 Capital Instruments177 Hedge accounting189 Derivatives191 The valuation of Financial instruments193 FRED 30 and the convergence programme197 Summary201 Recommended reading201 Questions2029 Substance over form and leases205 Overview205 Introduction206 Reflecting the substance of transactions206 Leases214 Beyond SSAP 21236 Summary238 Recommended reading238 Questions23910 Pension costs248 Overview248 Introduction248 SSAP 24 Accounting for Pension Costs252 From SSAP 24 to FRS 17259 FRS 17

9 Retirement Benefits260 Summary271 Recommended reading271 Questions27111 Reporting Financial performance276 Overview276 Part A Reconfiguring the Financial statements277 Reporting Financial performance277xContentsReview of FRS 3291 Segmental reporting296 Part B Extending the Financial reporting envelope300 Accounting for post balance sheet events300 Earnings per share303 Related party disclosures309 Part C Share-based payments313 Different types of share-based payment314 Summary318 Recommended reading319 Questions31912 Taxation: current and deferred337 Overview337 Introduction337 Current taxation339 Deferred taxation343 Summary355 Recommended reading355 Questions35613 Business combinations and goodwill359 Overview359 Business combinations359 Goodwill377 Summary391 Recommended reading392 Questions39214 Investments and groups403 Overview403 Introduction 403 Investments404 Accounting for groups407 Summary431 Recommended reading431 Questions43215 Associates and joint ventures447 Overview447 Introduction447 Possible methods of accounting448 The regulatory framework in the United Kingdom453 ContentsxiThe

10 International Accounting standards464 Summary466 Recommended reading466 Questions46716 Overseas involvement476 Overview476 Introduction: the problems identified476 Accounting for foreign currency transactions477 Translation of the Financial statements of an overseas subsidiary486 The international Accounting standard514 The proposed new standards516 Summary517 Recommended reading518 Questions51817 Expansion of the annual report526 Overview526 Introduction526 Cash flow statements528 The operating and Financial review549 The historical summary552 Reporting about and to employees554 Summary Financial statements555 Interim reports and preliminary announcements557 Summary560 Recommended reading560A u