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International

Financial Reporting
A Practical Guide
Third Edition

Alan Melville
FCA, BSc, Cert. Ed.

Financial Times
Prentice Hall
is an imprint of

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Singapore • Hong Kong
Tokyo • Seoul • Taipei • New Delhi • Cape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan

Contents Preface Acknowledgements List of international standards IX x xi Part 1 INTRODUCTION TO FINANCIAL REPORTING 1 2 3 The regulatory framework The need for regulation Sources of regulation Generally accepted accounting practice The International Accounting Standards Board (IASB) The standard-setting process The purpose of accounting standards Worldwide use of international standards First-time adoption of international standards The IASB conceptual framework Purpose and scope of the IASB Conceptual Framework Objective of general purpose financial reporting Qualitative characteristics of financial information Underlying assumption Elements of financial statements Recognition of the elements of financial statements Measurement of the elements of financial statements Concepts of capital and capital maintenance Presentation of financial statements Purpose of financial statements Components of financial statements General features 3 4 4 6 4 7 9 10 11 5 18 19 21 24 25 27 9R 36 37 37 38 40 41 45 49 51 52 53 Accounting policies. plant and equipment Subsequent measurement of property. accounting estimates and errors Accounting policies Accounting estimates Prior period errors 61 61 66 66 Part 2 FINANCIAL REPORTING IN PRACTICE 11 17 28 Structure and content of financial statements The statement of financial position The statement of comprehensive income The statement of changes in equity The notes to the financial statements Interim financial reporting Management commentary 6 Property. plant and equipment Depreciation Disclosure requirements Borrowing costs Government grants Investment property Intangible assets Definition of an intangible asset Initial recognition and measurement of intangible assets Subsequent measurement of intangible assets Amortisation of intangible assets 75 76 77 79 80 82 86 87 90 93 100 101 102 106 108 . plant and equipment Definition of property. plant and equipment Initial measurement of property. plant and equipment Recognition of property.

dividends and taxes Reporting cash flows from operating activities Disclosures 249 250 251 252 212 213 213 213 214 223 224 229 229 244 244 253 257 . royalties and dividends Disclosure requirements Proposed new standard Guidance to the implementation of IAS 18 209 210 210 211 14 Employee benefits Short-term employee benefits Post-employment benefits Accounting for defined contribution plans Accounting for defined benefit plans Other long-term employee benefits Termination benefits 220 221 223 15 Taxation in financial statements Current tax Deferred tax The tax base concept IAS 12 requirements with regard to deferred tax Disclosure requirements 234 235 237 239 16 Statement of cashflows Cash and cash equivalents Classification of cash flows by activity Interest.155 159 160 160 162 165 166 167 168 168 171 174 179 180 181 184 Disclosure requirements 12 Provisions and events after the reporting period Recognition of a provision Measurement of a provision Application of the recognition and measurement rules Contingent liabilities and contingent assets Disclosure requirements Events after the reporting period 189 195 196 198 199 201 202 203 13 Revenue .CONTENTS 7 Derecognition Disclosure requirements Goodwill IFRS3 Business Combinations 110 110 111 112 Impairment of assets Indications of impairment Recoverable amount Recognition and measurement of an impairment loss Cash-generating units Reversal of impairment losses Disclosure requirements 118 119 120 Non-current assets held for sale and discontinued operations Classification of non-current assets as held for sale Measurement of non-current assets held for sale Presentation of non-current assets held tor sale Discontinued operations Leases Classification of leases Accounting for operating leases Accounting for finance leases Disclosure requirements Proposed new leases standard 10 Inventories and construction contracts Inventories Cost of inventories Cost formulas Net realisable value Disclosures relating to inventories Construction contracts Contract revenue and costs Recognition of contract revenue and expenses Presentation and disclosure for construction contracts Proposed new standard 11 Financial instruments Definitions Classification of financial instruments Recognition and measurement VI 123 124 128 129 134 135 137 141 142 148 149 150 150 154 . Definition of revenue Measurement of revenue Recognition of revenue: Sale of goods Recognition of revenue: Rendering of services Recognition of revenue: Interest.

CONTENTS Proposed revision of IAS7 17 Financial reporting in hyperinflationary economies Historical cost accounting and its weaknesses Strengths of historical cost accounting Alternatives to historical cost accounting Hyperinflationary economies The restatement of financial statements Disclosures required by IAS29 258 268 269 274 349 351 Part 4 ANALYSIS OF FINANCIAL STATEMENTS 276 278 22 Ratio analysis Accounting ratios Profitability ratios Liquidity ratios Efficiency ratios Investment ratios Limitations of ratio analysis Multivariate ratio analysis 357 358 359 363 365 367 375 376 23 Earnings per share Significance of EPS Calculation of basic EPS Shares issued during the accounting period Bonus issues Rights issues Calculation of diluted EPS Presentation and disclosure requirements 384 384 385 24 Segmental analysis Operating segments Reportable segments Disclosures reauired bv IFRS8 400 401 401 403 283 284 285 289 292 295 297 298 299 19 Groups of companies (2) Group statement of comprehensive income Subsidiary acquired part way through an accounting period 308 20 Associates and joint ventures Significant influence The equity method Application of the equity method IAS28 disclosure requirements Joint ventures Accounting for an interest in a jointly controlled entity IAS31 disclosure requirements 323 324 325 325 331 332 21 Related parties and changes in foreign exchange rates Related parties 345 347 348 275 276 Part 3 CONSOLIDATED FINANCIAL STATEMENTS 18 Groups of companies (1) Requirement to prepare consolidated financial statements Group statement of financial position at date of acquisition Group statement of financial position in subsequent years Partly-owned subsidiaries Preference shares Elimination of intra-group balances Unrealised profits Reporting period and accounting policies Definition of related party and related party transaction Disclosures required by IAS24 Foreign exchange accounting Reporting foreign currency transactions Translation to a presentation currency 309 315 333 337 344 345 387 389 390 393 395 Part 5 SMALL AND MEDIUM-SIZED ENTITIES 25 The IFRS for SMEs Contents of the IFRS for SMEs Small and medium-sized entities Concepts and pervasive principles Financial statement presentation Statement of financial position Statement of comprehensive income and income statement Statement of changes in equity and statement of income and retained earnings 413 414 415 416 417 418 418 419 VII .

CONTENTS 25 The IFRS for SMEs (cont. estimates and errors Financial instruments Inventories Investments in associates Investments in joint ventures Investment property Property.) Statement of cash flows Notes to the financial statements Consolidated and separate financial statements Accounting policies. plant and equipment Intangible assets other than goodwill Business combinations and goodwill Leases Provisions and contingencies Liabilities and equity Revenue Government grants Borrowing costs Share-based payment Impairment of assets Employee benefits Income tax Foreign currency translation Hyperinflation Events after the end of the reporting period Related party disclosures Specialised activities Transition to the IFRS for SMEs Topics not covered in the IFRS for SMEs 419 420 420 421 421 422 422 423 423 424 424 425 425 426 426 427 427 428 428 428 429 429 430 430 431 431 431 431 432 Part 6 ANSWERS Answers to exercises Index VIM 435 497 .