index [assets.cambridge.org] · 2009-05-26 · index contracts accounting terms in 12 as ﬁnancial...

Index

4th EU Directive 61‘90 per cent test’ for finance leases 146

ACCA 35Accountancy and Actuarial Discipline

Board 36, 38accountancy bodies 35–40accountancy firms’ manuals and

guidance 14Accountancy Foundation 38accountants’ role in capital markets

transactions 42–43accounting

current trends 60–66as decision-making tool 4definition 3–5as source of management

information 4‘accounting mismatch’ in measuring

financial assets/liabilities 163accounting policies 91–92accounting principles in SI 2008/410 33accounting profit, adjustment

of 115–116example 120

accounting standards see also financialreporting standards (FRSs);international accountingstandards (IFRSs, IASs);statements of standard accountingpractices (SSAPs); see alsoentries for individual standards

ASB Forward to 30contrasting approaches of IASB, ASB

and FASB 63development in other countries 17EU structure for

standard-setting 20–21

expectations of effectiveness ofstronger standards 62

growth in volume of 61history 15in IFRS GAAP 13international structure for

standard-setting 18–19lists of 223–228as part of GAAP 13–14in UK GAAP 13UK structure for

standard-setting 15–16Accounting Standards Board (ASB) see

also ASB reporting statementsachievements 16approach to bottom line 56approach to standards contrasted to

FASB 63approval and issue of UITF

Abstracts 37development of FRSSE 31development of SORPs 17differences from ASC 16formation 35Forward to accounting standards 30harmonising standards, role in 15–17issue of standards 36issues and withdraws Reporting

Standard 1 205–207issues FRS 5 46list of statements 227as part of FRC 36plans to retain FRSs 6, 7 and 10 112role 17, 37Statement of Principles 131structure 37

Accounting Standards Committee (ASC)decline 36

232

© Cambridge University Press www.cambridge.org

Cambridge University Press978-0-521-50978-7 - Accounting Principles for Non-Executive DirectorsPeter Holgate and Elizabeth BuckleyIndexMore information

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Index

differences from ASB 16formation 15as part of CCAB 35

accounting terminology, need forprecision 59

accounting terms used in agreements 12accounts see also consolidated accounts;

individual entity accountscomponents 5–7composition of 80–81preparation, filing and distribution

CA 2006 requirement for 80‘corporate reporting supply

chain’ 54–55requirements for 52–54

presentation of 80–94APMs 57–58

reasons for changes in 60use and analysis of 58–59

accruals accounting 7, 33, 139, 148acquisitions 100–114 see also merger

acquisition accounting 101–102,105–106, 111

acquisition defined as transaction 43choice of acquisition accounting 75dividends out of pre-acquisition

profits, realised gains 191fair value of acquisition

expenses 106–107actuarial gains/losses

as comprehensive income 87, 152UK GAAP/IFRS approaches

contrasted 153–154actuarial profession, Morris Review

of 38actuarial variation, choice of accounting

policies for 95actuaries, role of 149adjusted earnings numbers see alternative

performance measures (APMs)adjusted EPS 98–99advertising, recognition on balance

sheet 124agriculture, fair value accounting 64AIM companies

AIM Rules 53consolidated accounts 71use of IFRS 21

alternative accounting rules in SI2008/410 33

Alternative Investment Market (AIM) seeAIM companies

alternative performance measures(APMs) 57–58

amortisation 128–129 see alsodepreciation; impairment

amortised cost method 163–164, 170financial assets/liabilities 163–164financial instruments 162goodwill 100, 101, 109–110

different approaches by UK GAAPand IFRS 3 105–106

under IFRS 57impairment instead of 129intellectual property 129

analysts 55, 56, 58–59‘annual report’, use of term 80annual reports see accountsAPB bulletins 41Application notes to FRS 5 46–47approval of accounts, CA 2006 rules 31ASB reporting statements 14

in IFRS GAAP 13in UK GAAP 13

assets 124–129 see also amortisation;depreciation; fixed assets;intangibles; liabilities; tangiblefixed assets

carried at valuation 33classification and

presentation 126–127current assets, definition 127current assets, IAS 1

classification 127for current tax, on balance sheet 89for deferred tax, on balance sheet 89definition asset 124depreciation 127–129disclosure 129fair value of net assets

acquired 107–108impairment 125–126intra-group transactions, realised

profits 192–193measurement of 125in merger accounting 101

233






Index

assets (cont.)mixed model for stating at cost and fair

value 64non-current assets, IAS 1

classification 127not recognised 124–125pension scheme assets,

valuing 150–151presentation on balance sheet 88–90recognition of 124–125SI 2008/410 formats, shown in 32

assets held for sale, on balance sheet 89associated companies, SI 2008/410

rules 34associates

consolidated accounts 77–78equity accounting 78relative importance to joint

ventures 79share of profit or loss entered on

income statement 82‘audit certificates’ 41audit committee 54

Smith Report guidance on committeereport 198

audit firm’s name on reports 42Audit Inspection Unit 38audit partner’s name on reports 42audit reporting

Companies Act 2006 40IAS Regulation 40

Auditing Practices Board (APB)bulletins 41formation 35guidance on presentation of APMs in

accounts 58as part of CCAB 38as part of FRC 36replaced by FRC 16role 38transfer from Accountancy Foundation

to FRC 38Auditing Practices Committee (APC) 35auditors

directors’ report, role in 40–41limited liability 42as part of ‘corporate reporting supply

chain’ 55

auditors’ opinion 40–42auditors’ report

definition 5standardised wording 41

balance sheet 88–90accordance with substance 33approach to defined benefit

schemes 150assets recognised/not recognised

on 124–125IFRS balance sheet 127

CA 2006 rules 29classification of shares 158–159consolidated accounts, example 70example of 8in historical cost accounting 63IAS 1 rules 29increased emphasis on 65integrated presentation of individual

entity and consolidated 93–94liabilities shown on 135in merger accounting 101, 104purpose 6SI 2008/410 formats 32, 90summary format 130

banksconsolidated accounts 71FRRP’s focus on 39–40SI 2008/410 rules 32

bargain purchase where negativegoodwill 110

basic EPS 85, 95–97basic rule of consolidation 34BERR 122–123bid-defence costs 84binomial model of option pricing 174biological assets

on balance sheet 89measurement of value 125

Black-Scholes-Merton model of optionpricing 174

Board for Actuarial Standards (BAS) 36,38

‘boiler plating’ in accounting policies 92bonus scheme, deferred tax

(example) 117–118book-keeping, definition 3–4

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Index

bottom line 55–56brands

amortisation 129recognition on balance sheet 124

Brown, Gordon 205business combinations

definition 101IASB/FASB projects on 100, 108

business developments, effects onaccounting 60–61

business review 5–6

Cadbury Code 196capital allowances 115–116

example 118–119capital injections as total comprehensive

income 87capital markets transactions, accountants’

role in 42–43cash dividends 180cash equivalents, definition 91cash flow

difference to profit 7–9division into operating, investing and

financing 91cash flow hedge 166, 167

gains/losses 87cash flow statement 6–7, 90–91

example of 8in merger accounting 101merger accounting 104

cash flow statement, CA 2006 rules 29cash on balance sheet 89cash-settled share-based payment

transactions 175–176chairman’s report 5charities’ choice of IFRS or UK

GAAP 28Chartered Institute of Management

Accountants (CIMA) 35Chartered Institute of Public Finance and

Accountancy (CIPFA) 35choice of accounting policies, actuarial

variation 95choice of dates for fair value

purposes 106choice of IFRS or UK GAAP 17, 24,

28

by charities 28listed groups 28by non-listed/non-AIM groups 25

‘clean opinion’ see unqualified auditreport

closure of business, profit or loss asextraordinary item 84

Combined Code on CorporateGovernance 36

disclosures 196–199on role of audit committee 54

commercial property sector, FRRP’sfocus on 39–40

Committee of European SecuritiesRegulators (CESR) 40

recommendations on presentation ofAPMs 58

Committee on Accounting for SmallerEntities (CASE) 37

Committee on Corporate Governance36

Companies Act 1981 rules on formats foraccounts 61

Companies Act 1985 26, 27, 111definition: profit 186disclosure of fair value of

derivatives 170disclosure of share capital and

debentures 170TECH 01/08 based on 185transactions with directors,

disclosures 212Companies Act 1989

acquisition and mergeraccounting 111

consolidated accounts 45–46Companies Act 2006 12, 13, 26–32

application to IFRS and UKGAAP 28–32

approval, distribution and filing ofaccounts 31

audit reporting, general rules 40choice of IFRS or UK GAAP 123consolidated accounts 46, 72content and scope of accounts and

reports requirements 27definition associates and joint

ventures 77

235






Index

Companies Act 2006 (cont.)definition fixed assets and current

assets 127directors’ report 201–205directors’ responsibilities 90directors’ ‘safe harbour’ as to

untrue/misleading statements205

disclosure of directors’remuneration 207–208

distributions 180–181, 185equity shares 159–160exemptions 31–32group accounts 29–30group reconstruction relief

112–114individual accounts rules 28–29interim and initial accounts 183merger relief 112–114requirement to prepare, file

and distribute accounts 52,80

s. 615 relief 113–114segment disclosure 214share premium 112–114statement of directors’

responsibilities 200summary financial statements 53–54table of origins 229–231timing of consolidated

accounts 71–72transactions with directors,

disclosures 212treasury shares 168true and fair view 30–31

Companies Act group accounts 29Companies Act individual accounts see

individual entity accountscompanies’ decisions, effect of earnings

expectations on 56–57Companies House 52, 53‘comply or explain’ culture of the

Combined Code 196comprehensive income 87

actuarial gains/losses recognisedin 152

definition 183

consolidated accountsassociates 77–78basic rule of consolidation 34CA 2006 29–30after changes in composition of

group 75Companies Acts rules 45–46definition 29EU Regulation 17, 20–22exclusion of subsidiaries 74exclusions 73exemption for holding company

income statement 74–75FASB project to reform rules on

62full or proportional consolidation,

choice of 75harmonisation of accounting policies

in merger accounting 104intra-group transactions, elimination

of 76–77joint ventures 77–78, 78–79

proportional consolidation 75minimum requirements for

IFRS 53–54minority interests 75, 76non-listed/non-AIM 25presentation with or separate to

individual entity accounts 93–94purpose 69–70, 76techniques 75–77what to consolidate 72–74when to consolidate 71–72

‘consolidation packs’ 24constructive obligations 132–133Consultative Committee of Accountancy

Bodies (CCAB) 35contingent consideration in acquisition

accounting 106contingent liabilities

definition contingent liability 135disclosure 134–136fair value 108

continuing operationsbasic and diluted EPS 85basic EPS 97diluted EPS 98

236






Index

contractsaccounting terms in 12as financial liabilities 157–158

‘contribution holiday’ 150control

control v. ownership 73, 75definition 72–73IASB statement on de facto control 73

convertible debt 98convertible loan stock, diluted EPS 98copyrights, amortisation 129corporate governance

disclosures 194–199trends towards increasing 63

corporate governance report 5‘corporate reporting supply chain’ 54–55corporation tax rates 116‘corridor’ method of pensions

accounting 151–152cost basis for tangible fixed assets 91–92credit crunch 39–40, 165current assets

classification 127definition 127IAS 1 89measurement of value 125

current liabilitiesclassification of 133–134definition 134IAS 1 89role in business finance 134

current tax 117assets and liabilities for, on balance

sheet 89‘cushion’, adding further amount to

estimate as 133

Dearing Committee report 15, 36debt and equity see also gearing

convertible debt 98debt issue defined as transaction 43distinction between 158

decisions by companies, effect ofearnings expectations on 56–57

declared, definition 86declared dividends on income

statement 86

defective accounts, CA 2006 rules forrevision of 31

deferred tax 117–121assets and liabilities for, on balance

sheet 89defined benefit schemes 153permanent differences 120

defined benefit schemesaccounting for 149–150actuarial gains/losses as

comprehensive income 87deferred tax 116, 153definition and description 149differences between IFRS and UK

GAAP 153–154distributable profits 153–154in notes 93

defined contribution schemes 148–149definitions

‘90 per cent test’ 146accounting 3–5accounting profit 115accounts 80accruals accounting 7asset 124associates 77auditors’ report 5basic EPS 96book-keeping 3–4bottom line 55business combination 101cash equivalents 91cash flows 91cash-settled share-based payment

transactions 175comprehensive income 183consolidated accounts 29constructive obligations 132contingent liability 135control 72–73current liabilities 134‘declared’ 86defined contribution scheme 148depreciation 128derivative 166discontinued operations 83earnings 55

237






Index

definitions (cont.)earnings per share 55, 95equity instrument 158equity-settled share-based payment

transactions 173–175exceptional items 83fair value 107, 165fair value defined 107fair value less costs to sell 126finance costs 81finance lease 138financial accounting/reporting 4financial asset 157financial instrument 157financial liability 157–158financial statements 80GAAP 12–14gains 186gearing 59, 134goodwill 109–110group accounts 29identifiable 109IFRS 14, 20IFRS GAAP 13individual accounts 28intangible asset 109joint venture 77lease term 144liability 130, 131long-term incentive plan (LTIP) 208management accounting 4merger relief 112minimum lease payments 143‘net assets’ 180net realisable value (NRV) 126‘non-subsidiary subsidiaries’ 45operating lease 138potential ordinary shares 98present fairly 30‘present value’ 126profit 186provisions 131qualifying consideration 187quasi-subsidiaries 46‘readily convertible to cash’ 188realised profits and losses 184, 187‘recoverable amount’ 125

‘recycling’ of gains 11related party 210remuneration 208share-based payment transaction 172share option 208SOCIE 11SORIE 11statement of comprehensive

income 11–12subsidiary 72subsidiary undertaking 72‘substantially all’ 146tax base 118total comprehensive income 87, 184transaction 42–43transaction costs 161true and fair view 44UK GAAP 12–13value in use 126‘whisper number’ 56‘worth’ 125

demergers, IASB project on 108Department for Business Enterprise and

Regulatory Reform (BERR)122–123

depreciation 127–129 see alsoamortisation

in adjusting accountingprofit 115–116

cost basis and valuation basis 91–92definition 128example 118–119examples 120, 128

derivatives 65–66, 166–167definition derivative 166disclosure under CA 1985 and

SI2008/410 170‘fair value through profit and loss’

167response to large-scale losses 62

developing countries, use of IAS by 18diluted EPS 85, 95–96, 97–98directors see also non-executive

directors; statement of directors’responsibilities

responsibilities to present accounts 93responsibilities under CA 2006 90

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Index

transactions with, disclosures 212untrue/misleading statements by, ‘safe

harbour’ as to 205directors’ remuneration

disclosures 207–210trends towards greater disclosure

63directors’ remuneration report 5,

208–209requirement for 40

directors’ report 5–6auditors’ role 40–41disclosures 201–205extension of FRRP’s remit to

204–205extension of FRRP’s role to cover

58Listing Rules disclosures 204SI 2008/410 disclosures 196

Disclosure and Transparency Rules(DTR) 14, 52

directors’ statement(example) 202–203

disclosures 195–196disclosures under 7in IFRS GAAP 13requirement for statement of directors’

responsibilities 200–201in UK GAAP 13

disclosures 7, 93assets 129audit committee report, Smith Report

guidance 198–199Combined Code on Corporate

Governance 196–199corporate governance

disclosures 194–199directors’ remuneration 207–210directors’ report 201–205Disclosure and Transparency

Rules 195–196expenses 82fair value of derivatives 170financial instruments 169internal control statement 198–199KPIs 207liabilities 134–136

Listing Rules 195directors’ report 204

note disclosures 194–215OFR 205–207related party relationships and

transactions 210–212Reporting Statement 1 206–207segment disclosure 212–215share-based payments 177share capital and debentures 170SI 2008/410 33statement of directors’

responsibilities 199–201taxation, other comprehensive

income 87transactions with directors 212trend towards greater 62–63

discontinuance of IFRS accounts,exceptions allowing 28

discontinued operationsbasic EPS 97diluted EPS 98on income statement 82, 83–84

discounting, deferred tax 121distributable profits 179–193

consolidated and individual entityaccounts distinguished 70–71

defined benefit schemes 153–154effect of pension costs 154–155examples 182taxation 24–25

distribution of accounts, CA 2006rules 31

distributions, rules on 180–181dividends

IAS 1 disclosure 85intra-group transactions, realised

profits 192out of pre-acquisition profits, realised

gains 191as total comprehensive income 87types of 180

dividends per share 85–86due-diligence, accountants’ role in 43

earn-out clause in sale and purchaseagreement 59

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Index

earnings 55at constant exchange rates 57effect of expectations on company

decisions 56–57before exceptional items 57before goodwill amortisation 57before goodwill amortisation and

exceptional items 57before interest, tax, depreciation and

amortisation (EBITDA) 57‘earnings game’ 55–57earnings per share (EPS) 55, 85–86,

95–99‘economic hedges’ 167effective interest (amortised cost)

method 163–164, 170embedded derivatives 167Emerging Issues Task Force (EITF)

(US) 14, 22emoluments 208‘emphasis of matter’ paragraph 42employee benefits, note disclosures 93employee share ownership trusts 168,

177–178Enron scandal 62entities, types of 69entity accounts see individual entity

accountsenvironmental damage, constructive

obligations arising from 132equity accounting

associates 78investments shown on balance

sheet 89equity instrument, definition 158equity-settled share-based payment

transactions 173–175equity shares, CA 2006

regulations 159–160estimations in note disclosures 93EU Regulation 1606/2002/EC 28

requirement to use IFRS forconsolidated accounts 61

European Unionaccounting regulation 20–22

effect of 61capital markets policy 20

structure for accounting standardssetting 20–21

examplesadjustment of accounting profit 116,

120amortisation of financial

assets/liabilities 163–164analysis of changes in shareholders’

equity 184analysis of pension fund

deficit 151–152annual charges for operating lease

139balance sheet 8calculation of basic EPS 97calculation of temporary

differences 120capital allowances 118–119cash flow statement 8consolidated balance sheet 70constructive obligations 132deferred tax 117–118deferred tax on revaluation gains 122depreciation 118–119, 120, 128difference between pension scheme

opening/closingsurplus/deficit 151

directors’ statement, DTR 202–203distributable profits 182finance leases, accounting

for 140–142form v. substance 47–50gearing 134goodwill in merger accounting 102group reconstruction relief 113hedging 166income statement 8, 10

declared dividends 86exceptional items 84, 85

initial measurement of financialassets/liabilities 162

intangibles 109issue of shares 160–161liabilities shown on balance sheet

135measurement of liabilities 133merger relief 112–113

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Index

modified grant date method of optionpricing 176

option-pricing models inputs 174realised profits 189–193realised/unrealised profits 179–180recording investment at fair value 113revaluation gains and deferred tax 122s. 615 relief 114share premium account 112shareholders’ equity statement 9statement of comprehensive

income 88statement of directors’

responsibilities 202tax computation 116

exceptional items 83entered on income statement 82,

98–99executive remuneration packages

response to scandals over size of 62share options as part of 171

expenses, disclosure of 82exposure draft of IFRS for SMEs 32Extensible Business Reporting Language

(XBRL) as part of ‘corporatereporting supply chain’ 55

external reportingcompliance aspect 4decision-making aspect 4–5

extraordinary items, banned by FRS3 84, 98

failed sale of asset, form v. substanceapplied to 47–49

fair valueacquisition accounting 103, 106–110contingent liabilities 108deferred tax 121definition 107, 165definition: fair value defined 107derivatives, Companies Act 1985

disclosure 170equity-settled share-based payment

transactions 174fair value hedge 166, 167‘fair value option’ for financial

instruments 163

‘fair value through profit and loss’,method for derivatives 167

financial assets/liabilities 165–166financial instruments 161–163goodwill and intangibles in acquisition

accounting 108–110greater use of 6IASB’s objectives 166less costs to sell 125–126marking to model v. marking to

market 166measurement of assets 125in merger accounting 102, 103merger accounting 104modified grant date method of option

pricing 175of net assets acquired 107–108realised gains/losses in fair value

accounting 190recording investment at (example)

113reliable measurement of

intangibles 109reorganisation costs 107–108SI 2008/410 33trends towards greater use of 63–65

filing of accounts, CA 2006 rules 31final salary schemes see defined benefit

schemesFinance and Leasing Association (FLA)

SORP 147finance costs, inclusion on income

statement 81finance leases 137

accounting for (example) 140–142definition finance lease 138disclosures 145under IFRS 139–142leases classified as 142–144minimum lease payments 143, 146substantially all, definition 146

financial accounting/reporting,definition 4

Financial Accounting Standards BoardFASB (US) 14

approach to standards contrasted toIASB and ASB 63

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Index

FASB (US) (cont.)joint project with IASB on business

combinations 100project to reform rules on

consolidations 62relationship with IASB 22–23role and structure 22

financial assets/liabilities‘accounting mismatch’ in

measuring 163amortisation 163–164on balance sheet 89categories of financial assets 161,

162categories of financial liability 163definition financial asset 157definition financial liability 157–158fair value 165–166‘fair value option’ 163held for trading 163initial measurement 161–162recognition/derecognition 168subsequent measurement 162

financial instruments 156–170accounting standards 156amortisation 162definition financial instrument

157disclosures 169fair value accounting 64, 161–163fair values, greater volatility through

greater use of 65–66growth of 60in notes 93scope of 156strengthening of standards on 62under UK GAAP 169–170

Financial Reporting Council (FRC)Board 36–37formation and structure 36–38opinion of Martin Moore QC to

30–31preamble to Combined Code 196replaces APB 16role 15

Financial Reporting Review Panel(FRRP)

annual report 2007 92, 93

extension of remit to directors’reports 204–205

extension of role to cover directors’reports 58

on further note disclosures forestimates 93

as part of FRC 36press release on choice of dates for fair

value purposes 106report on implementation of IFRS 58,

92role 15–16role and activities 39–40statement on Wiggins Group Plc case,

on revenue recognition 90–91financial reporting standards (FRSs) 16,

226 see also entries for individualstandards

issue of 16in UK GAAP 13

Financial Services Authority (FSA) 52see also Disclosure andTransparency Rules (DTR);Listing Rules

summary of CESR recommendationson presentation of APMs 58

financial statements see accountsfinancial statements, definition 80financing cash flow 91fixed assets see also tangible fixed assets

definition 127IAS 1 classification 127impairment 65

fixed rate interest rate swapgains/losses 87

fixed to floating interest rate swaps 166floating to fixed swap 166foreign currency forwards 166foreign currency gains/losses as

comprehensive income 87foreign subsidiaries, translation of net

assets of 87form v. substance 44–51

leases 137formats for accounts

CA 1981 61SI 2008/410 32

forward contracts 166

242






Index

Framework for the Preparation andPresentation of FinancialStatements (IASB) 30, 124, 131

FRS 2 73FRS 3 56, 82, 83, 84FRS 4 169–170FRS 5 45–51, 74, 131, 137, 146

Application notes 46–47FRS 6 100, 110–111, 112FRS 7 100, 108, 112FRS 8 210, 211–212FRS 9 77–78, 78, 78–79FRS 10 100, 108, 109, 112, 128, 129FRS 11 65FRS 12 65, 130, 131, 132–133FRS 15 92, 128FRS 16 117FRS 17 148, 150, 152, 153, 189, 190

TECH 50/04 guidance 154FRS 18 92FRS 19 121FRS 20 171, 178, 191FRS 25 33, 169FRS 26 64, 125, 169–170FRS 29 169–170FRSSE 24, 25, 31–32

GAAP, definition 12–14gains

definitions 186reporting in STRGL 10–11

gearingdefinition 134as ratio in loan agreement 59

GEC/AEI takeover 62going concern status, doubts about,

‘modified’ audit reports 41–42goodwill

acquisition accounting 103–104,108–110

amortisation 100exception to 129under IFRS 57

bargain purchase where negativegoodwill 110

definition 109–110different accounting approaches

109

different approaches by UK GAAPand IFRS 3 105–106

impairment 65, 105–106, 128measurement of value 125in mergers and acquisitions 100, 101,

104positive and negative goodwill 110under UK GAAP 100–101written off to reserves 70

‘gross equity method’ 79‘grossing-up’ in acquisition

accounting 103group accounts see consolidated accountsgroup reconstruction relief 112–114group reconstructions

FRS 6 111IASB project on 108merger accounting 104, 105

group reserves in merger accounting 104‘group returns’ 24groups

composition of 69, 72consolidated accounts following

changes in 75listed groups 28measures to restrict mixed use of UK

GAAP and IFRS 122–123use of merger accounting in

reconstructions 100guarantee as obligation 132

half-yearly financial reportAIM Rules for Companies 53FSA Rules 52

harmonisation of standardsASB’s role in 15–17as continuing process 61current situation in UK 25dividends out of pre-acquisition

profits, realised gains 192in EU 20–22form v. substance 50IASB/FASB agreements 22–23implications for UK 23–25income statement 86international harmonisation 17–18merger accounting 112UK GAAP with IFRS 24

243






Index

hedge accounting 167hedging, examples 166hedging instruments’ gains/losses as

comprehensive income 87held for trading, financial

assets/liabilities 163hire purchase

contract as lease 138form v. substance 44

historical cost accounting 63HM Revenue & Customs

acceptance of IFRS 24–25, 121–123tax assessment by 71

holding company income statement,exemption fromconsolidation 74–75

housebuilders, FRRP’s focus on 39–40

IAS 1 90actuarial gains/losses as

comprehensive income 152balance sheet 88–89

requirement for 29cash flow statement 92classification of current/non-current

assets 127composition of accounts 80–81current assets and liabilities 89disclosure of dividends 85disclosure of material items of income

and expense 213equity accounting 78exceptional items 83IASB ‘Basis of conclusions’ 82liabilities 134note disclosures 93override for true and fair view 31performance statements pre- and

post-amendment 11–12revised version 56, 86statement of comprehensive

income 81–82, 88statement of comprehensive income,

requirement for 29IAS 7 89, 91IAS 8 51, 92IAS 12 89, 117, 118, 119, 120–121, 134

IAS 16 91–92, 128IAS 17

allocation of interest income 141compared with SSAP 21 51, 137,

145–146definitions of finance/operating

lease 138disclosures 145guidance on classifying leases into

finance or operating 142–143IFRIC 4 guidance on 138sale and leaseback

transactions 144–145IAS 18 92IAS 19 148, 150, 150–153, 153–154,

190TECH 50/04 guidance 154

IAS 22 105IAS 24 210, 210–211IAS 27 72, 72–73, 73IAS 28 77, 77–78, 210IAS 31 75, 77, 78, 210IAS 32 19, 33, 50–51, 156–158, 159,

169IAS 33 85–86, 95, 95–96, 98, 98–99IAS 34 52IAS 36 65IAS 37 65, 130, 131, 132–133IAS 38 108, 128IAS 39 19, 125, 157–158

Application Guidance 165categories of financial

assets/liabilities 161definition fair value 165equivalents in UK GAAP 169–170hedge accounting use criteria 167mixed model approach 64recognition/derecognition of financial

assets/liabilities 168used in boiler plating 92

IAS 40 64, 180, 183IAS 41 125IAS group accounts 29IAS individual accounts see individual

entity accountsIAS Regulation, audit reporting under 40ICAEW 35

244






Index

guidance on accounting for goods soldsubject to reservation of title 45

guidance on off-balance sheetfinance 45

release of TECH 7/03 184TECH 50/04 154website 185

ICAEW Recommendations 15ICAI 35ICAS 35

release of TECH 7/03 184TECH 50/04 154

identifiable, definition 109IFRIC 4 138, 146IFRIC 8 177IFRIC 11 177, 178IFRIC interpretations

equivalence to UITF Abstracts 37list of 224

IFRSacceptance by HMRC 24–25,

121–123adoption 20, 22amortisation of goodwill 57application of 80assets on balance sheet 127authority 20CA 2006 applied to 28–32defined benefit schemes, contrast with

UK GAAP 153–154definition 14, 20fair value measurement of assets,

contrast with UK GAAP 125finance leases 139–142form v. substance in 50–51FRRP report on implementation by

listed companies 58, 92leases 138–145minimum requirements for

consolidated accounts 53–54mixture of UK GAAP and 122–123obligation to continue using 29operating leases 138–139preparation of ‘group returns’ and

‘consolidation packs’ 24SEC reform permitting use of 23share-based payments 172–178

for SMEs 24, 25, 32use by AIM companies 21

IFRS 1 ‘First time adoption ofInternational Financial ReportingStandards’ 22

rules for converting to 70IFRS 2 62, 171, 172, 191

disclosures 177employee share ownership trusts

178IFRIC 8 on scope of 177modified grant date method of option

pricing 174–175IFRS 3 100, 101, 103

application of 104–108revised version 100, 101

IFRS 5 73, 89, 134IFRS 7 157, 169IFRS 8 63, 213IFRS accounts, exceptions allowing

discontinuance 28IFRS GAAP

components 13definition 13reporting of performance under 6, 11UK GAAP aligned with

gains, reporting of 11immaterial information, omission of, SI

2008/410 rules 33impairment see also amortisation

assets 125–126goodwill 103–104, 109–110, 128instead of amortisation 129review 101

impairment of assets 65impairment write-downs 83income statement 6, 12 see also profit

and loss (P&L) account;statement of comprehensiveincome

combining into statement ofcomprehensive income 81

content 81–82example of 8, 10exemption from consolidation for

holding companies 74–75focus of 7

245






Index

income statement (cont.)under IFRS 11in merger accounting 101merger accounting 104presentation of items 84–85UK GAAP/IFRS alignment 86

individual accounts requirements of CA2006 28–29

individual entity accounts 25distinguished from consolidated

accounts 69–71presentation with or separate to

consolidated accounts 93–94retention of UK GAAP for 94tax assessed on 71

industry practice 14information distributors as part of

‘corporate reporting supplychain’ 55

information technologies as part of‘corporate reporting supplychain’ 55

initial accounts 181–182initial public offering defined as

transaction 42insurance companies

consolidated accounts 71SI 2008/410 rules 32

intangiblesacquisition accounting 108–110amortisation 129on balance sheet 89definition: intangible asset 109different approaches by UK GAAP

and IFRS 3 105examples 109impairment 65measurement of value 125reliable measurement of fair value

109intellectual property, amortisation 129interest rate swap 166interest rate swap, gains/losses for fixed

rate 87interim accounts 181–183interim management statement 52–53interim report see half-yearly financial

report

internal control disclosures in TurnbullReport 198–199

internal control statementdisclosures 198–199

International Accounting StandardsBoard (IASB) 13

approach to standards contrasted toFASB 63

‘Basis of conclusions’ re IAS 1 82development of IFRS for SMEs 31formation 37formation, role and structure 18Framework 14, 30Framework for the Preparation and

Presentation of FinancialStatements 124, 131

level of work compared to IASC 19list of statements 224objective of greater use of fair

value 166project for new guidance on lease

accounting 147project on business combinations 100,

108, 112relationship with FASB 18, 19, 22–23statement on de facto control 73

International Accounting StandardsCommittee Foundation(IASCF) 18

International Accounting StandardsCommittee (IASC) 13, 18

international accounting standards(IFRSs, IASs) see also entries forindividual standards

continued use and revision 19in IFRS GAAP 13lists of 223–225use by developing countries 18use by international capital markets 18

international capital markets, use of IASby 18

International Financial ReportingInterpretations Committee(IFRIC)

interpretations 14 see also entries forindividual IFRICs

in IFRS GAAP 13role 19

246






Index

international financial reporting standards(IFRSs) see entries for individualstandards

international GAAP see IFRSintra-group transactions

elimination in consolidatedaccounts 76–77

merger accounting 105realised profits 191–193

inventorieson balance sheet 89measurement of value 125

investing cash flow 91investment companies, SI 2008/410

rules 33investment properties

on balance sheet 89carrying at valuation or cost 64measurement of value 125

investmentsaccounted for using equity method 89measurement of value 125

investorsas part of ‘corporate reporting supply

chain’ 55use of accounts by 58–59

ISA 700 41issued capital shown on balance sheet

89

Joint Monitoring Unit 38joint ventures

consolidated accounts 77–78, 78–79proportional consolidation 75relative importance to associates 79share of profit or loss entered on

income statement 82SI 2008/410 34

key performance indicators (KPIs)in business review 5disclosures 207

land and buildings leases 144, 146leases 137–147 see also finance leases;

operating leasesclassification into finance or

operating 142–144

disclosures 145finance leases 137FLA SORP 147form v. substance 45future accounting developments 147IASB project for new guidance on

147under IFRS 138–145land and buildings 144, 146lease term, definition 144operating leases 137sale and leaseback

transactions 144–145under UK GAAP 145–147

leasing industry, changes in, effects onaccounting 60

legal agreements, accounting terms in12

legislation, changes in, effect onaccounting 61

leisure and travel sectors, FRRP’s focuson 39

liabilities 130–136 see also assets;contingent liabilities; obligation

classification as currentliabilities 133–134

for current tax, on balance sheet 89for deferred tax, on balance sheet

89definition: liability 130, 131disclosure 134–136measurement 133in merger accounting 101need for an obligation 131preference shares presented as,

realised loss 191presentation on balance sheet 88–90,

133–134recognition 131–133role of current, non-current and

long-term liabilities in businessfinance 134

SI 2008/410 formats, shown in 32limited liability for auditors 42listed companies, consolidated

accounts 71listed groups, choice of IFRS or UK

GAAP 28

247






Index

Listing Rules 14, 52disclosure of directors’

remuneration 207–208disclosures 195disclosures under 7in IFRS GAAP 13related party relationships and

transactions, disclosures 212in UK GAAP 13

lists of accounting standards 223–228loan obligations, initial measurement

of 162loan stock (convertible) and diluted

EPS 98London Stock Exchange 53long-term finance, ‘gearing’ relationship

with long-term liabilities 134long-term incentive plans (LTIPs) 168,

172–173definition 208

long-term liabilities, role in businessfinance 134

lossesentered on income statement 82equivalence to net cash flow 90

management accounting, definition 4management’s role in ‘earnings

game’ 56Manual of Accounting – Management

Reports and Governance 2008(PricewaterhouseCoopersLLP) 207

marking to model v. marking tomarket 166

‘Memorandum of Understanding’(IASB/FASB) 23

merger accounting 104banning of 75, 100choice of 75not permitted under IFRS 101, 105under UK GAAP 100, 110–114use in group reconstructions 100

merger relief 112–114merger reserve 113, 186mergers, defined as transaction 43minimum lease payments 146

definition 143

minority interest 75, 76acquisition accounting 103on balance sheet 89profit attributable to 96–97share of profit or loss entered on

income statement 82total comprehensive income 87

mixed model (assets at cost and fairvalue) 64

‘modified’ audit reports 41–42modified grant date method of option

pricing 174–175example 176

Monte-Carlo simulation model of optionpricing 174

Moore QC, Martin 30–31Morris Review of the actuarial

profession 38

names of audit firm and audit partner onreports 42

natural disasters, costs as extraordinaryitem 84

negative goodwill 110net assets

acquired, fair value 107–108definition 180

net cash flow, equivalence profit orloss 90

net investment hedge 167net realisable value (NRV) 125–126non-controlling interest see minority

interestnon-current assets see fixed assetsnon-current liabilities, role in business

finance 134non-executive directors

on audit committees 54questions to ask 219–222

non-GAAP numbers see alternativeperformance measures (APMs)

non-listed/non-AIM companies,consolidated accounts 71–72

‘non-subsidiary subsidiaries’ 45Northern Ireland, CA 2006 extending

to 26‘Norwalk agreement’ 22–23note disclosures see disclosures

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Index

obligationconstructive obligations 132–133as prerequisite for liability 131recognition of 132

off-balance sheet finance 45operating and financial review (OFR) 5

disclosures 205–207Reporting Statement 1 206–207withdrawal of statutory

requirement 205operating cash flow 91operating leases 137

annual charges for, example 139definition operating lease 138disclosures 145under IFRS 138–139leases classified as 142–144

operating profit 56, 84entered on income statement 82

operating segments 213opinion see auditors’ opinionoption-pricing models 174ordinary shares

balance sheet classification 159in calculating basic EPS 96–97potential ordinary shares 98

other comprehensive income 56 see alsototal recognised gains and losses

gains and losses reported as 64other recognised gains and losses 64override, true and fair


CA 2006 30in IAS 1 31

‘own shares’ see treasury sharesowners of parent company 87

issued capital and reserves on balancesheet 89

profit attributable to 96–97ownership, convergence with control

73

parent companiesretention of UK GAAP for individual

entity accounts 94as subsidiaries, exemption from

consolidating accounts 71

Parmalat Scandal 62patents, amortisation 129Penrose Report on Equitable Life 16pension defects, realised profits 190pensions 148–155 see also defined

benefit schemes; definedcontribution schemes

analysis of pension fund deficit(example) 151–152

changes in accounting treatment 189‘corridor’ method of

accounting 151–152difference between pension scheme

opening/closing surplus/deficit(example) 151

effect of pension costs on reserves155

effect on realised and distributableprofits 154–155

option to recognise actuarial gain/lossin other income 152

projected unit credit method forvaluing scheme assets 150–151

performance statements 6, 9–12two-statement approach 12

permanent differences 120phantom share option schemes 175‘phantom share options’ 173positive goodwill 110potential ordinary shares 98pre-acquisition reserves, merger

accounting 104precision in accounting terminology,

need for 59preference shares

balance sheet classification158–159

in calculating basic EPS 96–97presented as liabilities, realised

loss 191preliminary announcements 52present fairly, IFRS requirement to 30present value, definition 126presentation of items

APMs 57–58in balance sheet 90cash flow statement 91in income statement 84–85

249






Index

price-sensitive information, trendstowards earlier disclosure 63

PricewaterhouseCoopers LLP, Manual ofAccounting – ManagementReports and Governance 2008207

‘principle v. rules’ debate 63privately held companies, application of

IFRS for SMEs to 32pro-forma numbers see alternative

performance measures (APMs)professional bodies’ statements and

recommendations 14Professional Oversight Board (POB)

as part of FRC 36roles 38

profitfrom continuing operations, diluted

EPS 98definition 186difference to cash flow 7–9from discontinued operations, diluted

EPS 98dividends out of pre-acquisition

profits, realised gains 191entered on income statement 82equivalence to net cash flow 90realised and distributable

profits 179–193references in agreements to 12before and after tax 56before tax 84total profit and diluted EPS 98

profit and loss, decreasing emphasis oncalculation of 65

profit and loss (P&L) account 6 see alsoincome statement

accordance with substance 33CA 2006 rules 29SI 2008/410 formats 32–33

projected unit credit method forvaluing pensions schemeassets 150–151

property, plant and equipment seetangible fixed assets

proportional consolidation 75similarity to equity accounting 78

provisionson balance sheet 89definition 131

Public Companies Accounting OversightBoard 62

qualified opinion 41qualifying consideration 187quasi-subsidiaries 46, 74questions for non-executive

directors 219–222quoted companies

accounts on website, requirement topost 52, 53

minimum requirements for IFRSconsolidated accounts 53–54

requirement to prepare directors’remuneration report 40

withdrawal of proposal for statutoryOFR for 5

‘readily convertible to cash’definition 188fair value gains 190

realised profits 179–193changes in accounting

treatment 188–190definition 184definition: realised profit 187effect of pension costs 154–155examples 189–193TECH 01/08 185–186

reconstructions, use of mergeraccounting 100

recoverable amount, definition 125‘recycling’ of gains 11regulators as part of ‘corporate reporting

supply chain’ 55related party relationships and

transactionsAIM Rules for Companies 53definition related party 210disclosures 210–212Listing Rules disclosures 212

relevant accounts 181–183reliable measurement of fair value of

intangibles 109

250






Index

remuneration, definition 208reorganisations

constructive obligations arisingfrom 132

fair value in accounting forcosts 107–108

‘report and accounts’, use of term 80Reporting Standard 1 205–206Reporting Statement 1 206–207reputation of company, recognition on

balance sheet 124research and development expenditure,

recognition on balance sheet125

reservation of title, goods sold subject to,form v. substance 45

reserveson balance sheet 89effect of pension costs 155merger accounting 104undistributable reserves 180

restructuring expenses 83as extraordinary item 84

retail sector, FRRP’s focus on 39revaluation gains

deferred tax 121example 122

revaluation gains/losses, ascomprehensive income 87

revenue, inclusion on incomestatement 81

revenue recognitionFRRP statement on Wiggins Group Plc

case as to 90–91increasing complexity of 60–61

revision of accounts, CA 2006 rules31

rights issues as total comprehensiveincome 87

Romalpa case 45‘roughly right rather than exactly

wrong’ 126

s. 615 relief 113–114‘safe harbour’, directors’ 205sale and leaseback transactions

144–145

sale and purchase agreement, earn-outclause in 59

sale of business, profit or loss asextraordinary item 84

Sarbanes-Oxley Act (‘Sarbox’) 62scandals, effect on accounting 62‘scrip dividends’ 180secondary listing of shares, defined as

transaction 42Securities and Exchange Commission

(SEC), reforms to accountspreparation and filing rules 23

segment disclosure 212–215operating segments 213

segment reporting 63share awards 174share-based payments 171–178

cash-settled share-based paymenttransactions 175–176

definition share-based paymenttransaction 172

IFRIC 11 177IFRIC 8 177under IFRS 172–178in notes 93realised gains/losses 190–191through trusts 177under UK GAAP 178

share capital and debentures,disclosure 170

share capital, raising of, defined astransaction 42

share optionscost of 171definition share option 208as part of executive remuneration

171‘phantom share options’ 173, 175pricing models 174role in executive remuneration

scandals 62share premium 112–114shareholders’ equity 130

analysis of changes (example) 184role in gearing 134

shareholders’ equity statement, exampleof 9

251






Index

shares see also ordinary shares;preference shares; share options

equity shares and CA 2006 159–160issue by group following merger 104issue of 160–161potential ordinary shares 98types and balance sheet

classification 158–159SI 2008/374, consolidated accounts

rules 53SI 2008/409 27SI 2008/410 27


application on change to IFRS 28associates and joint ventures 34banks and insurance’s companies,

requirements for 32basic rule of consolidation 34carrying of assets, alternative rules

for 33consolidated accounts 71–72derivatives, disclosure of fair

value 170directors’ report disclosures 196disclosure of share capital and

debentures 170fair value 33formats for accounts 82, 90formats for balance sheet and P&L

account 32–33group accounts 30in IFRS GAAP 13immaterial information, omission

of 33investment companies 33notes to financial statements 33in UK GAAP 12UK GAAP-only requirements 32–34

SIC 12 50, 73–74, 177–178SIC 15 137, 139SIC 27 137–138, 146SIC interpretations, list of 224–225‘single entity’ see individual entity

accountssmall companies rate of corporation

tax 116

SMEs see also FRSSEfiling of abbreviated accounts 52FRSSE 24, 25IFRS for 24, 25

Smith Report guidance on auditcommittee report disclosures 198

smoothed results 55smoothing v. volatility 65–66software industry, revenue

recognition 60–61‘solus’ see individual entity accountssolus accounts see individual entity

accountsSORIE 86–88

combining into statement ofcomprehensive income 81

‘special’ dividends 180special purpose entities (SPEs)

consolidated accounts 73–74stronger US rules for disclosure and

consolidation 62SPVs, form v. substance applied to 50SSAP 16

development 15in UK GAAP 13withdrawal 15

SSAP 19 64SSAP 21 51, 137

differences to IAS 17 145–146Guidance Notes 147

SSAP 24 189SSAP 25 214–215standardised wording, usefulness of

92Standards Advisory Council (SAC) 19standards-setting bodies

continuing work of 61as part of ‘corporate reporting supply

chain’ 55statement of accounting policies 7statement of changes in equity (SOCIE),

definition 11statement of comprehensive income 6,

81–88 see also income statementdefinition 11–12IAS 1 rules 29in merger accounting 101

252






Index

statement of directors’ responsibilitiesdisclosures 199–201example 202

statement of financial position 6Statement of Principles (ASB) 131statement of total recognised gains and

losses (STRGL) 6, 10–11, 29,64

actuarial gains/losses in 153similarity to statement of

comprehensive income 88statement of total recognised income and

expenses (SORIE) 6definition 11

statements of recommended practice(SORPs) 17

FLA 147statements of standard accounting

practice (SSAPs) see also entriesfor individual standards

list of 226–227statutory requirement for OFR,

withdrawal of proposal for 5stock (convertible) and diluted EPS 98stronger standards, expectations of

effectiveness against futurescandals 62

subsidiariesdefinition subsidiary 72definition subsidiary undertaking 72exclusion from consolidated

accounts 74IASB project on spin-offs 108

substance, accordance with 33substance over form see form v.

substancesubstantially all, definition 146summary financial statements 53–54

regulation permitting 52

table of origins for CA 2006 229–231tangible assets, impairment 65tangible fixed assets

on balance sheet 89choice of measurements for 91–92measurement of value 125in notes 93

revaluation gains/losses ascomprehensive income 87

stating at value 64tax base of assets and liabilities 118taxation 115–123 see also current tax

assessment on individual entityfinancial statements 71

corporation tax rates 116current tax 117deferred tax 117–121distributable profits 24–25example of computation 116expense entered on income

statement 82liabilities shown on balance sheet 134on other comprehensive income 87

TECH 01/08 35–36, 154, 184–193TECH 02/07 186, 188, 190TECH 2/07 185TECH 50/04 154TECH 64/04 190TECH 7/03 184, 185, 186, 188, 190temporary/timing difference 116, 118,

119, 120–121calculation of (example) 120

third-party transactions, mergeraccounting 104

‘through the eyes of management’approach 213

total comprehensive income 87,183–184

total profit, diluted EPS 98total recognised gains and losses 56, 64

see also other comprehensiveincome

TR 481 184TR 482 184trade and other payables, on balance

sheet 89trade and other receivables, on balance

sheet 89transactions

costs 161definition transaction 42–43

Transparency Directive, requirement forstatement of directors’responsibilities 200

253






Index

travel and leisure sectors, FRRP’s focuson 39

treasury shares, CA 2006 rules 168true and fair view see also override

CA 2006 rules 30–31definition 44form v. substance 44

Trustee Appointments AdvisoryGroup 19

trustsform v. substance applied to

50share-based payments

through 177–178Turnbull Report, internal control

disclosures 198–199turnover see revenueTweedie, Sir David 18two-statement approach to reporting

performance 12

UITF 13 178UITF 17 178, 190UITF 38 190UITF abstracts 14, 15

approval, issue and status 37equivalence to IFRIC

interpretations 37list of 227–228in UK GAAP 13

UK GAAPalignment with IFRS as to reporting of

gains 11CA 2006 applied to 28–32components 12–13composition of accounts 81continuing use of 17deferred tax 121defined benefit schemes, contrast with

IFRS 153–154definition 12–13fair value measurement of assets,

contrast with IFRS 125financial instruments 169–170future of 25leases 145–147merger accounting 110–114

differences to IFRS 3 105future developments 112

mixture of IFRS and 122–123reporting of performance under 6retention for parent company

accounts 94share-based payments 178SI 2008/410 rules solely to 32–34

undistributable reserves 180unqualified audit report 41Urgent Issues Task Force (UITF) see also

UITF abstractsas part of ASB 37as part of FRC 36role 37

US GAAPpros and cons 22reconciliation, SEC reform 23

use of accounts for analysis andinvestment 58–59

valuation basis for tangible fixedassets 91–92

value in use, definition 126volatility in results, trend towards

65–66

warehousing of stock, form v. substanceapplied to 49–50

websiteICAEW 185posting of accounts on, requirement

for 52, 53‘whisper number’ 56wholly owned subsidiaries of privately

held companies, application toIFRS for SMEs to 32

Wiggins Group Plc, FRRP statement oncase as to revenuerecognition 90–91

workforce, recognition on balancesheet 124

WorldCom scandal 62worth, definition 125

XBRL as part of ‘corporate reportingsupply chain’ 55

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