UK accounting practice:
Gespeichert in:
| 1. Verfasser: | |
|---|---|
| Format: | Buch |
| Sprache: | English |
| Veröffentlicht: |
London [u.a.]
LexisNexis Butterworths
2005
|
| Online-Zugang: | Inhaltsverzeichnis |
| Beschreibung: | LXVI, 1156 S. graph. Darst. |
| ISBN: | 0754528014 |
Internformat
MARC
| LEADER | 00000nam a2200000 c 4500 | ||
|---|---|---|---|
| 001 | BV021458289 | ||
| 003 | DE-604 | ||
| 005 | 20051125 | ||
| 007 | t | ||
| 008 | 041006s2005 d||| |||| 00||| eng d | ||
| 020 | |a 0754528014 |9 0-7545-2801-4 | ||
| 035 | |a (DE-599)BVBBV021458289 | ||
| 040 | |a DE-604 |b ger |e rakwb | ||
| 041 | 0 | |a eng | |
| 049 | |a DE-M382 | ||
| 100 | 1 | |a Morris, Glynis D. |e Verfasser |4 aut | |
| 245 | 1 | 0 | |a UK accounting practice |c Glynis Morris |
| 264 | 1 | |a London [u.a.] |b LexisNexis Butterworths |c 2005 | |
| 300 | |a LXVI, 1156 S. |b graph. Darst. | ||
| 336 | |b txt |2 rdacontent | ||
| 337 | |b n |2 rdamedia | ||
| 338 | |b nc |2 rdacarrier | ||
| 856 | 4 | 2 | |m HBZ Datenaustausch |q application/pdf |u http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=014678362&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA |3 Inhaltsverzeichnis |
| 999 | |a oai:aleph.bib-bvb.de:BVB01-014678362 | ||
Datensatz im Suchindex
| _version_ | 1804135181527810048 |
|---|---|
| adam_text | Contents
CHAPTER 1 ACCOUNTING STANDARDS,
ACCOUNTING PRINCIPLES AND ACCOUNTING
RULES 1 36
Accounting Standards 1
The present regime 1
Changes to the role of the ASB 2
The UK IAS framework 3
UK convergence with IASs 5
Scope and application of accounting standards 5
Effective date of accounting standards 6
Disclosure of compliance with accounting standards 6
Applicable accounting standards 7
Role of the UITF 7
Role of the FRRP 7
Financial Reporting Standard for Smaller Entities (FRSSE) 9
SORPs 9
Accounting Principles 10
CA 1985 requirements 10
ASB Statement of Principles and FRS 18 Accounting Policies 10
Going concern 11
Accruals 14
Consistency and comparability 15
Prudence 17
vi UK Accounting Practice
Substance over form 18
Relevance, reliability and understandability 19 j
Off setting 19 !
Departure from accounting principles set out in CA 1985 20
Accounting Rules 21
Alternative sets of accounting rules 21
Determining amounts under the alternative accounting rules 25
Fair value accounting 28
Appendix 1: Summary of the key points on the appropriateness of the
going concern basis raised in International Standard on Auditing 570
(ISA 570) Going Concern 32
Appendix 2: Summary of the key points on the appropriateness of the
going concern basis raised in the Joint Working Group Guidance (JWG)
Going Concern and Financial Reporting 35
CHAPTER 2 THE ASB STATEMENT OF PRINCIPLES
FOR FINANCIAL REPORTING7 37 66
Introduction and Overview 37
Background 37
Purpose of the Statement 37
Status and scope 38
True and fair view 39
The standard setting process 39
Relationship with existing accounting standards and company law 39
Structure of the Statement 40
Application to Public Benefit Entities 40
The Objective of Financial Statements 41
Principles 41
Users of the accounts 42
Limitations of financial statements 42
Financial performance 42
Financial position 43
Generation and use of cash 43
Financial adaptability 44
The Reporting Entity 44
Principles 44
Control 44
When does one entity control another? 44
Contents vii
The Qualitative Characteristics of Financial Information 45
Principles 45
Relevance 46
Reliability 46
Prudence 47
Comparability 48
Understandability 48
Materiality 48
Conflicts between qualitative characteristics 49
The Elements of Financial Statements 49
Principles 49
Assets 50
Liabilities 51
Offset of rights and obligations 52
Ownership interest 52
Recognition in Financial Statements 53
Principles 53
Recognition process 53
Effect of transactions and other events 53
Uncertainty 54
Initial recognition of assets and liabilities 54
Prudence in the context of recognition 55
Derecognition of assets and liabilities 55
Matching 55
Critical events in the operating cycle 56
Measurement in Financial Statements 56
Principles 56
Measurement bases 57
Determining current value assets 58
Determining current value liabilities 58
Measurement on initial recognition 58
Subsequent remeasurement 59
Discounting 59
Dealing with uncertainty 59
Capital maintenance and changing prices 60
Presentation of Financial Information 60
Principles 60
Structure of financial statements 61
Classification 61
Statement of financial performance 62
Statement of financial position 62
viii UK Accounting Practice
Accompanying information 63
Highlights and summary indicators 63
Accounting for Interests in Other Entities 63
Principles 63
Degree of influence 64
Reflecting interests involving control 65
Potential Conflicts With Company Law 65
Presentation of dividends 65
Accounting for proposed dividends 65
Unrealised gains and losses 66
Measurement of current assets 66
Identification of subsidiaries for consolidation purposes 66
CHAPTER 3 THE TRUE AND FAIR VIEW 67 74
Company Law 67
Company law requirements 67
Small companies 67
Overriding requirement for accounts to give a true and fair view 68
Departure from the requirements of the Act 68
The relationship between accounting standards and the true and fair
requirement 69
Departure from accounting standards 70
Use of the true and fair override 70
Disclosure requirements under FRS 18 70
Appendix: Example wordings for the use of the true and fair override 72
CHAPTER 4 SUBSTANCE OVER FORM 75 94
Background to FRS 5 Reporting the Substance of Transactions 75
Off balance sheet financing 75
Conceptual nature of FRS 5 75
Transactions covered by the standard 76
Excluded transactions 76
Application of FRS 5 in practice 76
Impact of FRS 18 Accounting Policies 76
Company law requirement 77
Detailed Requirements of FRS 5 77
Assessing commercial substance 77
Relationship with other accounting standards and with company
law 77
Identifying and recognising assets and liabilities i 78
Contents ix
Options and guarantees 78
Subsequent transactions in respect of recognised assets 78
Non recourse finance arrangements 78
Additional disclosures 79
Off setting 79
Quasi subsidiaries 80
Application Notes 80
The Recognition of Assets and Liabilities 80
Identification of assets and liabilities 80
Impact of risk 81
Definition of liabilities 81
Recognising assets and liabilities 81
The Commercial Effect of Transactions 82
Linked transactions 82
Options 82
Importance of commercial logic 83
The lender s return 83
Subsequent transactions in assets previously recognised 83
Continued recognition 84
Derecognition 84
Special cases 84
Significant benefits and risks 85
Off setting 85
Net settlement assured beyond all doubt 86
Members of a group 86
Legally enforceable right of set off 87
Settlement intention 87
Simultaneous settlement 88
Situations where offsetting is inappropriate 88
Master netting arrangements 88
Leasing Transactions 89
The interaction of FRS 5 with SSAP 21 89
Where the requirements of FRS 5 may be relevant 89
Guidance in Application Note B to FRS 5 89
Accounting for ESOP Trusts 90
Usual features of ESOPs 90
Accounting treatment 90
Disclosure 91
Employee Benefit Trusts and Other Intermediate Payment
Arrangements 91
UITF Abstract 32 91
X UK Accounting Practice
Structure of the intermediary 91
Employee benefit trusts 92 *
Whether a payment represents an immediate expense 92 |
Creation of an asset 92 !
Impact of FRS 5 93 !
Accounting for the asset 93
Disclosure 94
CHAPTER 5 ACCOUNTING POLICIEST7TT7 , 7795 104
Background to Accounting Policies 95
Definition of accounting policy 95
Measurement bases 95
Purpose of accounting policies 96
Change of measurement basis 96
Fungible assets 96
Alternative treatments 96
Presentational changes 97
Selection of Accounting Policies 97
Requirement for a true and fair view 97
Choice of accounting policies 97
Balancing objectives 98
Use of additional disclosures 98
Industry practices 98
Review of Accounting Policies 98
The need for regular review 98
Accounting for a change in accounting policy 99
Impact on comparability 99
Disclosure of Accounting Policies 99
Requirements under the Companies Act 1985 99
Requirements under FRS 18 99
Disclosure requirements under other accounting standards 100
Location of disclosures 100
Accounting convention adopted 101
Estimation Techniques 101
Definition of estimation techniques 101
Selection of estimation techniques 101
Factors to be taken into account 102
Disclosure of techniques adopted 102
Changes in estimation techniques .... 102
Contents XI
Statements of Recommended Practice (SORPS) 103
Definition of SORP 103
Disclosure of adoption 103
Entities who voluntarily comply with a SORP 103
CHAPTER 6 COMPARATIVE FIGURES AND PRIOR
PERIOD ADJUSTMENTS 105 120
Comparative Figures 105
Company law requirements 105
Comparative figures where there is no current year item 105
Adjustment of comparative figures 106
Requirements of accounting standards 106
Proposals for change 106
Prior Period Adjustments 107
Definition of prior period adjustment 107
Changes in accounting estimates 107
Reassessment of provisions 107
Use of estimation techniques 108
Distinction between estimation techniques and accounting policies 108
Changes in estimation techniques 109
Change of accounting policy 110
Reasons for changing an accounting policy 110
Change in the method of applying an accounting policy 110
Accounting treatment on change of accounting policy Ill
Disclosure of change in accounting policy Ill
Correction of fundamental error 112
Appendix: Worked example of a prior period adjustment 113
CHAPTER 7 FOREIGN CURRENCY TRANSLATION 121 142
General Background to Foreign Currency Translation 121
Relevant accounting standards 121
Objectives of foreign currency translation 122
Need for consistency 123
Basis of invoicing 123
Translation 124
Local currency 124
Exchange rate and closing rate 125
Forward contract 125
Monetary items 125
xii UK Accounting Practice
Translation of Foreign Currency Transactions 126
Basic requirement 126
Date when the transaction occurs 126
Contracted rate 127 :
Calculation of exchange gains and losses 127
Use of a forward contract 128
Options 128
Impact on the profit and loss account 130
Translation of Assets and liabilities 130
Non monetary assets 130
Monetary assets and liabilities 131
Overseas debtors and creditors 131
Recording Exchange Gains and Losses 131
Settled transactions 131
Unsettled short term monetary transactions 132
Unsettled long term monetary transactions 132
Impact on distributable reserves 132
True and fair override 133
Post balance sheet events 133
Profit and Loss Account Disclosure 133
Gains and losses on ordinary activities 133
Inclusion under statutory headings 134
Exceptional items 134
Cash flow statement 134
Foreign Equity Investments 134
Alternative accounting treatment 134
Conditions to be satisfied 135
Disclosure of adoption 136
Accounts Disclosure Requirements 136
General disclosure requirement 136
Accounting policy 137
Other disclosure requirements 137
Other Changes Under FRS 23 and FRS 24 138
Change in functional currency 138
Using a different presentational currency 138
Disclosure of financial information in a different currency 139
Dealing with hyperinflationary economies 139
Contents xiii
CHAPTER 8 SMALL AND MEDIUM SIZED
COMPANIES 143 206
Qualification as a Small Company 143
Company qualifying as small 143
Company treated as qualifying as small 143
Practical effect 143
Qualifying conditions 144
Definitions 145
Qualification as a small group 145
Qualifying conditions 145
Gross and net 146
Accounts Exemptions Available to Small Companies and Groups 146
Accounts exemptions for small companies 146
Ineligible companies 147
Shorter form accounts 147
Additional disclosure exemptions 148
Modified directors report 148
Directors statement 149
True and fair view 150
Abbreviated accounts 150
Special auditors report 152
Accounts exemptions for small groups 152
Exemption from preparing group accounts 153
Shorter form group accounts 153
Accounting Standards and the Small Company 154
Compliance with accounting standards 154
Compliance with UITF Abstracts 154
Disclosure of compliance with accounting standards 155
Abbreviated accounts and accounting standards 155
Financial Reporting Standard for Smaller Entities (FRSSE): An
Overview 156
Background to the FRSSE 156
One stop shop document 156
Scope and objective of the FRSSE 157
Disclosure of adoption 157
Relationship with SORPs 157
Definitions 158
Items not specifically covered in the FRSSE 158
Voluntary presentation of cash flow statement 158
Statement of total recognised gains and losses 159
link with accounting standards 159
xiv WX Accounting Practice
Principal relaxations in requirements 159
Disclosure of directors personal guarantees 162
Group accounts 162
Possible changes to small entity reporting 162
The Financial Reporting Standard for Smaller Entities (FRSSE): Detailed
Requirements 163
True and fair view 163
True and fair override disclosures 164
Disclosure of adoption 164
Accounting policies and estimation techniques 164
Prior period adjustments 165
Gains and losses 166
Exceptional items 166
Profit or loss on disposal 166
Extraordinary items 166
Revenue recognition 167
Statement of total recognised gains and losses 167
Expenditure on research and development 168
Goodwill and intangible assets 169
Depreciation of goodwill and intangible assets 169
Negative goodwill 169
Transitional arrangements 169
Tangible fixed assets 170
Subsequent expenditure on tangible fixed assets 170
Revaluation of tangible fixed assets 170
Revaluation gains and losses 171
Transitional arrangements 171
Depreciation of tangible fixed assets 171
Review of useful economic lives and residual values 172
Change in depreciation method 172
Depreciation disclosures 172
Write downs to recoverable amount 172
Reversal of write down 173
Recognition of write downs and reversals 173
Investment properties 173
Government grants 174
Hire purchase contracts 174
Lessees: Accounting for finance leases 174
Lessees: Accounting for operating leases 175
Lessees: Accounting for lease incentives 175
Lessors: Accounting for finance leases 175
Lessors: Accounting for operating leases 175
Sale and leaseback transactions 176
Contents XV
Disclosure by lessees 176
Disclosure by lessors 177
Stocks 177
Long term contracts 179
Disclosure of long term contracts 180
Consignment stocks 180
Debt factoring 181
Start up costs and pre contract costs 182
Taxation 182
Recognition of deferred tax 183
Measurement of deferred tax 183
Disclosure of deferred tax 183
Tax on dividends 184
VAT 184
Defined contribution retirement schemes 184
Defined benefit retirement schemes 184
Accounting periods ending before 22 June 2006 184
Accounting periods ending on or after 22 June 2006 186
Provisions 188
Contingent liabilities and contingent assets 189
Financial instruments 189
Dividends 190
Translation of foreign currency transactions, assets and liabilities 190
Foreign equity investments financed by foreign currency borrowing 191
Incorporating the accounts of foreign entities 191
Investments in foreign entities financed by foreign currency
borrowings 191
Post balance sheet events 192
Date of approval of financial statements 192
Related party disclosures 192
Personal guarantees given by directors 193
Disclosure of controlling party 193
Consolidated financial statements 194
Medium sized Companies and Groups 194
Qualification as a medium sized company 194
Accounts exemptions available to medium sized companies 195
Ineligible companies , 196
Abbreviated accounts for medium sized companies 196
Directors statement 197
Special auditors report 197
Exemption from preparing group accounts 198
Xvi UK Accounting Practice
Audit Exemption 198
Categories of audit exemption 198
Total exemption conditions 198
Report conditions 199 ;
Ineligible companies 200
Special provisions for dormant subsidiaries and small groups 200
Members requiring an audit to be carried out 201
Directors statement 201
Special report by reporting accountants 202
Dormant companies 203
Conditions for dormant company audit exemption 204
Ineligible companies 204
Accounts requirements for dormant companies 204
Directors statement 205
Dormant companies acting as agents 205
CHAPTER 9 PROFIT AND LOSS ACCOUNT
FORMATS 207 240
Company Law Requirements 207
CA 1985 prescribed formats 207
Presentation of operating costs 208
Potential sensitivity of information 208
Change of format 208
Order of headings and sub headings 209
Analysis between headings 209
Condensed presentation 210
Potential duplication of headings and sub totals 210
Comparative figures 210
Additional disclosures 211
Continuing, Discontinued and Acquired Operations 212
Operating profit 212
Classification of discontinued operations 212
Completion of sale 213
Completion of termination 213
Deadline for completion of sale or termination 214
Operational effect of a discontinuation 214
Material effect on turnover 215
Separate identification of operation 216
Consideration individually or in aggregate? 217
Disclosure of continuing, discontinued and acquired activities 217
Columnar format 217
Alternative presentation , , 218
Contents xvii
No discontinued operations or acquisitions during the year 220
Disclosures in respect of acquisitions 220
Disclosures in respect of discontinued operations 221
Sale or termination not yet completed 221
Additional analysis of interest and tax 221
Comparative figures 221
Potential changes in requirements 222
Additional Format Headings 224
Requirements of FRS 3 Reporting Financial Performance 224
Profits or losses on the sale or termination of an operation 224
Costs of a fundamental reorganisation or restructuring 224
Profits and losses on the disposal of fixed assets 225
Additional disclosure requirements 225
FRS 17 Retirement Benefits 225
Disclosure of Exceptional Items 225
Definition of exceptional 225
Presentation of exceptional items 226
Use of columnar format 226
Continuing and discontinued operations 227
Disclosure of Extraordinary Items 227
CA 1985 requirements 227
Classification of income or expenditure as extraordinary 228
Suggested disclosure 228
Likely Future Developments 229
FRED 22 Review of FRS 3: Reporting Financial Performance 229
Structure of financial performance statement 230
Financing and treasury section 230
Other gains and losses section 231
Continuing operations, discontinuing operations and acquisitions 231
Discontinuing operations 232
Prohibition on recycling 232
Offsetting 232
Taxation . . 233
Dividends 233
Earnings per share 233
Prior period adjustments 233
Notes to the accounts 234
Ownership interests 234
Investment properties 234
Specialised sectors 234
Comparatives 234
xviii ^K Accounting Practice
Impact on other standards 235
Appendix 236
CHAPTER 10 TURNOVER 241 260
Segmental Analysis of Turnover 241
CA 1985 requirements 241
Requirements of SSAP 25 Segmental reporting 241
Identification of classes of business and geographical markets 242
Separate classes of business 242
Geographical segments 243
Redefining reporting segments 243
Exemption from segmental disclosure 243
Maintaining appropriate records 244
Likely future changes 244
Turnover relating to continuing, discontinued and acquired
activities 244
Accounting Policies and Revenue Recognition 245
Profit and loss account formats 245
Requirements of FRS 18 245
Revenue recognition under FRS 5 246
Convergence with international requirements 246
What is turnover? 247
Recognising turnover 247
Measuring revenue 247
Long term contractual performance 247
Revenue recognition and services contracts 248
Contract for a single service or product 249
Separation and linking to contractual arrangements 249
Bill and hold arrangements 250
Sales with a right of return 251
Acting as principal and agent 252
Leasing income in the accounts of a lessor 253
Disclosure of accounting policy 255
Long term Contracts 256
Definition of long term contract 256
Accounting treatment 256
Calculating turnover 256
Variations to original specification 257
Disclosure of method of calculating turnover 257
Contents xix
Barter Transactions for Advertising 257
Scope of UITF Abstract 26 257
Presentational issue 257
Recognition criteria 258
Substance of the transaction 258
Accounting treatment 258
Persuasive evidence 258
Disclosure 259
Contracts for Sales of Capacity 259
Sale of the right to use capacity 259
Capacity swaps 260
Artificial transactions 260
CHAPTER 11 STAFF COSTS AND EMPLOYEE
NUMBERS 261 284
Disclosure of Staff Costs 261
CA 1985 disclosure requirements 261
Requirements of FRS 3 Reporting Financial Performance 262
Wages and salaries 262
Benefits in kind 262
Social security costs 262
Pension costs 263
Calculation of Average Number of Employees 263
CA 1985 disclosure requirements 263
Basic rules 263
Contracts for services 264
Directors 264
Employees working overseas 264
Arrangements which may give rise to problems 264
Temporary or casual employees 265
Staff employed by a different company 265
Disclosure in subsidiary company s accounts 265
Disclosure in holding company accounts 266
Arrangements involving another group company 267
Disclosure of number of employees by category 267
link between staff costs and employee numbers 267
Employee Share Schemes Under UITF Abstract 17 268
Requirements of UITF Abstract 17 268
Recognition of the cost of share awards 268
Need for shareholder approval 269
Creation of an obligation 269
XX UK Accounting Practice
Shares becoming publicly traded 270
Consideration paid by employee 270
Shares purchased by ESOP trust 270
Uncertainty over achievement of performance criteria 271
Schemes requiring employees to retain shares awarded 271
Revision of charge in subsequent years 271
When should the award be recognised in the accounts 272
Requirement for further period of employment 272
Share options 272
Accounting for share awards in the company s balance sheet 272
Shares held by ESOP trust 273
Inclusion in reconciliation of movements in shareholders funds 273
Worked example 273
Other examples 274
Share based Payment Under FRS 20 274
FRS 20 Share based Payment 274
Underlying principles 275
Recognition of share based payments 275
Cash settled share based payment transactions 275
Equity settled share based transactions 276
Share based payment transactions with cash alternatives 276
Accounts disclosures 277
Transitional provisions: Equity settled transactions 278
Transitional provisions: Cash settled transactions 279
National Insurance Contributions on Share Option Gains 279
Charge to NI 279
When the liability arises 279
Impact of employee performance criteria 280
Date of grant of the option 280
Worked example 280
Recognition in the accounts 282
Reimbursement by employee 282
Transfer of liability to employee 283
Disclosure 283
Other situations 283
CHAPTER 12 RETIREMENT BENEFITS 285 304
Types of Retirement Scheme 285
What are retirement benefits? 285
Employer commitments 286
Unfunded schemes » 286
Contents xxi
Defined contribution schemes 286
Defined benefit schemes 286
Difficulties in accounting for defined benefit schemes 287
Accounting for Defined Contribution Schemes 287
Profit and loss account 287
Disclosure 287
Accounting policy 288
Multi employer Schemes 288
Group retirement schemes 288
Defined contribution schemes 288
Defined benefit schemes 289
Accounting for Defined Benefit Schemes 289
FRS 17 Retirement benefits 289
Actuarial valuations 290
Valuation methods 290
Measurement of scheme assets 291
Measurement of scheme liabilities 291
Actuarial assumptions 292
Discounting of scheme liabilities 293
Frequency of valuations 293
Balance sheet recognition of surplus or deficit 293
Determination of employer s liability 293
Determination of employer s asset 294
Asset resulting from reduced contributions 294
Refunds from the scheme 294
Improvement in benefits 294
Balance sheet presentation 295
Deferred tax 295
Recognition in performance statements 295
Impact of limit on balance sheet asset 298
Tax 299
Death in service and incapacity benefits 300
Disclosure 300
Reconciliation to the balance sheet 301
Five year summary 302
Analysis of reserves 302
Entities with more than one defined benefit scheme 302
Accounting policy 303
xxa UK Accounting Practice
CHAPTER 13 DEPRECIATION SOS^^
Nature and Methods of Depreciation 305
Definition of depreciation 305
Fair allocation of cost 305 :
Key factors 306 ;
Purchase price or production cost 306
Residual value 306
Regular review of residual value 307
Impact of revision of residual value 307
Useful economic life 308
Other factors to take into account 308
Review of asset lives 308
Disclosure of revision of asset lives 309
Assets purchased under finance lease or hire purchase contract 309
Impairment reviews 309
Methods of depreciating assets 310
Straight line method 310
Reducing balance method 311
Comparison of straight line and reducing balance methods 312
Change in method of depreciating assets 312
Assets with two or more major components 312
Renewals Accounting 313
Conditions 313
Accounting treatment 313
Non depreciation of Assets 314
The general rule 314
Enhancement of the asset 314
Where depreciation is immaterial 315
High residual values 315
Annual impairment review 316
Freehold land 316
Depreciation of Revalued Assets 316
Alternative accounting rules 316
Basis of depreciation charge 317
Amount charged to the profit and loss account 317
Transfers between reserves 317
Historical cost profits and losses 318
Depreciation in the year of revaluation 318
Profit or Loss on Disposal of Assets , 319
Measurement rules , 319
Contents xxiii
Revaluation reserve 319
Note of historical cost profits and losses 320
Accounting for Impairment 320
Permanent and temporary diminutions in value 320
Impact of FRS11 Impairment of Fixed Assets and Goodwill 321
The need to carry out an impairment review 321
Events and changes that might prompt a review 321
Separate requirements for intangible assets and goodwill 322
Recognition of impairment losses 322
Presentation of impairment losses 323
Reversal of an impairment loss 323
Recognition of a reversal of an impairment loss 324
Further detail 324
Depreciation of impaired assets 324
Transfers from Current to Fixed Assets 324
Requirements of UITF Abstract 5 324
Depreciation Disclosures 325
Disclosure of accounting policy on depreciation 325
Reasons for non depreciation of assets 326
Disclosure when depreciation method is changed 326
Other accounts disclosures 327
Likely Future Developments 327
FRED 29 Property, plant and equipment; Borrowing costs 327
FRED 32 Disposal of non current assets and presentation of
discontinued operations 328
CHAPTER 14 OTHER EXPENSES 331 352
Finance Costs of Debt under FRS 4 331
Accounting for debt instruments 331
Finance costs 331
Issue costs 332
Calculation of net issue proceeds 332
Calculation of finance costs 333
Allocation of finance costs over the term of the debt 333
Convertible debt 334
Accounting treatment on subsequent conversion 335
Gains and losses on repurchase of debt 336
Options 336
Option to extend the term of the debt 336
Options held by the issuer only 336
xx v UK Accounting Practice
Premiums payable on redemption of debt 338 ,
Situations where UITF 11 does not apply 339 j
Charging of issue expenses to the share premium account 340 j
More complex debt instruments • 340 I
Accounting for Income, Expenses, Gains and Losses Under FRS 25 341 j
Scope and effective date of FRS 25 341 }
Accounting for interest, dividends, gains and losses 341
Other disclosure requirements 342
Requirements of FRS 26 342
Transitional arrangements 343
Finance Charges in Respect of Finance Leases 343
Initial recording of asset and liability 343
Calculating the present value of lease payments 344
Depreciation of asset 344
Analysis of rental payments 345
Calculation of total finance charge 345
Allocation of finance charge 345
The straight line method • 345
The sum of the digits method 346
The actuarial method 347
Comparison of results 348
Lease payments in advance • • 348
Lease variation clauses 349
Accounts disclosure 349
Operating Lease Charges in the Accounts of the Lessee 349
Accounting for rental payments 349
Irregular payments 350
Accounting for incentives 350
Review of rental payments 351
Method of spreading the incentive 351
Accounts disclosure 351
CHAPTER 15 TAXATION 353 364
Tax on the Profit or Loss of Ordinary Activities 353
Requirement of CA 1985 353
Current tax 354
Recognition of current tax , 354
Taxable profit or loss 354
Tax rate 354
Effect of double tax relief , 355
Charge or credit for deferred taxation , 355
Contents XXV
Separate disclosure of deferred tax 355
Reconciliation of tax charge 356
Foreign tax 357
Withholding tax 358
Dividend income 358
Transitional arrangements for charities 358
Group relief 359
Disclosure of payments for group relief 359
Adjustments in respect of prior periods 360
Tax on extraordinary items 360
Tax on additional FRS 3 Format headings 360
Special circumstances affecting the tax charge 361
Change in the basis of taxation 361
Changes in tax rates and allowances 362
Accounting for Recoverable Advance Corporation Tax 362
Background 362
Recoverable ACT 362
Offset against deferred tax balance 363
Future period considered 363
Recognition of recoverable ACT 363
Change in assessment of recoverability 364
CHAPTER 16 DIVIDENDS AND OTHER
APPROPRIATIONS 365 384
Accounting and Disclosure Before 1 January 2005 365
CA 1985 requirements 365
Additional disclosure under FRS 4 365
ESOP trusts 367
Finance costs of non equity shares 367
Accruals basis for dividends 371
Scrip dividends 373
Accounting and Disclosure after 1 January 2005 374
CA 1985 requirements 374
Classification of financial instruments 374
Compound financial instruments 375
Presentation of equity dividends 375
Presentation of dividends as an interest expense 376
Distributable Reserves 376
Significance of distributable reserves 376
Definition of distribution 376
Profits available for distribution 377
xxvj UK Accounting Practice
Additional rules for public companies 377
Undistributable reserves 377
Definition of realised profit and losses 378
Development costs 381
Revaluation of fixed assets 381
Depreciation charged on revalued assets 382
Pension liabilities 382
ESOP trusts 382
CHAPTER 17 DIRECTORS REMUNERATION AND
BENEFITS 385 428
Disclosure by Quoted Companies 385
The Directors Remuneration Report Regulations 2002 385
Aggregate disclosures by quoted companies 386
Directors remuneration report 387
Contents subject to audit 387
Audit requirements 389
Contents not subject to audit .; 390
Additional disclosures under the UK Listing Rules 391
Disclosure by Unquoted Companies 392
Aggregate disclosures by unquoted companies 392
Highest paid director 393
Small companies 393
Compensation for loss of office 394
Pension arrangements 394
Payments to third parties 395
Excess retirement benefits 395
Duties of directors and auditors 395
Voluntary disclosure 395
Amounts to be included 395
Comparative figures 396
Positioning of disclosures 396
Example disclosures 396
Emoluments 396
Amounts to be included 396
Details to be disclosed 397
Payments on acceptance of office as director 397
Calculating the figures 397
Emoluments in the year of appointment or retirement 398
Accounting periods of more or less than one year 398
Bonus payments ,, . 398
Contents XXVii
Benefits in kind 399
Payments to connected parties 401
Payments by third parties 401
Subsequent adjustments 402
Apportionment of amounts received 402
Executive Share Options 402
Difficulties with share option disclosure 402
Disclosure requirements 402
Disclosure of options granted or exercised during the year 403
Charge to National Insurance 404
Combined Code recommendations 404
Shareholder approval of new share option schemes 405
Disclosure of policy on granting of options and awards to
employees 405
Long term Incentive Plans 406
Disclosure requirements 406
Definition of long term incentive scheme 406
Provisions for payments under long term incentive schemes 407
When do payments become disclosable? 407
Guaranteed Minimum Payment 407
Combined Code Recommendations 407
Shareholder approval of long term incentive schemes 408
Disclosure of policy on granting of options and awards to
employees 408
Pension Arrangements 408
Pension contributions and arrangements 408
Hybrid pension schemes 409
Pension scheme with an underpin 409
Additional disclosures for defined benefit schemes 409
Accrued pension benefits 410
Transfer values 411
Pensionable remuneration 412
Disclosure of excess retirement benefits 412
Benefits other than in cash 412
Additional pensions 412
Compensation for Loss of Office 413
Separate category of payment 413
Examples of compensation payments 413
Shareholder approval 413
Pension top ups 413
Benefits other than in cash 414
XXyijj UK Accounting Practice
Continuing involvement 414
Example disclosure 414 ,
Potential Problems in Groups of Companies 414 ]
Payments for services to holding company and fellow subsidiaries 414 ;
Remuneration paid by the holding company 415 i
No remuneration in respect of services to subsidiary 416
Directors Service Contracts 416
The need for service contracts for directors 416
Contents of a contract of service 417
Contents of a contract for services 418
Requirement to keep copies of contracts 418
Shareholder approval for contracts for more than five years 419
Extension of contract 420
Combined Code recommendations 421
Additional requirements for listed companies 421
Remuneration Committees 421
Need for a remuneration committee 421
Terms of reference 422
Remuneration policy 424
Appendix: Example emoluments and benefits disclosures for a small
company and an unquoted company 426
CHAPTER 18 OTHER PROFIT AND LOSS ACCOUNT
DISCLOSURES 429 452
Remuneration of the Auditors and Their Associates 429
CA 1985 disclosure requirements 429
Remuneration for services as auditors 429
Remuneration for other services 430
Associates of auditors 431
ICAEW recommendations on additional disclosure 431
Presentational issues 432
Changes from 1 October 2005 432
DTI consultation on proposed regulations 433
Proposed exemptions 434
Related Party Disclosures 434
Requirements of FRS 8 Related Party Disclosures 434
Objective of FRS 8 435
Definition of related party , , _ , 435
Parties that will always be related to the reporting entity 436
Parties that are presumed to be related to the reporting entity 436
Contents Xxix
Other related parties 437
Definition of control and influence 437
Close family members 437
Disclosure of control 438
Disclosure of related party transaction 438
Aggregation of transactions 438
Examples of related party transactions 439
Materiality 439
Exemptions from disclosure 439
Confidentiality 440
Identification of disclosable transactions 440
Potentially illegal transactions 440
likely future developments 441
Geographical Analysis of Results 442
Scope of SSAP 25 Segmental Reporting 442
Disclosure requirements 442
Consistency 443
Apportionment of costs 443
Treatment of interest 443
link with profit and loss account 443
Expenditure on Research and Development 444
Requirements of SSAP 13 Accounting for Research and
Development 444
Earnings Per Share 444
Requirements of accounting standards 444
Scope and objective 444
Measuring basic earnings per share 445
Weighted average number of ordinary shares 446
Measuring diluted earnings per share 447
Dilutive or not? 447
Assumptions on timing 448
Share warrants and options 448
Convertible instruments 449
Contingently issuable shares 449
Contracts with a settlement option 449
Restatement for comparative purposes 450
Presentation requirements 451
Other disclosures 452
xxx UK Accounting Practice
CHAPTER 19 BALANCE SHEET FORMATS 453 464
Company Law Requirements 453 j
ca iQp,z, „„ prescribed. format453
Vertical or horizontal structure 453 j
Change of format 454 ¦
Order of headings and sub headings 454
Condensed presentation 455
Alternative positions 455
Changes in presentation 456
Comparative figures 456
Additional disclosures 456
Items which must not be treated as assets 456
Defined Benefit Assets and Liabilities 456
Requirements of FRS 17 456
Appendix 1: Balance Sheet Format 1 458
Appendix 2: Balance Sheet Format 2 461
CHAPTER 20 INTANGIBLE FIXED ASSETS 465^90
Costs of Research and Development 465
CA 1985 requirements 465
Categories of research and development 466
Activities that do not constitute research and development 466
Research costs 467
Development costs 467
Prudent approach 468
Conditions for deferral of development costs 468
Amortisation of development costs 468
Annual review 469
Consistency of accounting 469
Exceptions to the normal rules 469
Accounts disclosure 470
Amount charged to the profit and loss account 471
Treatment as unrealised loss 471
Directors report 471
Concessions, Patents, Licences, Trade Marks and Similar Intangible
Assets 472
Capitalisation under company law 472
Requirements of FRS 10 472
Initial recognition 473
Readily ascertainable market value 473
Contents XXXi
Valuing an intangible asset acquired as part of a business 474
Amortisation 474
Determining useful economic life 474
Legal rights granted for a finite period 475
Residual value 475
Method of amortisation 476
Review and revision of economic lives 476
Requirement for impairment reviews 476
Accounting for impairment losses 477
Revaluation of intangible assets 477
Amortisation of revalued assets 478
Accounts disclosure 478
Accounting policy 479
Goodwill 480
Nature of goodwill 480
Recognition of goodwill 480
Value of purchased goodwill 481
Value of negative goodwill 481
Fair values 481
Amortisation 481
Determining the useful economic life of goodwill 482
Durability and continued measurement 482
Review and revision of economic life 483
Requirement for impairment reviews 483
Accounting for impairment losses 484
Accounting for negative goodwill 484
Accounts disclosure 484
Accounting policy 486
Transitional arrangements 487
Impact of goodwill on distributable reserves 488
CHAPTER 21 TANGIBLE FIXED ASSETS 491 548
Classification of Assets 491
Definition of fixed asset 491
Proposed sale of fixed asset 491
Transfers from current assets to fixed assets 493
Analysis of tangible fixed assets 493
Class of tangible fixed assets 493
Land and buildings 494
Other asset categories 495
Payments on account and assets in the course of construction 495
xxxii UK Accounting Practice
Initial Measurement of Tangible Fixed Assets 496
Measurement at cost 4^6
Cost of production 4^6
Examples of directly attributable costs 497
Exclusion of abnormal costs 497 ;
Cessation of capitalisation of costs 497
Start up or commissioning period 497
Initial operating period 498
Gifts and donations 498
Capitalisation of finance costs 499
Directly attributable finance costs 499
Specific and non specific borrowings 499
Commencement of capitalisation of finance costs 500
Suspension of capitalisation of finance costs 500
Cessation of capitalisation of finance costs 500
Finance costs disclosures 501
Write down to recoverable amount 501
Subsequent expenditure on fixed assets 501
Capitalisation of subsequent expenditure 501
Valuation of Tangible Fixed Assets 502
Alternative accounting rules and fair value accounting rules 502
Adopting a policy of valuation under FRS 15 503
Valuation basis properties 506
Valuation basis — other assets 507
Consistency within a class of assets 508
Accounting entries on revaluation of assets 508
Alternative approach where depreciated replacement cost is used 509
Depreciation in the year of valuation 510
Recognition of revaluation gains 510
Recognition of revaluation losses 511
No aggregation of gains and losses 512
Transitional arrangements under FRS 15 512
Principal Accounts Disclosures 512
Movements in the year 512
Disclosures in respect of revalued assets 513
Disclosures required by the RICS 514
Written consent 515
Example disclosure 515
Impairment Reviews 515
The need to carry out an impairment review 515
Events and changes that might prompt a review 516
Separate requirements for intangible assets and goodwill 516
Contents XXxiii
Fixed assets not held to generate cash flows 517
Measuring impairment losses 517
Using net realisable value 517
Impact of taxation 518
Calculating net realisable value 518
Calculating value in use 518
Identifying income generating units 519
Allocation of assets and liabilities 520
Allocation of central assets 520
Central assets that cannot sensibly be allocated 521
Capitalised goodwill 521
Cash flows 522
Newly acquired units 522
Discount rates 523
Reflecting risk 524
Subsequent monitoring of cash flows 524
Accounting for Impairment Losses 524
General rule 524
Revalued fixed assets 524
Reversal of an impairment loss 525
Tangible fixed assets and investments 525
Intangible assets and goodwill 526
Recognition of a reversal of an impairment loss 526
Allocation of impairment losses 526
Goodwill in a merged business 527
Presentation of impairment losses 528
Additional disclosures 529
Investment Properties 529
Treatment under accounting standards 529
Definition of investment property 530
Need for different treatment 530
Requirements of SSAP 19 531
Departure from the requirements of CA 1985 531
Disclosure of true and fair override 532
Valuation of investment properties 532
Accounts disclosures 533
Historical cost of investment properties 533
Accounting policy 533
Tangible fixed asset or investment? 533
Accounting for Leased Assets 533
Distinction between leases and hire purchase agreements 533
Definition of a finance lease 534
xxx^v UK Accounting Practice
Asset value at end of lease term 534
Impact of FRS 5 Accounting for the Substance of Transactions 534 •
Guidance notes on SSAP 21 535 j
Initial recording of asset and liability by lessee 535 ;
Depreciation of asset by lessee 536
Accounts disclosures by lessee 536
Assets held by lessor for use in operating leases 537
Classification of property leases 538
Sale and leaseback arrangements 538
Accounting for Costs Relating to the Introduction of the Euro 539
The basic issues 539
Accounting for modification of assets 540
When provision should be made 540
Disclosure 540
Accounting for Website Development Costs 540
Categories of development cost 540
Planning costs 541
Application and infrastructure costs 541
Design and content costs 541
Capitalisation of costs 542
Accounting for subsequent costs 542
Likely Future Developments 543
Convergence with international standards 543
FRED 29 ^Property, plant and equipment; Borrowing costs 543
FRED 32 Disposal of non current assets and presentation of
discontinued operations 546
CHAPTER 22 INVESTMENTS 549 568
Classification as Fixed or Current Assets 549
Balance sheet disclosure 549
Definition of fixed asset investment 550
Loans to group undertakings 550
Disclosure of movements in the year 550
Current asset investments 551
Group Investments , 551
Definition of group undertaking 551
Straightforward presentation of information 551
Definition of participating interest 552
Associated undertakings 553
Holding of own shares 553
Contents XXXV
Accounting for Associates, Joint Ventures and Joint Arrangements 554
Identification of associates, joint ventures and joint arrangements 554
FRS 9 Associates and Joint Ventures 554
Accounting treatment in the individual accounts of the investor 554
Joint venture with little commonality of interest 554
Non corporate associate or joint ventures 555
Joint arrangements that are not entities 555
Additional accounts disclosures 555
Accounting period and date of associates and joint ventures 556
Becoming or ceasing to be an associate 556
Becoming or ceasing to be a joint venture 556
Disclosure of decision not to treat as an associate 557
Notes on contingent liabilities and commitments 557
Significant restrictions on ability to distribute reserves 557
Amounts owed to or by associates and joint ventures 557
Significant associates and joint ventures 558
Accounting Policies 558
Historical cost accounting rules 558
Alternative accounting rules 558
Impairment of investments 559
Fair value accounting 559
Likely future developments 563
Other Accounts Disclosure 563
Fixed asset investments 563
Current asset investments 564
Listed investments 564
Details of significant shareholdings 566
Financial information in respect of significant investments 567
Avoiding a disclosure of excessive length 568
Fixed financial assets not at fair value 568
Derivatives not at fair value 568
CHAPTER 23 STOCKS 569 588
General Principles of Stock Valuation 569
Accruals concept under FRS 18 569
Cost of stocks 569
Sensitivity of stock valuation 570
Historical cost accounting rules 570
Alternative accounting rules 571
CA 1985 rules on purchase price and production cost 571
Requirements of SSAP 9 Stocks and Long term Contracts 571
xxxvi UK Accounting Practice
Definition of cost 572
Production overheads 572
Net realisable value 572
Acceptable Costing Methods 573
Principal types of costing system 573
Costing in the services sector 573
Valuation of stocks 574
Purchase or production cost of identical items 574
Use of estimation techniques 575
Inclusion of raw materials and consumables at a fixed amount 576
Allocation of Overheads 576
Overheads to be included 576
Management costs 577
Normal level of activity 577
Assessing Net Realisable Value 578
Situations where provision may be needed 578
Provisions on a formula basis 578
Calculating net realisable value 579
Provisions against raw material stocks 579
Accounts Disclosures 580
Analysis of stocks 580
Disclosure of accounting policy 580
Replacement cost of stocks 580
Consignment Stocks 581
Nature of consignment stocks 581
Transfer of legal tide 582
Deposit arrangements 582
On or off balance sheet? 582
Dealer s protection against price increases 583
Right to return the car to the manufacturer 583
Right of manufacturer to require return of the car 583
Accounting treatment — asset of the dealer 584
Accounting treatment asset of the manufacturer 584
Sale and Repurchase Agreements 584
Nature of a sale and repurchase agreement 584
Benefits and risks 585
Original selling price 585
Unconditional commitment to repurchase 585
Options to repurchase and resell 586
Accounting treatment 586
Contents XXXvii
CHAPTER 24 LONG TERM CONTRACTS 589 604
Identification of Long term Contracts 589
Definition of long term contract 589
Accounting treatment to avoid distortion 589
Contracts lasting more or less than one year 590
Need for consistency 590
Contracts with separable parts 590
Changing circumstances 591
Recognition of Turnover 591
Individual consideration of contracts 591
Ascertaining turnover 591
Services contracts 592
Disclosure of method used 593
Calculation of Attributable Profit 593
Definition of attributable profit 593
Contracted outcome assessed with reasonable certainty 594
Costs to be included 594
Profit earned to date 595
Accounting entries 595
Estimation of Foreseeable Losses 596
Provision for projected loss 596
Costs of sales greater than costs incurred to date 596
Treatment of loss as provision or accrual 597
Accounting for Contract Variations and Claims 597
Impact of variations and claims 597
Contract variations 598
Claims 598
Accounts Disclosures 598
Location of disclosures 598
Inclusion of long term contracts in stocks 598
Inclusion of amounts recoverable on contracts within debtors 600
Inclusion of payments on account in creditors 600
Excess provision for foreseeable losses 601
Summary of disclosures 601
Accounting policy 601
Inclusion of interest in the case of long term contracts 602
likely Future Developments 602
FRED 28 Inventories; Construction and service. contracts(502
Appendix: Summary of disclosures 604
XXXViii ^ Accounting Practice
CHAPTER 25 DEBTORS, PREPAYMENTS AND
ACCRUED INCOME 605 622
Trade Debtors 605
Sales ledger balances 605
Bad and doubtful debts 605
Credit notes 606
Settlement discounts 606
Credit balances 606
Uninvoiced sales 607
Lessor s Net Investment in Finance Leases 607
Nature of a finance lease 607
Net investment in the lease 607
Payments during the period of the lease 608
Balance sheet disclosure 608
Provision for bad and doubtful debts 608
Other Debtors 608
Items normally included 608
Tax balances 609
Prepayments and Accrued Income 609
Prepayments 609
Accrued income 609
Rent receivable under an operating lease 610
Accounting for Factored Debts 611
Main reasons for factoring debts 611
Impact of FRS 5 611
Importance of reviewing precise terms and conditions 611
Usual features of factoring agreements 611
Possible accounting treatments 612
Derecognition 612
Separate presentation 613
Linked presentation 613
Assessment of benefits and risks 613
Benefits retained by the company 614
Benefits resting with the factor 614
The risk of slow payment 614
The risk of bad debts 614
Practical application 615
Accounting for Pre contract Costs 616
UITF Abstract 34 616
Whether pre contract costs are an asset 616
Contents XXxix
When an asset is created 617
Measuring the asset 617
Consortium members 618
Accounts Disclosures 618
Analysis of debtors 618
Separate disclosures of amounts due after more than one year 619
Disclosure as current assets 620
Presentation on the balance sheet 621
Deciding on the form of presentation 622
Likely Future Developments 622
ASB Discussion Paper — Leases: Implementation of a New
Approach 622
CHAPTER 26 FINANCIAL INSTRUMENTS 623 658
Classification of Capital Instruments under FRS 4 623
Definition of debenture 623
Definition of capital instruments under FRS 4 623
The transfer of economic benefits 624
Shareholders funds or liabilities? 624
Options at the discretion of the issuer 625
Options without commercial substance 625
Power to issue appropriate number if shares 626
Shares issued by a subsidiary 626
Accounting Treatment under FRS 4 626
Initial recording of debt 626
Finance costs 626
Carrying value of debt 627
Accrued finance costs 627
More complex debt instruments 627
Accounts Disclosures under FRS 4 628
General disclosure requirements 628
Maturity of debt 629
Example disclosures 630
Convertible debt 631
Additional disclosures under FRS 4 633
Issue of debentures during the year 633
Debentures held by nominee or trustee 634
Classification of Financial Instruments under FRS 25 634
Effective date of FRS 25 634
New rules on classification 634
x UK Accounting Practice
Financial liability or equity? 635
New treatment of certain shares 635
Other examples or financial liabilities 636
Contract settlement in equity 636
Purchase of own equity instruments 637
Contingent settlement provisions 637
Settlement options o j /
Compound financial instruments 637
Members shares in co operative entities 638
Maturity of liabilities 640
Offsetting of financial assets and financial liabilities 641
Transitional arrangements for comparatives 641
Transitional arrangements for compound financial instruments 642
Accounts Disclosures under FRS 25 642
Objective and scope 642
Categories of risk 642
Minimum disclosures 643
Accounting for Financial Instruments at Fair Value 645
The fair value accounting rules 645
Scope of FRS 26 646
Derivatives 646
Categories of financial instrument 647
Initial measurement 648
Subsequent measurement 648
Reclassification of financial instruments 649
Accounting for gains and losses 649
Transitional arrangements 650
Hedge Accounting 651
Scope of FRS 26 651
Hedging instruments and hedged items 651
Categories of hedging relationships 651
When hedge accounting can be applied 652
Accounting for fair value hedges 652
Accounting for cash flow hedges 653
Accounting for hedges of a net investment in a foreign operation 654
Disclosures in respect of hedging activities 654
Transitional arrangements 655
Likely Future Developments , 655
FRED 33 Financial Instruments: Disclosures 655
Proposed amendments to FRS 26 656
Contents xli
CHAPTER 27 BANK LOANS AND OVERDRAFTS 659 668
Bank Loans 659
Analysis of bank loans 659
Repayment date of loans 660
Payment terms and interest rates 661
Secured loans and overdrafts 661
Bank Overdrafts 662
Source of the figure for bank overdrafts 662
Use of bank statement balance 661
Repayment date 663
Combined disclosure with loans due within one year 663
Window dressing 664
Secured overdrafts 664
Offsetting of Bank Balances 664
General prohibition on offsetting 664
Accounting periods beginning before 1 January 2005 664
Accounting periods beginning on or after 1 January 2005 666
CHAPTER 28 LEASING AND HIRE PURCHASE
LIABILITIES 669 676
Calculation of Liabilities Under Finance Leases 669
Initial recording of liability 669
Analysis of rental payments 669
Reduction of liability to lessor 670
Accounting policies 671
Separate Disclosure of Leasing Obligations 671
Additional sub heading within creditors 671
Alternative disclosure 672
Security in respect of leasing obligations 673
Disclosure of future commitments 673
Analysis of Leasing Liabilities 673
Requirements under CA 1985 673
Requirements under SSAP 21 673
Disclosure using gross obligations 674
Details of finance charges 675
likely Future Developments 676
ASB Discussion Paper Leases: Implementation of a New
Approach 676
xj[jj UK Accounting Practice
CHAPTER 29 OTHER CREDITORS, ACCRUALS AND
DEFERRED INCOME • 677 692
Payments Received on Account 677
Items to be included 677
Payments on account in respect of long term contracts 677
Trade Creditors 678
Purchase ledger balances 678
Adjustment for unprocessed items 678
Credit notes due 678
Settlement discounts 678
Debit balances 679
Taxation, Social Security and Other Creditors 679
Disclosure under CA 1985 679
Corporation tax payable 680
Other creditors 680
Example disclosure 680
Accruals and Deferred Income 681
Disclosure under CA 1985 681
Items normally included 682
Accruals 682
Deferred income 682
Disclosure of amounts due after more than one year 683
Accounting for Government Grants 683
Type of grants covered by SSAP 4 683
What are government grants? 684
General rules on recognition of grants 684
Accruals concept 685
Grants in respect of fixed assets 685
Grants in respect of non depreciated assets 686
Revenue related grants 686
Relating the grant to expenditure 686
Relating the grant to an event 686
Relating the grant to other expenditure 687
Grants to reimburse previous expenditure 687
Grants to finance general activities or to provide compensation 687
Grants in forms other than cash 688
Repayment of grants 688
Tax treatment of grants 688
Accounts disclosure 688
Accounting policy 689
Contents xliii
Effect of grants on the results and financial position 689
Other forms of assistance 690
Retention of Title 690
Recommended accounts disclosures 690
Practical difficulties 690
Application in practice 691
CHAPTER 30 PROVISIONS FOR LIABILITIES 693 714
Identifying Provisions 693
Definition of provision 693
Distinction between creditors and provisions 694
Other types of provision 694
Distinction between provisions and contingent liabilities 694
Items commonly treated as provisions for liabilities 695
Recognising Provisions 695
Scope of FRS 12 695
Recognition criteria 696
Present obligation 696
Obligating events 696
Future operating costs 697
Future operating losses 697
Onerous contracts 697
Identity of third parties 698
Future events that create an obligation 698
Probable transfer of economic benefits 699
Reliable estimate 699
Subsequent changes to provisions 699
Recognition of an asset 699
Further examples 700
Measuring Provisions 700
Calculating the best estimate 700
Dealing with uncertainty 701
Adopting a cautious approach 701
Impact of taxation 702
Discounting provisions 702
Unwinding the discount 702
Taking account of future events 702
Expected disposal of assets 703
Expected reimbursement of costs 703
Reimbursement that reduces liability 703
X2|v UK Accounting Practice
Provisions for Restructuring 04
Definition of restructuring 704
When a constructive obligation arises 704
Public announcement of the plan 705
Management decisions 705
Management decision confirming earlier events 706
Costs to be included 706
Provisions on the Sale or Termination of an Operation 706
Consequences of a decision to sell or terminate 706
Entity to be demonstrably committed to the sale or termination 706
Evidence of demonstrable commitment 707
Commitment at the balance sheet date or subsequently? 707
Costs included in the provision 708
Impairment of assets 708
Disclosure in the accounts 708
Accounts Disclosure 708
Principle disclosure requirements 708
What constitutes a class of provision 710
Provisions linked with contingent liabilities 710
Restriction of the disclosures 710
Sale or termination of an operation 710
Utilisation of provisions in subsequent year 710
Pension and Similar Commitments 712
Nature of pension and similar commitments 712
Unfunded schemes 712
Balance sheet presentation 712
Disclosure requirements 713
Pension commitments not provided for 713
CHAPTER 31 DEFERRED TAXATION 715 728
The Nature of Deferred Tax 715
Differences between taxable profit and accounting profit 715
Permanent difference 715
Timing differences 716
Deferred tax 717
Methods of Providing for Deferred Tax 717
Three alternatives 717
How through method 718
Full provision 718
Partial provision 718
Contents xlv
The UK position 718
Methods of computing deferred tax 719
Recognition of Deferred Tax under FRS 19 720
General requirement 720
Capital allowances 720
Non monetary assets 720
Roll over of taxable gain 721
Unremitted earnings 721
Deferred tax assets 721
Factors to be taken into account 722
Subsequent adjustments to a deferred tax asset 722
Measurement of Deferred Tax under FRS 19 723
General requirement 723
Average tax rates 723
Discounting 723
Discounting method 724
Discount rates 724
Presentation of Deferred Tax in Financial Statements 725
Performance statements 725
Balance sheet 725
Offset of debit and credit balances 725
Disclosure of Deferred Tax 726
Performance statements 726
Balance sheet 726
Deferred tax assets 727
Other circumstances 727
Accounting policy 728
CHAPTER 32 SHARE CAPITAL AND RESERVES 729 754
Authorised, Allotted and Called Up Share Capital 729
CA 1985 disclosure requirements 729
Disclosure where shares are not fully paid 730
Different classes of share 730
Accounts disclosure by class of share 732
Example disclosure 732
Disclosure of share issue during the year 733
Share awards to employees 734
Share Premium Account 735
Creation of share premium account 735
Use of the share premium account 735
xjvj UK Accounting Practice
Transfers to and from share premium account 736
Equity and Non Equity Shares 736
Definition of equity share capital under CA 1985 736
Non equity and equity shares under FRS 4 736
Definition of equity under FRS 25 737
Disclosure of equity and non equity shares 738
Accounts attributable to non equity interests 739
Analysis of non equity shareholders funds 739
Debt or equity? 739
Redeemable Shares 740
General disclosure requirement 740
Accounting for finance costs and dividends 741
Accounting for redemption 741
Convertible Instruments, Share Options and Similar Rights 741
Convertible Debt 741
Warrants 742
Composite transactions 742
Exercise of warrant 743
Lapse of warrant 743
Disclosure requirements 743
Share options and similar rights 744
Transactions in Own Shares 744
Holding of own shares 744
Shares held by an ESOP trust 745
Expected Future Changes in respect of Share Capital 745
FRED 33 Financial Instruments: Disclosures 745
Revaluation Reserve 746
Use of the alternative accounting rules 746
Surplus or deficit on initial revaluation 746
Debit balance on revaluation reserve 747
Impact of FRS 11 747
Impairment of previously revalued assets 748
Movements on the revaluation reserve 748
Transfer in respect of depreciation on revalued assets 748
Transfer on disposal of a revalued asset 749
Accounts disclosure 749
Tax implications of revaluations 749
Use of the revaluation reserve 749
Other Reserves 75O
Analysis of other reserves 75O
Contents xlvii
Profit and loss account reserve 750
Fair value reserve 751
Disclosure of movements on reserves 752
Other Disclosure Requirements 752
Disclosure of non distributable reserves 752
Dividend arrears 753
CHAPTER 33 COMMITMENTS AND
CONTINGENCIES 755 764
Contingent Liabilities 755
Definition of contingent liability 755
Distinction between provisions and contingent liabilities 755
Items commonly identified as contingent liabilities 756
Accounting treatment 756
Regular review 756
Joint and several liability 757
Detailed disclosures 757
Provisions linked with contingent liabilities 758
Restriction of the disclosures 758
Example disclosure 758
Contingent Assets 758
Definition of contingent asset 758
Accounting treatment 759
Regular review 759
Detailed disclosures 759
Restriction of the disclosures 759
Guarantees 760
Disclosure under CA 1985 760
Disclosure of amount outstanding and maximum liability 760
Aggregate disclosure 760
Separate disclosure of group items 761
Charge on the company s assets 761
Capital Commitments 761
Disclosure under CA 1985 761
No capital commitments 762
Pension Commitments 762
Disclosure of amounts not provided 762
Leasing Commitments 763
Lessee commitments under finance leases 763
xlviii UK Accountin% Practice
Lessee commitments under operating leases 763
Example 763
CHAPTER 34 EVENTS AFTER THE BALANCE SHEET
DATE AND OTHER DISCLOSURES 765 774
Adjusting Events /0D
Definition of post balance sheet events 765
Definition of adjusting events 765
Examples of adjusting events 766
Events which impact on the use of the going concern concept 767
Non Adjusting Events 767
Definition of non adjusting events 767
Examples of non adjusting events 768
Window dressing 768
Disclosure of Post Balance Sheet Events 769
Details to be disclosed 769
Distinctions between accounting standards and CA1985 770
Locations of the disclosures 770
Date of Approval of Accounts 770
Importance of date of approval of accounts 770
Realisation process 771
Disclosure of the date of approval of the accounts 771
Disclosures in Respect of Parent Undertakings 772
Disclosures required by CA 1985 772
Ultimate parent company/controlling party 772
Segmental Reporting of Net Assets 773
Analysis of net assets 773
Apportionment of operating assets and liabilities 773
link with balance sheet 773
Comparative information 773
Other Balance Sheet Disclosures 773
Financial assistance for the purchase of own shares 773
Dormant companies acting as agents 774
CHAPTER 35 CASH FLOW STATEMENT 775 802
Requirement to Prepare a Cash Flow Statement 775
Nature of the statement 775
Prescribed structure 775
Exemption for small companies 775
Contents xlix
Exemption for subsidiary undertakings 776
Exemption for specialised businesses 776
Statement on availability of exemption 776
No cash flow transactions 777
Structure of a Cash Flow Statement 777
Definitions 777
Standard headings 778
Analysis of each heading 779
Reporting of cash inflows and outflows 779
Gross or net disclosure? 779
Continuing and discontinued operations 780
Exceptional items and cash flows 780
Totals 780
Reconciliations 780
Need to present comparatives 781
Material non cash transactions 781
Illustrative examples 781
Net Cash Flow from Operating Activities 782
Alternative disclosure methods 782
Provisions 782
VAT and similar taxes 782
Returns on Investments and Servicing of Finance 783
Items to be included 783
Interest paid 783
Dividends paid 783
Other finance costs 784
Interest received 784
Dividends received 784
Other Sections of the Statement 784
Joint ventures and associates 784
Taxation 785
Capital expenditure and financial investment 785
Equity dividends paid 786
Management of liquid resources 786
Financing 787
Reconciliation of Operating Profit to Net Cash Flow from Operating
Activities , 788
Items to be shown 788
Debtors and creditors 788
Other common reconciling items 788
I UK Accounting Practice
Reconciliation of Net Cash Flow to Movement in Net Debt 789
Purpose of the reconciliation 789
Definition of net debt 789
Analysis of changes in net debt 789
Foreign Currency Translation 790
Exchange differences 790
Settled transactions relating to operating activities 790
Unsettled transactions relating to operating activities 790
Interest on foreign currency borrowings 790
liquid resources, financial items and cash 791
Hedging transactions 791
Appendix 792
Worked example of a cash flow statement 792
Cash Flow Statement Working Sheet 797
Notes to the cash flow statement 799
Additional working notes 801
CHAPTER 36 OTHER STATEMENTS 803 818
Statement of Total Recognised Gains and Losses 803
Nature and purpose of the statement 803
Requirement to prepare 803
Main items 804
Profit for the financial year 804
Gains and losses 804
Goodwill 805
Gains and losses on revalued fixed assets 805
Impairment of fixed assets and goodwill 805
Taxation 806
Share issue costs 806
Amounts attributable to different classes of shareholder 807
Worked example 807
Comparative figures 807
Prior period adjustments 808
likely future developments 808
Reconciliation of Movements in Shareholders Funds 809
Changes in shareholders funds 809
Presentation gO9
Negative statement 809
Reconciling items 810
Other changes in shareholders funds 810
Shares issued under employee share schemes 811
Contents li
Worked example 811
Comparative figures 812
Prior period adjustments 812
Likely future developments 813
Note of Historical Cost Profits and Losses 814
Nature and purpose of the note 814
Detailed disclosures 814
Including fixed assets at valuation 815
Profits and losses on disposal of assets 815
Negative statement 815
Worked example 816
Comparative figures 817
Prior period adjustments 817
Likely future developments 817
CHAPTER 37 DIRECTORS LOANS AND OTHER
TRANSACTIONS 819 848
Loans and Related Arrangements 819
General prohibition on loans to directors 819
Definition of loan 819
Definition of director 820
Exception for small loans 821
Loan from a holding company to a director of a subsidiary 823
Other Transactions 823
Additional prohibitions for relevant companies 823
Definition of relevant company 824
Permitted transactions for non relevant companies 824
Individuals connected with a director 825
Body corporate connected with a director 825
Other persons connected with a director 827
Complex rules 827
Inter group loans 830
Quasi loans 830
Credit transactions 832
Funding of directors expenditure 833
Directors business expenditure 833
Transactions between a subsidiary and its holding company 834
Other prohibited transactions and arrangements 834
Value of transactions and arrangements 835
Disclosure of Loans and Similar Transactions with Directors 835
General disclosure requirement 835
]£ UK Accounting Practice
Individuals covered and details to be disclosed 836
Transactions prior to appointment as director 836
Transactions with a subsidiary company 836
Details required for all loans and similar transactions 837
Additional details in respect of loans 837
Additional details in respect of guarantees and securities 838
Additional details in respect of quasi loans and credit transactions 838
General exemptions from disclosure 838
De minimis limit for credit transactions 839
Loans and quasi loans between group companies 839
Directors duty to disclose 840
Company procedures 840
Audit requirements 840
Loans to officers of the company 840
Disclosure of Other Transactions with Directors 842
Legal requirements on disclosure 842
Purpose of the disclosures 842
Material interest 843
Disclosure under FRS 8 843
Director s duty to disclose 843
Board s opinion on materiality 844
Interpretation of material 844
FRS 8 approach to materiality 845
Legal advice 845
Value and amount outstanding 845
Principal terms 845
FRS 8 disclosure requirements 846
Audit requirements 846
Exceptions to the general disclosure requirement 846
Inter group transactions in the ordinary course of business 847
De minimis exception 848
CHAPTER 38 DIRECTORS7 REPORT 849 878
Requirement to Prepare a Directors Report 849
Company law requirements 849
Detailed contents of the report 849
Additional disclosures in respect of shares 852
Consistency with accounts 853
Business Review 853
Accounting periods before 1 April 2005 853
Changes from 1 April 2005 854
Contents liii
RS 1 Operating and Financial Review 855
Proposed Dividend 855
Consistency with accounts 855
Normal practice on disclosure 855
Principle Activities 856
Statement on activities 856
Consistency with accounts 856
Likely Future Developments 856
Form and contents 856
Guidance on wording 857
Research and Development 858
Nature of disclosures 858
Consistency with accounts 858
Form and content 858
Post Balance Sheet Events 859
Interaction with accounting standards 859
Disclosure of adjusting events 859
Disclosure of non adjusting events 860
Fixed Assets 860
Market value of land and buildings 860
Need for additional information 860
Directors and their Interests 861
Names of directors 861
Directors share interests 861
Definition of interest 861
Interests at the end of the year 862
Interests at the beginning of the year 862
Interests held by directors immediate family 863
Change of holding company during the year 863
Beneficial and non beneficial interests 863
Options to subscribe for shares or debentures 864
Cumulative details of options held 864
Directors of wholly owned subsidiaries 865
Political Donations and Expenditure 865
Political Parties, Elections and Referendums Act 2000 865
Relevant date 866
Definition of EU political expenditure 866
Definition of donations 866
Gifts 867
i j:„ UK Accounting Practice
Sponsorship Loans, services and facilities provided 868
Contributions to non EU political parties 868
Charitable Donations 868
Donations for charitable purposes 868
Payments via a charitable trust 869
Employee Disclosures 869
Scope of the disclosure requirements 869
Disabled persons 870
Employee involvement 870
Payment of Creditors 871
Scope of the disclosure requirements 871
Detailed disclosures 871
Statement of Directors Responsibilities 872
Requirement to include a statement 872
Matters to be covered 872
Example wording 873
Audit exemption 874
Specialised businesses and unincorporated entities 875
Financial Risk 875
Disclosures required from 1 January 2005 875
Use of financial instruments 876
Interest rate risk 876
Credit risk 876
Cash flow and liquidity 877
Disclosure of Information to Auditors 877
Changes to auditors rights to information 877
Requirement for formal statement by directors 878
CHAPTER 39 OPERATING AND FINANCIAL
REVIEW 879 890
The Statutory Operating and Financial Review 879
Development of OFR reporting 879
Introduction of statutory OFRs 879
Requirement to prepare an OFR 880
Approval, signature and issue of the OFR 881
Objective of a statutory OFR 881
Required contents 881
Key performance indicators , 882
Contents lv
Disclosure exemption 882
Compliance with reporting standards 882
Audit requirements 883
Defective OFRs 883
The OFR and summary financial statements 884
OFR Reporting Standards 884
Legal provisions 884
RS 1 Operating and Financial Review 884
Scope and effective date of RS 1 885
Presentation of OFR analysis 885
Other key principles 886
Detailed disclosures 886
Key performance indicators 887
DTI Guidance for Directors 888
Development of guidance for directors 888
Scope of OFR reporting 889
Assessing materiality 889
Process for OFR reporting 889
CHAPTER 40 CORPORATE GOVERNANCE
DISCLOSURES 891 924
Background to UK Corporate Governance Reporting 891
The Cadbury Code of Best Practice 891
Openness, integrity and accountability 892
Greenbury Code of Best Practice 892
The Combined Code 893
Ongoing monitoring and review 894
Reporting on Compliance with the Combined Code 895
Requirement for compliance statement 895
The role of the auditors 895
Form of auditors report 897
Structure of the Combined Code 898
Directors 898
Directors remuneration 899
Accountability and audit 900
Relations with shareholders 900
Institutional shareholders 901
Reporting on Going Concern 902
Reporting under the Combined Code 902
Definition of going concern 902
jvj UK Accounting Practice
Foreseeable future 903
Procedures to be carried out ^04
Factors to consider 905
Other factors 908
Overall assessment and conclusion 908
Content of disclosure 909
Location of the directors statement 910
Application of the guidance to groups 911
Interim reporting 911
Reporting on Internal Control 911
Reporting under the Combined Code 911
Turnbull Guidance 912
Internal control and SEC reporting 913
Importance of internal control and risk management 914
Application to groups 914
Responsibility for maintaining a system of internal control 915
Definition of internal control 915
Elements of a sound system of internal control 916
Control environment 916
Reviewing the effectiveness of internal control 917
The process of the review 917
The annual statement on internal control 918
Review of the need for an internal audit function 919
Role of the external auditors 919
Appendix: Checklist of Combined Code Reporting Requirements 920
CHAPTER 41 INTERIM REPORTS 925 934
Preparation of an Interim Report 925
Requirement to prepare an interim statement 925
The value of interim reports 925
Timing and distribution of interim reports 926
Review by the auditors 926
Contents of an Interim Report 927
The ASB Statement Interim Reports 927
Recommended contents of an interim report 927
Other disclosures 929
Accounting policies 929
Earnings per share 930
Basis of presentation of financial information 930
Taxation , 931
Other presentation issues , , 931
Contents Mi
Comparative figures 931
Statutory disclosure 932
Management Commentary 932
Focus of the report 932
Balanced view 932
Additional guidance 933
CHAPTER4^FRELIMINAR^ANNOUNCEMENTS 935 944
Preparation of a Preliminary Announcement . 935
Requirement to prepare a preliminary announcement 935
Timing of preliminary announcement 935
Auditors agreement to issue of the preliminary announcement 936
Procedures to help ensure reliability 936
Distribution of preliminary announcement 937
Contents of a Preliminary Announcement 937
The ASB Statement Preliminary announcements 937
Recommended contents of a preliminary announcement 937
Other disclosures 939
Accounting policies 940
Earnings per share 940
Comparative figures 940
Statutory disclosure 940
Management Commentary 941
Focus of the report 941
Balanced view 941
Additional guidance 942
Inclusion of Pro Forma Information 942
Guidance for companies 942
APB guidance for auditors 942
CHAPTER43SUMMARYFINANCIAL
STATEMENTS • ¦ • 945 956
Process for Issuing Summary Financial Statements 945
Background 945
Detailed requirements 945
Legal position 946
The right of entitled persons to receive full accounts 946
Consultation with entitled persons 946
Alternative method of consultation 947
Revision of summary financial statements 948
lv[[[ UK Accounting Practice
Form and Content of Summary Financial Statements 948
Requirements of the Regulations 948
Other statements and disclosures 950
Implications of wider publications 950
Audit requirements 951
Proposals for Change 951
DTI consultation 951
Impact of recent legislative changes 952
Audit requirement 952
Advantages and Disadvantages Of Summary Financial Statements 953
The purpose of summary financial statements 953
The company view 953
The shareholder view 954
Alternative methods of preparation 954
Usual contents of summary financial statements 955
CHAPTER 44 REQUIREMENT FOR GROUP
ACCOUNTS 957 986
Form and Content of Group Accounts 957
Requirement to prepare group accounts 957
Requirements of FRS 2 958
True and fair view 958
Standard formats 958
Additional profit and loss accounts items 959
Additional disclosures under FRS 3 960
Disclosures in respect of directors 961
Auditors remuneration 961
Directors Report and Operating and Financial Review (OFR) 961
Exemptions from the Preparation of Group Accounts 962
Small companies and groups 962
Medium sized companies and groups 962
Parent company which is part of a larger group 962
Exemptions under FRS 2 965
Exclusion of Subsidiaries from the Consolidation 966
Legal provisions on exclusion 966
Exclusions under FRS 2 966
Severe restrictions hindering parent s rights 967
Interest held exclusively with a view to subsequent resale 968
Dissimilar activities 970
Exclusion of quasi subsidiaries from the consolidation 970
Contents lix
Disclosure requirements 971
Likely future developments 971
Accounting Dates of Subsidiaries 972
Requirement for consistency with parent company 972
Different accounting dates 972
Change of subsidiary s accounting date 973
Parent Company Profit and Loss Account 975
Exemption from publication 975
Requirement to prepare a profit and loss account 975
Appendix: Standard Formats for Group Accounts 977
CHAPTER 45 SUBSIDIARIES . 987 998
Identification of Subsidiaries 987
Legal definition of parent undertaking and subsidiary undertaking 987
Definition of subsidiary undertaking under FRS 2 988
Definition of holding company and subsidiary 988
Dominant influence 989
Actual exercise of dominant influence 990
Managed on a unified basis 990
Control and control contracts 991
Participating interest 991
Definition of member 991
Quasi subsidiaries 992
Disclosures in respect of subsidiaries 992
General Interpretation of Rights 992
Rights exercisable only in certain circumstances 992
Rights held by trustees and nominees 993
Rights held by way of security 993
Shares held by a group undertaking 993
Rights attributed to a parent undertaking or holding company 994
Voting rights 994
Right to appoint and remove directors 995
Accounting for Quasi subsidiaries 995
Impact of FRS 5 995
Definition of quasi subsidiary 996
Benefits and risks 996
Inclusion in group accounts 996
Exclusion from consolidation 996
Reporting entity that does not prepare group accounts 997
Linked presentation 997
k^ UK Accounting Practice
Additional disclosures in the accounts 997
CHAPTER 46 ASSOCIATES AND JOINT VENTURES .... 999 1024
Identification of Associates 999
Introduction 999
Treatment of associates and joint ventures in group accounts 999
Definition of associate 1000
Participating interest 1000
Exercise of significant influence 1002
The Equity Method of Accounting 1004
Definition in FRS 9 1004
Investor s share of associates operating results 1005
Amortisation or write down of goodwill 1006
Investor s share of items shown below operating profit 1006
Investor s share of interest 1006
Investor s share of taxation 1007
Investor s share of extraordinary items 1007
Dividends and retained profit or loss for the year 1007
Additional disclosure of turnover and operating profit 1007
Statement of total recognised gains and losses 1007
Balance sheet presentation 1008
Cash flow statement 1009
Elimination of profits and losses on transactions with associates 1009
Consistency of accounting policies 1009
Limited access to information 1009
Aggregation of group interest 1009
Associate with subsidiaries 1010
Impact of options, convertibles and non equity shares 1010
Impairment of goodwill attributable to an associate 1010
Treatment of losses and net liabilities 1010
Additional liabilities in the case of unincorporated associates 1011
Accounting for Joint Ventures 1011
Definition of joint venture 1011
Right of veto 1011
Long term factors 1012
Joint venture where an investor does not share control 1012
Joint venture that qualifies as a subsidiary of a participant 1012
Structure with the form but not the substance of a joint venture 1012
Gross equity method of accounting , 1013
Supplemental disclosure in certain circumstances 1013
Columnar presentation „ „ 1013
Contents lxi
Changes in Shareholdings and Status 1014
Date of becoming or ceasing to be an associate or joint venture 1014
Profit or loss on disposal of a joint venture or associate 1015
Acquisition or disposal in stages 1015
Transition from joint venture or associate to investment 1015
Existing investment that becomes an associate 1015
Subsidiary that becomes an associate 1016
Exchange transactions 1017
Accounting Date of Associates and Joint Ventures 1018
Amounts to be consolidated 1018
Potential release of price sensitive information 1018
Changes in the intervening period 1018
Use of management accounts 1018
Accounts Disclosures 1018
Requirements under CA 1985 1018
Principal associates and joint ventures 1019
Notes on contingent liabilities and commitments 1019
Significant restrictions on ability to distribute reserves 1020
Amounts owed to or by associates or joint ventures 1020
Significant associates and joint ventures 1020
Segmental disclosure under SSAP 25 1021
Why an investment has not been treated as an associate 1022
Joint Arrangements that are not Entities 1022
Definition of an entity 1022
Definition of joint arrangement that is not an entity 1023
Joint arrangement to carry out a single project 1023
Accounting treatment under FRS 9 1023
Changes in the nature of the arrangement 1024
CHAPTER 47 CONSOLIDATION 1025 1040
The Consolidation Process 1025
line by line aggregation 1025
Full consolidation 1026
Use of group consolidation packages 1026
Accounting date of subsidiary undertakings 1027
Overseas subsidiary undertakings 1027
Disclosure of accounting principles in respect of consolidation 1027
Uniform accounting policies 1027
Consolidation adjustments 1028
Use of different accounting policies 1028
Disclosure of accounting policies 1029
Ixji UK Accounting Practice
Restrictions on distributions 1029
Elimination of Group Balances and Transactions 1029
Amounts due to and from group companies 1029
Elimination of group transactions 1030
Transfers of fixed assets 1030
The elimination of intra group profits and losses 1031
Other related adjustments 1032
Full elimination of profit or loss 1032
Impact only where assets are still held at year end 1033
Subsidiaries excluded from the consolidation 1033
Accounting for Minority Interests 1033
Shares held outside the group 1033
Consolidated profit and loss account 1033
Impact of dividend paid by subsidiary 1035
Analysis of profit and loss account adjustment 1036
Consolidated balance sheet 1037
Proposed dividends 1038
Minority interest in net liabilities 1038
Significant minority interest 1039
Analysis of minority interests 1039
Shares that create a liability for the group as a whole 1039
CHAPTER 48 CONSOLIDATION GOODWILL 1041 1058
Calculating Goodwill 1041
The nature of goodwill 1041
Recognition of goodwill 1041
Acquisition or merger accounting 1042
The value of purchased goodwill 1042
Partly owned subsidiaries 1043
Separable intangible assets 1044
Negative goodwill 1044
Accounting for Consolidation Goodwill 1045
Creation of goodwill in the group accounts 1045
Minority interests 1046
Amortisation 1048
Determining the useful economic life of goodwill 1049
Need to establish useful economic life 1049
Durability and continued measurement 1050
Method of amortisation 1050
Review of economic life 1050
Requirement for impairment reviews 1051
Contents lxiii
Procedures for impairment reviews 1051
Impact of impairment losses 1051
Restoration of impairment losses 1052
Accounting for negative goodwill 1052
Transitional arrangements on implementing FRS 10 1053
Goodwill reinstated in implementing FRS 10 1053
Goodwill not reinstated on implementing FRS 10 1053
Accounting for goodwill on disposals 1054
Potential future changes 1055
Accounts Disclosures in respect of Goodwill 1056
Disclosures required by the Act 1056
Detailed disclosures under FRS 10 1056
Accounting policy 1057
Impact of goodwill on distributable reserves 1058
CHAPTER 49 ACQUISITIONS, DISPOSALS AND
MERGERS 1059 1096
Acquisition and Merger Accounting 1059
Prevalence of acquisition accounting 1059
Acquisition accounting 1059
Company law conditions for the use of merger accounting 1060
FRS 6 definitions of merger and acquisition 1060
Merger method of accounting 1061
Disclosure of impact on group accounts 1062
Accounts disclosure in respect of disposals 1063
Exemptions from disclosure 1063
Date of Acquisition or Disposal 1064
Significance of date of acquisition or disposal 1064
Date of acquisition 1064
Date on which consideration passes 1064
Date of disposal 1064
Deemed disposals 1065
Gain or loss on disposal 1065
Measuring Fair Values of Assets and Liabilities 1066
Principles of recognition and measurement 1066
Prohibition on provisions for future loss and reorganisation costs 1067
Provisions raised during the negotiation period 1068
Identifiable assets and liabilities 1068
Business closures 1068
Fair value 1068
Market price 1069
JxJV UK Accounting Practice
Recoverable amount 1069
Tangible fixed assets 1069
Intangible fixed assets 1069
Stocks and work in progress 1070
Long term contracts 1071
Quoted investments 1071
Monetary assets and liabilities 1071
Contingencies 1072
Pensions and other post retirement benefits 1072
Deferred taxation 1073
Business sold or held exclusively with a view to resale 1073
Adjustments in subsequent years 1074
Acquisition of a Lloyd s Business 1074
Potential future changes 1074
Fair Value of Acquisition Costs 1075
Cost of acquisition 1075
Purchase consideration 1075
Cash and other monetary items 1075
Capital instruments and non monetary items 1076
Contingent consideration 1076
Contingent consideration in the form of shares 1076
Contingent consideration in the form of either cash or shares 1077
Vendor option to require payment in either cash or shares 1077
Acquisition expenses 1077
Piecemeal Acquisitions and Disposals 1077
Accounting for an acquisition in stages 1077
Associate that becomes a subsidiary 1078
Previous investment written down 1078
Increasing the interest in an existing subsidiary 1078
FRRP case on acquisition of minority interest 1079
Reducing the interest in an existing subsidiary 1081
Exchange Transactions 1081
Exchange of business for equity 1081
Analysis of the transaction 1082
Element of the business owned throughout 1082
Share of net assets acquired 1082
Recognition of gain or loss on disposal 1082
Artificial transactions 1083
Acquisitions and Disposals in a Cash Flow Statement 1083
Amounts included in the cash flow statement on acquisition 1083
Share issues 1083
Contents lxv
Amounts included in the cash flow statement in respect of
disposals 1084
Cash flows of subsidiary undertakings acquired and disposed of 1084
Material effect on standard heading in cash flow statement 1085
Effects of acquisition or disposal 1085
Merger Transactions 1086
Criteria for a merger 1086
Portrayal of business combination 1087
Management structure 1088
Relative size of the parties 1088
Non equity consideration 1088
Retention of partial interest only 1089
Merger accounting 1089
Elimination of investment in subsidiary 1089
Share premium or capital redemption reserve of the subsidiary 1090
Merger relief 1090
Acquisition of 90% holding in another company 1090
Accounting treatment of premium where merger relief applies 1091
Acquisition of non equity shares 1091
Piecemeal acquisitions 1092
Appendix 1093
A — Disclosures in the case of a combination accounted for as an
acquisition 1093
B Disclosures in the case of a combination accounted for as a
merger 1095
CHAPTER 50 ACCOUNTING FOR FOREIGN
OPERATIONS 1097 1110
Background to Accounting for Foreign Operations 1097
Current UK accounting requirements 1097
Requirement for translation 1098
Local currency 1098
Relationship between the investor and the foreign entity 1099
Consistency of accounting 1099
Translating cash flows 1100
Use of the Temporal Method 1100
When the temporal method should be applied 1100
Applying the temporal method 1101
Use of the Closing Rate/Net Investment Method 1101
When the closing rate/net investment method should be applied 1101
lxvi UK Accounting Practice
Translation of the balance sheet 1102
Translation of the profit and loss account 1103
Translation of the cash flow statement 1103
Accounting for exchange differences 1104
Goodwill 1105
Foreign Equity Investments 1105
Financing arrangements for foreign equity investments 1105
Conditions 1106
Disclosure of adoption 1106
Other parent company investments 1106
Accounts Disclosures 1107
Detailed disclosures 1107
Accounting policy 1107
Reserves note 1108
Dealing with Hyperinfktionary Economies 1108
The effects of hyperinflation 1108
The need for adjustment 1109
Method of adjustment 1109
|
| adam_txt |
Contents
CHAPTER 1 ACCOUNTING STANDARDS,
ACCOUNTING PRINCIPLES AND ACCOUNTING
RULES 1 36
Accounting Standards 1
The present regime 1
Changes to the role of the ASB 2
The UK IAS framework 3
UK convergence with IASs 5
Scope and application of accounting standards 5
Effective date of accounting standards 6
Disclosure of compliance with accounting standards 6
Applicable accounting standards 7
Role of the UITF 7
Role of the FRRP 7
Financial Reporting Standard for Smaller Entities (FRSSE) 9
SORPs 9
Accounting Principles 10
CA 1985 requirements 10
ASB Statement of Principles and FRS 18 Accounting Policies' 10
Going concern 11
Accruals 14
Consistency and comparability 15
Prudence 17
vi UK Accounting Practice
Substance over form 18
Relevance, reliability and understandability 19 j
Off setting 19 !
Departure from accounting principles set out in CA 1985 20
Accounting Rules 21
Alternative sets of accounting rules 21
Determining amounts under the alternative accounting rules 25
Fair value accounting 28
Appendix 1: Summary of the key points on the appropriateness of the
going concern basis raised in International Standard on Auditing 570
(ISA 570) 'Going Concern' 32
Appendix 2: Summary of the key points on the appropriateness of the
going concern basis raised in the Joint Working Group Guidance (JWG)
'Going Concern and Financial Reporting' 35
CHAPTER 2 THE ASB 'STATEMENT OF PRINCIPLES
FOR FINANCIAL REPORTING7 37 66
Introduction and Overview 37
Background 37
Purpose of the Statement 37
Status and scope 38
True and fair view 39
The standard setting process 39
Relationship with existing accounting standards and company law 39
Structure of the Statement 40
Application to Public Benefit Entities 40
The Objective of Financial Statements 41
Principles 41
Users of the accounts 42
Limitations of financial statements 42
Financial performance 42
Financial position 43
Generation and use of cash 43
Financial adaptability 44
The Reporting Entity 44
Principles 44
Control 44
When does one entity control another? 44
Contents vii
The Qualitative Characteristics of Financial Information 45
Principles 45
Relevance 46
Reliability 46
Prudence 47
Comparability 48
Understandability 48
Materiality 48
Conflicts between qualitative characteristics 49
The Elements of Financial Statements 49
Principles 49
Assets 50
Liabilities 51
Offset of rights and obligations 52
Ownership interest 52
Recognition in Financial Statements 53
Principles 53
Recognition process 53
Effect of transactions and other events 53
Uncertainty 54
Initial recognition of assets and liabilities 54
Prudence in the context of recognition 55
Derecognition of assets and liabilities 55
Matching 55
Critical events in the operating cycle 56
Measurement in Financial Statements 56
Principles 56
Measurement bases 57
Determining current value assets 58
Determining current value liabilities 58
Measurement on initial recognition 58
Subsequent remeasurement 59
Discounting 59
Dealing with uncertainty 59
Capital maintenance and changing prices 60
Presentation of Financial Information 60
Principles 60
Structure of financial statements 61
Classification 61
Statement of financial performance 62
Statement of financial position 62
viii UK Accounting Practice
Accompanying information 63
Highlights and summary indicators 63
Accounting for Interests in Other Entities 63
Principles 63
Degree of influence 64
Reflecting interests involving control 65
Potential Conflicts With Company Law 65
Presentation of dividends 65
Accounting for proposed dividends 65
Unrealised gains and losses 66
Measurement of current assets 66
Identification of subsidiaries for consolidation purposes 66
CHAPTER 3 THE TRUE AND FAIR VIEW 67 74
Company Law 67
Company law requirements 67
Small companies 67
Overriding requirement for accounts to give a true and fair view 68
Departure from the requirements of the Act 68
The relationship between accounting standards and the true and fair
requirement 69
Departure from accounting standards 70
Use of the true and fair override 70
Disclosure requirements under FRS 18 70
Appendix: Example wordings for the use of the true and fair override 72
CHAPTER 4 SUBSTANCE OVER FORM 75 94
Background to FRS 5 'Reporting the Substance of Transactions' 75
Off balance sheet financing 75
Conceptual nature of FRS 5 75
Transactions covered by the standard 76
Excluded transactions 76
Application of FRS 5 in practice 76
Impact of FRS 18 Accounting Policies' 76
Company law requirement 77
Detailed Requirements of FRS 5 77
Assessing commercial substance 77
Relationship with other accounting standards and with company
law 77
Identifying and recognising assets and liabilities i 78
Contents ix
Options and guarantees 78
Subsequent transactions in respect of recognised assets 78
Non recourse finance arrangements 78
Additional disclosures 79
Off setting 79
Quasi subsidiaries 80
Application Notes 80
The Recognition of Assets and Liabilities 80
Identification of assets and liabilities 80
Impact of risk 81
Definition of liabilities 81
Recognising assets and liabilities 81
The Commercial Effect of Transactions 82
Linked transactions 82
Options 82
Importance of commercial logic 83
The lender's return 83
Subsequent transactions in assets previously recognised 83
Continued recognition 84
Derecognition 84
Special cases 84
Significant benefits and risks 85
Off setting 85
Net settlement assured beyond all doubt 86
Members of a group 86
Legally enforceable right of set off 87
Settlement intention 87
Simultaneous settlement 88
Situations where offsetting is inappropriate 88
Master netting arrangements 88
Leasing Transactions 89
The interaction of FRS 5 with SSAP 21 89
Where the requirements of FRS 5 may be relevant 89
Guidance in Application Note B to FRS 5 89
Accounting for ESOP Trusts 90
Usual features of ESOPs 90
Accounting treatment 90
Disclosure 91
Employee Benefit Trusts and Other Intermediate Payment
Arrangements 91
UITF Abstract 32 91
X UK Accounting Practice
Structure of the intermediary 91
Employee benefit trusts 92 *
Whether a payment represents an immediate expense 92 |
Creation of an asset 92 !
Impact of FRS 5 93 !
Accounting for the asset 93
Disclosure 94
CHAPTER 5 ACCOUNTING POLICIEST7TT7 ,"7795 104
Background to Accounting Policies 95
Definition of accounting policy 95
Measurement bases 95
Purpose of accounting policies 96
Change of measurement basis 96
Fungible assets 96
Alternative treatments 96
Presentational changes 97
Selection of Accounting Policies 97
Requirement for a true and fair view 97
Choice of accounting policies 97
Balancing objectives 98
Use of additional disclosures 98
Industry practices 98
Review of Accounting Policies 98
The need for regular review 98
Accounting for a change in accounting policy 99
Impact on comparability 99
Disclosure of Accounting Policies 99
Requirements under the Companies Act 1985 99
Requirements under FRS 18 99
Disclosure requirements under other accounting standards 100
Location of disclosures 100
Accounting convention adopted 101
Estimation Techniques 101
Definition of estimation techniques 101
Selection of estimation techniques 101
Factors to be taken into account 102
Disclosure of techniques adopted 102
Changes in estimation techniques . 102
Contents XI
Statements of Recommended Practice (SORPS) 103
Definition of SORP 103
Disclosure of adoption 103
Entities who voluntarily comply with a SORP 103
CHAPTER 6 COMPARATIVE FIGURES AND PRIOR
PERIOD ADJUSTMENTS 105 120
Comparative Figures 105
Company law requirements 105
Comparative figures where there is no current year item 105
Adjustment of comparative figures 106
Requirements of accounting standards 106
Proposals for change 106
Prior Period Adjustments 107
Definition of prior period adjustment 107
Changes in accounting estimates 107
Reassessment of provisions 107
Use of estimation techniques 108
Distinction between estimation techniques and accounting policies 108
Changes in estimation techniques 109
Change of accounting policy 110
Reasons for changing an accounting policy 110
Change in the method of applying an accounting policy 110
Accounting treatment on change of accounting policy Ill
Disclosure of change in accounting policy Ill
Correction of fundamental error 112
Appendix: Worked example of a prior period adjustment 113
CHAPTER 7 FOREIGN CURRENCY TRANSLATION 121 142
General Background to Foreign Currency Translation 121
Relevant accounting standards 121
Objectives of foreign currency translation 122
Need for consistency 123
Basis of invoicing 123
Translation 124
Local currency 124
Exchange rate and closing rate 125
Forward contract 125
Monetary items 125
xii UK Accounting Practice
Translation of Foreign Currency Transactions 126
Basic requirement 126
Date when the transaction occurs 126 '
Contracted rate 127 :
Calculation of exchange gains and losses 127
Use of a forward contract 128
Options 128
Impact on the profit and loss account 130
Translation of Assets and liabilities 130
Non monetary assets 130
Monetary assets and liabilities 131
Overseas debtors and creditors 131
Recording Exchange Gains and Losses 131
Settled transactions 131
Unsettled short term monetary transactions 132
Unsettled long term monetary transactions 132
Impact on distributable reserves 132
True and fair override 133
Post balance sheet events 133
Profit and Loss Account Disclosure 133
Gains and losses on ordinary activities 133
Inclusion under statutory headings 134
Exceptional items 134
Cash flow statement 134
Foreign Equity Investments 134
Alternative accounting treatment 134
Conditions to be satisfied 135
Disclosure of adoption 136
Accounts Disclosure Requirements 136
General disclosure requirement 136
Accounting policy 137
Other disclosure requirements 137
Other Changes Under FRS 23 and FRS 24 138
Change in functional currency 138
Using a different presentational currency 138
Disclosure of financial information in a different currency 139
Dealing with hyperinflationary economies 139
Contents xiii
CHAPTER 8 SMALL AND MEDIUM SIZED
COMPANIES 143 206
Qualification as a Small Company 143
Company qualifying as small 143
Company treated as qualifying as small 143
Practical effect 143
Qualifying conditions 144
Definitions 145
Qualification as a small group 145
Qualifying conditions 145
'Gross' and 'net' 146
Accounts Exemptions Available to Small Companies and Groups 146
Accounts exemptions for small companies 146
Ineligible companies 147
Shorter form accounts 147
Additional disclosure exemptions 148
Modified directors' report 148
Directors' statement 149
True and fair view 150
Abbreviated accounts 150
Special auditors' report 152
Accounts exemptions for small groups 152
Exemption from preparing group accounts 153
Shorter form group accounts 153
Accounting Standards and the Small Company 154
Compliance with accounting standards 154
Compliance with UITF Abstracts 154
Disclosure of compliance with accounting standards 155
Abbreviated accounts and accounting standards 155
Financial Reporting Standard for Smaller Entities (FRSSE): An
Overview 156
Background to the FRSSE 156
'One stop shop' document 156
Scope and objective of the FRSSE 157
Disclosure of adoption 157
Relationship with SORPs 157
Definitions 158
Items not specifically covered in the FRSSE 158
Voluntary presentation of cash flow statement 158
Statement of total recognised gains and losses 159
link with accounting standards 159
xiv WX Accounting Practice
Principal relaxations in requirements 159
Disclosure of directors' personal guarantees 162
Group accounts 162
Possible changes to small entity reporting 162
The Financial Reporting Standard for Smaller Entities (FRSSE): Detailed
Requirements 163
True and fair view 163
True and fair override disclosures 164
Disclosure of adoption 164
Accounting policies and estimation techniques 164
Prior period adjustments 165
Gains and losses 166
Exceptional items 166
Profit or loss on disposal 166
Extraordinary items 166
Revenue recognition 167
Statement of total recognised gains and losses 167
Expenditure on research and development 168
Goodwill and intangible assets 169
Depreciation of goodwill and intangible assets 169
Negative goodwill 169
Transitional arrangements 169
Tangible fixed assets 170
Subsequent expenditure on tangible fixed assets 170
Revaluation of tangible fixed assets 170
Revaluation gains and losses 171
Transitional arrangements 171
Depreciation of tangible fixed assets 171
Review of useful economic lives and residual values 172
Change in depreciation method 172
Depreciation disclosures 172
Write downs to recoverable amount 172
Reversal of write down 173
Recognition of write downs and reversals 173
Investment properties 173
Government grants 174
Hire purchase contracts 174
Lessees: Accounting for finance leases 174
Lessees: Accounting for operating leases 175
Lessees: Accounting for lease incentives 175
Lessors: Accounting for finance leases 175
Lessors: Accounting for operating leases 175
Sale and leaseback transactions 176
Contents XV
Disclosure by lessees 176
Disclosure by lessors 177
Stocks 177
Long term contracts 179
Disclosure of long term contracts 180
Consignment stocks 180
Debt factoring 181
Start up costs and pre contract costs 182
Taxation 182
Recognition of deferred tax 183
Measurement of deferred tax 183
Disclosure of deferred tax 183
Tax on dividends 184
VAT 184
Defined contribution retirement schemes 184
Defined benefit retirement schemes 184
Accounting periods ending before 22 June 2006 184
Accounting periods ending on or after 22 June 2006 186
Provisions 188
Contingent liabilities and contingent assets 189
Financial instruments 189
Dividends 190
Translation of foreign currency transactions, assets and liabilities 190
Foreign equity investments financed by foreign currency borrowing 191
Incorporating the accounts of foreign entities 191
Investments in foreign entities financed by foreign currency
borrowings 191
Post balance sheet events 192
Date of approval of financial statements 192
Related party disclosures 192
Personal guarantees given by directors 193
Disclosure of controlling party 193
Consolidated financial statements 194
Medium sized Companies and Groups 194
Qualification as a medium sized company 194
Accounts exemptions available to medium sized companies 195
Ineligible companies , 196
Abbreviated accounts for medium sized companies 196
Directors' statement 197
Special auditors' report 197
Exemption from preparing group accounts 198
Xvi UK Accounting Practice
Audit Exemption 198
Categories of audit exemption 198
Total exemption conditions 198
Report conditions 199 ;
Ineligible companies 200
Special provisions for dormant subsidiaries and small groups 200
Members requiring an audit to be carried out 201
Directors' statement 201
Special report by reporting accountants 202
Dormant companies 203
Conditions for dormant company audit exemption 204
Ineligible companies 204
Accounts requirements for dormant companies 204
Directors' statement 205
Dormant companies acting as agents 205
CHAPTER 9 PROFIT AND LOSS ACCOUNT
FORMATS 207 240
Company Law Requirements 207
CA 1985 prescribed formats 207
Presentation of operating costs 208
Potential sensitivity of information 208
Change of format 208
Order of headings and sub headings 209
Analysis between headings 209
Condensed presentation 210
Potential duplication of headings and sub totals 210
Comparative figures 210
Additional disclosures 211
Continuing, Discontinued and Acquired Operations 212
Operating profit 212
Classification of discontinued operations 212
Completion of sale 213
Completion of termination 213
Deadline for completion of sale or termination 214
Operational effect of a discontinuation 214
Material effect on turnover 215
Separate identification of operation 216
Consideration individually or in aggregate? 217
Disclosure of continuing, discontinued and acquired activities 217
Columnar format 217
Alternative presentation , , 218
Contents xvii
No discontinued operations or acquisitions during the year 220
Disclosures in respect of acquisitions 220
Disclosures in respect of discontinued operations 221
Sale or termination not yet completed 221
Additional analysis of interest and tax 221
Comparative figures 221
Potential changes in requirements 222
Additional Format Headings 224
Requirements of FRS 3 'Reporting Financial Performance' 224
Profits or losses on the sale or termination of an operation 224
Costs of a fundamental reorganisation or restructuring 224
Profits and losses on the disposal of fixed assets 225
Additional disclosure requirements 225
FRS 17 'Retirement Benefits' 225
Disclosure of Exceptional Items 225
Definition of exceptional 225
Presentation of exceptional items 226
Use of columnar format 226
Continuing and discontinued operations 227
Disclosure of Extraordinary Items 227
CA 1985 requirements 227
Classification of income or expenditure as extraordinary 228
Suggested disclosure 228
Likely Future Developments 229
FRED 22 'Review of FRS 3: Reporting Financial Performance' 229
Structure of financial performance statement 230
Financing and treasury section 230
Other gains and losses section 231
Continuing operations, discontinuing operations and acquisitions 231
Discontinuing operations 232
Prohibition on recycling 232
Offsetting 232
Taxation .'. 233
Dividends 233
Earnings per share 233
Prior period adjustments 233
Notes to the accounts 234
Ownership interests 234
Investment properties 234
Specialised sectors 234
Comparatives 234
xviii ^K Accounting Practice
Impact on other standards 235
Appendix 236
CHAPTER 10 TURNOVER 241 260
Segmental Analysis of Turnover 241
CA 1985 requirements 241
Requirements of SSAP 25 'Segmental reporting' 241
Identification of classes of business and geographical markets 242
Separate classes of business 242
Geographical segments 243
Redefining reporting segments 243
Exemption from segmental disclosure 243
Maintaining appropriate records 244
Likely future changes 244
Turnover relating to continuing, discontinued and acquired
activities 244
Accounting Policies and Revenue Recognition 245
Profit and loss account formats 245
Requirements of FRS 18 245
Revenue recognition under FRS 5 246
Convergence with international requirements 246
What is turnover? 247
Recognising turnover 247
Measuring revenue 247
Long term contractual performance 247
Revenue recognition and services contracts 248
Contract for a single service or product 249
Separation and linking to contractual arrangements 249
Bill and hold arrangements 250
Sales with a right of return 251
Acting as principal and agent 252
Leasing income in the accounts of a lessor 253
Disclosure of accounting policy 255
Long term Contracts 256
Definition of long term contract 256
Accounting treatment 256
Calculating turnover 256
Variations to original specification 257
Disclosure of method of calculating turnover 257
Contents xix
Barter Transactions for Advertising 257
Scope of UITF Abstract 26 257
Presentational issue 257
Recognition criteria 258
Substance of the transaction 258
Accounting treatment 258
Persuasive evidence 258
Disclosure 259
Contracts for Sales of Capacity 259
Sale of the right to use capacity 259
Capacity swaps 260
Artificial transactions 260
CHAPTER 11 STAFF COSTS AND EMPLOYEE
NUMBERS 261 284
Disclosure of Staff Costs 261
CA 1985 disclosure requirements 261
Requirements of FRS 3 'Reporting Financial Performance' 262
Wages and salaries 262
Benefits in kind 262
Social security costs 262
Pension costs 263
Calculation of Average Number of Employees 263
CA 1985 disclosure requirements 263
Basic rules 263
Contracts for services 264
Directors 264
Employees working overseas 264
Arrangements which may give rise to problems 264
Temporary or casual employees 265
Staff employed by a different company 265
Disclosure in subsidiary company's accounts 265
Disclosure in holding company accounts 266
Arrangements involving another group company 267
Disclosure of number of employees by category 267
link between staff costs and employee numbers 267
Employee Share Schemes Under UITF Abstract 17 268
Requirements of UITF Abstract 17 268
Recognition of the cost of share awards 268
Need for shareholder approval 269
Creation of an obligation 269
XX UK Accounting Practice
Shares becoming publicly traded 270
Consideration paid by employee 270
Shares purchased by ESOP trust 270
Uncertainty over achievement of performance criteria 271
Schemes requiring employees to retain shares awarded 271
Revision of charge in subsequent years 271
When should the award be recognised in the accounts 272
Requirement for further period of employment 272
Share options 272
Accounting for share awards in the company's balance sheet 272
Shares held by ESOP trust 273
Inclusion in reconciliation of movements in shareholders' funds 273
Worked example 273
Other examples 274
Share based Payment Under FRS 20 274
FRS 20 'Share based Payment' 274
Underlying principles 275
Recognition of share based payments 275
Cash settled share based payment transactions 275
Equity settled share based transactions 276
Share based payment transactions with cash alternatives 276
Accounts disclosures 277
Transitional provisions: Equity settled transactions 278
Transitional provisions: Cash settled transactions 279
National Insurance Contributions on Share Option Gains 279
Charge to NI 279
When the liability arises 279
Impact of employee performance criteria 280
Date of grant of the option 280
Worked example 280
Recognition in the accounts 282
Reimbursement by employee 282
Transfer of liability to employee 283
Disclosure 283
Other situations 283
CHAPTER 12 RETIREMENT BENEFITS 285 304
Types of Retirement Scheme 285
What are retirement benefits? 285
Employer commitments 286
Unfunded schemes » 286
Contents xxi
Defined contribution schemes 286
Defined benefit schemes 286
Difficulties in accounting for defined benefit schemes 287
Accounting for Defined Contribution Schemes 287
Profit and loss account 287
Disclosure 287
Accounting policy 288
Multi employer Schemes 288
Group retirement schemes 288
Defined contribution schemes 288
Defined benefit schemes 289
Accounting for Defined Benefit Schemes 289
FRS 17 'Retirement benefits' 289
Actuarial valuations 290
Valuation methods 290
Measurement of scheme assets 291
Measurement of scheme liabilities 291
Actuarial assumptions 292
Discounting of scheme liabilities 293
Frequency of valuations 293
Balance sheet recognition of surplus or deficit 293
Determination of employer's liability 293
Determination of employer's asset 294
Asset resulting from reduced contributions 294
Refunds from the scheme 294
Improvement in benefits 294
Balance sheet presentation 295
Deferred tax 295
Recognition in performance statements 295
Impact of limit on balance sheet asset 298
Tax 299
Death in service and incapacity benefits 300
Disclosure 300
Reconciliation to the balance sheet 301
Five year summary 302
Analysis of reserves 302
Entities with more than one defined benefit scheme 302
Accounting policy 303
xxa UK Accounting Practice
CHAPTER 13 DEPRECIATION SOS^^
Nature and Methods of Depreciation 305
Definition of depreciation 305
Fair allocation of cost 305 :
Key factors 306 ;
Purchase price or production cost 306
Residual value 306
Regular review of residual value 307
Impact of revision of residual value 307
Useful economic life 308
Other factors to take into account 308
Review of asset lives 308
Disclosure of revision of asset lives 309
Assets purchased under finance lease or hire purchase contract 309
Impairment reviews 309
Methods of depreciating assets 310
Straight line method 310
Reducing balance method 311
Comparison of straight line and reducing balance methods 312
Change in method of depreciating assets 312
Assets with two or more major components 312
Renewals Accounting 313
Conditions 313
Accounting treatment 313
Non depreciation of Assets 314
The general rule 314
Enhancement of the asset 314
Where depreciation is immaterial 315
High residual values 315
Annual impairment review 316
Freehold land 316
Depreciation of Revalued Assets 316
Alternative accounting rules 316
Basis of depreciation charge 317
Amount charged to the profit and loss account 317
Transfers between reserves 317
Historical cost profits and losses 318
Depreciation in the year of revaluation 318
Profit or Loss on Disposal of Assets , 319
Measurement rules , 319
Contents xxiii
Revaluation reserve 319
Note of historical cost profits and losses 320
Accounting for Impairment 320
Permanent and temporary diminutions in value 320
Impact of FRS11 'Impairment of Fixed Assets and Goodwill' 321
The need to carry out an impairment review 321
Events and changes that might prompt a review 321
Separate requirements for intangible assets and goodwill 322
Recognition of impairment losses 322
Presentation of impairment losses 323
Reversal of an impairment loss 323
Recognition of a reversal of an impairment loss 324
Further detail 324
Depreciation of impaired assets 324
Transfers from Current to Fixed Assets 324
Requirements of UITF Abstract 5 324
Depreciation Disclosures 325
Disclosure of accounting policy on depreciation 325
Reasons for non depreciation of assets 326
Disclosure when depreciation method is changed 326
Other accounts disclosures 327
Likely Future Developments 327
FRED 29 'Property, plant and equipment; Borrowing costs' 327
FRED 32 'Disposal of non current assets and presentation of
discontinued operations' 328
CHAPTER 14 OTHER EXPENSES 331 352
Finance Costs of Debt under FRS 4 331
Accounting for debt instruments 331
Finance costs 331
Issue costs 332
Calculation of net issue proceeds 332
Calculation of finance costs 333
Allocation of finance costs over the term of the debt 333
Convertible debt 334
Accounting treatment on subsequent conversion 335
Gains and losses on repurchase of debt 336
Options 336
Option to extend the term of the debt 336
Options held by the issuer only 336
xx v UK Accounting Practice
Premiums payable on redemption of debt 338 ,
Situations where UITF 11 does not apply 339 j
Charging of issue expenses to the share premium account 340 j
More complex debt instruments • 340 I
Accounting for Income, Expenses, Gains and Losses Under FRS 25 341 j
Scope and effective date of FRS 25 341 }
Accounting for interest, dividends, gains and losses 341
Other disclosure requirements 342
Requirements of FRS 26 342
Transitional arrangements 343
Finance Charges in Respect of Finance Leases 343
Initial recording of asset and liability 343
Calculating the present value of lease payments 344
Depreciation of asset 344
Analysis of rental payments 345
Calculation of total finance charge 345
Allocation of finance charge 345
The straight line method • 345
The sum of the digits method 346
The actuarial method 347
Comparison of results 348
Lease payments in advance • • 348
Lease variation clauses 349
Accounts disclosure 349
Operating Lease Charges in the Accounts of the Lessee 349
Accounting for rental payments 349
Irregular payments 350
Accounting for incentives 350
Review of rental payments 351
Method of spreading the incentive 351
Accounts disclosure 351
CHAPTER 15 TAXATION 353 364
Tax on the Profit or Loss of Ordinary Activities 353
Requirement of CA 1985 353
Current tax 354
Recognition of current tax , 354
Taxable profit or loss 354
Tax rate 354
Effect of double tax relief , 355
Charge or credit for deferred taxation , 355
Contents XXV
Separate disclosure of deferred tax 355
Reconciliation of tax charge 356
Foreign tax 357
Withholding tax 358
Dividend income 358
Transitional arrangements for charities 358
Group relief 359
Disclosure of payments for group relief 359
Adjustments in respect of prior periods 360
Tax on extraordinary items 360
Tax on additional FRS 3 Format headings 360
Special circumstances affecting the tax charge 361
Change in the basis of taxation 361
Changes in tax rates and allowances 362
Accounting for Recoverable Advance Corporation Tax 362
Background 362
Recoverable ACT 362
Offset against deferred tax balance 363
Future period considered 363
Recognition of recoverable ACT 363
Change in assessment of recoverability 364
CHAPTER 16 DIVIDENDS AND OTHER
APPROPRIATIONS 365 384
Accounting and Disclosure Before 1 January 2005 365
CA 1985 requirements 365
Additional disclosure under FRS 4 365
ESOP trusts 367
Finance costs of non equity shares 367
Accruals basis for dividends 371
Scrip dividends 373
Accounting and Disclosure after 1 January 2005 374
CA 1985 requirements 374
Classification of financial instruments 374
Compound financial instruments 375
Presentation of equity dividends 375
Presentation of dividends as an interest expense 376
Distributable Reserves 376
Significance of distributable reserves 376
Definition of distribution 376
Profits available for distribution 377
xxvj UK Accounting Practice
Additional rules for public companies 377
Undistributable reserves 377
Definition of realised profit and losses 378 \
Development costs 381
Revaluation of fixed assets 381
Depreciation charged on revalued assets 382
Pension liabilities 382
ESOP trusts 382
CHAPTER 17 DIRECTORS' REMUNERATION AND
BENEFITS 385 428
Disclosure by Quoted Companies 385
The Directors' Remuneration Report Regulations 2002 385
Aggregate disclosures by quoted companies 386
Directors' remuneration report 387
Contents subject to audit 387
Audit requirements 389
Contents not subject to audit .; 390
Additional disclosures under the UK Listing Rules 391
Disclosure by Unquoted Companies 392
Aggregate disclosures by unquoted companies 392
Highest paid director 393
Small companies 393
Compensation for loss of office 394
Pension arrangements 394
Payments to third parties 395
Excess retirement benefits 395
Duties of directors and auditors 395
Voluntary disclosure 395
Amounts to be included 395
Comparative figures 396
Positioning of disclosures 396
Example disclosures 396
Emoluments 396
Amounts to be included 396
Details to be disclosed 397
Payments on acceptance of office as director 397
Calculating the figures 397
Emoluments in the year of appointment or retirement 398
Accounting periods of more or less than one year 398
Bonus payments ,, . 398
Contents XXVii
Benefits in kind 399
Payments to connected parties 401
Payments by third parties 401
Subsequent adjustments 402
Apportionment of amounts received 402
Executive Share Options 402
Difficulties with share option disclosure 402
Disclosure requirements 402
Disclosure of options granted or exercised during the year 403
Charge to National Insurance 404
Combined Code recommendations 404
Shareholder approval of new share option schemes 405
Disclosure of policy on granting of options and awards to
employees 405
Long term Incentive Plans 406
Disclosure requirements 406
Definition of long term incentive scheme 406
Provisions for payments under long term incentive schemes 407
When do payments become disclosable? 407
Guaranteed Minimum Payment 407
Combined Code Recommendations 407
Shareholder approval of long term incentive schemes 408
Disclosure of policy on granting of options and awards to
employees 408
Pension Arrangements 408
Pension contributions and arrangements 408
Hybrid pension schemes 409
Pension scheme with an underpin 409
Additional disclosures for defined benefit schemes 409
Accrued pension benefits 410
Transfer values 411
Pensionable remuneration 412
Disclosure of excess retirement benefits 412
Benefits other than in cash 412
Additional pensions 412
Compensation for Loss of Office 413
Separate category of payment 413
Examples of compensation payments 413
Shareholder approval 413
Pension top ups 413
Benefits other than in cash 414
XXyijj UK Accounting Practice
Continuing involvement 414
Example disclosure 414 ,
Potential Problems in Groups of Companies 414 ]
Payments for services to holding company and fellow subsidiaries 414 ;
Remuneration paid by the holding company 415 i
No remuneration in respect of services to subsidiary 416
Directors' Service Contracts 416
The need for service contracts for directors 416
Contents of a contract of service 417
Contents of a contract for services 418
Requirement to keep copies of contracts 418
Shareholder approval for contracts for more than five years 419
Extension of contract 420
Combined Code recommendations 421
Additional requirements for listed companies 421
Remuneration Committees 421
Need for a remuneration committee 421
Terms of reference 422
Remuneration policy 424
Appendix: Example emoluments and benefits disclosures for a small
company and an unquoted company 426
CHAPTER 18 OTHER PROFIT AND LOSS ACCOUNT
DISCLOSURES 429 452
Remuneration of the Auditors and Their Associates 429
CA 1985 disclosure requirements 429
Remuneration for services as auditors 429
Remuneration for other services 430
Associates of auditors 431
ICAEW recommendations on additional disclosure 431
Presentational issues 432
Changes from 1 October 2005 432
DTI consultation on proposed regulations 433
Proposed exemptions 434
Related Party Disclosures 434
Requirements of FRS 8 'Related Party Disclosures' 434
Objective of FRS 8 435
Definition of related party , , _ , 435
Parties that will always be related to the reporting entity 436
Parties that are presumed to be related to the reporting entity 436
Contents Xxix
Other related parties 437
Definition of control and influence 437
Close family members 437
Disclosure of control 438
Disclosure of related party transaction 438
Aggregation of transactions 438
Examples of related party transactions 439
Materiality 439
Exemptions from disclosure 439
Confidentiality 440
Identification of disclosable transactions 440
Potentially illegal transactions 440
likely future developments 441
Geographical Analysis of Results 442
Scope of SSAP 25 'Segmental Reporting' 442
Disclosure requirements 442
Consistency 443
Apportionment of costs 443
Treatment of interest 443
link with profit and loss account 443
Expenditure on Research and Development 444
Requirements of SSAP 13 Accounting for Research and
Development' 444
Earnings Per Share 444
Requirements of accounting standards 444
Scope and objective 444
Measuring basic earnings per share 445
Weighted average number of ordinary shares 446
Measuring diluted earnings per share 447
Dilutive or not? 447
Assumptions on timing 448
Share warrants and options 448
Convertible instruments 449
Contingently issuable shares 449
Contracts with a settlement option 449
Restatement for comparative purposes 450
Presentation requirements 451
Other disclosures 452
xxx UK Accounting Practice
CHAPTER 19 BALANCE SHEET FORMATS 453 464
Company Law Requirements 453 j
ca iQp,z, „„ prescribed. format453 \
Vertical or horizontal structure 453 j
Change of format 454 ¦
Order of headings and sub headings 454
Condensed presentation 455
Alternative positions 455
Changes in presentation 456
Comparative figures 456
Additional disclosures 456
Items which must not be treated as assets 456
Defined Benefit Assets and Liabilities 456
Requirements of FRS 17 456
Appendix 1: Balance Sheet Format 1 458
Appendix 2: Balance Sheet Format 2 461
CHAPTER 20 INTANGIBLE FIXED ASSETS 465^90
Costs of Research and Development 465
CA 1985 requirements 465
Categories of research and development 466
Activities that do not constitute research and development 466
Research costs 467
Development costs 467
Prudent approach 468
Conditions for deferral of development costs 468
Amortisation of development costs 468
Annual review 469
Consistency of accounting 469
Exceptions to the normal rules 469
Accounts disclosure 470
Amount charged to the profit and loss account 471
Treatment as unrealised loss 471
Directors' report 471
Concessions, Patents, Licences, Trade Marks and Similar Intangible
Assets 472
Capitalisation under company law 472
Requirements of FRS 10 472
Initial recognition 473
Readily ascertainable market value 473
Contents XXXi
Valuing an intangible asset acquired as part of a business 474
Amortisation 474
Determining useful economic life 474
Legal rights granted for a finite period 475
Residual value 475
Method of amortisation 476
Review and revision of economic lives 476
Requirement for impairment reviews 476
Accounting for impairment losses 477
Revaluation of intangible assets 477
Amortisation of revalued assets 478
Accounts disclosure 478
Accounting policy 479
Goodwill 480
Nature of goodwill 480
Recognition of goodwill 480
Value of purchased goodwill 481
Value of negative goodwill 481
Fair values 481
Amortisation 481
Determining the useful economic life of goodwill 482
Durability and continued measurement 482
Review and revision of economic life 483
Requirement for impairment reviews 483
Accounting for impairment losses 484
Accounting for negative goodwill 484
Accounts disclosure 484
Accounting policy 486
Transitional arrangements 487
Impact of goodwill on distributable reserves 488
CHAPTER 21 TANGIBLE FIXED ASSETS 491 548
Classification of Assets 491
Definition of fixed asset 491
Proposed sale of fixed asset 491
Transfers from current assets to fixed assets 493
Analysis of tangible fixed assets 493
Class of tangible fixed assets 493
Land and buildings 494
Other asset categories 495
Payments on account and assets in the course of construction 495
xxxii UK Accounting Practice
Initial Measurement of Tangible Fixed Assets 496
Measurement at cost 4^6
Cost of production 4^6
Examples of directly attributable costs 497
Exclusion of abnormal costs 497 ;
Cessation of capitalisation of costs 497
Start up or commissioning period 497
Initial operating period 498
Gifts and donations 498
Capitalisation of finance costs 499
Directly attributable finance costs 499
Specific and non specific borrowings 499
Commencement of capitalisation of finance costs 500
Suspension of capitalisation of finance costs 500
Cessation of capitalisation of finance costs 500
Finance costs disclosures 501
Write down to recoverable amount 501
Subsequent expenditure on fixed assets 501
Capitalisation of subsequent expenditure 501
Valuation of Tangible Fixed Assets 502
Alternative accounting rules and fair value accounting rules 502
Adopting a policy of valuation under FRS 15 503
Valuation basis properties 506
Valuation basis — other assets 507
Consistency within a class of assets 508
Accounting entries on revaluation of assets 508
Alternative approach where depreciated replacement cost is used 509
Depreciation in the year of valuation 510
Recognition of revaluation gains 510
Recognition of revaluation losses 511
No aggregation of gains and losses 512
Transitional arrangements under FRS 15 512
Principal Accounts Disclosures 512
Movements in the year 512
Disclosures in respect of revalued assets 513
Disclosures required by the RICS 514
Written consent 515
Example disclosure 515
Impairment Reviews 515
The need to carry out an impairment review 515
Events and changes that might prompt a review 516
Separate requirements for intangible assets and goodwill 516
Contents XXxiii
Fixed assets not held to generate cash flows 517
Measuring impairment losses 517
Using net realisable value 517
Impact of taxation 518
Calculating net realisable value 518
Calculating value in use 518
Identifying income generating units 519
Allocation of assets and liabilities 520
Allocation of central assets 520
Central assets that cannot sensibly be allocated 521
Capitalised goodwill 521
Cash flows 522
Newly acquired units 522
Discount rates 523
Reflecting risk 524
Subsequent monitoring of cash flows 524
Accounting for Impairment Losses 524
General rule 524
Revalued fixed assets 524
Reversal of an impairment loss 525
Tangible fixed assets and investments 525
Intangible assets and goodwill 526
Recognition of a reversal of an impairment loss 526
Allocation of impairment losses 526
Goodwill in a merged business 527
Presentation of impairment losses 528
Additional disclosures 529
Investment Properties 529
Treatment under accounting standards 529
Definition of investment property 530
Need for different treatment 530
Requirements of SSAP 19 531
Departure from the requirements of CA 1985 531
Disclosure of true and fair override 532
Valuation of investment properties 532
Accounts disclosures 533
Historical cost of investment properties 533
Accounting policy 533
Tangible fixed asset or investment? 533
Accounting for Leased Assets 533
Distinction between leases and hire purchase agreements 533
Definition of a finance lease 534
xxx^v UK Accounting Practice
Asset value at end of lease term 534
Impact of FRS 5 'Accounting for the Substance of Transactions' 534 •
Guidance notes on SSAP 21 535 j
Initial recording of asset and liability by lessee 535 ;
Depreciation of asset by lessee 536
Accounts disclosures by lessee 536
Assets held by lessor for use in operating leases 537
Classification of property leases 538
Sale and leaseback arrangements 538
Accounting for Costs Relating to the Introduction of the Euro 539
The basic issues 539
Accounting for modification of assets 540
When provision should be made 540
Disclosure 540
Accounting for Website Development Costs 540
Categories of development cost 540
Planning costs 541
Application and infrastructure costs 541
Design and content costs 541
Capitalisation of costs 542
Accounting for subsequent costs 542
Likely Future Developments 543
Convergence with international standards 543
FRED 29 ^Property, plant and equipment; Borrowing costs' 543
FRED 32 'Disposal of non current assets and presentation of
discontinued operations' 546
CHAPTER 22 INVESTMENTS 549 568
Classification as Fixed or Current Assets 549
Balance sheet disclosure 549
Definition of fixed asset investment 550
Loans to group undertakings 550
Disclosure of movements in the year 550
Current asset investments 551
Group Investments , 551
Definition of group undertaking 551
Straightforward presentation of information 551
Definition of participating interest 552
Associated undertakings 553
Holding of own shares 553
Contents XXXV
Accounting for Associates, Joint Ventures and Joint Arrangements 554
Identification of associates, joint ventures and joint arrangements 554
FRS 9 Associates and Joint Ventures' 554
Accounting treatment in the individual accounts of the investor 554
Joint venture with little commonality of interest 554
Non corporate associate or joint ventures 555
Joint arrangements that are not entities 555
Additional accounts disclosures 555
Accounting period and date of associates and joint ventures 556
Becoming or ceasing to be an associate 556
Becoming or ceasing to be a joint venture 556
Disclosure of decision not to treat as an associate 557
Notes on contingent liabilities and commitments 557
Significant restrictions on ability to distribute reserves 557
Amounts owed to or by associates and joint ventures 557
Significant associates and joint ventures 558
Accounting Policies 558
Historical cost accounting rules 558
Alternative accounting rules 558
Impairment of investments 559
Fair value accounting 559
Likely future developments 563
Other Accounts Disclosure 563
Fixed asset investments 563
Current asset investments 564
Listed investments 564
Details of significant shareholdings 566
Financial information in respect of significant investments 567
Avoiding a disclosure of excessive length 568
Fixed financial assets not at fair value 568
Derivatives not at fair value 568
CHAPTER 23 STOCKS 569 588
General Principles of Stock Valuation 569
Accruals concept under FRS 18 569
'Cost' of stocks 569
Sensitivity of stock valuation 570
Historical cost accounting rules 570
Alternative accounting rules 571
CA 1985 rules on purchase price and production cost 571
Requirements of SSAP 9 'Stocks and Long term Contracts' 571
xxxvi UK Accounting Practice
Definition of 'cost' 572
Production overheads 572
Net realisable value 572
Acceptable Costing Methods 573
Principal types of costing system 573
Costing in the services sector 573
Valuation of stocks 574
Purchase or production cost of identical items 574
Use of estimation techniques 575
Inclusion of raw materials and consumables at a fixed amount 576
Allocation of Overheads 576
Overheads to be included 576
Management costs 577
Normal level of activity 577
Assessing Net Realisable Value 578
Situations where provision may be needed 578
Provisions on a formula basis 578
Calculating net realisable value 579
Provisions against raw material stocks 579
Accounts Disclosures 580
Analysis of stocks 580
Disclosure of accounting policy 580
Replacement cost of stocks 580
Consignment Stocks 581
Nature of consignment stocks 581
Transfer of legal tide 582
Deposit arrangements 582
On or off balance sheet? 582
Dealer's protection against price increases 583
Right to return the car to the manufacturer 583
Right of manufacturer to require return of the car 583
Accounting treatment — asset of the dealer 584
Accounting treatment asset of the manufacturer 584
Sale and Repurchase Agreements 584
Nature of a sale and repurchase agreement 584
Benefits and risks 585
Original selling price 585
Unconditional commitment to repurchase 585
Options to repurchase and resell 586
Accounting treatment 586
Contents XXXvii
CHAPTER 24 LONG TERM CONTRACTS 589 604
Identification of Long term Contracts 589
Definition of long term contract 589
Accounting treatment to avoid distortion 589
Contracts lasting more or less than one year 590
Need for consistency 590
Contracts with separable parts 590
Changing circumstances 591
Recognition of Turnover 591
Individual consideration of contracts 591
Ascertaining turnover 591
Services contracts 592
Disclosure of method used 593
Calculation of Attributable Profit 593
Definition of attributable profit 593
Contracted outcome assessed with reasonable certainty 594
Costs to be included 594
Profit earned to date 595
Accounting entries 595
Estimation of Foreseeable Losses 596
Provision for projected loss 596
Costs of sales greater than costs incurred to date 596
Treatment of loss as provision or accrual 597
Accounting for Contract Variations and Claims 597
Impact of variations and claims 597
Contract variations 598
Claims 598
Accounts Disclosures 598
Location of disclosures 598
Inclusion of long term contracts in stocks 598
Inclusion of amounts recoverable on contracts within debtors 600
Inclusion of payments on account in creditors 600
Excess provision for foreseeable losses 601
Summary of disclosures 601
Accounting policy 601
Inclusion of interest in the case of long term contracts 602
likely Future Developments 602
FRED 28 'Inventories; Construction and service. contracts(502
Appendix: Summary of disclosures 604
XXXViii ^ Accounting Practice
CHAPTER 25 DEBTORS, PREPAYMENTS AND
ACCRUED INCOME 605 622
Trade Debtors 605
Sales ledger balances 605
Bad and doubtful debts 605
Credit notes 606
Settlement discounts 606
Credit balances 606
Uninvoiced sales 607
Lessor's Net Investment in Finance Leases 607
Nature of a finance lease 607
Net investment in the lease 607
Payments during the period of the lease 608
Balance sheet disclosure 608
Provision for bad and doubtful debts 608
Other Debtors 608
Items normally included 608
Tax balances 609
Prepayments and Accrued Income 609
Prepayments 609
Accrued income 609
Rent receivable under an operating lease 610
Accounting for Factored Debts 611
Main reasons for factoring debts 611
Impact of FRS 5 611
Importance of reviewing precise terms and conditions 611
Usual features of factoring agreements 611
Possible accounting treatments 612
Derecognition 612
Separate presentation 613
Linked presentation 613
Assessment of benefits and risks 613
Benefits retained by the company 614
Benefits resting with the factor 614
The risk of slow payment 614
The risk of bad debts 614
Practical application 615
Accounting for Pre contract Costs 616
UITF Abstract 34 616
Whether pre contract costs are an asset 616
Contents XXxix
When an asset is created 617
Measuring the asset 617
Consortium members 618
Accounts Disclosures 618
Analysis of debtors 618
Separate disclosures of amounts due after more than one year 619
Disclosure as current assets 620
Presentation on the balance sheet 621
Deciding on the form of presentation 622
Likely Future Developments 622
ASB Discussion Paper — 'Leases: Implementation of a New
Approach' 622
CHAPTER 26 FINANCIAL INSTRUMENTS 623 658
Classification of Capital Instruments under FRS 4 623
Definition of debenture 623
Definition of capital instruments under FRS 4 623
The transfer of economic benefits 624
Shareholders' funds or liabilities? 624
Options at the discretion of the issuer 625
Options without commercial substance 625
Power to issue appropriate number if shares 626
Shares issued by a subsidiary 626
Accounting Treatment under FRS 4 626
Initial recording of debt 626
Finance costs 626
Carrying value of debt 627
Accrued finance costs 627
More complex debt instruments 627
Accounts Disclosures under FRS 4 628
General disclosure requirements 628
Maturity of debt 629
Example disclosures 630
Convertible debt 631
Additional disclosures under FRS 4 633
Issue of debentures during the year 633
Debentures held by nominee or trustee 634
Classification of Financial Instruments under FRS 25 634
Effective date of FRS 25 634
New rules on classification 634
x\ UK Accounting Practice
Financial liability or equity? 635
New treatment of certain shares 635
Other examples or financial liabilities 636
Contract settlement in equity 636
Purchase of own equity instruments 637
Contingent settlement provisions 637
Settlement options o j /
Compound financial instruments 637
Members' shares in co operative entities 638
Maturity of liabilities 640
Offsetting of financial assets and financial liabilities 641
Transitional arrangements for comparatives 641
Transitional arrangements for compound financial instruments 642
Accounts Disclosures under FRS 25 642
Objective and scope 642
Categories of risk 642
Minimum disclosures 643
Accounting for Financial Instruments at Fair Value 645
The fair value accounting rules 645
Scope of FRS 26 646
Derivatives 646
Categories of financial instrument 647
Initial measurement 648
Subsequent measurement 648
Reclassification of financial instruments 649
Accounting for gains and losses 649
Transitional arrangements 650
Hedge Accounting 651
Scope of FRS 26 651
Hedging instruments and hedged items 651
Categories of hedging relationships 651
When hedge accounting can be applied 652
Accounting for fair value hedges 652
Accounting for cash flow hedges 653
Accounting for hedges of a net investment in a foreign operation 654
Disclosures in respect of hedging activities 654
Transitional arrangements 655
Likely Future Developments , 655
FRED 33 'Financial Instruments: Disclosures' 655
Proposed amendments to FRS 26 656
Contents xli
CHAPTER 27 BANK LOANS AND OVERDRAFTS 659 668
Bank Loans 659
Analysis of bank loans 659
Repayment date of loans 660
Payment terms and interest rates 661
Secured loans and overdrafts 661
Bank Overdrafts 662
Source of the figure for bank overdrafts 662
Use of bank statement balance 661
Repayment date 663
Combined disclosure with loans due within one year 663
Window dressing 664
Secured overdrafts 664
Offsetting of Bank Balances 664
General prohibition on offsetting 664
Accounting periods beginning before 1 January 2005 664
Accounting periods beginning on or after 1 January 2005 666
CHAPTER 28 LEASING AND HIRE PURCHASE
LIABILITIES 669 676
Calculation of Liabilities Under Finance Leases 669
Initial recording of liability 669
Analysis of rental payments 669
Reduction of liability to lessor 670
Accounting policies 671
Separate Disclosure of Leasing Obligations 671
Additional sub heading within creditors 671
Alternative disclosure 672
Security in respect of leasing obligations 673
Disclosure of future commitments 673
Analysis of Leasing Liabilities 673
Requirements under CA 1985 673
Requirements under SSAP 21 673
Disclosure using gross obligations 674
Details of finance charges 675
likely Future Developments 676
ASB Discussion Paper 'Leases: Implementation of a New
Approach' 676
xj[jj UK Accounting Practice
CHAPTER 29 OTHER CREDITORS, ACCRUALS AND
DEFERRED INCOME • 677 692
Payments Received on Account 677
Items to be included 677
Payments on account in respect of long term contracts 677
Trade Creditors 678
Purchase ledger balances 678
Adjustment for unprocessed items 678
Credit notes due 678
Settlement discounts 678
Debit balances 679
Taxation, Social Security and Other Creditors 679
Disclosure under CA 1985 679
Corporation tax payable 680
Other creditors 680
Example disclosure 680
Accruals and Deferred Income 681
Disclosure under CA 1985 681
Items normally included 682
Accruals 682
Deferred income 682
Disclosure of amounts due after more than one year 683
Accounting for Government Grants 683
Type of grants covered by SSAP 4 683
What are government grants? 684
General rules on recognition of grants 684
Accruals concept 685
Grants in respect of fixed assets 685
Grants in respect of non depreciated assets 686
Revenue related grants 686
Relating the grant to expenditure 686
Relating the grant to an event 686
Relating the grant to other expenditure 687
Grants to reimburse previous expenditure 687
Grants to finance general activities or to provide compensation 687
Grants in forms other than cash 688
Repayment of grants 688
Tax treatment of grants 688
Accounts disclosure 688
Accounting policy 689
Contents xliii
Effect of grants on the results and financial position 689
Other forms of assistance 690
Retention of Title 690
Recommended accounts disclosures 690
Practical difficulties 690
Application in practice 691
CHAPTER 30 PROVISIONS FOR LIABILITIES 693 714
Identifying Provisions 693
Definition of provision 693
Distinction between creditors and provisions 694
Other types of provision 694
Distinction between provisions and contingent liabilities 694
Items commonly treated as provisions for liabilities 695
Recognising Provisions 695
Scope of FRS 12 695
Recognition criteria 696
Present obligation 696
Obligating events 696
Future operating costs 697
Future operating losses 697
Onerous contracts 697
Identity of third parties 698
Future events that create an obligation 698
Probable transfer of economic benefits 699
Reliable estimate 699
Subsequent changes to provisions 699
Recognition of an asset 699
Further examples 700
Measuring Provisions 700
Calculating the best estimate 700
Dealing with uncertainty 701
Adopting a cautious approach 701
Impact of taxation 702
Discounting provisions 702
Unwinding the discount 702
Taking account of future events 702
Expected disposal of assets 703
Expected reimbursement of costs 703
Reimbursement that reduces liability 703
X2|v UK Accounting Practice
Provisions for Restructuring '04
Definition of restructuring 704
When a constructive obligation arises 704
Public announcement of the plan 705
Management decisions 705
Management decision confirming earlier events 706
Costs to be included 706
Provisions on the Sale or Termination of an Operation 706
Consequences of a decision to sell or terminate 706
Entity to be demonstrably committed to the sale or termination 706
Evidence of demonstrable commitment 707
Commitment at the balance sheet date or subsequently? 707
Costs included in the provision 708
Impairment of assets 708
Disclosure in the accounts 708
Accounts Disclosure 708
Principle disclosure requirements 708
What constitutes a class of provision 710
Provisions linked with contingent liabilities 710
Restriction of the disclosures 710
Sale or termination of an operation 710
Utilisation of provisions in subsequent year 710
Pension and Similar Commitments 712
Nature of pension and similar commitments 712
Unfunded schemes 712
Balance sheet presentation 712
Disclosure requirements 713
Pension commitments not provided for 713
CHAPTER 31 DEFERRED TAXATION 715 728
The Nature of Deferred Tax 715
Differences between taxable profit and accounting profit 715
Permanent difference 715
Timing differences 716
Deferred tax 717
Methods of Providing for Deferred Tax 717
Three alternatives 717
How through method 718
Full provision 718
Partial provision 718
Contents xlv
The UK position 718
Methods of computing deferred tax 719
Recognition of Deferred Tax under FRS 19 720
General requirement 720
Capital allowances 720
Non monetary assets 720
Roll over of taxable gain 721
Unremitted earnings 721
Deferred tax assets 721
Factors to be taken into account 722
Subsequent adjustments to a deferred tax asset 722
Measurement of Deferred Tax under FRS 19 723
General requirement 723
Average tax rates 723
Discounting 723
Discounting method 724
Discount rates 724
Presentation of Deferred Tax in Financial Statements 725
Performance statements 725
Balance sheet 725
Offset of debit and credit balances 725
Disclosure of Deferred Tax 726
Performance statements 726
Balance sheet 726
Deferred tax assets 727
Other circumstances 727
Accounting policy 728
CHAPTER 32 SHARE CAPITAL AND RESERVES 729 754
Authorised, Allotted and Called Up Share Capital 729
CA 1985 disclosure requirements 729
Disclosure where shares are not fully paid 730
Different classes of share 730
Accounts disclosure by class of share 732
Example disclosure 732
Disclosure of share issue during the year 733
Share awards to employees 734
Share Premium Account 735
Creation of share premium account 735
Use of the share premium account 735
xjvj UK Accounting Practice
Transfers to and from share premium account 736
Equity and Non Equity Shares 736
Definition of equity share capital under CA 1985 736
Non equity and equity shares under FRS 4 736
Definition of equity under FRS 25 737
Disclosure of equity and non equity shares 738
Accounts attributable to non equity interests 739
Analysis of non equity shareholders' funds 739
Debt or equity? 739
Redeemable Shares 740
General disclosure requirement 740
Accounting for finance costs and dividends 741
Accounting for redemption 741
Convertible Instruments, Share Options and Similar Rights 741
Convertible Debt 741
Warrants 742
Composite transactions 742
Exercise of warrant 743
Lapse of warrant 743
Disclosure requirements 743
Share options and similar rights 744
Transactions in Own Shares 744
Holding of own shares 744
Shares held by an ESOP trust 745
Expected Future Changes in respect of Share Capital 745
FRED 33 'Financial Instruments: Disclosures' 745
Revaluation Reserve 746
Use of the alternative accounting rules 746
Surplus or deficit on initial revaluation 746
Debit balance on revaluation reserve 747
Impact of FRS 11 747
Impairment of previously revalued assets 748
Movements on the revaluation reserve 748
Transfer in respect of depreciation on revalued assets 748
Transfer on disposal of a revalued asset 749
Accounts disclosure 749
Tax implications of revaluations 749
Use of the revaluation reserve 749
Other Reserves 75O
Analysis of other reserves 75O
Contents xlvii
Profit and loss account reserve 750
Fair value reserve 751
Disclosure of movements on reserves 752
Other Disclosure Requirements 752
Disclosure of non distributable reserves 752
Dividend arrears 753
CHAPTER 33 COMMITMENTS AND
CONTINGENCIES 755 764
Contingent Liabilities 755
Definition of contingent liability 755
Distinction between provisions and contingent liabilities 755
Items commonly identified as contingent liabilities 756
Accounting treatment 756
Regular review 756
Joint and several liability 757
Detailed disclosures 757
Provisions linked with contingent liabilities 758
Restriction of the disclosures 758
Example disclosure 758
Contingent Assets 758
Definition of contingent asset 758
Accounting treatment 759
Regular review 759
Detailed disclosures 759
Restriction of the disclosures 759
Guarantees 760
Disclosure under CA 1985 760
Disclosure of amount outstanding and maximum liability 760
Aggregate disclosure 760
Separate disclosure of group items 761
Charge on the company's assets 761
Capital Commitments 761
Disclosure under CA 1985 761
No capital commitments 762
Pension Commitments 762
Disclosure of amounts not provided 762
Leasing Commitments 763
Lessee commitments under finance leases 763
xlviii UK Accountin% Practice
Lessee commitments under operating leases 763
Example 763
CHAPTER 34 EVENTS AFTER THE BALANCE SHEET
DATE AND OTHER DISCLOSURES 765 774
Adjusting Events /0D
Definition of post balance sheet events 765
Definition of adjusting events 765
Examples of adjusting events 766
Events which impact on the use of the going concern concept 767
Non Adjusting Events 767
Definition of non adjusting events 767
Examples of non adjusting events 768
Window dressing 768
Disclosure of Post Balance Sheet Events 769
Details to be disclosed 769
Distinctions between accounting standards and CA1985 770
Locations of the disclosures 770
Date of Approval of Accounts 770
Importance of date of approval of accounts 770
Realisation process 771
Disclosure of the date of approval of the accounts 771
Disclosures in Respect of Parent Undertakings 772
Disclosures required by CA 1985 772
Ultimate parent company/controlling party 772
Segmental Reporting of Net Assets 773
Analysis of net assets 773
Apportionment of operating assets and liabilities 773
link with balance sheet 773
Comparative information 773
Other Balance Sheet Disclosures 773
Financial assistance for the purchase of own shares 773
Dormant companies acting as agents 774
CHAPTER 35 CASH FLOW STATEMENT 775 802
Requirement to Prepare a Cash Flow Statement 775
Nature of the statement 775
Prescribed structure 775
Exemption for small companies 775
Contents xlix
Exemption for subsidiary undertakings 776
Exemption for specialised businesses 776
Statement on availability of exemption 776
No cash flow transactions 777
Structure of a Cash Flow Statement 777
Definitions 777
Standard headings 778
Analysis of each heading 779
Reporting of cash inflows and outflows 779
Gross or net disclosure? 779
Continuing and discontinued operations 780
Exceptional items and cash flows 780
Totals 780
Reconciliations 780
Need to present comparatives 781
Material non cash transactions 781
Illustrative examples 781
Net Cash Flow from Operating Activities 782
Alternative disclosure methods 782
Provisions 782
VAT and similar taxes 782
Returns on Investments and Servicing of Finance 783
Items to be included 783
Interest paid 783
Dividends paid 783
Other finance costs 784
Interest received 784
Dividends received 784
Other Sections of the Statement 784
Joint ventures and associates 784
Taxation 785
Capital expenditure and financial investment 785
Equity dividends paid 786
Management of liquid resources 786
Financing 787
Reconciliation of Operating Profit to Net Cash Flow from Operating
Activities , 788
Items to be shown 788
Debtors and creditors 788
Other common reconciling items 788
I UK Accounting Practice
Reconciliation of Net Cash Flow to Movement in Net Debt 789
Purpose of the reconciliation 789
Definition of net debt 789
Analysis of changes in net debt 789
Foreign Currency Translation 790
Exchange differences 790
Settled transactions relating to operating activities 790
Unsettled transactions relating to operating activities 790
Interest on foreign currency borrowings 790
liquid resources, financial items and cash 791
Hedging transactions 791
Appendix 792
Worked example of a cash flow statement 792
Cash Flow Statement Working Sheet 797
Notes to the cash flow statement 799
Additional working notes 801
CHAPTER 36 OTHER STATEMENTS 803 818
Statement of Total Recognised Gains and Losses 803
Nature and purpose of the statement 803
Requirement to prepare 803
Main items 804
Profit for the financial year 804
Gains and losses 804
Goodwill 805
Gains and losses on revalued fixed assets 805
Impairment of fixed assets and goodwill 805
Taxation 806
Share issue costs 806
Amounts attributable to different classes of shareholder 807
Worked example 807
Comparative figures 807
Prior period adjustments 808
likely future developments 808
Reconciliation of Movements in Shareholders' Funds 809
Changes in shareholders' funds 809
Presentation gO9
Negative statement 809
Reconciling items 810
Other changes in shareholders' funds 810
Shares issued under employee share schemes 811
Contents li
Worked example 811
Comparative figures 812
Prior period adjustments 812
Likely future developments 813
Note of Historical Cost Profits and Losses 814
Nature and purpose of the note 814
Detailed disclosures 814
Including fixed assets at valuation 815
Profits and losses on disposal of assets 815
Negative statement 815
Worked example 816
Comparative figures 817
Prior period adjustments 817
Likely future developments 817
CHAPTER 37 DIRECTORS' LOANS AND OTHER
TRANSACTIONS 819 848
Loans and Related Arrangements 819
General prohibition on loans to directors 819
Definition of loan 819
Definition of director 820
Exception for small loans 821
Loan from a holding company to a director of a subsidiary 823
Other Transactions 823
Additional prohibitions for relevant companies 823
Definition of relevant company 824
Permitted transactions for non relevant companies 824
Individuals connected with a director 825
Body corporate connected with a director 825
Other persons connected with a director 827
Complex rules 827
Inter group loans 830
Quasi loans 830
Credit transactions 832
Funding of directors' expenditure 833
Directors' business expenditure 833
Transactions between a subsidiary and its holding company 834
Other prohibited transactions and arrangements 834
Value of transactions and arrangements 835
Disclosure of Loans and Similar Transactions with Directors 835
General disclosure requirement 835
]£ UK Accounting Practice
Individuals covered and details to be disclosed 836
Transactions prior to appointment as director 836
Transactions with a subsidiary company 836
Details required for all loans and similar transactions 837
Additional details in respect of loans 837
Additional details in respect of guarantees and securities 838
Additional details in respect of quasi loans and credit transactions 838
General exemptions from disclosure 838
De minimis limit for credit transactions 839
Loans and quasi loans between group companies 839
Directors' duty to disclose 840
Company procedures 840
Audit requirements 840
Loans to officers of the company 840
Disclosure of Other Transactions with Directors 842
Legal requirements on disclosure 842
Purpose of the disclosures 842
Material interest 843
Disclosure under FRS 8 843
Director's duty to disclose 843
Board's opinion on materiality 844
Interpretation of 'material' 844
FRS 8 approach to materiality 845
Legal advice 845
Value and amount outstanding 845
Principal terms 845
FRS 8 disclosure requirements 846
Audit requirements 846
Exceptions to the general disclosure requirement 846
Inter group transactions in the ordinary course of business 847
De minimis exception 848
CHAPTER 38 DIRECTORS7 REPORT 849 878
Requirement to Prepare a Directors' Report 849
Company law requirements 849
Detailed contents of the report 849
Additional disclosures in respect of shares 852
Consistency with accounts 853
Business Review 853
Accounting periods before 1 April 2005 853
Changes from 1 April 2005 854
Contents liii
RS 1 'Operating and Financial Review' 855
Proposed Dividend 855
Consistency with accounts 855
Normal practice on disclosure 855
Principle Activities 856
Statement on activities 856
Consistency with accounts 856
Likely Future Developments 856
Form and contents 856
Guidance on wording 857
Research and Development 858
Nature of disclosures 858
Consistency with accounts 858
Form and content 858
Post Balance Sheet Events 859
Interaction with accounting standards 859
Disclosure of adjusting events 859
Disclosure of non adjusting events 860
Fixed Assets 860
Market value of land and buildings 860
Need for additional information 860
Directors and their Interests 861
Names of directors 861
Directors' share interests 861
Definition of 'interest' 861
Interests at the end of the year 862
Interests at the beginning of the year 862
Interests held by directors' immediate family 863
Change of holding company during the year 863
Beneficial and non beneficial interests 863
Options to subscribe for shares or debentures 864
Cumulative details of options held 864
Directors of wholly owned subsidiaries 865
Political Donations and Expenditure 865
Political Parties, Elections and Referendums Act 2000 865
Relevant date 866
Definition of EU political expenditure 866
Definition of donations 866
Gifts 867
i j:„ UK Accounting Practice
Sponsorship Loans, services and facilities provided 868
Contributions to non EU political parties 868
Charitable Donations 868
Donations for charitable purposes 868
Payments via a charitable trust 869
Employee Disclosures 869
Scope of the disclosure requirements 869
Disabled persons 870
Employee involvement 870
Payment of Creditors 871
Scope of the disclosure requirements 871
Detailed disclosures 871
Statement of Directors' Responsibilities 872
Requirement to include a statement 872
Matters to be covered 872
Example wording 873
Audit exemption 874
Specialised businesses and unincorporated entities 875
Financial Risk 875
Disclosures required from 1 January 2005 875
Use of financial instruments 876
Interest rate risk 876
Credit risk 876
Cash flow and liquidity 877
Disclosure of Information to Auditors 877
Changes to auditors' rights to information 877
Requirement for formal statement by directors 878
CHAPTER 39 OPERATING AND FINANCIAL
REVIEW 879 890
The Statutory Operating and Financial Review 879
Development of OFR reporting 879
Introduction of statutory OFRs 879
Requirement to prepare an OFR 880
Approval, signature and issue of the OFR 881
Objective of a statutory OFR 881
Required contents 881
Key performance indicators , 882
Contents lv
Disclosure exemption 882
Compliance with reporting standards 882
Audit requirements 883
Defective OFRs 883
The OFR and summary financial statements 884
OFR Reporting Standards 884
Legal provisions 884
RS 1 'Operating and Financial Review' 884
Scope and effective date of RS 1 885
Presentation of OFR analysis 885
Other key principles 886
Detailed disclosures 886
Key performance indicators 887
DTI Guidance for Directors 888
Development of guidance for directors 888
Scope of OFR reporting 889
Assessing materiality 889
Process for OFR reporting 889
CHAPTER 40 CORPORATE GOVERNANCE
DISCLOSURES 891 924
Background to UK Corporate Governance Reporting 891
The Cadbury Code of Best Practice 891
Openness, integrity and accountability 892
Greenbury Code of Best Practice 892
The Combined Code 893
Ongoing monitoring and review 894
Reporting on Compliance with the Combined Code 895
Requirement for compliance statement 895
The role of the auditors 895
Form of auditors' report 897
Structure of the Combined Code 898
Directors 898
Directors' remuneration 899
Accountability and audit 900
Relations with shareholders 900
Institutional shareholders 901
Reporting on Going Concern 902
Reporting under the Combined Code 902
Definition of going concern 902
jvj UK Accounting Practice
Foreseeable future 903
Procedures to be carried out ^04
Factors to consider 905
Other factors 908
Overall assessment and conclusion 908
Content of disclosure 909
Location of the directors' statement 910
Application of the guidance to groups 911
Interim reporting 911
Reporting on Internal Control 911
Reporting under the Combined Code 911
Turnbull Guidance 912
Internal control and SEC reporting 913
Importance of internal control and risk management 914
Application to groups 914
Responsibility for maintaining a system of internal control 915
Definition of internal control 915
Elements of a sound system of internal control 916
Control environment 916
Reviewing the effectiveness of internal control 917
The process of the review 917
The annual statement on internal control 918
Review of the need for an internal audit function 919
Role of the external auditors 919
Appendix: Checklist of Combined Code Reporting Requirements 920
CHAPTER 41 INTERIM REPORTS 925 934
Preparation of an Interim Report 925
Requirement to prepare an interim statement 925
The value of interim reports 925
Timing and distribution of interim reports 926
Review by the auditors 926
Contents of an Interim Report 927
The ASB Statement 'Interim Reports' 927
Recommended contents of an interim report 927
Other disclosures 929
Accounting policies 929
Earnings per share 930
Basis of presentation of financial information 930
Taxation , 931
Other presentation issues , , 931
Contents Mi
Comparative figures 931
Statutory disclosure 932
Management Commentary 932
Focus of the report 932
Balanced view 932
Additional guidance 933
CHAPTER4^FRELIMINAR^ANNOUNCEMENTS 935 944
Preparation of a Preliminary Announcement . 935
Requirement to prepare a preliminary announcement 935
Timing of preliminary announcement 935
Auditors' agreement to issue of the preliminary announcement 936
Procedures to help ensure reliability 936
Distribution of preliminary announcement 937
Contents of a Preliminary Announcement 937
The ASB Statement 'Preliminary announcements' 937
Recommended contents of a preliminary announcement 937
Other disclosures 939
Accounting policies 940
Earnings per share 940
Comparative figures 940
Statutory disclosure 940
Management Commentary 941
Focus of the report 941
Balanced view 941
Additional guidance 942
Inclusion of Pro Forma Information 942
Guidance for companies 942
APB guidance for auditors 942
CHAPTER43SUMMARYFINANCIAL
STATEMENTS • ¦ • 945 956
Process for Issuing Summary Financial Statements 945
Background 945
Detailed requirements 945
Legal position 946
The right of entitled persons to receive full accounts 946
Consultation with entitled persons 946
Alternative method of consultation 947
Revision of summary financial statements 948
lv[[[ UK Accounting Practice
Form and Content of Summary Financial Statements 948
Requirements of the Regulations 948
Other statements and disclosures 950
Implications of wider publications 950
Audit requirements 951
Proposals for Change 951
DTI consultation 951
Impact of recent legislative changes 952
Audit requirement 952
Advantages and Disadvantages Of Summary Financial Statements 953
The purpose of summary financial statements 953
The company view 953
The shareholder view 954
Alternative methods of preparation 954
Usual contents of summary financial statements 955
CHAPTER 44 REQUIREMENT FOR GROUP
ACCOUNTS 957 986
Form and Content of Group Accounts 957
Requirement to prepare group accounts 957
Requirements of FRS 2 958
True and fair view 958
Standard formats 958
Additional profit and loss accounts items 959
Additional disclosures under FRS 3 960
Disclosures in respect of directors 961
Auditors' remuneration 961
Directors' Report and Operating and Financial Review (OFR) 961
Exemptions from the Preparation of Group Accounts 962
Small companies and groups 962
Medium sized companies and groups 962
Parent company which is part of a larger group 962
Exemptions under FRS 2 965
Exclusion of Subsidiaries from the Consolidation 966
Legal provisions on exclusion 966
Exclusions under FRS 2 966
Severe restrictions hindering parent's rights 967
Interest held exclusively with a view to subsequent resale 968
Dissimilar activities 970
Exclusion of quasi subsidiaries from the consolidation 970
Contents lix
Disclosure requirements 971
Likely future developments 971
Accounting Dates of Subsidiaries 972
Requirement for consistency with parent company 972
Different accounting dates 972
Change of subsidiary's accounting date 973
Parent Company Profit and Loss Account 975
Exemption from publication 975
Requirement to prepare a profit and loss account 975
Appendix: Standard Formats for Group Accounts 977
CHAPTER 45 SUBSIDIARIES .' 987 998
Identification of Subsidiaries 987
Legal definition of parent undertaking and subsidiary undertaking 987
Definition of subsidiary undertaking under FRS 2 988
Definition of holding company and subsidiary 988
Dominant influence 989
Actual exercise of dominant influence 990
Managed on a unified basis 990
Control and control contracts 991
Participating interest 991
Definition of 'member' 991
Quasi subsidiaries 992
Disclosures in respect of subsidiaries 992
General Interpretation of 'Rights' 992
Rights exercisable only in certain circumstances 992
Rights held by trustees and nominees 993
Rights held by way of security 993
Shares held by a group undertaking 993
Rights attributed to a parent undertaking or holding company 994
Voting rights 994
Right to appoint and remove directors 995
Accounting for Quasi subsidiaries 995
Impact of FRS 5 995
Definition of quasi subsidiary 996
Benefits and risks 996
Inclusion in group accounts 996
Exclusion from consolidation 996
Reporting entity that does not prepare group accounts 997
Linked presentation 997
k^ UK Accounting Practice
Additional disclosures in the accounts 997
CHAPTER 46 ASSOCIATES AND JOINT VENTURES . 999 1024
Identification of Associates 999
Introduction 999
Treatment of associates and joint ventures in group accounts 999
Definition of associate 1000
Participating interest 1000
Exercise of significant influence 1002
The Equity Method of Accounting 1004
Definition in FRS 9 1004
Investor's share of associates' operating results 1005
Amortisation or write down of goodwill 1006
Investor's share of items shown below operating profit 1006
Investor's share of interest 1006
Investor's share of taxation 1007
Investor's share of extraordinary items 1007
Dividends and retained profit or loss for the year 1007
Additional disclosure of turnover and operating profit 1007
Statement of total recognised gains and losses 1007
Balance sheet presentation 1008
Cash flow statement 1009
Elimination of profits and losses on transactions with associates 1009
Consistency of accounting policies 1009
Limited access to information 1009
Aggregation of group interest 1009
Associate with subsidiaries 1010
Impact of options, convertibles and non equity shares 1010
Impairment of goodwill attributable to an associate 1010
Treatment of losses and net liabilities 1010
Additional liabilities in the case of unincorporated associates 1011
Accounting for Joint Ventures 1011
Definition of joint venture 1011
Right of veto 1011
Long term factors 1012
Joint venture where an investor does not share control 1012
Joint venture that qualifies as a subsidiary of a participant 1012
Structure with the form but not the substance of a joint venture 1012
Gross equity method of accounting , 1013
Supplemental disclosure in certain circumstances 1013
Columnar presentation „ „ 1013
Contents lxi
Changes in Shareholdings and Status 1014
Date of becoming or ceasing to be an associate or joint venture 1014
Profit or loss on disposal of a joint venture or associate 1015
Acquisition or disposal in stages 1015
Transition from joint venture or associate to investment 1015
Existing investment that becomes an associate 1015
Subsidiary that becomes an associate 1016
Exchange transactions 1017
Accounting Date of Associates and Joint Ventures 1018
Amounts to be consolidated 1018
Potential release of price sensitive information 1018
Changes in the intervening period 1018
Use of management accounts 1018
Accounts Disclosures 1018
Requirements under CA 1985 1018
Principal associates and joint ventures 1019
Notes on contingent liabilities and commitments 1019
Significant restrictions on ability to distribute reserves 1020
Amounts owed to or by associates or joint ventures 1020
Significant associates and joint ventures 1020
Segmental disclosure under SSAP 25 1021
Why an investment has not been treated as an associate 1022
Joint Arrangements that are not Entities 1022
Definition of an entity 1022
Definition of joint arrangement that is not an entity 1023
Joint arrangement to carry out a single project 1023
Accounting treatment under FRS 9 1023
Changes in the nature of the arrangement 1024
CHAPTER 47 CONSOLIDATION 1025 1040
The Consolidation Process 1025
line by line aggregation 1025
Full consolidation 1026
Use of group consolidation packages 1026
Accounting date of subsidiary undertakings 1027
Overseas subsidiary undertakings 1027
Disclosure of accounting principles in respect of consolidation 1027
Uniform accounting policies 1027
Consolidation adjustments 1028
Use of different accounting policies 1028
Disclosure of accounting policies 1029
Ixji UK Accounting Practice
Restrictions on distributions 1029
Elimination of Group Balances and Transactions 1029
Amounts due to and from group companies 1029
Elimination of group transactions 1030
Transfers of fixed assets 1030
The elimination of intra group profits and losses 1031
Other related adjustments 1032
Full elimination of profit or loss 1032
Impact only where assets are still held at year end 1033
Subsidiaries excluded from the consolidation 1033
Accounting for Minority Interests 1033
Shares held outside the group 1033
Consolidated profit and loss account 1033
Impact of dividend paid by subsidiary 1035
Analysis of profit and loss account adjustment 1036
Consolidated balance sheet 1037
Proposed dividends 1038
Minority interest in net liabilities 1038
Significant minority interest 1039
Analysis of minority interests 1039
Shares that create a liability for the group as a whole 1039
CHAPTER 48 CONSOLIDATION GOODWILL 1041 1058
Calculating Goodwill 1041
The nature of goodwill 1041
Recognition of goodwill 1041
Acquisition or merger accounting 1042
The value of purchased goodwill 1042
Partly owned subsidiaries 1043
Separable intangible assets 1044
Negative goodwill 1044
Accounting for Consolidation Goodwill 1045
Creation of goodwill in the group accounts 1045
Minority interests 1046
Amortisation 1048
Determining the useful economic life of goodwill 1049
Need to establish useful economic life 1049
Durability and continued measurement 1050
Method of amortisation 1050
Review of economic life 1050
Requirement for impairment reviews 1051
Contents lxiii
Procedures for impairment reviews 1051
Impact of impairment losses 1051
Restoration of impairment losses 1052
Accounting for negative goodwill 1052
Transitional arrangements on implementing FRS 10 1053
Goodwill reinstated in implementing FRS 10 1053
Goodwill not reinstated on implementing FRS 10 1053
Accounting for goodwill on disposals 1054
Potential future changes 1055
Accounts Disclosures in respect of Goodwill 1056
Disclosures required by the Act 1056
Detailed disclosures under FRS 10 1056
Accounting policy 1057
Impact of goodwill on distributable reserves 1058
CHAPTER 49 ACQUISITIONS, DISPOSALS AND
MERGERS 1059 1096
Acquisition and Merger Accounting 1059
Prevalence of acquisition accounting 1059
Acquisition accounting 1059
Company law conditions for the use of merger accounting 1060
FRS 6 definitions of merger and acquisition 1060
Merger method of accounting 1061
Disclosure of impact on group accounts 1062
Accounts disclosure in respect of disposals 1063
Exemptions from disclosure 1063
Date of Acquisition or Disposal 1064
Significance of date of acquisition or disposal 1064
Date of acquisition 1064
Date on which consideration passes 1064
Date of disposal 1064
Deemed disposals 1065
Gain or loss on disposal 1065
Measuring Fair Values of Assets and Liabilities 1066
Principles of recognition and measurement 1066
Prohibition on provisions for future loss and reorganisation costs 1067
Provisions raised during the negotiation period 1068
Identifiable assets and liabilities 1068
Business closures 1068
Fair value 1068
Market price 1069
JxJV UK Accounting Practice
Recoverable amount 1069
Tangible fixed assets 1069
Intangible fixed assets 1069
Stocks and work in progress 1070
Long term contracts 1071
Quoted investments 1071
Monetary assets and liabilities 1071
Contingencies 1072
Pensions and other post retirement benefits 1072
Deferred taxation 1073
Business sold or held exclusively with a view to resale 1073
Adjustments in subsequent years 1074
Acquisition of a Lloyd's Business 1074
Potential future changes 1074
Fair Value of Acquisition Costs 1075
Cost of acquisition 1075
Purchase consideration 1075
Cash and other monetary items 1075
Capital instruments and non monetary items 1076
Contingent consideration 1076
Contingent consideration in the form of shares 1076
Contingent consideration in the form of either cash or shares 1077
Vendor option to require payment in either cash or shares 1077
Acquisition expenses 1077
Piecemeal Acquisitions and Disposals 1077
Accounting for an acquisition in stages 1077
Associate that becomes a subsidiary 1078
Previous investment written down 1078
Increasing the interest in an existing subsidiary 1078
FRRP case on acquisition of minority interest 1079
Reducing the interest in an existing subsidiary 1081
Exchange Transactions 1081
Exchange of business for equity 1081
Analysis of the transaction 1082
Element of the business owned throughout 1082
Share of net assets acquired 1082
Recognition of gain or loss on disposal 1082
Artificial transactions 1083
Acquisitions and Disposals in a Cash Flow Statement 1083
Amounts included in the cash flow statement on acquisition 1083
Share issues 1083
Contents lxv
Amounts included in the cash flow statement in respect of
disposals 1084
Cash flows of subsidiary undertakings acquired and disposed of 1084
Material effect on standard heading in cash flow statement 1085
Effects of acquisition or disposal 1085
Merger Transactions 1086
Criteria for a merger 1086
Portrayal of business combination 1087
Management structure 1088
Relative size of the parties 1088
Non equity consideration 1088
Retention of partial interest only 1089
Merger accounting 1089
Elimination of investment in subsidiary 1089
Share premium or capital redemption reserve of the subsidiary 1090
Merger relief 1090
Acquisition of 90% holding in another company 1090
Accounting treatment of premium where merger relief applies 1091
Acquisition of non equity shares 1091
Piecemeal acquisitions 1092
Appendix 1093
A — Disclosures in the case of a combination accounted for as an
acquisition 1093
B Disclosures in the case of a combination accounted for as a
merger 1095
CHAPTER 50 ACCOUNTING FOR FOREIGN
OPERATIONS 1097 1110
Background to Accounting for Foreign Operations 1097
Current UK accounting requirements 1097
Requirement for translation 1098
Local currency 1098
Relationship between the investor and the foreign entity 1099
Consistency of accounting 1099
Translating cash flows 1100
Use of the Temporal Method 1100
When the temporal method should be applied 1100
Applying the temporal method 1101
Use of the Closing Rate/Net Investment Method 1101
When the closing rate/net investment method should be applied 1101
lxvi UK Accounting Practice
Translation of the balance sheet 1102
Translation of the profit and loss account 1103
Translation of the cash flow statement 1103
Accounting for exchange differences 1104
Goodwill 1105
Foreign Equity Investments 1105
Financing arrangements for foreign equity investments 1105
Conditions 1106
Disclosure of adoption 1106
Other parent company investments 1106
Accounts Disclosures 1107
Detailed disclosures 1107
Accounting policy 1107
Reserves note 1108
Dealing with Hyperinfktionary Economies 1108
The effects of hyperinflation 1108
The need for adjustment 1109
Method of adjustment 1109 |
| any_adam_object | 1 |
| any_adam_object_boolean | 1 |
| author | Morris, Glynis D. |
| author_facet | Morris, Glynis D. |
| author_role | aut |
| author_sort | Morris, Glynis D. |
| author_variant | g d m gd gdm |
| building | Verbundindex |
| bvnumber | BV021458289 |
| ctrlnum | (DE-599)BVBBV021458289 |
| format | Book |
| fullrecord | <?xml version="1.0" encoding="UTF-8"?><collection xmlns="http://www.loc.gov/MARC21/slim"><record><leader>00924nam a2200253 c 4500</leader><controlfield tag="001">BV021458289</controlfield><controlfield tag="003">DE-604</controlfield><controlfield tag="005">20051125 </controlfield><controlfield tag="007">t</controlfield><controlfield tag="008">041006s2005 d||| |||| 00||| eng d</controlfield><datafield tag="020" ind1=" " ind2=" "><subfield code="a">0754528014</subfield><subfield code="9">0-7545-2801-4</subfield></datafield><datafield tag="035" ind1=" " ind2=" "><subfield code="a">(DE-599)BVBBV021458289</subfield></datafield><datafield tag="040" ind1=" " ind2=" "><subfield code="a">DE-604</subfield><subfield code="b">ger</subfield><subfield code="e">rakwb</subfield></datafield><datafield tag="041" ind1="0" ind2=" "><subfield code="a">eng</subfield></datafield><datafield tag="049" ind1=" " ind2=" "><subfield code="a">DE-M382</subfield></datafield><datafield tag="100" ind1="1" ind2=" "><subfield code="a">Morris, Glynis D.</subfield><subfield code="e">Verfasser</subfield><subfield code="4">aut</subfield></datafield><datafield tag="245" ind1="1" ind2="0"><subfield code="a">UK accounting practice</subfield><subfield code="c">Glynis Morris</subfield></datafield><datafield tag="264" ind1=" " ind2="1"><subfield code="a">London [u.a.]</subfield><subfield code="b">LexisNexis Butterworths</subfield><subfield code="c">2005</subfield></datafield><datafield tag="300" ind1=" " ind2=" "><subfield code="a">LXVI, 1156 S.</subfield><subfield code="b">graph. Darst.</subfield></datafield><datafield tag="336" ind1=" " ind2=" "><subfield code="b">txt</subfield><subfield code="2">rdacontent</subfield></datafield><datafield tag="337" ind1=" " ind2=" "><subfield code="b">n</subfield><subfield code="2">rdamedia</subfield></datafield><datafield tag="338" ind1=" " ind2=" "><subfield code="b">nc</subfield><subfield code="2">rdacarrier</subfield></datafield><datafield tag="856" ind1="4" ind2="2"><subfield code="m">HBZ Datenaustausch</subfield><subfield code="q">application/pdf</subfield><subfield code="u">http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=014678362&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA</subfield><subfield code="3">Inhaltsverzeichnis</subfield></datafield><datafield tag="999" ind1=" " ind2=" "><subfield code="a">oai:aleph.bib-bvb.de:BVB01-014678362</subfield></datafield></record></collection> |
| id | DE-604.BV021458289 |
| illustrated | Illustrated |
| index_date | 2024-07-02T14:06:52Z |
| indexdate | 2024-07-09T20:36:25Z |
| institution | BVB |
| isbn | 0754528014 |
| language | English |
| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-014678362 |
| open_access_boolean | |
| owner | DE-M382 |
| owner_facet | DE-M382 |
| physical | LXVI, 1156 S. graph. Darst. |
| publishDate | 2005 |
| publishDateSearch | 2005 |
| publishDateSort | 2005 |
| publisher | LexisNexis Butterworths |
| record_format | marc |
| spelling | Morris, Glynis D. Verfasser aut UK accounting practice Glynis Morris London [u.a.] LexisNexis Butterworths 2005 LXVI, 1156 S. graph. Darst. txt rdacontent n rdamedia nc rdacarrier HBZ Datenaustausch application/pdf http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=014678362&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA Inhaltsverzeichnis |
| spellingShingle | Morris, Glynis D. UK accounting practice |
| title | UK accounting practice |
| title_auth | UK accounting practice |
| title_exact_search | UK accounting practice |
| title_exact_search_txtP | UK accounting practice |
| title_full | UK accounting practice Glynis Morris |
| title_fullStr | UK accounting practice Glynis Morris |
| title_full_unstemmed | UK accounting practice Glynis Morris |
| title_short | UK accounting practice |
| title_sort | uk accounting practice |
| url | http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=014678362&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA |
| work_keys_str_mv | AT morrisglynisd ukaccountingpractice |