J Q OOO####I i ' WWc #OOO####CI # «0O O0OQi###t i oi oo ###0 # i CRAIG DEEGAN / GRANT SAMKIN RMIT University University of Waikato NEW ZEALAND FINANCIAL ACCOUNTING The McGraw-Hill Companieii Sydney New York San Francisco Auckland Bangkok Bogota Caracas Hong Kong Kuala Lumpur Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Taipei Toronto
CONTENTS Acknowledgments xix How to use this book XXIV About the authors xx E-student xxvi Preface xxii E-instructor xxvii PART 1 CHAPTER 1 THE NEW ZEALAND'ACCOUNTING ENVIRONMEIsIfl AN OVERVIEW OF THE NEW ZEALAND EXTERNAL REPORTING ENVIRONMENT 2 INTRODUCTION TO FINANCIAL ACCOUNTING 3 1.1 Users' demand for general purpose financial statements 3. 1.2 Sources of external financial reporting regulation 4 1.3 New Zealand's adoption of accounting standards issued by the International Accounting Standards Board 1.4 Structure of the International Accounting Standards Board 1.5 International cultural differences and the harmonisation of accounting standards 19 27 29 34 35 35 35 1.6 The use and role of audit reports 30 36 1.7 All this regulation is it really necessary? 32 40 CHAPTER 2 THE CONCEPTUAL FRAMEWORK OF ACCOUNTING AND ITS RELEVANCE TO FINANCIAL REPORTING 42 42 INTRODUCTION TO THE CONCEPTUAL FRAMEWORK OF ACCOUNTING AND ITS RELEVANCE TO FINANCIAL REPORTING 43 2.1 What is a conceptual framework? 43 2.2 The benefits of a conceptual framework 44 2.3 Structure of the New Zealand Framework 45 2.4 Current initiatives to develop a revised conceptual framework 47 68 2.5 Building blocks of a conceptual framework 48 68 2.6 Measurement principles 62 68 2.7 Implications of convergence with IASB standards 63 69 2.8 A critical review of conceptual frameworks 64 69 2.9 The conceptual framework as a normative theory of accounting 67 71 VI
PART 2 THEORIES OF ACCOUNTING CHAPTER 3 AN OVERVIEW OF THEORIES OF ACCOUNTING 74 INTRODUCTION TO ACCOUNTING THEORY 74 75 3.1 Why discuss theories in a book such as this? 75 3.2 Theory definition 76 3.3 Positive Accounting Theory 77 3.4 Accounting policy selection and disclosure 91 115 3.5 Accounting policy choice and 'creative accounting' 92 116 3.6 Some criticisms of Positive Accounting Theory 93 117 3.7 Normative accounting theories 95 117 3.8 Systems-oriented theories to explain accounting practice 99 117 3.9 Theories that seek to explain why regulation is introduced 109 119 3.10 Critical theory 114 120 PART 3 ACCOUNTING FOR ASSETS CHAPTER 4 AN OVERVIEW OF ACCOUNTING FOR ASSETS 126 INTRODUCTION TO ACCOUNTING FOR ASSETS 126 127 4.1 Definition of assets 127 4.2 General classification of assets 133 4.3 How to present a statement of financial position 134 4.4 Determination of future economic benefits 139 4.5 Acquisition cost of assets 140 4.6 Accounting for property, plant and equipment an introduction 141 4.7 Accounting for donated or subsidised assets 149 4.8 Exchange of assets 150 4.9 Expenditure maintaining the useful life of items of property, plant and equipment 4.10 Post-acquisition expenditure on non-current assets 4.11 Capitalisation of interest 4.12 Discovery of errors in prior period financial statements 4.13 Possible changes in the requirements pertaining to financial statement presentation 152 152 153 157 158 160 161 161 162 163 166 VII
CONTENTS CONTINUED CHAPTER 5 DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT 168 INTRODUCTION TO ACCOUNTING FOR DEPRECIATION 168 169 5.1 Depreciable amount (base) of an asset 170 5.2 Determining useful life 171 5.3 Methods of cost apportionment 172 5.4 When to start depreciating assets 175 5.5 Revision of depreciation rate and depreciation method 176 5.6 Land and buildings 5.7 Modifying existing items of property, plant and equipment 5.8 Disposition of depreciable assets 5.9 Contractual implications of building depreciation 5.10 Depreciation as a process of allocating the cost of an asset over its useful life: further considerations 5.11 Disclosure requirements 176 179 179 181 182 183 184 184 185 185 186 188 CHAPTER 6 REVALUATION AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS 190 INTRODUCTION TO THE REVALUATION AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS 6.1 Measuring property, plant and equipment at cost or at fair value 191 6.2 The use of fair values 6.3 Revaluation increments 6.4 Treatment of balances of accumulated depreciation upon revaluation 6.5 Revaluation decrements 6.6 Reversal of revaluation decrements and increments 6.7 Accounting for gain or loss on the disposal of a revalued non-current asset 6.8 Impairment of assets 6.9 Determining the recoverable amount 6.10 Reversal of impairment losses 6.11 Offsetting increments/decrements within a class of non-current assets 6.12 Change in measurement base 6.13 Investment properties 6.14 Economic consequences of asset revaluations 6.15 Disclosure requirements 190 191 192 193 194 196 196 197 200 202 208 210 210 210 211 212 v 217 217 218 219 220 221 VIII
CHAPTER 7 ACCOUNTING FOR INVENTORIES 222 INTRODUCTION TO ACCOUNTING FOR INVENTORIES 222 223 238 7.1 Definition of inventory 223 238 7.2 The general basis of inventory measurement 224 238 7.3 Inventory cost-flow assumptions 230 239 7.4 Reversal of previous inventory write-downs 236 240 7.5 Disclosure requirements 237 243 CHAPTER 8 ACCOUNTING FOR INTANGIBLES 244 INTRODUCTION TO ACCOUNTING FOR INTANGIBLES 244 245 8.1 Which intangible assets may be recognised and included in the statement of financial position? 248 8.2 What is the initial basis of measurement of intangible assets? 248 8.3 General amortisation requirements for intangible assets 8.4 Revaluation of intangible assets 8.5 Gain or loss on disposal of intangible assets 8.6 Required disclosures in relation to intangible assets 8.7 Research and development 8.8 Accounting for goodwill 8.9 Are the new approaches to accounting for intangibles an improvement? 250 253 254 254 255 264 979 274 275 275 276 278 284 CHAPTER 9 ACCOUNTING FOR HERITAGE AND BIOLOGICAL ASSETS 286 286 318 INTRODUCTION TO ACCOUNTING FOR HERITAGE AND BIOLOGICAL ASSETS 9.1 Accounting for heritage assets 9.2 Accounting for biological assets 287 287 303 319 319 319 319 320 321 IX
CONTENTS CONTINUED CHAPTER 10 ACCOUNTING FOR LIABILITIES, PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 324 INTRODUCTION TO ACCOUNTING FOR LIABILITIES 10.1 Classification of liabilities as current or non-current 10.2 Some implications of reporting liabilities 10.3 Debt equity debate 10.4 Accounting for debentures 10.5 Accounting for provisions, contingent liabilities and contingent assets 10.6 Accounting for contingent liabilities 10.7 Contingent assets 10.8 Hybrid securities 324 325 326 327 329 331 336 346 352 353 355 356 356 357 361 366 CHAPTER 11 ACCOUNTING FOR LEASES 368 INTRODUCTION TO ACCOUNTING FOR LEASES 11.1 Interest rate for determining the present value of the minimum lease payments 11.2 Lessee accounting for finance leases 368 369 374 377 11.3 Lessee accounting for operating leases 11.4 Lessee accounting for sale and leaseback transactions 11.5 Lessee disclosure requirements 11.6 Accounting by lessors 11.7 Lessor accounting for direct-financing leases 381 382 386 392 393 11.8 Lessor accounting for lessors that are manufacturers or dealers of the leased asset 11.9 Lessor accounting for operating leases 11.10 Leases involving land and buildings 11.11 Lessee accounting for lease incentives under a non-cancellable operating lease 11.12 Future changes in accounting for leases 11.13 Implications for accounting-based contracts 396 400 400 402 404 408 409 410 410 411 414 416
CHAPTER 12 ACCOUNTING FOR EMPLOYEE ENTITLEMENTS 418 418 INTRODUCTION TO ACCOUNTING FOR EMPLOYEE ENTITLEMENTS 419 12.1 Overview of employee entitlements 419 12.2 Categories of employee benefits 421 12.3 Accounting for employee benefits 421 12.4 Employees' accrued employee benefits and corporate collapses 434 435 436 436 437 438 440 CHAPTER 13 CAPITAL AND RESERVES 442 442 INTRODUCTION TO ACCOUNTING FOR CAPITAL AND RESERVES 443 13.1 Different classes of shares 444 13.2 Accounting for the issue of capital 445 13.3 Accounting for distributions 450 466 13.4 Redemption of shares 452 466 13.5 Share repurchases 453 467 13.6 The solvency test 459 467 13.7 Forfeited shares 461 468 13.8 Share splits and bonus issues 462 468 13.9 Required disclosures for equity 463 470 CHAPTER 14 ACCOUNTING FOR SHARE-BASED PAYMENTS 472 472 INTRODUCTION TO ACCOUNTING FOR SHARE-BASED PAYMENT TRANSACTIONS 473 14.1 Background to the release of NZ IFRS 2 473 14.2 Overview of the requirements of NZ IFRS 2 14.3 Equity-settled share-based payment transactions 14.4 Cash-settled share-based payment transactions 14.5 Share-based payment transactions with cash alternatives 14.6 Some possible economic implications of NZ IFRS 2 14.7 Disclosure requirements 475 477 489 492 495 497 502 502 502 503 503 XI
CONTENTS CONTINUED CHAPTER 15 ACCOUNTING FOR FINANCIAL INSTRUMENTS 506 INTRODUCTION TO ACCOUNTING FOR FINANCIAL INSTRUMENTS 15.1 Financial instruments defined 15.2 Set-off of financial assets and financial liabilities 15.3 Debt versus equity components of financial instruments 15.4 Recognition and measurement of financial instruments 15.5 Derivative financial instruments 15.6 Disclosure requirements 506 507 507 512 515 520 528 558 Reference 559 560 560 561 563 565 CHAPTER 16 INCOME AND REVENUE RECOGNITION ISSUES 566 INTRODUCTION TO ACCOUNTING FOR INCOME AND REVENUE 566 567 16.1 Income and revenue recognition 16.2 Accounting for sales with associated conditions 16.3 Interest and dividends 16.4 Unearned revenue 16.5 Customer loyalty programs 16.6 Disclosure requirements 16.7 Accounting for construction contracts 570 575 577 580 580 583 585 Reference 595 596 596 599 601 602 CHAPTER 17 STATEMENT OF COMPREHENSIVE INCOME AND STATEMENT OF CHANGES IN EQUITY 604 INTRODUCTION TO THE STATEMENT OF COMPREHENSIVE INCOME 17.1 Profit and loss disclosure 604 605 607 17.2 Statement of changes in equity 620 17.3 Profit as a guide to an organisation's success 631 17.4 Future changes in the requirements pertaining to how information1 about comprehensive income will be presented 633 635 635 635 635 636 636 640 XII
CHAPTER 18 ACCOUNTING FOR INCOME TAXES 642 642 INTRODUCTION TO ACCOUNTING FOR INCOME TAXES 643 18.1 Balance sheet approach to accounting for tax 643 18.2 Tax base of assets and liabilities: further considerations 650 18.3 Deferred tax assets and deferred tax liabilities 653 18.4 Changes in the tax rates 656 18.5 Unused tax losses 658 18.6 Transfer of tax losses - 660 18.7 Revaluation of assets 662 18.8 Disclosure requirements 670 18.9 Evaluation of the balance sheet approach 673 18.10 Future changes in accounting for taxes 674 675 675 675 676 678 680 683 CHAPTER 19 THE STATEMENT OF CASH FLOWS 686,686 INTRODUCTION TO THE STATEMENT OF CASH FLOWS 687 19.1 Comparison with other financial statements 687 19.2 Defining 'cash' and 'cash equivalents', 690 19.3 Classification of cash flows 692 19.4 Format of statement of cash flows 693 19.5 Calculating cash inflows and outflows 698 19.6 Contractual implications 712 19.7 Potential future changes to the statement of cash flows 713 716 717 717, 722 726 729 CHAPTER 20 EVENTS AFTER THE REPORTING PERIOD INTRODUCTION TO ACCOUNTING FOR EVENTS AFTER THE REPORTING PERIOD 20.1 Events after the reporting period 20.2 Dividends declared after the end of the reporting period 20.3 Going concern assumption 20.4 Disclosure requirements 732 733 734 738 739 739 741 742 742 742 742 743 XIII
CONTENTS CONTINUED CHAPTER 21 SEGMENT REPORTING 746 INTRODUCTION TO SEGMENT REPORTING 21.1 An introduction to NZ IFRS 8 746 747 752 21.2 Defining an operating segment 755 21.3 Defining a reportable segment 757 21.4 Measurement of segment items 760 21.5 Required financial disclosures 762 21.6 Reconciliation of segment information to financial statements 762 21.7 Non-financial disclosures 764 21.8 Is there a case for competitive harm? 768 CHAPTER 22 RELATED-PARTY DISCLOSURES 778 INTRODUCTION TO RELATED-PARTY DISCLOSURES 779 22.1 NZ IAS 24 'Related Party Disclosures' 779 22.2 Key management personnel disclosures under NZ IAS 24 787 22.3 Examples of related-party disclosure notes 795 Reference 769 770 770 773 774 777 778 796 796 796 797 797 797 CHAPTER 23 EARNINGS PER SHARE 798 INTRODUCTION TO EARNINGS PER SHARE 23.1 Computation of basic earnings per share 23.2 Diluted earnings per share 798 799 800 809 817 818 818 820 822 825 XIV
CHAPTER 24 ACCOUNTING FOR GROUP STRUCTURES 828 828 INTRODUCTION TO ACCOUNTING FOR GROUP STRUCTURES 829 24.1 Rationale for consolidating the financial statements of different legal entities, 830 24.2 Development of the accounting standard on consolidated financial statements 24.3 Alternative consolidation concepts 24.4 The concept of control 24.5 Direct and indirect control 24.6 Accounting for business combinations 24.7 Gain on bargain purchase 24.8 Subsidiaries' assets not recorded at fair values 24.9 Consolidation after date of acquisition 24.10 Disclosure requirements 831 835 835 840 841 850 852 857 859 860 860 861 864 867 871 CHAPTER 25 ACCOUNTING FOR INTRAGROUP TRANSACTIONS -' 872 INTRODUCTION TO ACCOUNTING FOR INTRAGROUP TRANSACTIONS 873 25.1 Dividend payments pre-acquisition and post-acquisition 873 25.2 Intragroup sale of inventory, 881 25.3 Sale of non-current assets within the group 893 Key term 872 903 904 904 911 912 914 CHAPTER 26 ACCOUNTING FOR NON-CONTROLLING INTERESTS 920 920 INTRODUCTION TO ACCOUNTING FOR NON-CONTROLLING INTERESTS 26.1 What is non-controlling interest? 26.2 Non-controlling interests to be disclosed in the consolidated financial statements 921 921 922 943 943 943 954 26.3 Calculating non-controlling interests 924 957 XV
CONTENTS CONTINUED CHAPTER 27 ACCOUNTING FOR INDIRECT OWNERSHIP INTERESTS 966 966 INTRODUCTION TO ACCOUNTING FOR INDIRECT OWNERSHIP INTERESTS 27.1 Indirect ownership interests 27.2 Direct and indirect ownership interests in a subsidiary 27.3 Sequential and non-sequential acquisitions 967 967 968 993 1004 1005 1005 1007 CHAPTER 28 ACCOUNTING FOR CHANGES IN THE DEGREE OF OWNERSHIP OF A SUBSIDIARY 1012 INTRODUCTION TO ACCOUNTING FOR CHANGES IN THE DEGREE OF OWNERSHIP OF A SUBSIDIARY 28.1 Increase in the ownership interest held in a subsidiary after control has been obtained 28.2 Loss of control 1012 1013 Key term 1013 1028 1044 1044 1044 1050 1052 CHAPTER 29 ACCOUNTING FOR EQUITY INVESTMENTS 1056 INTRODUCTION TO ACCOUNTING FOR EQUITY INVESTMENTS 1056 1057 29.1 Why do firms make equity investments? 1057 29.2 Types of investments 29.3 Accounting standards for equity investments 29.4 Equity method of accounting 29.5 Applying the equity method of accounting 29.6 Losses incurred by an associate 29.7 Carrying amount of the investment in an associate 29.8 Disclosure requirements 1058 1058 1060 1061 1074 1075 1075 Reference 1076 1077 1077 1080 1081 1085 XVI
CHAPTER 30 ACCOUNTING FOR INTERESTS IN JOINT VENTURES 1086 1086 INTRODUCTION TO ACCOUNTING FOR INTERESTS IN JOINT VENTURES 30.1 Joint ventures defined 30.2 Jointly controlled operations 30.3 Jointly controlled assets * 30.4 Jointly controlled entities 30.5 Disclosure requirements 30.6 A new accounting standard on joint arrangements 1087 1087 1088 1092 1093 1097 1099 1100 1101 1101 1103 1103 1107 CHAPTER 31 ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS 1110 INTRODUCTION TO ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS 31.1 Foreign currency transactions 31.2 Determination of functional currency and presentation currency 1114 31.3 Longer term receivables and payables.' 31.4 Non-monetary items 31.5 Translation of other monetary assets such as cash deposits 31.6 Qualifying assets 31.7 Hedging transactions 31.8 Foreign currency swaps 1110 1111 1111 1116 1116 1118 1118 1120 1140 1143 1144 1144 1146 1148 CHAPTER 32 TRANSLATING THE FINANCIAL STATEMENTS OF FOREIGN OPERATIONS 1152 1152 INTRODUCTION TO TRANSLATING THE FINANCIAL STATEMENTS OF FOREIGN OPERATIONS 1153 32.1 Reporting foreign currency transactions in the functional currency 32.2 Changing the functional currency 32.3 Translating the financial statements of foreign operations into the presentation currency 1153 1159 1159 1168 1168 1168 32.4 Consolidation subsequent to translation 1164 1170 32.5 Disclosure requirements 1166 1171 XVII
CONTENTS CONTINUED CHAPER 33 ACCOUNTING FOR CORPORATE SOCIAL RESPONSIBILITY 1176 INTRODUCTION TO ACCOUNTING FOR CORPORATE SOCIAL RESPONSIBILITY 33.1 Social and environmental reporting defined 1176 1177 1178 33.2 What are the responsibilities of business, to whom and for what? 1180 33.3 Regulation of public social and environmental reporting 1187 33.4 Limitations of traditional financial accounting 1190 33.5 Industry and government initiatives 1199 33.6 Other initiatives to assist corporate social and environmental performance 1211 33.7 Evidence of social and environmental reporting 1211 33.8 Social accounting and social auditing 1225 33.9 Assurance of social and environmental reports 1227 33.10 Diversity in reporting approaches 33.11 Motivation for social and environmental reporting 33.12 Stakeholder demands for, and reactions to, social and environmental information 33.13 Linkage between social and environmental performance, financial risk and financial performance 1228 1232 1237 1239 1248 1249 1249 1250 1250 33.14 The growing importance of climate change issues 1244 1252 33.15 Concluding remarks 1248 1256 Appendix A Present value of $1 1260 Appendix B Present value of an annuity of $1 1262 Appendix C Calculating present values 1264 Appendix D New Zealand equivalents to International Financial Reporting Standards Glossary Index 1266 1268 1278