International

Financial Reporting
A Practical Guide
Third Edition

Alan Melville
FCA, BSc, Cert. Ed.

Financial Times
Prentice Hall
is an imprint of

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

Contents
Preface
Acknowledgements
List of international standards

IX

x
xi

Part 1 INTRODUCTION TO FINANCIAL

REPORTING
1

The regulatory framework

The need for regulation
Sources of regulation
Generally accepted accounting practice
The International Accounting Standards
Board (IASB)
The standard-setting process
The purpose of accounting standards
Worldwide use of international
standards
First-time adoption of international
standards
The IASB conceptual framework
Purpose and scope of the IASB
Conceptual Framework
Objective of general purpose financial
reporting
Qualitative characteristics of financial
information
Underlying assumption
Elements of financial statements
Recognition of the elements of
financial statements
Measurement of the elements of
financial statements
Concepts of capital and capital
maintenance
Presentation of financial statements
Purpose of financial statements
Components of financial statements
General features

3
4
4
6

7
9
10
11

18
19
21
24
25
27

9R

36
37
37
38

40
41
45
49
51
52
53

Accounting policies, accounting

estimates and errors
Accounting policies
Accounting estimates
Prior period errors

61
61
66
66

Part 2 FINANCIAL REPORTING IN

PRACTICE

11
17

28

Structure and content of financial

statements
The statement of financial position
The statement of comprehensive income
The statement of changes in equity
The notes to the financial statements
Interim financial reporting
Management commentary

Property, plant and equipment

Definition of property, plant and
equipment
Recognition of property, plant
and equipment
Initial measurement of property, plant
and equipment
Subsequent measurement of property,
plant and equipment
Depreciation
Disclosure requirements
Borrowing costs
Government grants
Investment property
Intangible assets
Definition of an intangible asset
Initial recognition and measurement
of intangible assets
Subsequent measurement of
intangible assets
Amortisation of intangible assets

75
76
77
79
80
82
86
87
90
93
100
101
102
106
108

CONTENTS

Derecognition
Disclosure requirements
Goodwill
IFRS3 Business Combinations

110
110
111
112

Impairment of assets
Indications of impairment
Recoverable amount
Recognition and measurement of an
impairment loss
Cash-generating units
Reversal of impairment losses
Disclosure requirements

118
119
120

Non-current assets held for sale

and discontinued operations
Classification of non-current assets
as held for sale
Measurement of non-current assets
held for sale
Presentation of non-current assets
held tor sale
Discontinued operations
Leases
Classification of leases
Accounting for operating leases
Accounting for finance leases
Disclosure requirements
Proposed new leases standard
10 Inventories and construction
contracts
Inventories
Cost of inventories
Cost formulas
Net realisable value
Disclosures relating to inventories
Construction contracts
Contract revenue and costs
Recognition of contract revenue
and expenses
Presentation and disclosure for
construction contracts
Proposed new standard
11 Financial instruments
Definitions
Classification of financial instruments
Recognition and measurement

VI

123
124
128
129
134
135
137
141
142
148
149
150
150
154
,155
159
160
160
162
165
166
167
168
168
171
174
179
180
181
184

Disclosure requirements
12 Provisions and events after the
reporting period
Recognition of a provision
Measurement of a provision
Application of the recognition and
measurement rules
Contingent liabilities and contingent
assets
Disclosure requirements
Events after the reporting period

189
195
196
198
199
201
202
203

13 Revenue .
Definition of revenue
Measurement of revenue
Recognition of revenue: Sale of goods
Recognition of revenue: Rendering
of services
Recognition of revenue: Interest,
royalties and dividends
Disclosure requirements
Proposed new standard
Guidance to the implementation
of IAS 18

209
210
210
211

14 Employee benefits
Short-term employee benefits
Post-employment benefits
Accounting for defined contribution
plans
Accounting for defined benefit plans
Other long-term employee benefits
Termination benefits

220
221
223

15 Taxation in financial statements

Current tax
Deferred tax
The tax base concept
IAS 12 requirements with regard to
deferred tax
Disclosure requirements

234
235
237
239

16 Statement of cashflows
Cash and cash equivalents
Classification of cash flows by activity
Interest, dividends and taxes
Reporting cash flows from
operating activities
Disclosures

249
250
251
252

212
213
213
213
214

223
224
229
229

244
244

253
257

CONTENTS

Proposed revision of IAS7

17 Financial reporting in
hyperinflationary economies
Historical cost accounting and
its weaknesses
Strengths of historical cost accounting
Alternatives to historical cost
accounting
Hyperinflationary economies
The restatement of financial
statements
Disclosures required by IAS29

258
268
269
274

349
351

Part 4 ANALYSIS OF FINANCIAL

STATEMENTS

276
278

22 Ratio analysis
Accounting ratios
Profitability ratios
Liquidity ratios
Efficiency ratios
Investment ratios
Limitations of ratio analysis
Multivariate ratio analysis

357
358
359
363
365
367
375
376

23 Earnings per share

Significance of EPS
Calculation of basic EPS
Shares issued during the accounting
period
Bonus issues
Rights issues
Calculation of diluted EPS
Presentation and disclosure
requirements

384
384
385

24 Segmental analysis
Operating segments
Reportable segments
Disclosures reauired bv IFRS8

400
401
401
403

283
284
285
289
292
295
297
298
299

19 Groups of companies (2)

Group statement of comprehensive
income
Subsidiary acquired part way through
an accounting period

308

20 Associates and joint ventures

Significant influence
The equity method
Application of the equity method
IAS28 disclosure requirements
Joint ventures
Accounting for an interest in a
jointly controlled entity
IAS31 disclosure requirements

323
324
325
325
331
332

21 Related parties and changes in

foreign exchange rates
Related parties

345
347
348

275
276

Part 3 CONSOLIDATED FINANCIAL

STATEMENTS
18 Groups of companies (1)
Requirement to prepare consolidated
financial statements
Group statement of financial position
at date of acquisition
Group statement of financial position
in subsequent years
Partly-owned subsidiaries
Preference shares
Elimination of intra-group balances
Unrealised profits
Reporting period and accounting
policies

Definition of related party and related

party transaction
Disclosures required by IAS24
Foreign exchange accounting
Reporting foreign currency
transactions
Translation to a presentation currency

309
315

333
337
344
345

387
389
390
393
395

Part 5 SMALL AND MEDIUM-SIZED

ENTITIES
25 The IFRS for SMEs
Contents of the IFRS for SMEs
Small and medium-sized entities
Concepts and pervasive principles
Financial statement presentation
Statement of financial position
Statement of comprehensive income
and income statement
Statement of changes in equity and
statement of income and retained
earnings

413
414
415
416
417
418
418

419

VII

CONTENTS

25 The IFRS for SMEs (cont.)

Statement of cash flows
Notes to the financial statements
Consolidated and separate financial
statements
Accounting policies, estimates and
errors
Financial instruments
Inventories
Investments in associates
Investments in joint ventures
Investment property
Property, plant and equipment
Intangible assets other than goodwill
Business combinations and goodwill
Leases
Provisions and contingencies
Liabilities and equity
Revenue
Government grants
Borrowing costs
Share-based payment
Impairment of assets
Employee benefits
Income tax
Foreign currency translation
Hyperinflation
Events after the end of the reporting
period
Related party disclosures
Specialised activities
Transition to the IFRS for SMEs
Topics not covered in the IFRS
for SMEs

419
420
420

421
421
422
422
423
423
424
424
425
425
426
426
427
427
428
428
428
429
429
430
430
431
431
431
431
432

Part 6 ANSWERS
Answers to exercises
Index

VIM

435
497