Financial Reporting

 

 

Autumn 2020

 

 

 

 

Module Outline

 

 

Module Team:

Topic Schedule:

 

Week beginning	Topic for Lecture and Physical Class	On-line Workshop in that week
September 28	1. Introduction. Accountability, law, standards and Framework	NO WORKSHOPS
October 5	2. Tangible assets	I. Conceptual frameworks
October 12	3.Off-balance sheet finance and lease accounting	II. Applying IAS 16
October 19	4.Intangible assets	III. Lease accounting
October 26	5.Measurement of assets	IV. Applying IAS 38
November 2	6.Liabilities; and the example of pensions	V. Asset measurement bases
November 9	7.Share-based payments	VI. Pension accounting
November 16	8.Presentation of financial statements	VII. Share-based payments
November 23	9. Synthesis on the consistency of IFRS with the Framework	VIII. Presentation of financial statements
November 30	10. No lectures, but physical class on Revision	IX: Effects of the 2018 Conceptual Framework

 

 

 

 

 

 

 

Lectures, Classes and Workshops

The lectures are recorded. There are two one-hour lectures each week. You can watch them in parts, and multiple times. You should watch them before the physical class of the week.

The one-hour physical classes put the lecture material into practice with examples. You can ask questions related to the lecture and to these examples.

The on-line workshops are in smaller groups. They provide an opportunity to discuss issues related to the lectures/classes, and to develop your understanding of the topics while deepening your grasp of the subject. Workshop assignments are set out later in this document.

Assessment

The assessment for this module comprises an assignment and an end-of-module examination. The assignment carries a weighting of 30% and the two-hour examination carries a weighting of 70% towards the overall module mark.

The assignment question is set out in great detail at the end of this moduleoutline, along with some guidance and relevant reading. The assignment is due for submission no later than 12 noon on 19th November 2020.

Reading

The main textbook for the module (also used in year 3) is:

Alexander, Britton, Jorissen, Hoogendorn and van Mourik,International Financial Reporting and Analysis, 7^th Edition, Cengage Learning, 2017 (ISBN 978-1408075012). DO NOT BUY OR READ ANY EARLIER EDITION, as it is out of date. In the reading guide below, this book is referred to as ALEXANDER.

Two other textbooks that cover similar material are:

Alexander, D. and Nobes C. Financial Accounting: An International Introduction, 7^th edition, 2020, Pearson.

 

Barry Elliott and Jamie Elliott Financial Accounting and Reporting, 17^th Edition, Harlow: Pearson, 2015 (ISBN 978-1292080505)

In addition to the textbook, you should read the academic and professional articles that are listed below for each topic. All these items are available on the module Moodle page.

 

READINGS FOR SPECIFIC TOPICS

Lecture 1 – Accountability, law, standards and Framework

Objectives

To develop students’ knowledge and understanding of:

• The concept of accountability
• The roles of corporate reporting
• The regulatory framework for accounting in the UK and European Union
• Economic consequences of accounting regulation
• The conceptual framework

 

Textbook reading

ALEXANDER chapters 1, 3 and 9.Note that the book is out-of-date now because it deals with the old Framework only.However, all the current standards were written under the old Framework, so it is still relevant to us.

 

Regulatory reading

The 2010 and 2018 Conceptual Frameworks of the IASB are on Moodle.

 

Article reading

Barker, R. (2015) ‘Conservatism, prudence and the IASB’s conceptual framework’, Accounting and Business Research, Vol. 45, No. 4, pp. 514-38.

Barker, R. and Teixeira, A. (2018) ‘Gaps in the IFRS conceptual framework’, Accounting in Europe, Vol. 15, No. 2, pp. 153-66.

Bushman, R. & Landsman, W. R. (2010), ‘The pros and cons of regulating corporate reporting: a critical review of the arguments’, Accounting and Business Research, Vol. 40, No. 3, pp. 259-273.

Messner, M. (2009), ‘The limits of accountability’, Accounting, Organizations and Society, Vol. 34, No. 8, pp. 918-938.

 

 

Lecture 2 – Tangible assets

 

Objectives

To develop students’ knowledge and understanding of:

 

Textbook reading

ALEXANDER chapters 12, 14 and 16.

 

Regulatory reading

IASs 2, 16 and 40 are on Moodle.

 

Article reading

Israeli, D. (2015), ‘Recognition versus disclosure: evidence from fair value of investment property’, Review of Accounting Studies, Vol. 20, pp. 1457-1503.

 

Lecture 3 – Off-balance sheet finance and lease accounting

Objectives

To develop students’ knowledge and understanding of:

• What assets are, and when they should be put into balance sheets
• Reasons for using off balance sheet finance
• Accounting for leases (IFRS 16)

 

Textbook reading

ALEXANDER chapters 4 and 15 (you are not expected to cover accounting by lessors).

 

Regulatory reading

IFRS 16 is on Moodle.

 

Article reading

Barker, R. and McGeachin, A. (2013) ‘Why is there inconsistency in accounting for liabilities in IFRS? An analysis of recognition, measurement, estimation and conservatism’, Accounting and Business Research, Vol. 43, No. 6, pp. 579-604.

Barone, E., Birt, J. and Moya, M. (2014) ‘Lease accounting: a review of recent literature’, Accounting in Europe, Vol. 11, No. 1, pp. 35-54.

Morales-Díaz, J. and Zamora-Ramírez, C. (2018) ‘The impact of IFRS 16 on key financial ratios: a new methodological approach’, Accounting in Europe, Vol. 15, No. 1, pp. 105-33.

Nobes, C. W. (2005), ‘Rules-based standards and the lack of principles in accounting’, Accounting Horizons, Vol. 19, No. 1, pp. 25-34.

 

 

Lecture 4 – Intangible assets

 

Objectives

To develop students’ knowledge and understanding of:

 

Textbook reading

ALEXANDER chapters 13 and 14.

 

Regulatory reading

IAS 38 is on Moodle.

 

Article reading

Amir, E., Lev, B. and Sougiannis, T. (2003), ‘Do financial analysts get intangibles?’, European Accounting Review, Vol. 12, No. 4, pp. 635-659.

Basu, S. and Waymire, G. (2008), ‘Has the importance of intangibles really grown? And if so, why?’, Accounting and Business Research, Vol. 38, No. 3, pp. 171-190.

Skinner, D.J. (2008), ‘Accounting for intangibles – a critical review of policy recommendations’, Accounting and Business Research, Vol. 38, No. 3, pp. 191-204.

Wyatt, A. (2008), ‘What financial and non-financial information on intangibles is value-relevant? A review of the evidence’, Accounting and Business Research, Vol. 38, No. 3, pp. 217-56.

 

Lecture5 – Measurement of assets

Objectives

To develop students’ knowledge and understanding of:

• Different approaches to accounting measurement and valuation
• Fair value measurement and its problems

 

Textbook reading

ALEXANDER chapters 6, 7 and 12 (note: concentrate on how assets and liabilities are measured – you will not be expected to know how to prepare full financial statements using different measurement bases).

 

Regulatory reading

IASs 2, 16, 38, 40, 41 are on Moodle.

 

Article reading

Barth, M. E. (2010), ‘Comments on panellists’, Abacus, Vol. 46, No. 1, pp. 120-127.

Barth, M. E. & Landsman, W. R. (1995), ‘Fundamental issues related to using fair value accounting for financial reporting’, Accounting Horizons, Vol. 9, No. 4, pp. 97-107.

Dean, G. (2010), ‘Background and case for exit-price accounting’, Abacus, Vol. 46, No. 1, pp. 84-96.

Lennard, A. (2010), ‘The case for entry values: a defence of replacement cost’, Abacus, Vol. 46, No. 1, pp. 97-103.

Nobes, C. W. (2015), ‘IFRS ten years on: Has the IASB imposed extensive use of fair value? Has the EU learnt to love IFRS? And does the use of fair value make IFRS illegal in the EU?’, Accounting in Europe, Vol.12, No. 2, pp.153-170.

Sellhorn, T. and Stier, C. (2019), ‘Fair value measurement for long-lived operating assets: research evidence’, European Accounting Review, Vol. 28, No. 3, pp. 573-603.

Penman, S. H. (2007), ‘Financial reporting quality: is fair value a plus or minus?’,Accounting and Business Research, Special Issue: International Accounting Policy Forum, pp. 33-44.

Whittington, G. (2010), ‘Measurement in financial reporting’, Abacus, Vol. 46, No. 1, pp. 104-110.

Whittington, G. (2008), ‘Fair value and the IASB/FASB conceptual framework project: an alternative view’, Abacus, Vol. 44, No. 2, pp. 139-168.

Bradbury, M. (2008), ‘Discussion of Whittington’, Abacus, Vol. 44, No. 2, pp. 169-180.

 

Lecture6 – Liabilities; and the example of pensions

Objectives

To develop students’ knowledge and understanding of:

• The nature of liabilities, and their measurement
• Distinction between defined contribution and defined benefit pensions
• Conceptual difficulties in accounting for defined benefit pension obligations
• Accounting for pension obligations under IAS 19

 

Textbook reading

ALEXANDERchapters 19 and 21.

 

Regulatory reading

IASs 19 and 37 are on Moodle.

 

Article reading

Napier, C. J. (2009), ‘The logic of pension accounting’, Accounting and Business Research, Vol. 39, No. 3, pp. 231-249.

Josiah, J., Gough, O., Haslam, J. & Shah, N. (2014), ‘Corporate reporting implication in migrating from definedbenefit to defined contribution pension schemes:A focus on the UK’, Accounting Forum, Vol. 38, No. 1, pp. 18-37.

Macve, R. (2010), ‘The case for deprival value’, Abacus, Vol. 46, No. 1, pp. 111-119.

Nobes, C. (2011), ‘On Relief Value versus Fair Value for the Measurement of Liabilities’, Accounting and Business Research,Vol.41, No.5, pp.515-524.

 

 

Lecture 7 – Share-based payments

Objectives

To develop students’ knowledge and understanding of:

• The various ways of remunerating staff
• Accounting for share-based payments

 

Textbook reading

ALEXANDER chapter 21.

 

Regulatory reading

IFRS 2 is on Moodle.

 

Article reading

McKernan, J. F. (2007), ‘Objectivity in accounting’, Accounting, Organizations and Society, Vol. 32, No. 1-2, pp. 155-180.

Ravenscroft, S. & Williams, P. F. (2009), ‘Making imaginary worlds real: the case of expensing employee stock options’, Accounting, Organizations and Society, Vol. 34, No. 6-7, pp. 770-786.

Nobes, C. W. & Stadler, C. (2015), ‘The qualitative characteristics of financial

information, and managers’ accounting decisions: evidence from IFRS policy changes’, Accounting and Business Research, Vol. 45, No. 5, pp.    572-601.

 

 

Lecture 8 – Presentation of financial statements

 

Objectives

To develop students’ knowledge and understanding of:

• The preparation and presentation of financial statements
• How to apply the requirements of IAS 1 and IAS 7

 

Textbook reading

ALEXANDER chapters 8 and 23.

 

Regulatory reading

IAS 1 is on Moodle.

 

Article reading

Nobes, C. (2009),‘The importance of being fair: an analysis of IFRS regulation and practice’, Accounting and Business Research, Vol. 39, No. 4, pp.415-427.

 

 

Lecture 9 – Synthesis on the consistency of IFRS with the Framework

Objectives

To develop students’ knowledge and understanding of:

• The content of the Framework and standards
• Inconsistencies between theFramework and standards

 

Textbook reading

ALEXANDER chapter 4.

 

Regulatory reading

The 2010 and 2018 Frameworks are on Moodle.

 

Article reading

Barker, R. &McGeachin, A. (2013),‘Why is there inconsistencyin accounting for liabilities in IFRS? An analysis of recognition, measurement,estimation and conservatism’, Accounting and Business Research, Vol. 43, No. 6, pp.579-604.

Brouwer, A., Hoogendoorn, M. &Naarding, E. (2015),‘Will thechanges proposed to the conceptual framework’s definitions and recognition criteria provide abetter basis for IASB standard setting?’, Accounting and Business Research, Vol. 45, No. 5, pp.547-571.

Nobes, C. W. (2012), ‘On the definitions of income and revenue in IFRS’, Accounting in Europe, Vol. 9, No. 1, pp. 85-94.

MODULE ASSIGNMENT

 

For the assignment, you are required to choose a company which uses IFRS, based in any country, which operates inone of the following business sectors:

• Banking
• Retail
• Hotels

 

If the company operates in several business sectors, its main activity should be in one of the three sectors listed above. You should look at the consolidated statements and related notes.

 

The company you select should have its equity share capital listed on a stock exchange. It should publish its annual financial statements and annual report in English, accessible on the company’s website.To repeat: the company should use IFRS for its reporting; and this will exclude US corporations. Use the latest available annual report (e.g. with year ending 31 December 2019 or 31 March 2020).

 

You are required to write a report (maximum 1,250 words, excluding the reference list and excluding any factual material about the company included in appendices). Your reportshould use your chosen company to examine the practical problems of applying fair value measurement. Your report should cover the following aspects:

 

• Give a brief explanation of the concept of fair value and discuss how IFRS 13 sets out guidelines for measuring fair value in practice.
• Identify the principal types of non-currentasset owned by your chosen company (e.g. land, brands, investments). To establish this, you should look at the balance sheet and the notes to it. Depending on the company chosen, the assets may be intangible, tangible or financial – if there are many different types of non-current asset, restrict your report to threeof the types of asset with large values.
• Explain, for each of the principal assets identified in (b), which measurement basis is required or allowed by IFRS.
• For each of the principal assets, identify whether the company has used the cost basis or the fair value basis for continuing ‘subsequent measurement’.
• For any type of asset for which fair value has been used, discuss the problems that your chosen company is likely to have met when measuring the fair value.Where fair value has not been chosen, discuss the possible reasons for this.

 

 

 

 

In writing your report, the following guidance may be helpful:

 

• Your report should have a brief introduction, several sections with appropriate headings, and a conclusion.
• A useful summary of IFRS 13 is available from the IAS Plus website: http://www.iasplus.com/standard/ifrs13.htm. It is worth looking at this summary to note some of the issues involved in fair value measurement. In particular, think about the need for fair value measurements to be “market-based” rather than “entity-specific”. That is, the measurements should reflect the “highest and best use” of an asset from the perspective of “market participants”, and should not take into account any special benefits that a particular owner can achieve.

 

• Some companies have non-current assets that are highly specific to the company concerned. It is unlikely that such assets are required by IFRS to be measured at fair value on a recurring basis, but there are two other circumstances in which fair value might be used. First, when a company buys a new subsidiary, it brings in all the subsidiary’s assets at their fair values at the date of acquisition. Secondly, companies must assess whether there has been an impairment that would require the carrying value of a specific asset to be reduced. One of the bases of assessing the recoverable amount at which the asset is shown is fair value. Hence, your chosen company may disclose information about how it determines fair value for these purposes, even if it does not actually report many assets in its balance sheet on a continuing fair value basis. If you see such references to fair value, you could mention them; but this will not be part of the answer to Questions (c) to (e) above, because they are concerned with ‘subsequent measurement’.

 

• You should distinguish between land and buildings included in property, plant and equipment (covered by IAS 16) and investment property (covered by IAS 40). Note that “investment property” is still a type of land and buildings, not financial investments like shares or bonds.

 

• Please note that for this assignment (and for any other purpose related to this module), the internet is a very unreliable source of information. The same applies to many journals found on the internet, which agree to publish papers if the authors pay. By contrast, the various articles listed under Topic 5 – Measurement – are respectable and relevant to this assignment. Some additional articles are listed below. All of these are available on the module Moodle page. Other articles in the same journals would also be suitable.
  1. A general review of the theoretical justification for fair value measurement is provided by:

Hitz, J.-M. (2007), The decision-usefulness of fair value accounting – a theoretical perspective,European Accounting Review, Vol. 16, No. 2, pp. 323-362.

1. A more critical theoretical view is given by:

Biondi, Y. (2011), The pure logic of accounting: A critique of the fair value revolution,Accounting, Economics, and Law, Vol. 1, No. 1, Art. 7 (available at: http://hal.archives-ouvertes.fr/docs/00/56/18/94/PDF/viewcontent.pdf).

1. There is relatively little literature specifically about non-financial assets and fair value. A paper that supports the use of fair values for property, plant and equipment, but notes problems with the verifiability of fair value measurements for such assets is:

Herrmann, D., Saudagaran, S. M. & Thomas, W. B. (2006), The quality of fair value measures for property, plant, and equipment,Accounting Forum, Vol. 30, No. 1, pp. 43-59.

1. A survey of actual reporting practice by UK and German companies is provided by two researchers at the University of Chicago:

Christensen, H. B. & Nikolaev, V. V. (2011), Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, Vol. 18, No. 3, pp. 734-775.

These researchers suggest that most German and UK companies use historical cost for property, plant and equipment, except for investment properties. Use of fair value as a main measurement method is rare.

111. An article which surveys whether IFRS-using companies choose fair value for non-financial assets is:Nobes, C. (2013), ‘The continued survival of international differences under IFRS’, Accounting and Business Research, 43 (2), pp. 83-111.

You will be assessed in part on the quality of your arguments and how you use relevant evidence to support your arguments and your conclusions.  The references in this note are provided to get you started, but you are encouraged to explore other material.

There is a marking rubric available in the Introduction part of the Moodle page for this module. This should help you to plan your report.