The Concise Guide to Accounting Standards The Concise Guide to Accounting Standards Second edition Roy Dodge FCCA SPRINGER-SCIENCE+BUSINESS MEDIA B.V. First edition 1988 Second edition 1991 © 1988, 1991 R. Dodge Originally published by Chapman and Hall in 1991 Typeset in 10/llpt Palatino by Columns of Reading Printed and bound in Great Britain by T.J. Press (Padstow) Ltd, Padstow, Cornwall ISBN 978-0-412-39610-6 All rights reserved. No part of this book may be reproduced or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in any retrieval system of any nature, without the written permission of the copyright holder and the publisher, application for which shall be made to the publisher. British Library Cataloguing in Publication Data Dodge, Roy The concise guide to accounting standards. 1. Accounting. Standards 1. Title 657.0218 ISBN 978-0-412-39610-6 Library of Congress Cataloging-in-Publication Data Dodge, Roy. The concise guide to accounting standards / Roy Dodge. - 2nd ed. p. cm. Includes index. ISBN 978-0-412-39610-6 ISBN 978-1-4899-7096-1 (eBook) DOI 10.1007/978-1-4899-7096-1 1. Accounting-Standards-Great Britain. I. Title HF5616.G7D64 1990 657' .021841-dc20 90-2289 C1P Contents Preface vii Abbreviations and references ix The impact of SSAPs on examinations xi Using the guide xiii A change of policy XVll Sources and acknowledgements xxiii SSAP Overview xxv Students' SSAP checklist xl SSAP 1 Accounting for associated companies 1 SSAP 2 Disclosure of accounting policies 7 SSAP 3 Earnings per share 13 SSAP 4 The accounting treatment of government grants 21 SSAP 5 Accounting for value added tax 25 SSAP 6 Extraordinary items and prior year adjustments 29 SSAP 8 The treatment of taxation under the imputation system 37 SSAP 9 Stocks and work in progress - excluding long-term contracts 43 SSAP 9 Stocks and work in progress - long-term contracts 51 SSAP 10 Statements of source and application of funds 59 SSAP 12 Accounting for depreciation 65 SSAP 13 Accounting for research and development 73 SSAP 14 Group accounts 79 SSAP 15 Accounting for deferred taxation 87 SSAP 16 Current cost accounting 95 SSAP 17 Accounting for post balance sheet events 101 SSAP 18 Accounting for contingencies 107 SSAP 19 Accounting for investment properties 113 SSAP 20 Foreign currency translation 119 SSAP 21 Accounting for leases and hire purchase contracts 127 SSAP 22 Accounting for goodwill 141 SSAP 23 Accounting for acguisitions and mergers 151 SSAP 24 Accounting for pension costs 159 vi COlllcll1s Improving examination performance on SSAPs 165 Appendix 1 Examples from published accounts 167 Appendix 2 Harmonization of international and UK standards 171 Appendix 3 A summary of the latest debate on inflation accounting 173 Index 179 Preface This guide contains a collection of key facts, comments and illustrations on each SSAP. I originally conceived it as an examination note book for students. As it turned out, the system which I eventually used to catalogue the notes enabled me (or maybe forced me) to produce a more comprehensive book without abandoning my original aim of keeping the work concise. In its final form the guide has many uses. First it could be used by anyone who wants to find factual information on any SSAP quickly without having to wade through a mass of words in the SSAP itself. This could be the busy practitioner using it as a first source of reference or lecturers and students embroiled in a classroom discussion. The system of cross-referencing, together with the interpretive comments included, should enable users to reach a well informed conclusion on any line of enquiry. It could certainly be used as a companion guide to the more traditional forms of study text which are popular with students. And there is no reason, except that it is not written in normal text book style, why it should not be used for unaided study. It might take a certain amount of courage and self-reliance to use it this way, but it can be done. The section called 'Using the Guide' explains how it can be used either as basis for study or for revision. There is also a section at the end called 'Improving Examination Performance'. This is specifically related to answering questions on SSAPs rather than dealing with examination technique in general. An attempt has been made to analyse each SSAP under seven main headings most of which have a regular system of sub-headings. The nature of certain SSAPs precludes this universal analysis, although a degree of uniformity has been achieved throughout the work. Most headings are self-explanatory and should enable the user to distinguish points of comment and interpretation from those which are factual summary of the SSAP itself. Comments under the main headings of 'Background' and 'Interesting Points' have, for the most part, been written with anormal sentence viii Prefacr structure since the reason for including them was to help students with the discursive aspects of their studies. Those wh ich come under the prescriptive sections such as 'Definitions' and 'The Standard' tend to be in precis form and sometimes these will only make sense if read in the context of their own particular sub-heading. The points summarized under 'Developing the Standard' are mainly based on the explanatory notes to the SSAP. These are particularly important for students since they usually contain a discussion of the concepts as weIl as abrief outline of the standard being adopted. The illustrations have been included to give meaning to some of the more ambiguous points in the standard and to help with related areas in accounting practice. Some are very simple. Others deal with complex issues by using simple facts so that the principles can be seen more clearly. Some, particularly those dealing with the more recent SSAPs, may appear to be crammed with detail, but anyone taking the trouble to work through them will soon find that only the essentials have been included. Apart from the notes and illustrations the book contains various sections which students may find useful. There is a commentary on the general state of the SSAP programme, an SSAP overview which provides a summary of the key points in each SSAP, some examples of accounting policies from published accounts and a table showing the state of harmonization between SSAPs and lASs. In view of the renewed interest being shown by examiners in accounting for the effects of inflation, notes on the defunct SSAP 16 have been retained. I have also provided an additional commentary on inflation accounting in Appendix 3. This includes an illustrated comparison between HCA, CCA, CPP, and Real Terms accounting. Abbreviations and references An attempt has been made to avoid using too many abbreviations. Those whieh are used are either so much apart of the accountant's everyday language as to be widely understood or their full meaning was introduced earlier in the relevant text. The following are included: ACT - Advance corporation tax ASB - Accounting Standards Board ASC - Accounting Standards Committee ASSC - Accounting Standards Steering Committee CA - Companies Act CCA - Current cost accounting (or accounts) OTI - Oepartment of Trade and Industry EO - Exposure draft HCA - Historie cost accounting (or accounts) lAS - International Accounting Standard ICAEW - Institute of Chartered Accountants in England and Wales Sch. - Schedule Sec. - Section At the time of putting the finishing touches to this second edition, the work of the ASC was being transferred to the new Accounting Standards Board (ASB). It should be obvious from the context in which the abbreviation ASC has been used, as to whether such reference should be construed as relating to the new ASB. The impact of SSAPs on examinations One of the difficulties facing the present generation of accountancy students is how to cope with the growing maze of accounting regulations and official pronouncements which provide a constant flow of material for the examiners. Foremost amongst these regulations are the Statements of Standard Accounting Practice issued by the Accounting Standards Committee. Each additional SSAP not only creates a new and separable topic of its own but usually has connecting links with other regulations, concepts and working rules. At the time of writing this first edition there have been twenty-four standards issued over the course of twenty years. Two of these (SSAPs 7 and 11) were aborted shortly after their publication and one (SSAP 16) has been withdrawn although it remains 'an authoritative reference on accounting under the current cost convention' . There is some comfort in knowing that the proliferation of accounting standards in the UK has not taken on anything like the proportions found in the USA. Furthermore we see m to have reached a point where the initial surge of issues in UK has died down and future growth in SSAPs will be slow. The ASC have indicated that the majority of future pronouncements are likely to be in the form of Statements of Recommended Practice (SORPs) and revisions to existing standards. Even so, there is already a substantial bulk for students to contend with and I cannot understand why examiners in the professional bodies have not yet mooted the idea of letting students take the actual SSAPs into the examination room. Questions which require a student to do little more than restate the contents of an SSAP are not really a test of ability. The accountant in practice has access to the SSAPs, and he does not usually refer to them so that he can tell someone what they say; he is probably solving a problem, and this is what students should be learning to do. At the moment questions on SSAPs come in various forms including the application of principles to particular problems. One common factor is that the student will not get very far without learning and being able to recall the essential contents of the SSAP. But this is only a