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FINANCIAL
REPORTING
LOF TUS | LEO | BOYS | DANILIUC
LUKE | ANG | BYRNES
Contents
Preface xvi Case studies 29
Acknowledgements xviii Application and analysis exercises 30
References 32
Part 1 THEORY AND PRACTICE 1
2 Application of accounting theory 33
1 Accounting regulation and the conceptual 2.1 Professional judgement in accounting 34
framework 3 2.2 What is an accounting policy? 34
1.1 Key sources of regulation of financial 2.3 What is accounting theory? 35
reporting in Australia 4 2.3.1 Types of theories 36
1.1.1 The Corporations Act 4 2.3.2 Development of theories 36
1.1.2 Australian accounting standards 6 2.4 Positive accounting theory 38
1.1.3 A conceptual framework 9 2.4.1 Nexus of contracts 38
1.1.4 Australian Securities Exchange Listing Rules 10 2.4.2 Agency theory 38
1.2 The role of key players in financial 2.4.3 Owner–manager agency relationships 39
reporting regulation 11 2.4.4 Manager–lender agency relationships 42
1.2.1 Financial Reporting Council (FRC) 11 2.4.5 Political relationships 43
1.2.2 Australian Accounting Standards 2.4.6 Role of accounting information in
Board (AASB) 12 reducing agency problems 44
1.2.3 Australian Securities and Investments 2.4.7 Implications of agency theory for
Commission (ASIC) 14 accounting policy choice 44
1.2.4 Australian Prudential Regulation 2.5 The role of accounting in capital markets 45
Authority (APRA) 16 2.5.1 The mechanistic hypothesis 45
1.2.5 Australian Securities Exchange Group (ASX) 16 2.5.2 The efficient market hypothesis 46
1.3 The International Accounting 2.5.3 What does accounting theory tell us about
Standards Board (IASB) 17 accounting policies? 47
1.4 The components of the conceptual framework 17 Summary 48
1.4.1 The objective of financial reporting 18 Glossary 48
1.4.2 The reporting entity 18 Comprehension questions 49
1.5 Qualitative characteristics of useful information 19 Case studies 49
1.5.1 Fundamental qualitative characteristics 19 Application and analysis exercises 50
References 53
1.5.2 Enhancing qualitative characteristics 20
1.5.3 Cost constraint on useful financial reporting 20
1.6 Going concern assumption 21 3 Fair value measurement 55
1.7 Definition of the elements of financial statements 21 3.1 Introduction and scope 56
1.7.1 Assets 21 3.2 The definition of fair value 57
1.7.2 Liabilities 22 3.2.1 Current exit price 57
1.7.3 Equity 22 3.2.2 Orderly transactions 57
1.7.4 Income 23 3.2.3 Market participants 57
1.7.5 Expenses 23 3.2.4 Transaction and transport costs 58
1.8 Recognition of the elements of financial 3.3 Application to non-financial assets 59
statements 24 3.3.1 Step 1: What is the particular
1.8.1 Asset recognition 24 asset being measured? 59
1.8.2 Liability recognition 24 3.3.2 Step 2: What is the appropriate measurement
1.8.3 Income recognition 24 valuation premise? 59
1.8.4 Expenses recognition 25 3.3.3 Step 3: What is the principal (or most
1.9 Measurement of the elements of advantageous market) for the asset? 62
financial statements 25 3.3.4 Step 4: What is the appropriate valuation
1.10 Concepts of capital 26 technique for the measurement of the asset? 62
Summary 27 3.4 Application to liabilities 67
Glossary 27 Application to an entity’s own equity
3.5
Comprehension questions 28 instruments 69
vi
3.6 Issues relating to application to 5.3 Initial measurement of PPE 119
financial instruments 69 5.3.1 Purchase price 119
3.6.1 Inputs based on bid and ask prices 70 5.3.2 Directly attributable costs 121
3.6.2 Offsetting positions 70 5.3.3 Acquisition for zero or nominal cost 122
3.7 Disclosure requirements 70 5.3.4 Costs of dismantling, removal or restoration 123
Summary 72 5.4 Measurement subsequent to initial recognition 123
Glossary 72 5.5 The cost model 124
Comprehension questions 73 5.5.1 Depreciation 124
Case studies 73
5.6 The revaluation model 132
Application and analysis exercises 75
References 79 5.6.1 Revaluation increases and decreases 132
5.6.2 Revaluation increases and decreases
Part 2 ELEMENTS OF FINANCIAL STATEMENTS 81 involving reversals 133
5.6.3 Depreciation of revalued assets 134
4 Inventories 83 5.7 Derecognition 135
4.1 The nature of inventories 84 5.8 Disclosure 136
4.2 Recognition and measurement of inventories 85 Summary 138
4.3 Measurement at cost 86 Glossary 138
4.3.1 Costs of purchase 86 Demonstration problem 138
Comprehension questions 141
4.3.2 Costs of conversion 86
Case studies 141
4.3.3 Other costs 87 Application and analysis exercises 142
4.3.4 Cost of inventories of a service provider 88 Reference 152
4.3.5 Estimating cost 88
4.4 Inventories methods 89 6 Intangible assets 153
4.4.1 Periodic method 89
6.1 Introduction and scope 154
4.4.2 Perpetual method 89
6.2 The nature of intangible assets 155
4.5 End-of-period accounting 92
6.2.1 Identifiable 156
4.5.1 Physical count 92
6.2.2 Non-monetary in nature 156
4.5.2 Cut-off procedures 93
6.2.3 Lack of physical substance 156
4.5.3 Goods in transit 93
6.3 Recognition of intangible assets 157
4.5.4 Consignment inventories 93
6.4 Measurement 158
4.5.5 Control account/subsidiary ledger
6.4.1 Separate acquisition 158
reconciliation 94
6.4.2 Acquisition as part of a business combination 158
4.6 Assigning costs to inventories on sale 95
6.4.3 Internally generated intangible assets 159
4.6.1 First-in, first-out (FIFO) cost formula 96
6.4.4 Internally generated goodwill 161
4.6.2 Weighted average cost formula 96
6.4.5 Examples of recognition and
4.6.3 Which cost formula to use? 98
measurement of intangible assets 161
4.6.4 Consistent application of costing
6.5 Amortisation of intangible assets 163
methods 99
6.6 Measurement subsequent to initial recognition 165
4.7 Net realisable value 99
6.6.1 Subsequent expenditure 166
4.7.1 Estimating net realisable value 100
6.7 Disclosure 166
4.7.2 Materials and other supplies 100
Summary 169
4.7.3 Write-down to net realisable value 100 Glossary 169
4.7.4 Reversal of prior write-down Demonstration problem 169
to net realisable value 101 Comprehension questions 171
4.8 Recognition as an expense 102 Case studies 171
4.9 Disclosure 102 Application and analysis exercises 173
Summary 103 References 177
Glossary 103
Demonstration problems 103 7 Impairment of assets 179
Comprehension questions 106 7.1 Introduction and scope 180
Case studies 107
7.2 When to undertake an impairment test 181
References 116 7.2.1 Evidence of impairment 182
7.3 The impairment test 183
5 Property, plant and equipment 117 7.4 Impairment loss: individual assets 185
5.1 The nature of property, plant and equipment 118 7.5 Impairment loss: cash-generating units 186
5.2 Initial recognition of PPE 118 7.5.1 Identifying a cash-generating unit 186
5.2.1 The significant parts approach 119 7.5.2 Goodwill and CGUs 187
Contents vii
7.5.3 Impairment loss for a CGU 188 9.2.4 Short-term paid absences 249
7.5.4 Corporate assets 190 9.2.5 Profit-sharing and bonus plans 251
7.6 Reversal of an impairment loss 192 9.3 Post-employment benefits 252
7.7 Disclosure 194 9.4 Accounting for defined contribution
Summary 197 post-employment plans 253
Glossary 197 9.5 Accounting for defined benefit
Demonstration problems 197 post-employment plans 254
Comprehension questions 201 9.5.1 Step 1: Determine the deficit
Case studies 201 or surplus of the fund 256
Application and analysis exercises 203 9.5.2 Step 2: Determine the amount of the
References 212 net defined benefit liability (asset) 257
9.5.3 Step 3: Determine the amounts to
8 Provisions, contingent liabilities and contingent be recognised in profit or loss 258
assets 213 9.5.4 Step 4: Determine the remeasurements
8.1 Introduction and scope 214 of the net defined benefit liability (asset) to be
8.2 Definition of a provision 215 recognised in other comprehensive income 259
8.2.1 Distinguishing provisions from other liabilities 215 9.6 Other long-term employment benefits 262
8.3 Definition of a contingent liability 216 9.7 Termination benefits 265
8.3.1 Distinguishing a contingent Summary 266
liability from a provision 216 Glossary 267
Demonstration problem 267
8.4 The recognition criteria for provisions 217
8.4.1 Putting it all together — a useful decision tree 218
Case studies 269
8.5 Measurement of provisions 219 Application and analysis exercises 270
8.5.1 Best estimate 219 Reference 276
8.5.2 Risks and uncertainties 220
8.5.3 Present value 220
10 Leases 277
8.5.4 Future events 221
8.5.5 Expected disposal of assets 221
10.2 What is a lease? 279
8.5.6 Reimbursements 221
10.3 Classification of leases 280
8.5.7 Changes in provisions and use of provisions 221
10.3.1 Classification guidance 280
8.6 Application of the definitions, recognition
10.4 Accounting for finance leases by lessees 285
and measurement rules 223
10.4.1 Initial recognition 285
8.6.1 Future operating losses 223
10.4.2 Subsequent measurement 285
8.6.2 Onerous contracts 223
10.4.3 Disclosures of finance leases
8.6.3 Restructuring provisions 224
required by lessees 288
8.6.4 Other applications 227
10.5 Accounting for finance leases by lessors 290
8.7 Contingent assets 230
10.5.1 Initial recognition 290
8.8 Disclosure 230
10.5.2 Subsequent measurement 291
8.9 Comparison between AASB 3/IFRS 3 and AASB 137/
10.5.3 Accounting for executory costs
IAS 37 in respect of contingent liabilities 233
and contingent rentals 291
8.9.1 Contingent liabilities acquired in
10.5.4 The initial direct costs anomaly 293
a business combination 233
10.5.5 Disclosures required by lessors 293
8.9.2 Contingent consideration in a
business combination 234 10.6 Accounting for finance leases by
Summary 235
manufacturer or dealer lessors 293
Glossary 235 10.7 Accounting for operating leases 294
Demonstration problem 235 10.7.1 Accounting treatment 294
Comprehension questions 239 10.7.2 Disclosures required 296
Case studies 239 10.8 Accounting for lease incentives 297
Application and analysis exercises 240 10.9 Sale and leaseback transactions 298
References 244 10.9.1 Leaseback is a finance lease 299
10.9.2 Leaseback is an operating lease 300
9 Employee benefits 245 10.9.3 Disclosures required 300
9.1 Introduction to accounting for employee benefits 246 10.9.4 Deferral and amortisation —
9.2 Short-term employee benefits 246 some theoretical concerns 300
9.2.1 Payroll 247 10.10 A proposed new model for lease accounting 301
9.2.2 Accounting for the payroll 247 10.10.1 Identifying a lease 301
9.2.3 Accrual of wages and salaries 248 10.10.2 Accounting by lessees 302
viii Contents
Summary 304 11.15.2 Risks arising from financial
Glossary 305 instruments and their management 349
Demonstration problems 305 Summary 350
Comprehension questions 312 Glossary 351
Case studies 312 Demonstration problems 352
Application and analysis exercises 313 Comprehension questions 355
References 319 Case studies 356
11 Financial instruments 321 References 360
11.1 Introduction to financial instruments 322
11.1.1 Transactions that result in 12 Income taxes 361
financial instruments 322 12.1 Introduction and scope 362
11.1.2 Transactions that do not result 12.2 Differences between accounting profit and
in financial instruments 322 taxable profit 363
11.2 Financial assets 323 12.3 Current and future tax consequences
11.3 Financial liabilities 324 of transactions 364
11.4 Derivative instruments 325 12.4 Calculation of current tax 365
11.4.1 Hybrid contracts with embedded derivatives 326 12.5 Calculation of deferred tax 370
11.5 What is an equity instrument? 327 12.5.1 Step 1: Determining carrying amounts 371
11.6 Distinguishing between financial liabilities and 12.5.2 Step 2: Determining tax bases 371
equity instruments 328 12.5.3 Step 3: Determining and classifying
11.6.1 Ordinary shares and preference shares 328 temporary differences 375
11.6.2 Contingent settlement provisions 329 12.5.4 Step 4(a): Determining the closing balances of
11.6.3 Contracts involving a company’s deferred tax assets and deferred tax liabilities 377
own equity instruments 329 12.5.5 Step 4(b): Determining the movement
11.7 Compound financial instruments — in deferred tax asset and deferred
convertible notes 331 tax liability accounts 378
11.8 Consequential effects of classifications for 12.5.6 Step 4(c): Determining the deferred
interest, dividends, gains and losses 332 tax adjustment entry 378
11.9 Recognition of financial asset or financial liability 333 12.5.7 Recognition criteria for deferred
11.9.1 Subject to contractual provisions 333 tax assets and liabilities 378
11.9.2 Recognition of regular way purchases 12.5.8 Other movements in deferred tax
or sales of a financial asset 333 accounts in the current period 379
11.10 Offsetting a financial asset and a 12.5.9 Offsetting tax assets and liabilities 380
financial liability 334 12.6 Changes in tax rates 381
11.11 Derecognition of a financial asset 12.7 Disclosure requirements 382
or a financial liability 335 Summary 385
11.11.1 Derecognition of financial asset 335 Glossary 385
11.11.2 Derecognition of financial liability 335 Demonstration problem 385
11.12 Initial measurement of a financial asset or a Comprehension questions 390
financial liability 337 Case studies 390
11.12.1 Initial measurement of financial asset 337 Application and analysis exercises 392
Reference 401
11.12.2 Initial measurement of financial liability 338
11.13 Subsequent measurement of a financial asset 339
13 Share capital and reserves 403
11.13.1 Summary of requirements 339
13.1 Equity 404
11.13.2 Measurement of financial
assets at amortised cost 340 13.2 Types of companies 405
11.13.3 Measurement of financial assets at 13.2.1 Not-for-profit companies 405
fair value 341 13.2.2 For-profit companies 405
11.13.4 Reclassification of financial assets 343 13.3 Key features of the corporate structure 407
11.14 Subsequent measurement of a financial liability 343 13.3.1 The use of share capital 407
11.14.1 Summary of requirements 343 13.3.2 Limited liability 407
11.14.2 Measurement of financial 13.3.3 Par value and no-par value shares 408
liabilities at amortised cost 344 13.4 Different forms of share capital 408
11.14.3 Measurement of financial 13.4.1 Ordinary shares 408
liabilities at fair value 345 13.4.2 Preference shares 409
11.15 Disclosures 346 13.5 Contributed equity: issue of share capital 411
11.15.1 Significance of financial instruments to financial 13.5.1 Issue of shares 411
position/performance 346 13.5.2 Oversubscriptions 414
Contents ix
13.6 Contributed equity: subsequent movements in 15.3 Measurement at fair value 480
share capital 415 15.3.1 Measurement requirement 480
13.6.1 Placements of shares 416 15.3.2 How to apply the fair value
13.6.2 Rights issues 417 measurement requirement 481
13.6.3 Share purchase plans 419 15.4 The recognition criteria 482
13.6.4 Dividend reinvestment plans 420 15.4.1 The recognition criteria for income generally 482
13.6.5 Options 421 15.4.2 Identifying the transaction 483
13.6.6 Bonus issues 422 15.4.3 Sale of goods 484
13.6.7 Capital raising in Australia 422 15.4.4 Rendering of services 486
13.7 Share capital: share buybacks 424 15.5 Interest, royalties and dividends 488
13.8 Reserves 426 15.6 Revenue recognition issues in various industries
13.8.1 Retained earnings 427 in practice 489
13.8.2 Other components of equity 428 15.6.1 The principal/agent distinction 489
13.9 Disclosure 430 15.6.2 Understanding multiple-element
13.9.1 Specific disclosures 430 arrangements 489
13.9.2 Statement of changes in equity 430 15.6.3 Telecommunications 491
Summary 433 15.6.4 Retail 493
Glossary 433 15.6.5 Airline 493
Demonstration problems 433 15.7 Interaction between AASB 118/IAS 18 and
Comprehension questions 437 other standards and interpretations 494
Case studies 438 15.8 Disclosure requirements of AASB 118 495
Application and analysis exercises 440 15.9 New developments in accounting for revenue 496
References 447
15.9.1 Step 1: Identify the contract or
contracts with the customer 496
14 Share-based payment 449 15.9.2 Step 2: Identify the performance
14.1 Objective and scope 450 obligations in the contract 496
14.2 Cash-settled and equity-settled share-based 15.9.3 Step 3: Determine the transaction price 497
payment transactions 451 15.9.4 Step 4: Allocate the transaction price to the
14.3 Recognition 452 performance obligation 497
14.4 Equity-settled share-based payment transactions 453 15.9.5 Step 5: Recognise revenue when (or as) the
14.4.1 Transactions in which services are received 453 entity satisfies a performance obligation 497
14.4.2 Transactions measured by reference to the Summary 498
fair value of the equity instruments granted 454 Glossary 498
14.5 Vesting 455 Demonstration problem 498
14.5.1 Treatment of vesting conditions 455 Comprehension questions 499
14.5.2 Treatment of non-vesting conditions 458 Case studies 500
14.6 Treatment of a reload feature 459
References 503
14.7 Modifications to terms and conditions on which
equity instruments were granted 461
14.7.1 Repurchases 461 Part 3 DISCLOSURE 505
14.8 Cash-settled share-based payment transactions 462
14.8.1 Share-based payment transactions 16 Presentation of financial statements 507
with cash alternatives 463 16.1 Components of financial statements 508
14.9 Disclosure 466 16.2 General features of financial statements 509
Summary 469 16.2.1 Fair presentation and compliance
Glossary 469 with standards 509
Demonstration problems 469 16.2.2 Going concern 509
Comprehension questions 473 16.2.3 Accrual basis of accounting 509
Case studies 473 16.2.4 Materiality and aggregation 510
16.2.5 Offsetting 510
Reference 476
16.2.6 Frequency of reporting 510
16.2.7 Comparative information 510
15 Revenue 477 16.2.8 Consistency of presentation 511
15.1 The scope of AASB 118/IAS 18 478 16.3 Statement of financial position 511
15.2 The definitions of income and revenue 478 16.3.1 Statement of financial position
15.2.1 Income 478 classifications 511
15.2.2 Revenue 479 16.3.2 Information required to be presented in
15.2.3 Ordinary activities and gross inflows 479 the statement of financial position 515
x Contents
16.3.3 Information required to be presented in the Summary 572
statement of financial position or in the notes 516 Glossary 572
16.3.4 Limitations of the statement Demonstration Problem 573
of financial position 517 Comprehension questions 581
16.4 Statement of profit or loss and other Case studies 581
comprehensive income 517 Application and analysis exercises 583
Reference 593
16.4.1 Items of comprehensive income 517
16.4.2 Information required to be presented 18 Accounting policies and other disclosures 595
in the statement of profit or loss and
18.1 Accounting policies 596
other comprehensive income 518
18.1.1 Disclosure of accounting policies 596
16.4.3 Information required to be presented
18.1.2 Disclosure of changes in accounting policies 603
in the statement of profit or loss and other
comprehensive income or in the notes 519 18.2 Changes in accounting estimates 605
16.4.4 Illustrative statements of profit or loss and other 18.3 Errors 606
comprehensive income 521 18.4 Impracticability in respect of retrospective
16.5 Statement of changes in equity 524 adjustments for accounting policy
16.5.1 Presentation of the statement
changes or correction of errors 607
of changes in equity 524 18.5 Materiality 608
16.5.2 Information required to be reported in 18.6 Events occurring after the end of
the statement of changes in equity 525 the reporting period 609
16.6 Notes 526 Summary 611
Glossary 611
16.6.1 Compliance with IFRSs and
Demonstration problems 611
Australian accounting standards 526
16.6.2 Statement of significant accounting policies 527 Case studies 613
16.6.3 Information about capital 528 Application and analysis exercises 614
16.6.4 Other disclosures 529 References 618
16.6.5 Illustrative examples of financial statements 529
Summary 530 19 Earnings per share 619
Glossary 530 19.1 Objective of AASB 133/IAS 33 620
Demonstration problems 531 19.2 Application and scope 621
Comprehension questions 539 19.3 Basic earnings per share 622
Case studies 539 19.3.1 Earnings 623
19.3.2 Shares 624
References 551
19.4 Diluted earnings per share 627
17 Statement of cash flows 553 19.4.1 Earnings 627
17.1 Purpose of a statement of cash flows 554 19.4.2 Shares 628
17.2 Defining cash and cash equivalents 554 19.5 Retrospective adjustments 631
17.3 Classifying cash flow activities 555 19.6 Disclosure 631
17.3.1 Classifying interest and dividends Summary 633
received and paid 556 Glossary 633
17.3.2 Classifying taxes on income 557
17.4 Format of the statement of cash flows 557 Case studies 636
17.4.1 Reporting cash flows from operating Application and analysis exercises 637
activities 558 Reference 638
17.4.2 Reporting cash flows from investing
and financing activities 559 20 Operating segments 639
17.4.3 Reporting cash flows on a net basis 559 20.1 Objectives of financial reporting by segments 640
17.5 Preparing a statement of cash flows 560 20.2 Scope 640
17.5.1 Cash flows from operating activities 561 20.3 A controversial standard 641
17.5.2 Cash flows from investing activities 567 20.4 Operating segments 642
17.5.3 Cash flows from financing activities 568 20.5 Reportable segments 644
17.6 Other disclosures 570 20.5.1 Identifying reportable segments 644
17.6.1 Components of cash and cash equivalents 570 20.5.2 Applying the definition of
17.6.2 Changes in ownership interests of reportable segments 647
subsidiaries and other businesses 570 20.6 Disclosure 648
17.6.3 Non-cash transactions 571 20.6.1 General information 648
17.6.4 Disclosures that are encouraged 20.6.2 Information about profit or loss,
but not required 572 assets and liabilities 648
Contents xi
20.6.3Measurement 649 Part 4 FOREIGN CURRENCY 697
Reconciliations 650
20.6.4
20.6.5Entity-wide disclosures 650 23 Foreign currency transactions and forward
Comparative information 650
20.6.6 exchange contracts 699
20.7 Applying the disclosures in practice 651
23.1 The need for translation of foreign
Summary 657
currency amounts 700
Glossary 657
Comprehension questions 657 23.1.1 Functional currency 700
Case studies 658 23.1.2 Types of foreign currency transactions 701
Application and analysis exercises 658 23.1.3 Monetary items 701
References 662 23.2 Exchange rates 702
23.3 Foreign exchange differences 703
21 Related party disclosures 663 23.3.1 Realised and unrealised exchange
differences 703
21.1 Objective, application and scope
23.3.2 The relationship between exchange rates and
of AASB 124/IAS 24 664
exchange differences 704
21.2 Identifying related parties 665
23.4 Accounting for foreign currency monetary items 705
21.3 Relationships that are not related
23.4.1 The transaction date 705
parties 667
23.4.2 Recording the transaction at
21.4 Disclosure 668
the transaction date 706
21.4.1 Related party transactions and related
23.4.3 Subsequent measurement of monetary item
party relationships 668
at the end of the reporting period 706
21.5 Government-related entities 670
23.4.4 Subsequent measurement of monetary item
Summary 671
at settlement date 707
Glossary 671
Comprehension questions 671 23.4.5 Illustrative examples 708
Case studies 672 23.5 Exchange differences for non-monetary
Application and analysis exercises 673 items 712
References 674 23.5.1 Qualifying assets 712
23.5.2 Revalued assets 713
23.5.3 Inventories write-downs and impairment 714
22 Sustainability and corporate social responsibility 23.6 Foreign exchange risk 715
reporting 675 23.7 Forward exchange contracts without
22.1 Sustainability and corporate social hedging 715
responsibility 676 23.7.1 The nature of a forward contract 715
22.1.1 Origins of sustainability and corporate 23.7.2 The fair value of a forward contract 716
social responsibility 676 23.7.3 Accounting where there is no
22.1.2 Reasons for adopting sustainable and hedging relationship 717
corporate social responsibility practices 676 23.8 Forward exchange contracts with hedging 719
22.2 Stakeholder influences 678 23.8.1 Hedging relationships that qualify
22.2.1 Ethical investment 683 for hedge accounting 719
22.3 Sustainability reporting 683 23.8.2 Accounting for hedging relationships 721
22.3.1 Integrated reporting 684 23.9 Disclosures 725
22.3.2 Environmental reporting 685 Summary 725
22.4 Guidelines for sustainability and Glossary 726
CSR reporting 686 Demonstration problems 727
22.4.1 Global Reporting Initiative 687 Comprehension questions 729
22.4.2 Mandatory sustainability and Case studies 729
CSR reporting requirements 688 Application and analysis exercises 729
22.4.3 Social and environmental
management systems 690 24 Translation of foreign currency financial
22.5 Climate change and accounting 690 statements 735
22.5.1 Emissions reduction schemes 690
22.5.2 Accounting for carbon emissions 691
24.2 Functional and presentation currencies 737
Summary 692
Glossary 692 24.2.1 Functional currency 738
Comprehension questions 693 24.2.2 Identifying the functional currency 738
Case studies 693 24.3 The translation process 740
Application and analysis exercises 694 24.4 Translation into the functional currency — the
References 695 temporal method 742
xii Contents
24.5 Translation from the functional currency into the 27 Consolidation: wholly owned entities 819
presentation currency — the current rate method 746 27.1 Consolidation process in the case of
24.5.1 Choice of a presentation currency 748 wholly owned entities 820
24.6 Disclosure 749 27.2 Consolidation worksheets 821
Summary 750 27.3 The acquisition analysis 822
Glossary 750
27.3.1 Parent has no previously held equity interest in
the subsidiary 823
27.3.2 Parent has previously held equity
Case studies 755
interest in the subsidiary 824
References 765 27.4 Consolidation worksheet entries at the
acquisition date 825
Part 5 ECONOMIC ENTITIES 767 27.4.1 Business combination valuation entries 826
27.4.2 Pre-acquisition entries 826
25 Business combinations 769 27.4.3 Consolidation worksheet 827
25.1 Objective of AASB 3/IFRS 3 770 27.4.4 Subsidiary has recorded goodwill
25.2 Determining whether a transaction is at acquisition date 828
a business combination 771 27.4.5 Subsidiary has recorded dividends
25.3 The acquisition method 773 at acquisition date 829
25.4 Step 1: Identify the acquirer 773 27.4.6 Gain on bargain purchase 830
25.5 Step 2: Determine the acquisition date 775 27.5 Consolidation worksheet entries subsequent
to the acquisition date 831
25.6 Step 3: Recognise and measure identifiable
assets acquired and liabilities assumed 775 27.5.1 Business combination valuation entries 831
25.6.1 Recognition 776 27.5.2 Pre-acquisition entries 838
27.6 Consolidation worksheet entries when the subsidiary
25.6.2 Measurement 776
revalues its assets at acquisition date 845
25.7 Step 4: Recognise and measure goodwill and
27.7 Disclosure 846
a gain on bargain purchase 778
Summary 848
25.7.1 Consideration transferred 778
Glossary 849
25.7.2 Acquisition-related costs 780
Demonstration problems 849
25.7.3 Goodwill 781 Comprehension questions 860
25.7.4 Gain on bargain purchase 784 Case studies 861
25.8 Disclosures 785 Application and analysis exercises 862
Summary 785
Glossary 786 28 Consolidation: intragroup transactions 875
Demonstration problem 786 28.1 The need for intragroup adjustments 876
Comprehension questions 788 28.2 The adjustment process 876
Case studies 788 28.3 Inventories 878
Application and analysis exercises 790 28.3.1 Sales of inventories in the current
References 800 period 878
28.3.2 Sales of inventories in the prior period 883
26 Consolidation: controlled entities 801 28.4 Property, plant and equipment 886
26.1 Consolidated financial statements 802 28.4.1 Sale of property, plant and equipment 886
26.2 Control 804 28.4.2 Depreciation and realisation of profits 889
26.2.1 Power 804 28.4.3 Change in classification of transferred
26.2.2 Exposure or rights to variable returns 806 assets 892
26.2.3 Ability to use power to affect returns 807 28.5 Intragroup services 896
26.2.4 Agents 807 28.6 Dividends 897
26.3 Consolidation process 808 28.6.1 Dividends declared in the current
26.4 Circumstances where a parent may not prepare period but not paid 897
consolidated financial statements 809 28.6.2 Dividends declared and paid
26.5 Disclosure 811 in the current period 899
26.5.1 Disclosures required by AASB 12/IFRS 12 811 28.6.3 Bonus share dividends 899
26.5.2 Disclosures required by AASB 127/IAS 27 813 28.7 Intragroup borrowings 901
Summary 814 Summary 903
Glossary 814 Glossary 903
Comprehension questions 814 Demonstration problem 903
Case studies 815 Comprehension questions 909
Application and analysis exercises 815 Case studies 909
Reference 818 Application and analysis exercises 910
Contents xiii
29 Consolidation: non-controlling interest 919 Comprehension questions 1009
Case studies 1009
29.1 The nature of a non-controlling interest 920
29.2 Measurement and disclosure of the
NCI share of equity 920 31 Associates and joint ventures 1025
29.2.1 Measurement of the NCI share of equity 920 31.1 Introduction and scope 1026
29.2.2 Disclosure of NCI 920 31.2 Identifying associates and joint ventures 1028
29.3 The consolidation worksheet in 31.2.1 Associates 1028
the presence of NCI 923 31.2.2 Joint ventures 1029
29.4 The effects of the NCI on the goodwill
31.3 The equity method of accounting:
recognised in the consolidation process 924 rationale and application 1030
29.4.1 Full goodwill method 925
31.3.1 Rationale for the equity method 1030
29.4.2 Partial goodwill method 926
31.3.2 Application of the equity method: consolidation
29.4.3 Analysing the two methods 927 worksheet or investor’s accounts 1030
29.5 Calculating the NCI share of recorded equity 928 31.4 Applying the equity method: basic principles 1031
29.5.1 Basic principles 928 31.5 Applying the equity method: goodwill
29.5.2 Step 1: Measurement of the and fair value adjustments 1033
NCI at acquisition date 929 31.5.1 Applying the equity method
29.5.3 step 2: Measurement of the NCI share across multiple years 1035
of changes in equity between acquisition date 31.6 Applying the equity method — inter-entity
and beginning of the current period 932 transactions 1038
29.5.4 step 3: Measurement of the NCI share of 31.7 Share of losses of an associate or joint venture 1046
changes in equity in the current period 934 31.8 Disclosure 1048
29.5.5 Posting the NCI entries into the Summary 1051
consolidation worksheet 935 Glossary 1051
29.6 Adjusting NCI for the effects of Comprehension questions 1051
intragroup transactions 936 Case studies 1052
29.7 Gain on bargain purchase 940 Application and analysis exercises 1053
29.8 Disclosure 941 References 1060
Summary 941
Glossary 941
32 Joint arrangements 1061
Demonstration problem 941 32.1 Introduction and scope 1062
Comprehension questions 953 32.2 Joint arrangements: characteristics
Case studies 953 and classification 1063
Application and analysis exercises 954 32.2.1 The characteristics of a joint arrangement 1063
Reference 970 32.2.2 The classification of a joint arrangement 1064
32.3 Accounting for joint arrangements 1068
30 Consolidation: other issues 971
32.3.1 Accounting by the joint operation itself 1068
32.4 Accounting by a joint operator 1070
30.2 Direct and indirect non-controlling interest 972
32.4.1 Contributions of cash to a joint operation 1070
30.3 Sequential acquisitions 973
32.4.2 Contributions of assets to a joint operation 1071
30.3.1 Calculation of the NCI share of equity 974
32.4.3 Management fees paid to a joint operator 1074
30.3.2 The effects of intragroup transactions
32.5 Disclosure 1075
on the calculation of the NCI 977
Summary 1076
30.3.3 Dividends 978
Glossary 1077
30.4 Non-sequential acquisitions 980 Demonstration problem 1077
30.5 Changes in ownership interests 984 Comprehension questions 1081
30.5.1 Changes in ownership interests Case studies 1081
without loss of control 985 Application and analysis exercises 1082
30.5.2 Acquisition of additional shares by the References 1091
parent subsequent to date of acquisition 985
30.5.3 Sale of shares by parent with
33 Insolvency and liquidation E-CHAPTER
retention of control 987
33.1 Insolvency
30.5.4 Changes in ownership interests
with loss of control 989 33.2 Receivership
30.5.5 Disclosures relating to changes 33.3 Administration
in ownership interests 991 33.4 Liquidation
Summary 991 33.4.1 Winding up by the court
Glossary 992 33.4.2 Voluntary winding up
Demonstration problems 992 33.5 Powers of a liquidator
xiv Contents
33.6 Identifying the company’s debts on liquidation 34.9 Developments and contemporary issues
33.7 Ranking the company’s debts on liquidation 34.9.1 Accounting for waste removal costs
33.7.1 Secured creditors 34.9.2 The IASB’s extractive activities project
33.7.2 Preferential unsecured creditors Summary
33.7.3 Ordinary unsecured creditors Glossary
33.7.4 Deferred creditors Comprehension questions
Case studies
33.8 Rights of contributories on liquidation
Application and analysis exercises
33.8.1 Insufficient funds to pay creditors
References
33.8.2 Sufficient funds to pay creditors, but not
to repay all share capital to contributories
33.8.3 Surplus funds over and above 35 Agriculture E-CHAPTER
creditors’ and contributories’ claims 35.1 Introduction to AASB 141/IAS 41

33.8.4 Calls in advance and arrears of dividends 35.2 Scope and key definitions
33.9 Accounting for liquidation 35.2.1 Scope
33.9.1 Reports prepared by the company for the liquidator 35.2.2 Key definitions
33.9.2 Realisation of the assets 35.3 The harvest distinction
33.9.3 Possession of assets by secured creditors 35.4 The recognition criteria for biological
33.9.4 Payment to other creditors in order of priority assets and agricultural produce
33.9.5 Return of capital to contributories 35.4.1 The recognition criteria
Summary 35.4.2 The problem with ‘control’
Glossary 35.5 Measurement at fair value
Demonstration problems 35.5.1 Measurement requirement
Comprehension questions 35.5.2 Arguments for and against the use of fair value
Case studies 35.5.3 How to apply the fair value
Application and analysis exercises measurement requirement
35.5.4 Gains and losses
34 Accounting for mineral resources E-CHAPTER
35.6 Practical implementation issues
34.1 Mineral resources in context with the use of fair value
34.2 Objective of AASB 6/IFRS 6 35.6.1 Immature biological assets
34.3 Application and scope of AASB 6/IFRS 6 35.6.2 Measuring the fair value of vineyards and grapes
34.4 Recognition of exploration and evaluation assets 35.6.3 Disclosure practices
34.4.1 Temporary exemption from AASB 108/IAS 8 35.7 Government grants
paragraphs 11 and 12
35.8 The interaction between AASB 141/IAS 41 and
34.4.2 Treatment of exploration and evaluation AASB 116/IAS 16, AASB 140/IAS 40
expenditures in Australia and AASB 117/IAS 17
34.5 Measurement of exploration and evaluation assets 35.9 Disclosure requirements
34.5.1 Measurement at recognition 35.9.1 General disclosures
34.5.2 Obligations for removal and restoration 35.9.2 Additional disclosures for biological assets
34.5.3 Measurement after recognition where fair value cannot be measured reliably
34.5.4 Changes in accounting policies 35.9.3 Government grants
34.5.5 Depreciation and amortisation 35.10 Preparing financial statements when
34.6 Presentation applying AASB 141/IAS 41
34.6.1 Classification of E&E assets Summary
34.6.2 Reclassification of E&E assets Glossary
34.7 Impairment Comprehension questions
34.7.1 Recognition and measurement Case studies
Application and analysis exercises
34.7.2 Specifying the level at which E&E assets are
References
assessed for impairment
34.8 Disclosure Index 1093
Contents xv
Preface
We are excited to present the first edition of Financial Reporting! This new text builds on the strengths of
Understanding Australian Accounting Standards (Loftus) and Company Accounting (Leo), bringing the strongest
elements of those two respected titles into one combined volume.
Financial Reporting is designed to be used in the second and third year financial accounting courses. It covers
all the topics typically taught across two units, including company regulation, the conceptual framework, applying
accounting standards, disclosures and consolidations.
Our aim was to produce a book that explained accounting principles and practice to students in a clear, under-
standable way. In endeavouring to make accounting more understandable to students we have not lost sight of
the fact that Accounting Standards are principles-based. An understanding of the conceptual basis of accounting
and the rationale behind the principles espoused in particular standards is crucial to their consistent application
in a variety of practical contexts. The text then provides both a conceptual understanding as well as a practical
application of accounting standards.
At the time of writing the International Accounting Standards Board had several major projects on its agenda
that have implications for topics covered in this book, including financial instruments, revenue and leases. The
following discussion explains how those projects and the ensuing changes to accounting standards have been
treated in this book.
Accounting for financial instruments is regulated by AASB 132/IAS 32 Financial Instruments: Presentations,
AASB 7/IFRS 7 Financial Instruments: Disclosures and either AASB 139/IAS 39 Financial Instruments: Recog-
nition and Measurement or AASB 9/IFRS 9 Financial Instruments, which is effective from 1 January 2018 with
early adoption permitted. Much of the coverage of recognition and measurement issues in the financial instru-
ments chapter is based on AASB 9/IFRS 9 in anticipation of the Standard becoming effective from 1 January
2015, as per the scheduled operative date at the time of writing. However, impairment of financial instruments is
based on AASB 139/IAS 39 due to the timing of revision to that section of AASB 9/IFRS 9. Occasional refer-
ence is also made to AASB 139/IAS 39 in explaining terms, such as transaction costs, where AASB 9/IFRS 9
defers to the earlier standard for definitions.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, with the AASB following suit
with the issue of AASB 15 Revenue from Contracts with Customers in December 2014. When effective, that is,
from 1 January 2017, AASB 15/IFRS 15 will replace the current suite of pronouncements that regulate accounting
for revenue and other income — namely, AASB 111/IAS 11 Construction Contacts, AASB 118/IAS 18 Revenue,
AASB Interpretation 13/IFRIC 13 Customer Loyalty Programmes, AASB Interpretation 15/IFRIC 15 Agreements
for the Construction of Real Estate, AASB Interpretation 18/IFRIC 18 Transfers of Assets from Customers and
AASB Interpretation 131/SIC-31 Revenue — Barter Transactions Involving Advertising Services. The chapter on
revenue is based on the currently applicable standards and interpretations, with a section devoted to the principles
of AASB 15/IFRS 15 and their application.
A new IFRS on leases has been scheduled for release in the second half of 2015. Accordingly, the approach
adopted in this book is based on AASB 117/IAS 17 Leases, supplemented by comprehensive coverage of the
approach adopted by the IASB in developing the proposed new standard. The section explains the principles
embodied in the new approach and illustrates their application.
Learning design
We recognise that a university textbook should not be written for practising accountants, but for those who are
learning accounting prior to entering the accounting profession. Besides making explanations as simple as poss-
ible, we have not tried to cover everything that an accounting practitioner needs to know. We recognise that
university students will undertake further education and professional qualifications. Hence, we have provided
students with the basis necessary for further study. We see it as important that the basic principles are clear and
well understood before more difficult issues are discussed.
The author team has brought their collective teaching insights to bear on the learning design of the
text — the hallmark features of which include: an optimised mix of basic, moderate and difficult illustrative
examples; a similar graduation with the end-of-chapter questions; applications in the form of case studies;
and end-of-section learning checks to assist students to understand what they should now know and/or be
able to do.
xvi Preface
Concepts for review. This feature lists the prerequisite knowledge students need in order to understand the
chapter. It prompts students to revise those concepts should they need to.
Learning objectives. The learning objectives have been designed to articulate into the broader Accounting
Threshold Learning Objectives. They reflect the level of knowledge and skill that an accounting major should
have acquired after studying each section of the chapter.
Key terms. The important terminology introduced in the chapter is bolded and coloured. These key terms help
students identify the most important concepts. They are also listed at the end of each chapter to help students
assess their knowledge.
AASB standards. Quotes from the AASB standards and explanations are included throughout the text. The
equivalent international standard is also noted.
Illustrative examples. In each chapter a range of illustrative examples are provided to model how accounting
principles are applied. The aim is to enable students to gradually build their understanding and skills by pro-
viding lower level examples initially and then progressing to more detailed scenarios as the chapter progresses.
Learning checks. A list of the main points covered in the topic appears at the end of every section. This helps
students to revise and assess whether they need to study the section more before proceeding to the next one.
Chapter summaries. Each chapter concludes with a succinct overview of the key concepts and processes dis-
cussed in the chapter.
Application and analysis exercises. End of chapter exercises allow students to test their progress and whether
they have understood what they have read. These exercises require the student to apply their knowledge to
specific problems and scenarios and are at graduated levels of difficulty, allowing students to build confidence by
achieving success with basic problems before tackling the more complex tasks.
Case studies. The case studies require the students to write a report explaining the accounting concepts relevant
to a particular example/scenario. As part of this, they may have to solve problems, but the focus is on explaining the
concepts.
Comprehension questions. Comprehension questions require the student to discuss, explain or apply a concept
rather than simply restate it.
Threshold Learning Outcomes. There is a growing demand for graduates with strong skills in communication,
problem solving, critical thinking and judgement, and the need to provide assurance that graduates have devel-
oped these skills. To this end, Threshold Learning Outcomes for accounting bachelors and coursework masters
degrees have been developed. This text supports the development of these learning outcomes by highlighting
which skills are developed across the end-of-chapter application and analysis exercises
WileyPLUS. The text is accompanied by a WileyPLUS course featuring algorithmic versions of most of the
end-of-chapter questions plus animated examples of the key demonstration problems from the text with additional
explanatory content to facilitate student self-study.
Supplementary materials
Financial Reporting 1st Edition is supported with an extensive teaching and learning resources supplementary
package.
•• WileyPLUS is a research-based online environment for effective teaching and learning. With WileyPLUS, lecturers
can prepare, assign and grade accounting activities simply and in a time-efficient manner. WileyPLUS increases
student confidence through an innovative design that allows greater engagement, which leads to improved learning
outcomes. For more information, contact your John Wiley & Sons sales consultant or visit www.wileyplus.com.
•• A solutions manual containing worked solutions to all end-of-chapter discussion questions, exercises, prob-
lems, case studies and activities is available for lecturers who prescribe this text. The solutions manual has
been thoroughly checked for accuracy and correctness.
•• PowerPoint Presentations contain over 1000 slides with summaries of key concepts and processes presented in
the chapter as well as key diagrams and worked examples from the text.
•• A testbank contains over 1000 multiple-choice questions designed to test students’ knowledge and under-
standing of the key concepts from the text.
Janice Loftus
Ken Leo
Noel Boys
Belinda Luke
Sorin Daniliuc
Hong Nee Ang
Karyn Byrnes
March 2015
Preface xvii
Acknowledgements
The authors and publisher would like to thank the following copyright holders, organisations and individuals for
their permission to reproduce copyright material in this book.
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Council: 11 From the Financial Reporting Council, Australian Accounting Standards Board and Auditing and Assur-
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Council. • © Australian Accounting Standards Board: 13, 336, 458, 1065, 1067 © Commonwealth of Australia 2015.
All legislation herein is reproduced by permission but does not purport to be the official or authorised version. It is
subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publi-
cation of Commonwealth legislation. In particular, s.182A of the Act enables a complete copy to be made by or on
behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should
be sought in writing from the Commonwealth available from the Australian Accounting Standards Board. Requests
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Part 1
THEORY AND PRACTICE

1 Accounting regulation and the conceptual framework 3
2 Application of accounting theory 33
3 Fair value measurement 55
1 Accounting regulation and
the conceptual framework
CHAPTER AIM
This chapter introduces the regulatory framework that governs financial reporting in Australia, including the
conceptual framework and accounting standards issued by the Australian Accounting Standards Board (AASB)
and the International Accounting Standards Board (IASB), the Corporations Act 2001 and the Australian Securities
Exchange Listing Rules.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 assess whether an entity is a reporting entity in the context of the regulation of financial reporting
2 identify the roles of the key bodies involved in accounting regulation in Australia
3 explain the structure, role and processes of the International Accounting Standards Board (IASB) and the IFRS
Interpretations Committee (IFRIC)
4 explain the key components of the conceptual framework
5 explain the qualitative characteristics that make information in financial statements useful
6 discuss the going concern assumption underlying the preparation of financial statements
7 define the basic elements in financial statements — assets, liabilities, equity, income and expenses
8 explain the principles for recognising the elements of financial statements
9 distinguish between alternative bases for measuring the elements of financial statements
10 outline concepts of capital maintenance.
CONCEPTS FOR REVIEW

Before studying this chapter, you should understand and, if necessary, revise:
•• the basic accounting system used to record and classify transactions
•• the rules of double-entry accounting and how to apply these rules in analysing transactions
•• the purpose and basic format of accounting journals, ledger accounts and financial statements.
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"And why so?" I asked.
"Because, an you read and believe it, you will never go back
there," answered Dick; and that was all I could get out of
him.
Dick is changed, but not as Mistress Bullen said. He is far

graver, and more manly than he used to be. He has lost
most of his old blundering bashfulness, and seems indeed
not to think of himself at all. The very expression of his face
is changed, yet he has all his old kind ways, and is just as
ready to do service to gentle and simple.
It is odd he never so much as noticed the change in my

dress.
I am vexed when I think of the coil that was made about

poor Dick's simple offering. If dear Mother had only opened
it—but she will know when I write to her.
To-morrow is May-day, and is like to be fine. If so we shall

go down as usual, and see the dances on the green, and
perhaps join in them. My Lord and Lady have promised to
grace us with their presence. I fear she will think our
country ways but rude and boisterous, as she has lived all
her life in town and about the Court; though in her manners
she is as modest and simple as any country maid.
CHAPTER XXVI.
May 12.
THE May games went off very well. We had all the usual
sports—Robin Hood and Little John, Maid Marian and all the
rest of them, and besides a Miracle play—the first ever seen
in these parts, and for mine own part I should hope it might
be the last. The players, it seems, were at Biddeford May
games, and hearing that we were to have unusual festivities
here, they sent a deputation hither, praying my Lord and
my father to patronize them. The Prior also gave them his
good word, so my Lord consented and won my father to do
the same.
The old May pole having been shivered by lightning last

year, my Lord gave a new one from his own woods, a fine,
stately shaft, which was duly bedizened with flowers and
ribbons, and drawn to its place on the morning of the
games, with all the oxen that could be mustered, and a
great noise of horns, hautbois and fiddles.
We walked down to the green about ten of the clock, and

found the lads and maids dancing about the pole, and more
than the usual crowd assembled. There was an Egyptian
woman telling of fortunes, a travelling huckster or two with
ribbons, toys and gingerbread, and another selling of books
and ballads, who I fear made but a bad speculation. He was
a sober, decent-looking man, and seeing him looking our
way, my mother beckoned him, and began looking over his
stock, which was made up mostly of tracts and primers,
with some ballads and penny prints of saints and virgins.
"And have you no other wares than these?" asked my step-

dame. "There are many new books going now-a-days?"
"And that is true, madam," answered the chapman, (and I

could not but notice how well he spoke, respectfully, but
with no fawning servility, such as chapmen commonly use).
"The present time is, under your favor, like the householder
in the scriptures, bringing forth out of his treasures things
new and old. Aye, and the old have been so long forgot in
these parts that they are the newest of all."
"And that is true!" answered my mother. "Well, this is but a

public place. Come you to Corby End this evening, and we
will look over your wares, and give you a night's
entertainment."
The man gave her courteous thanks and turned away. Just
then Harry came to tell us that the play was about to begin,
and only waited our coming to the seats reserved for us.
"I have little fancy for these mummeries," said my Lady to

us, as we took the stools which had been set for our
accommodation; "but yet we must not mortify the poor
players. I trust they will confine themselves in proper
bounds."
"'Tis the Passion of our Lord they are about to play," said
the Prior of Stanton, who had his seat near us. "No one can
object to that, surely."
"With submission, reverend Father, such a subject seems to

me hardly fitted for the day and the scene," answered my
Lady, gently. "Besides, does it not seem to you to savor of
presumption—to say no more—that a poor strolling player,
and he often a lewd and profane person, as but too many of
them are—should take upon himself to personate our
suffering Lord, putting his own words in the mouth of one
so unspeakably august and venerable?"
The Prior fidgetted on his scat, and looked somewhat

uncomfortable as he answered:
"You know, my Lady, the Church path always sanctioned

these things, considering them to be of the nature of
pictures and images, which are called the books of the
unlearned."
"But why not expend the time and treasure which these
things cost, in teaching the unlearned?" asked my mother.
"Nay, Madam, that would never do," answered the Prior.

"What, would you have Jack and Jill, and Hodge and Joan,
leaving their ploughing and spinning to pore over books of
divinity, and discuss questions of casuistry? What then
would become of the work, and of the respect which they
owe to their betters?"
The poor old fat priest got so red and did seem so
disturbed, that I was glad my mother made him no reply,
save a smile. Indeed, she had no time to do so, for the play
began directly.
I had never seen such an one before, and I must say I was
shocked. There were all the holy Apostles, our Lady
(represented by a simpering boy with a crack in his voice)
Pontius Pilate (a most truculent looking personage), the two
thieves, and worst of all, our Lord himself, besides devils
and angels in plenty. The people made their remarks freely
enough, and I can't say they seemed greatly solemnized or
edified. The part which pleased them most was when the
devils thrust Judas down to the infernal pit, and were then
kicked after him, without any ceremony, by the angels, who
afterward ascended to heaven, one at a time, on the same
cloud which had served our Lord, and which was worked in
plain sight by a man with a rope and a winch.
It seems to me almost profane to write these things down,

and yet I don't know why I should feel so. We used to make
little Christs of wax at the convent, and paint them to the
life, and nobody thought any harm of that. And there were
our Bethlehems, which practice was begun by Saint Francis
himself, our holy founder, and at the first of which happened
a wonderful miracle, for during the ceremony, the saint was
seen caressing an infant of celestial beauty, who appeared
to the astonishment of all beholders. The straw on which
this apparition happened was preserved with great
devotion, and worked many miraculous cures. We had some
of it among our relics, and 'twas held almost as sacred as
the glass containing the Holy Virgin's milk. But I am
forgetting the May games.
After the play was ended, the dancing began anew. Several
of the fathers were down from the convent, as usual, but
methought they were not very cordially received. And when
Father Jerome ventured to chuck Jan Lee's new wife under
the chin, with what I must needs say was rather a broad
jest, Jan gave him a look as black as thunder and drew his
bride away. I too had an encounter which did not please
me. I was standing by my father, and leaning on his arm,
when the Prior came up to us with the same dark priest who
had been in the church on Sunday, and presented him to
my father as Father Barnabas of Glastonbury. Then turning
to me:
"What, my fair Rosamond, is this you? I did not know the

dove in her plumage!"
While I was thinking what to say in reply, the other priest
broke in:
"Methinks neither the plumes nor the place are very well
suited to the promised bride of Christ; how well soever they
may beseem fair Rosamond!" with an emphasis on the
name. It was now my father's turn to look black.
"My daughter, sir priest, is no nun; and being as yet under

her father's roof and rule, she dresses to please him, like a
dutiful maiden, and according to the words we heard last
Sunday: 'Honor thy father and mother.'"
"Aye, there it is," said the prior. "Now may we see what
comes of these innovations. Soon every man will be ready
with his text and his commentary—according to the boast of
that archfiend Tyndale, which I heard him make to myself,
that he would so order matters that in a few years every
ploughboy should know more of Scripture than I did. And
what are we to do then!"
"Lackaday! I don't know," answered Will Paxton, my Lord's

jester, putting in his word as usual—"'Tis an ill-ordered
house where the man can write, though the master can't
read."
Whereat the priest frowned, and my father laughed heartily,

and gave Will a silver groat, bidding him go buy a fairing for
his sweetheart. Then saying that I was standing too long
and would be ill again, he led me away, and we presently
went up to the Court to spend the day with my Lady, to
whom I had promised instruction in the art of knitting. We
passed a very quiet and pleasant day, and walking home
together in the twilight, in a thoughtful mood, I suddenly
bethought myself of Dick's little book, and asked my
mother, saying:
"Madam, have you ever seen one of these same Testaments
of Master Tyndale's?"
"Aye, daughter, that have I! I have both seen and read it!"
she answered.
"And do you think 'tis really the true Gospel?" I asked

again, remembering what Amice had told me about it.
"I have no doubt of it. Master Ellenwood, at my request,

and for his own satisfaction, has been comparing it with the
Greek and Latin text, and says 'tis marvellously well done."
"Oh, how I should love to read it!" I exclaimed.
"You would find many things to astonish you, my child,"

answered my mother. "Yea, to upset all your former notions,
and mayhap lead you to renounce and contemn many
things which you have been used to hold most sacred all
your life long."
"Dick said I must not read it if I ever meant to go back to

the convent," I said. "But mother—Madam, I would say—"
"Nay, dearest child, call me ever mother, if you will," said

she, pressing my arm kindly. "'Tis very sweet to me to hear
the name fall so naturally from your lips. But what would
you say, dear heart?"
"I was going to say, that this difference seems very strange
and sad to me," I went on. "If the Gospels are right—and
the true Gospel must be right—then is the Church wrong!"
"Well, what then?" she asked. "Your reasoning is good, but

what then?"
"Why, then we must follow the Gospel, as it seems to me," I
answered. "But, mother, will you let me have this Gospel to
read?"
"Yes, child! Since you ask it, I can do no otherwise," said

she, after a moment's hesitation. "I dare not withhold the
word of God from you—but alas, my child, have you
considered that you may be taking in hand the torch to light
your own funeral pile, withal? Shall I give you that which
may be your death?"
"Why not, if it shall lead me to eternal life?" I said.

"Besides, it may not be so bad as you say. Mistress Bullen
favors the new teachings, my Lady says—not that I think
any better of them for that, but she is very great with the
King, as we all know."
"I build not at all on Mrs. Bullen's favor," answered my Lady.

"She is indeed in the sunshine of his Majesty's countenance
even now, but how long will she stay there, think you? She
is beautiful and brilliant and fascinating, if you will—though
I must say she never pleased me—but she hath neither
principle nor prudence to guide her in her dangerous path.
Ah, child, be thankful that you have grown up at home, and
not in a Court."
"But as to this book!" I ventured to say.
"As to this book, you shall have it, if your father be willing
to let you run the risk. But count the cost, my child, and
pray for guidance to Him who has promised to give wisdom
to them that ask. When you have done so, come to me in
my closet, and I will put into your hands the word of God."
CHAPTER XXVII.
June 1.
DICK was right! I shall never go back to the convent.
The next day after the May games, my mother, according to

her promise, put into my hand Master Tyndale's New
Testament, and with it a copy of the same in Latin—the
Vulgate, as 'tis called—bidding me compare as I read. Since
then every leisure moment has been spent in reading and
studying and comparing, and oh, in what a new world of
thought and feeling and experience do I find myself! What
clouds have cleared away from my mind!
I have spent many hours closeted with my mother, and

while our fingers worked at Harry's outfit, our minds were
busy with these great themes. No, I never can go back,
never can take the veil! I find in the word of God no warrant
for any such life.
How astonished I was to find that St. Peter and St. James
and other of the Apostles had been married—that our Lady
herself seems to have lived at home with her husband like
any other woman—and that she is nowhere represented as
bearing any rule, or being of more authority in the Church
than any other woman. Indeed, our Lord Himself said that
any one who had His word and kept it, was as near to Him
as His mother—"the same is my brother, and sister, and
mother"—are His words. And then this very Gospel, which
the priests keep so jealously from us, was at the first
preached to the common folk in those parts—they followed
Him in crowds to hear His words, and indeed very few of
the better or more religious class followed Him at all. But I
cannot write down all my thoughts—they are too new and
too precious. I must think them over.
My mother tells me that the chapman whom we saw at the

May games, and who stayed more than one night here and
at the Court, was a member of the fraternity known among
themselves as the Christian Brothers—a company of
merchants and men of substance who devote their time,
their means, yea and their lives also to spreading the word
of God in this land. This same Master Bradbury's stock in
trade consisted chiefly of Testaments, or fragments of the
same, which he disseminated wherever he found
opportunity.
My mother, I can see, builds nothing at all on his Majesty's

favor for the new religion. She says he may quarrel with the
Pope about this matter of the divorce, but if so, 'twill be but
to make himself Pope instead. He is already highly enraged
at Tyndale, because of his letter against the divorce, and
hath forbidden the circulation of his books; but, said my
mother, he might as well forbid the wind to blow.
'Tis even as Master Ellenwood said—like making a breach in

the dykes and forbidding the sea to run through.
But I can't help hoping more than my mother does—

perhaps because I am younger. Anyhow I am sure I shall
never be sorry that I have come to know the true Gospel. It
has cleared away many doubts and fears and cares from my
mind. All anxiety for my mother's soul, for one thing;
because, though she believed as she was taught, and never
saw this book, yet I am sure she trusted in God for her
salvation, and served Him according to the light that she
had. As for my dear Amice, I feel sure that she has obtained
the object of her old ambition, though in a far different way
from that she proposed for herself, and is now indeed a
saint—a glorified saint, to go no more out from His presence
forever, in whom she trusted. Oh, that dear Mother
Gertrude could have this comfort about one whom she
mourns as eternally condemned to perdition! I cannot give
it her—I can only pray for her and—what a word have I here
written! Only pray for her, forsooth!
CHAPTER XXVIII.
I HAVE had an adventure which hath bred serious
consequences in the household.
The night before last was very dark and sultry, with thick,
low hanging clouds, and a feeling of thunder in the air. The
sea was calling loudly, and Dobby's Pool roaring in that
hollow, boding tone, which always foretells a storm. I had
had a headache, and some threatenings of a chill, a
visitation to which I am now and then subject, and my
mother gave me a dose of her favorite spicy cordial, and
sent me early to bed.
Thunder always makes me drowsy, and I was soon asleep.

It must have been near midnight when I waked. The waning
moon had risen, and shone full into the chamber and on the
door of my mother's oratory. To my utter amazement it
opened slowly, and a figure issued therefrom, dressed in my
mother's garments, and bearing in one hand a dim light, in
the other my old convent dress, which it seemed to hold up
reproachfully before my eyes, while it uttered in a hollow
whisper these words:
"Wretched, apostate child! Will you doom your own soul and
your mother's to the flames of hell forever?"
I was scared at first, I confess—but the moment the

apparition spoke, my courage returned, or something which
served me instead. I sprang from the bed, and snatching
the bed staff which stood near, I rushed at the would-be
ghost, which retreated the way it had come with all haste,
but not before I had dealt it one sound blow, which fell
plainly on corporal substance. I followed the thing into the
oratory, but it was nowhere to be seen. By this time I was
as cool as possible. I knew there was but one place of
concealment, namely a small closet which had no outlet,
and finding the key in the oratory door, I quietly locked it on
the outside, put the key away, and returned to bed.
The start and exertion brought on my shivering fit, and I

was just beginning to get over it a little, when I heard a
voice I well knew, but humble and quavering enough.
"Mrs. Rosamond—Oh, Mistress Rosamond—" then as I did

not answer—"Oh, Mistress Rosamond, do let me out! There
is a storm coming on, and I dare not stay here."
"Who are you?" I asked, trying to speak soberly, though I

was choked with laughter.
"I am nobody but Prudence—Prudence, your poor bower-

woman. Oh, Mistress Rosamond, do let me out, and I will
thank you all my days!"
"I do not believe you!" I said. "Prudence would never play

such a wicked, malicious trick, and one too so profane and
impious. You are some impudent stroller and thief—an
Egyptian, too, for aught I know. You shall stay till morning,
and see what measure my Lord and my father will deal out
to you."
She still pleaded for mercy, and in tones of such real and
abject terror, that I began to fear she might die of fright,
and rose to release her; but just as I was striking a light,
for the clouds had risen once more, and it was very dark,
my stepmother entered the room with a candle in her hand.
"Are you ill, Rosamond—and who were you talking with?"

said she, looking around, and naturally surprised to see
nobody. "I am sure I heard you talking."
"You did, Madam!" I answered. "A ghost appeared to me
and I chased it with the bed staff into the closet yonder and
locked it up, and now it is scared and wants to get out."
Madam looked as if she thought my wits were wandering,

and as well as I could for laughing, I told her the tale. Then
suddenly the wickedness and unkindness of the trick flashed
on me, and I fell to crying as hard as I had laughed.
Madam soothed and kissed me, and making me lie down,

she said she would fetch me some drops from her room
—"and then I will call your father, and we will unearth this
ghost of ours."
When she was gone, Prudence renewed her pleadings. "Oh,

Mistress Rosamond, do let me out. My master will kill me!"
"I can't," said I. "Madam has taken the key—" (as indeed
she had, thinking, I dare say, that I should relent).
"Whoever you are, you must bake as you have brewed. I
fear the bread will not be to your taste."
My father and mother entered even as I spoke, and going at

once to the door, my father unlocked and threw it open.
There stood Mistress Prudence, arrayed as I had seen her,
for in the darkness she had not been able to find her own
gown, and looking as foolish and venomous as a fox caught
in a poultry yard.
I pass over the scene that followed—my father's stern

wrath, which my mother vainly strove to mitigate, and
Prue's tears and exclamations that she meant no harm, and
it was only a joke, and so on.
"It is a joke that shall cost you dear," said my father, grimly.
"You shall spend the night in the prison you have chosen,
and in the morning you leave this house forever. But for her
sake whose memory you have outraged, the rising sun
should see you set in the stocks on the village green as a
thief and an impudent witch."
"I am no thief!" sobbed Prudence. "I never took so much as

a hair."
"Where got you the clothes you wear—and that rosary by

your side—wretch that you are!" interrupted my father, his
wrath rising as he recognized my mother's beads and cross,
which he had always kept on his own table. "Here, you men
and women—" for by this time half the household were
gathered at the door—"come in and see this woman, who
has dared to dress up in her sainted lady's clothes to scare
my daughter. Look at her well! For by this hand you will not
see her soon again!"
Many and various were the remarks and comments of pity

for me and anger and contempt against Prue, who is no
favorite.
"If it had been any common young lady, and so delicate in

health as Mistress Rosamond too—it might have scared her
to death!" said one.
"I wonder Mrs. Prue didn't see a ghost in good earnest,"

said another. "I should have expected an evil spirit to come
after me if I had played such a trick."
"There is no evil spirit worse than the spirit of lying and

cruelty—remember that, maids!" said Madam, solemnly.
"Now let all go to bed, say your paternosters, and let the
house be quiet."
In the morning Prue was released from her durance and

allowed to go free whither she would. So much grace did
my mother and I obtain for her, but farther than that my
father was adamant. He declared in answer to a hint of
mine that she had had a lesson, and might be allowed to
remain—that nothing should tempt him to let her stay
under the roof another day. And here indeed my step-dame
took part against me, and on consideration, I believe they
are both right—yet I can't but feel very sorry for Prue. She
came to my room to bid me farewell, and I gave her some
money. My step-dame did the same, though I believe there
was little need of it, for I know she hath saved nearly all her
earnings.
"Oh, Mistress Rosamond!" was all she could say at first, for
she was really weeping—and then—"'Twas all for your good
—to save your precious soul and your mother's."
"Souls are not to be saved by lies, Prue!" says I.

"Remember that there is no sin that God hates more than
this of lying."
"Nay, 'tis but a venial sin," she answered, excusing herself;

"'tis not one of the seven deadly sins!"
"'Tis a sin most expressly forbidden in the word of God," I

told her, "as you might have known if you had listened to
the commandments which have been read in the church
lately."
"Not I!" said she, tartly. "I am for no such new-fangled

ways. But oh, Mistress Rosamond, I meant not to harm you
—I did not, indeed. 'Twas all for your good, and to scare
you into your duty. Oh, Mistress Rosamond, my dear heart,
do not you be persuaded into breaking your convent vows!
Your mother, your blessed mother, gave you to the Church
the very hour you were born, and before. You will pull down
destruction on your head, if you draw back—Father
Barnabas himself says the same. This new lady is no better
than a heretic, and I have it from a sure hand that in
London she was well-known as such, and my mistress is
just the same. Oh, that ever I should have lived to see the
day! But, my dear Mistress Rosamond, for your own soul
and body's sake, don't you break your vows and be a
castaway!"
"Now you are meddling with matters far too high for you,
Prudence!" said I. "As for my vows, there can be none
broken where there were none made, and for the rest,
beware my Lord's anger! If he should hear that you had but
breathed on the fair fame of his wife, it were better you had
never been born!"
She winced a little at this, and took refuge in tears and

exclamations that ever she had lived to see the day: and so
took her leave, meaning, as she says, to go to her sisters at
Bristol. Yet I hear she hath not gone, but is staying with
some one here in the village, making a great show of
devotion, and specially of saying her prayers at my
mother's grave. I wish she would go away, I know not why,
but I do dread some mischief from her tongue.
What she said about lying has set me to looking up all the
passages in Scripture relating to the same. I find plenty of
them condemning the sin in the strongest terms, as even
that all liars shall have their part in the lake that burneth
with fire and brimstone, which is the second death; and yet
it is true, as she said, that the Church counts it but a venial
sin. I cannot understand it.
CHAPTER XXIX.
June 20.
I HAVE been called on to make a very solemn and awful

decision—and I have made it. Some days ago my father
sent for me into his room, and said to me:
"Rosamond, the time has come for you to decide upon your
way of life. If you are going back to the convent it is time
and more that you were gone. You know what your
mother's and my wishes once were on the subject. You
have seen what convent life is, and now you must decide
what you will do—whether you will become a nun, or live at
home."
I was struck dumb for a few minutes. It had never occurred

to me that I was to be called upon to decide the matter. I
had somehow supposed that it would be settled for me.
"So far as we are concerned," continued my father, after a
little silence, "my wife and I would gladly keep you at home.
You have ever shown yourself a dutiful and good child to us,
as well as to—her that is gone. But we put no force upon
your inclinations, either way. You must decide for yourself."
"But not this minute, or this hour, dear heart," said madam,
who had hitherto been silent. "Take time, pray, ask counsel
of God and thine own heart, and then decide. Be sure that
we shall be only too glad to keep you with us as long as we
can."
"Only this much I must say, Rosamond," added my father,

"I do believe if we could know thy mother's mind now, she
would bid thee remain at home. But go now and do as
madam hath said—pray—read the Gospel, and then decide.
Bless thee, my dear one; and truly I believe thou wilt be
blessed, for better maid never lived."
I cannot but write these words, they are so precious,

coming from my father, who seldom puts his deeper feelings
into words. I rose from my knees and went to mine own
chamber, to the oratory where my mother spent so much
time in prayer, and there I remained many hours—Madam,
with her usual kind care, giving orders that I should not be
disturbed.
For a while my mind was so tossed and tumbled that I could

see nothing. I could not even pray, and at last took refuge
in repeating the Psalms, specially the hundred and
nineteenth, which seemed full of petitions suitable to my
state. By degrees my spirit grew calmer, and I was able to
pour out my whole heart. I do not now pray to the Saints or
to our Lady, because I can find in the whole of Scripture no
warrant for doing so, but every encouragement to come at
once to my Heavenly Father, through the merits and
intercession of His Son.
Toward evening my mother came, bringing with her own

hands a simple and dainty little repast, decked with fresh
flowers, as her manner is. (She does love flowers above any
woman I ever saw, and has brought from London and the
East country many new kinds of roots and seeds, such as
have never been seen in these parts.) She would have me
eat and drink to keep up my strength; and though I felt no
great inclination thereto, it behooved me to please her,
when she had taken so much pains for me.
"And now, my dear one, let me give thee a little counsel!"

said she. "Do not you remain shut up here, but go out and
walk in the fresh cool evening, before the sun goes down,
and then committing thyself and all thy cares to thy
Heavenly Father, lie down to rest in peace. Be sure He will
guide thee to a wise decision."
I had purposed to watch all night in the oratory, I told her.
She smiled.
"And will that clear your head, think you, sweetheart? Or

will a fit of ague, such as any fatigue is sure to bring upon
you, assist you in deciding wisely? See here what the
Psalmist says!"
And taking up my Latin Psalter, she read from the hundred

and twenty-seventh Psalm: "It is but lost labor that ye
haste to rise up early, and so late take rest—for so He
giveth his beloved sleep!"
I saw that she was right. Certainly the ague does not clear
one's head, and I am apt to have a return of it on any
unusual fatigue. So I kissed her good-night, said my

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(eBook PDF) Financial Reporting by

creditors’ and contributories’ claims 35.1 Introduction to AASB 141/IAS 41

THEORY AND PRACTICE

4 explain the key components of the conceptual framework

8 explain the principles for recognising the elements of financial statements

10 outline concepts of capital maintenance.

CONCEPTS FOR REVIEW

Dick is changed, but not as Mistress Bullen said. He is far

It is odd he never so much as noticed the change in my

I am vexed when I think of the coil that was made about

To-morrow is May-day, and is like to be fine. If so we shall

The old May pole having been shivered by lightning last

We walked down to the green about ten of the clock, and

"And have you no other wares than these?" asked my step-

"And that is true, madam," answered the chapman, (and I

"And that is true!" answered my mother. "Well, this is but a

"I have little fancy for these mummeries," said my Lady to

"With submission, reverend Father, such a subject seems to

The Prior fidgetted on his scat, and looked somewhat

"You know, my Lady, the Church path always sanctioned

"Nay, Madam, that would never do," answered the Prior.

It seems to me almost profane to write these things down,

"What, my fair Rosamond, is this you? I did not know the

"My daughter, sir priest, is no nun; and being as yet under

"Lackaday! I don't know," answered Will Paxton, my Lord's

Whereat the priest frowned, and my father laughed heartily,

"And do you think 'tis really the true Gospel?" I asked

"I have no doubt of it. Master Ellenwood, at my request,

"Oh, how I should love to read it!" I exclaimed.

"You would find many things to astonish you, my child,"

"Dick said I must not read it if I ever meant to go back to

"Nay, dearest child, call me ever mother, if you will," said

"Well, what then?" she asked. "Your reasoning is good, but

"Yes, child! Since you ask it, I can do no otherwise," said

"Why not, if it shall lead me to eternal life?" I said.

"I build not at all on Mrs. Bullen's favor," answered my Lady.

"But as to this book!" I ventured to say.

DICK was right! I shall never go back to the convent.

The next day after the May games, my mother, according to

I have spent many hours closeted with my mother, and

My mother tells me that the chapman whom we saw at the

My mother, I can see, builds nothing at all on his Majesty's

'Tis even as Master Ellenwood said—like making a breach in

But I can't help hoping more than my mother does—

Thunder always makes me drowsy, and I was soon asleep.

I was scared at first, I confess—but the moment the

The start and exertion brought on my shivering fit, and I

"Mrs. Rosamond—Oh, Mistress Rosamond—" then as I did

"Who are you?" I asked, trying to speak soberly, though I

"I am nobody but Prudence—Prudence, your poor bower-

"I do not believe you!" I said. "Prudence would never play

"Are you ill, Rosamond—and who were you talking with?"

Madam looked as if she thought my wits were wandering,

Madam soothed and kissed me, and making me lie down,

When she was gone, Prudence renewed her pleadings. "Oh,

My father and mother entered even as I spoke, and going at

I pass over the scene that followed—my father's stern

"I am no thief!" sobbed Prudence. "I never took so much as