Advanced Financial Accounting: An International Approach

Citation

Malthus, S. (2011), "Advanced Financial Accounting: An International Approach", Journal of Accounting & Organizational Change, Vol. 7 No. 4, pp. 410-412. https://doi.org/10.1108/18325911111182349

This is the first edition of an advanced financial accounting textbook, written by Jagdish Kothari, a retired partner of PricewaterhouseCoopers, and Elisabetta Barone, a Financial Accounting Lecturer at King's College London. Kothari and Barone also co‐authored the text Financial Accounting: An International Approach, which was written for introductory level courses in financial accounting. The background and expertise of the authors together with their previous book have had an obvious impact on the manner this book was conceived, being the product of the practical accounting experience of Kothari and the academic background of Barone.

This book is aimed at accounting students who possess a basic foundation of accounting principles and practices. It has been written primarily for second‐ and third‐year undergraduate students studying for a degree in accounting or finance, and for postgraduate students undertaking an MBA, or an MSc in accounting, finance or international accounting. It may also be helpful as a revision resource for students preparing for professional accounting qualifications.

The book covers most of the latest developments in International Financial Reporting Standards (IFRS) and has a strong European focus, with numerous examples of real‐world data taken from European listed companies' annual reports, such as Lufthansa and Puma. In addition, the Euro is used as the currency in the illustrative examples throughout the book. The European focus of the book caters to the needs of students across Europe and hence the book should have a wide appeal. In addition it could be used as a supplementary advanced financial accounting text in countries outside Europe that have implemented IFRS, such as Australia and New Zealand, particularly for international students studying in these countries.

Although the book covers advanced financial accounting topics, it stands out from most other texts in that it provides a more simplified and practical approach to teaching the application of IFRS than some other texts currently on the market. The approach taken by the authors is aimed, in part, at students for whom English is their second language, and hence the authors attempt to keep the use of technical language to a minimum. Each chapter summarises and explains the relevant IFRSs, along with their key underlying concepts, appropriate accounting treatment and the associated requirements in a concise and user‐friendly way.

The book is organised into six parts. Part one provides an introduction to IFRS (Chapters 1 and 2) and starts with a (very brief) history of accounting, which is not that common for a financial accounting text. This provides a good introduction to financial accounting and why it is needed. The section on the convergence in financial reporting standards is concise and easy to understand (except for the colour coding in Figure 1.2). Chapter 2 is comprehensive and easy to read.

Part two on reporting and presentation (Chapters 3 and 4) covers the presentation of financial statements including the Statement of Comprehensive Income. There is very limited explanation of what comprises “other comprehensive income” and why it is included in the income statement. Interestingly, if you look for the term in the index you will find a reference to the glossary only. Further, the first time adoption of IFRS (IFRS 1) is included in Chapter 4, along with accounting policies. This is an area that could be excluded given that IFRS 1 has been adopted by listed European companies since 2005 and therefore is only applicable to a relatively small number of companies.

Part three on income statement and balance sheet items (Chapters 5‐13) covers most of the topics and the IFRSs and IASs that are normally included in advanced financial accounting texts. The only exceptions are equity (share capital and reserves) and possibly IAS 21The Effects of Changes in Foreign Exchange Rates. Some standards are covered only very briefly in Part three. However, the basics of their application are covered adequately, for example IAS 10 Events after the Reporting Period.

Chapter 6 includes the characteristics and consequences of LIFO. However, as this cost flow assumption is not permitted under IAS 2, it is unlikely that accounting graduates will use this inventory valuation method in practice and hence its inclusion may not be necessary. Chapter 7 covers the revaluation model for non‐current assets in a very concise manner (three pages) that will need to be expanded on when teaching to include the accounting for the reversal of revaluation increments and decrements, and the disposal of revalued non‐current assets.

Employee benefits are covered in Chapter 13; however there is no reference to share‐based payments. This is contrary to the list of International Financial Reporting Standards on pages xiv and xv of the book which suggests that IFRS 2 is covered in Chapter 13.

Part four on accounting for financial instruments (Chapters 14 and 15) covers the technically complex area of financial instruments. Chapter 14 deals with the classification of financial instruments whilst Chapter 15 covers the recognition, derecognition, measurement and disclosures of financial instruments. Those using the book should note that the classification of financial instruments on page 386 includes Held to Maturity, Available for Sale, and Loans and Receivables categories of financial assets previously considered under IAS 39 which have since been eliminated by IFRS 9 (issued by the IASB in November 2009).

Part five on reporting and disclosure (Chapters 16 and 17) covers other reporting and disclosure topics, including the Statement of Cash Flows in Chapter 16, which includes a good, comprehensive example. This example (Section 16.6) determines the cash receipts from customers and cash payments to suppliers and employees both by the columnar method and from the general ledgers, which is helpful for students.

Part six (Chapters 18 to 20) covers group reporting. Chapter 18 includes the concepts of control and consolidation and Chapter 19 covers the preparation of consolidated financial statements, including non‐controlling interests (NCI). Chapter 18 illustrates the three most common consolidation models with an example (Example 18.9). However, this example would have been easier to understand if the basic elimination consolidation journals had been shown first. Chapter 19 briefly explains the consolidation process and how goodwill is calculated. A comprehensive example, including the elimination journals and a consolidation worksheet for the purchase of a 100 percent holding would be helpful at this stage, before introducing the accounting for NCIs. Similarly, a consolidation worksheet showing each of the consolidation adjustments would assist the understanding of Example 19.10.

I very much enjoyed reading this book and would recommend it to students who are not native English speakers, and their lecturers. Additionally I would recommend it to students who struggle with the subject area, in particular the theoretical and very technical textbooks that are more often than not prescribed texts for this subject. The use of plain English and practical real‐world examples are the strengths of this book.

In summary, the challenge facing lecturers considering adopting this text is the level at which it is aimed. It appears to be too technical and advanced to be used in an introductory financial accounting class (as suggested by its title) however it appears to be rather lightweight to be used in an advanced level course. However, it appears to have a role as a supplementary text at the advanced level, in particular for students studying financial accounting at this level for whom English is not their first language.