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PrefaceWelcome to Advanced Financial Accounting, Fourth Edition! Since the first edition was published in 1984, many tens of thousands of students have learned about business combinations, consolidations, international operations, and non-business accounting through this text. The fourth edition has been eagerly anticipated by many past users of the book, not the least of whom are the authors themselves! Users of the earlier editions will immediately see that this book is more than just a revision—it is a complete rewrite. The book has been dramatically shortened and reorganized to fit more comfortably into the standard one-semester framework of an advanced accounting course. Instead of 18 chapters in the previous edition, there now are 12. The early chapters have been condensed into a single large chapter; consolidations and business combinations have been reduced from seven chapters to six and brought forward in the book; international operations has been reduced from three chapters to two; and non-business organizations has been condensed into two chapters. Despite the dramatic shortening of the book, the essential characteristics that have distinguished the earlier editions have been retained:
Chapter 1 presents the framework for accounting decisions. This is not the usual brief introductory chapter, but instead is the foundation for all that follows. It should not be ignored, because later chapters build on the base of Chapter 1. For some students, the material in this chapter will be familiar. But many others will not have encountered the basic structure of criteria and objectives that form the context for all accounting decisions in financial reporting. The objectives of financial reporting are especially important. All preparers and users of financial information should have a sophisticated understanding of the various objectives and of the potential conflicts between different objectives. Although the primary emphasis in Chapter 1 is on corporate reporting, partnership accounting and the applicability of a disclosed basis of accounting are also discussed. Chapters 2 through 7 comprise the core of the book—the topic of business combinations and consolidations that is the principal topic of all advanced financial accounting courses. There are some major revisions in these chapters that should make the book even more user-friendly than it already was. Probably the most far-reaching of the changes is the methodology for consolidation. In response to many requests, we have used the direct approach, in addition to a worksheet (or spreadsheet) approach. Every example is illustrated first by the direct approach and then by a spreadsheet approach. Some readers will find the more intuitive direct approach to be more to their liking, while others will prefer the discipline of the spreadsheet approach. Using two approaches does introduce redundancy into each example, illustrating the consolidation process from two different viewpoints. However, it is quite possible to study the material by focusing solely on one of the two methods. If a student finds the direct approach more understandable, then he or she may skip over the spreadsheet approach and work only with the direct approach. The reverse also is true—the direct approach can be skipped and only the spreadsheet approach used. We also have simplified the worksheet or spreadsheet technique, compared to the previous edition. We have retained the three-column separation of eliminating and adjusting entries in order to retain the distinction among the time frames to which the adjustments pertain. However, the spreadsheets now use a trial balance format rather than the mock financial statement approach used in the third edition. The trial balance format coincides with the technique used in professional practice (whether manual or computerized). The debit-credit format of the adjustments also will be more familiar to any student who has used worksheets in previous courses. Accounting for business combinations reflects the new harmonized reporting recommendations that are being finalized cooperatively by the U.S. Financial Accounting Standards Board and the CICA Accounting Standards Board. As we go to press, the new standard as it will appear in the CICA Handbook has not been finalized, and therefore all detailed cross-references are to the Business Combinations Exposure Draft. But the new principles and recommendations are all thoroughly incorporated into the text material. The income tax aspects of consolidation have been removed from the main text and placed in two chapter appendices. In the “old days,” the only income tax impact was to recognize the deferred tax effect of unrealized intercompany profits. Under the new balance sheet approach to income tax allocation, the tax aspects become much more complicated. Many students have a lot of trouble coping with income tax allocation. Therefore, we thought it best not to superimpose those complexities on top of the challenge of learning consolidations. Still, the material is in the appendices for those who wish to examine the tax allocation implications of consolidating business combinations. Throughout the consolidations chapters, we have based our
examples on the assumption that the parent corporation uses the cost
method of recording its investment in subsidiaries. This is the
practical reality. We see little point in spending a lot of time
examining the techniques of consolidation when the equity method of
recording is used by the parent, because it just doesn’t happen in
practice. There is no reporting implication of using the cost
vs. equity basis for recording. Therefore we have only a
brief discussion of the consequences of consolidating equity-basis
accounts in the unlikely event that a parent actually uses that
method of recording. Reporting on the equity method is, of
course, fully There also has been some reorganization of material within the consolidations chapters. Pooling of interests is of decreasing importance on the world stage. The discussion of pooling has been retained in Chapter 3 as one of the alternative approaches to business combinations, but there no longer is a separate chapter on pooling. The illustration of proportionate consolidation for joint ventures also has been reduced. Canada’s approach to joint venture reporting is unique, but it is an approach that almost certainly will be harmonized out of existence in the near future. Other aspects of the consolidations chapters have been rewritten and clarified. In some instances (e.g., step acquisitions), the amount of detail has been reduced. In others (e.g., intercompany sales of amortizable assets), the coverage has been expanded and clarified. Illustrative journal entries have been simplified by avoiding “compound” entries. Throughout the book, we have clarified the sources and calculations underlying numbers used in journal entries and in financial statements. The chapter on segmented and interim reporting has been updated
for the recent revisions in segmented and interim reporting
recommendations. As well, a new example has been added that
illustrates segment reporting in interim Reporting for international activities is presented in two chapters. Chapter 9 focuses on foreign-currency-denominated transactions, while Chapter 10 deals with foreign operations. As we go to press, the Accounting Standards Board is about to issue an Exposure Draft that will eliminate the defer-and-amortize method for accounting for unrealized currency exchanges and losses on long-term monetary items. We anticipated this change, and therefore it is easy to skip over the sections relating to defer-and-amortize in Chapters 9 and 10. Chapter 10 retains a discussion of the several alternatives for translating foreign operations, including the much-maligned current/non-current approach. Current accounting standards for translation and consolidation of foreign subsidiaries is far from fully satisfactory. Of course, the two currently recommended approaches are clearly explained and fully illustrated. The book ends with two chapters devoted to accounting for non-business organizations. Chapter 11 discusses non-profit organizations, and Chapter 12 presents the accounting issues of governments. In this edition, an overview of fund accounting is provided in an appendix to Chapter 11 rather than in a separate chapter. The appendix is purely textual, not numerical. The bookkeeping aspect of fund accounting is readily available from many other sources, and our focus in this book is on preparing professional accountants, not high-class bookkeepers. For Public Sector Accounting, we have included the new proposed standards in the CICA’s Senior Government Reporting Model—these recommendations had not been finalized as we go to press. Supplements There are many changes underway in accounting standards. As events unfold, we will post updates on the book’s Web site: www.pearsoned.ca/beechyfarrell. In addition to this new Web site, we are offering to instructors a comprehensive Instructor’s Resource Manual including Solutions, as well as a new Test Item File containing additional material for tests and extra student practice. Acknowledgements As in previous editions, much of the assignment material has been drawn from the professional examinations of Canada’s three professional accounting bodies: CGA-Canada, CICA, and SMA-Canada. A few cases have also been included by the kind permission of the Institute of Chartered Accountants of Ontario. We are deeply indebted to all of these organizations for their cooperation and support in permitting us to use their copyrighted material. An acknowledgement appears at the end of each case or problem that was obtained from one of these four professional sources. We also are deeply indebted to the individuals who reviewed the revision plan and the manuscript and who provided valuable suggestions. The following individuals provided comments on the proposed revision plan:
The experienced instructors who provided comments on the draft manuscript are as follows:
We are grateful for the enthusiastic support and encouragement of the people at Pearson Education Canada for bringing this project to a rapid and successful conclusion. In particular, we would like to thank Patrick Ferrier, former Editorial Director, for bringing the book to Pearson Education Canada from its previous publisher and Samantha Scully, Senior Acquisitions Editor, for getting the overdue fourth edition underway. We also are deeply indebted to Anita Smale, Developmental Editor, for her unflagging enthusiasm and support. Gail Marsden was the copy editor who understood what we were doing and helped to clarify our writing. Marisa D’Andrea was the unflappable production editor who guided the book through an unusually rapid production cycle, so that Canadian instructors could have the book on their desks well in advance of the 2001–2002 academic year. On a personal level, we would like to thank our friends and family for their support and encouragement throughout the lengthy process of bringing this book to a close. From the Farrell end of things, we’d like especially to thank Ed, Catherine, Michael, and Megan Farrell. In the Beechy contingent, kudos for patience and forbearance go to Brian McBurney and Calvin Luong. Despite the efforts of many people and many sets of eyes, errors have a nasty habit of creeping into all books. Of course, we authors bear the responsibility for any errors that you may find. We would greatly appreciate your bringing any and all errors to our attention, no matter how minor. We will forward these corrections to other students and instructors. We also will then be able to correct errors before the next printing of the book. Please report any errors by e-mail to tbeechy@schulich.yorku.ca. Thank you for using Advanced Financial Accounting, Fourth Edition. We hope that you find it an enjoyable book to use. Thomas H. Beechy Elizabeth Farrell
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