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 13th
Financial Accounting & Reporting is the most up-to-date text on the market. Now fully updated in
EDITION BARRY ELLIOTT AND JAMIE ELLIOTT

FINANCIAL
its 13th edition, it includes extensive coverage of International Accounting Standards (IASs) and
International Financial Reporting Standards (IFRSs).

ELLIOTT AND ELLIOTT

ACCOUNTING
This market-leading text offers students a clear, well-structured and comprehensive treatment
of the subject. Supported by illustrations and exercises, the book provides a strong balance of
theoretical and conceptual coverage. Students using this book will gain the knowledge and skills

AND 13th Edition

to help them apply current standards, and critically appraise the underlying concepts and financial
reporting methods.

Key features
l Combines academic rigour with an
REPORTING
engaging and accessible style New features for this edition
l Coverage of International Financial
Reporting Standards l Fully updated to May 2009

AND REPORTING
FINANCIAL ACCOUNTING
l Illustrations taken from real published l Updated coverage of International
accounts Financial Reporting Standards
l Excellent range of review questions l Substantial revisions to Analysis of
l Numerous exercises, varying in level of Accounts and Accountability chapters
difficulty, with solutions where applicable l Selected chapters include new additional
l Extensive references questions and exercises
l A section on the Analysis of Accounts l Includes more examples of extracts from
l A section on Accountability – includes real financial reports
Corporate Governance issues, l Fully supported by a comprehensive set
Sustainability - environmental and of multiple-choice questions online,
social reporting and Ethics covering all parts of the text.

Barry Elliott is a training consultant. He has extensive teaching experience at undergraduate,

postgraduate and professional level in China, Hong Kong, New Zealand and Singapore. He has
wide experience as an external examiner both in higher education and at all levels of professional
education.

Jamie Elliott is a Director with Deloitte & Touche. Prior to this he has lectured at university on
undergraduate degree programmes and as an assistant professor on MBA and Executive
programmes at the London Business School.
Cover image © alamy

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A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page i

Financial Accounting
and Reporting
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page ii

We work with leading authors to develop the

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Financial Accounting
and Reporting
THIRTEENTH EDITION

Barry Elliott and Jamie Elliott

A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page iv

Pearson Education Limited

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First published 1993

Second edition 1996
Third edition 1999
Fourth edition 2000
Fifth edition 2001
Sixth edition 2002
Seventh edition 2003
Eighth edition 2004
Ninth edition published 2005
Tenth edition published 2006
Eleventh edition published 2007
Twelfth edition published 2008
Thirteenth edition published 2009

© Prentice Hall International UK Limited 1993, 1999

© Pearson Education Limited 2000, 2009

The rights of Barry Elliott and Jamie Elliott to be identified as authors of this
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All rights reserved. No part of this publication may be reproduced, stored in a

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British Library Cataloguing-in-Publication Data

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The publisher’s policy is to use paper manufactured from sustainable forests.

A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page v

Brief Contents

Preface and acknowledgements xxi

Guided tour of MyAccountingLab xxvi

Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1

1 Accounting and reporting on a cash flow basis 3

2 Accounting and reporting on an accrual accounting basis 22
3 Income and asset value measurement: an economist’s approach 40
4 Accounting for inflation 59

Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO ACHIEVE
UNIFORMITY 99

5 Financial reporting – evolution of the regulatory framework in the UK 101

6 Financial reporting – evolution of international standards 137
7 Conceptual framework 158
8 Published accounts of companies 184
9 Preparation of published accounts 229

Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY, LIABILITY
AND ASSET MEASUREMENT AND DISCLOSURE 255

10 Share capital, distributable profits and reduction of capital 257

11 Off balance sheet finance 282
12 Financial instruments 317
13 Employee benefits 342
14 Taxation in company accounts 373
15 Property, plant and equipment (PPE) 402
16 Leasing 436
17 R&D; goodwill and intangible assets; brands 457
18 Inventories 498
19 Construction contracts 524
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page vi

vi • Brief Contents

Part 4
CONSOLIDATED ACCOUNTS 543

20 Accounting for groups at the date of acquisition 545

21 Preparation of consolidated statements of financial position after the date
of acquisition 562
22 Preparation of consolidated statements of comprehensive income and
consolidated statements of changes in equity 575
23 Accounting for associates and joint ventures 591
24 Accounting for the effects of changes in foreign exchange rates under IAS 21 611

Part 5
INTERPRETATION 625

25 Earnings per share 627

26 Statements of cash flows 654
27 Review of financial ratio analysis 680
28 Trend analysis and multivariate analysis 724
29 An introduction to financial reporting on the Internet 770

Part 6
ACCOUNTABILITY 783

30 Corporate governance 785

31 Sustainability – environmental and social reporting 838
32 Ethics for accountants 884

Appendix: Outline solutions to selected exercises 907

Index 913
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page vii

Full Contents

Preface and acknowledgements xxi

Guided tour of MyAccountingLab xxvi

Part 1
INCOME AND ASSET VALUE MEASUREMENT SYSTEMS 1
1 Accounting and reporting on a cash flow basis 3
1.1 Introduction 3
1.2 Shareholders 3
1.3 What skills does an accountant require in respect of external reports? 4
1.4 Managers 4
1.5 What skills does an accountant require in respect of internal reports? 5
1.6 Procedural steps when reporting to internal users 5
1.7 Agency costs 8
1.8 Illustration of periodic financial statements prepared under the cash
flow concept to disclose realised operating cash flows 8
1.9 Illustration of preparation of balance sheet under the cash flow concept 12
1.10 Treatment of non-current assets in the cash flow model 14
1.11 What are the characteristics of these data that make them reliable? 15
1.12 Reports to external users 16
Summary 16
Review questions 17
Exercises 18
References 21

2 Accounting and reporting on an accrual accounting basis 22

2.1 Introduction 22
2.2 Historical cost convention 23
2.3 Accrual basis of accounting 24
2.4 Mechanics of accrual accounting – adjusting cash receipts and payments 24
2.5 Subjective judgements required in accrual accounting – adjusting cash
receipts in accordance with lAS 18 25
2.6 Subjective judgements required in accrual accounting – adjusting cash
payments in accordance with the matching principle 27
2.7 Mechanics of accrual accounting – the statement of financial position 28
2.8 Reformatting the statement of financial position 28
2.9 Accounting for the sacrifice of non-current assets 29
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page viii

viii • Full Contents

2.10 Reconciliation of cash flow and accrual accounting data 32

Summary 34
Review questions 34
Exercises 35
References 38

3 Income and asset value measurement: an economist’s

approach 40
3.1 Introduction 40
3.2 Role and objective of income measurement 40
3.3 Accountant’s view of income, capital and value 43
3.4 Critical comment on the accountant’s measure 46
3.5 Economist’s view of income, capital and value 47
3.6 Critical comment on the economist’s measure 53
3.7 Income, capital and changing price levels 53
Summary 55
Review questions 55
Exercises 56
References 57
Bibliography 58

4 Accounting for inflation 59

4.1 Introduction 59
4.2 Review of the problems of historical cost accounting (HCA) 59
4.3 Inflation accounting 60
4.4 The concepts in principle 60
4.5 The four models illustrated for a company with cash purchases
and sales 61
4.6 Critique of each model 65
4.7 Operating capital maintenance – a comprehensive example 68
4.8 Critique of CCA statements 79
4.9 The ASB approach 81
4.10 The IASC/IASB approach 83
4.11 Future developments 84
Summary 86
Review questions 87
Exercises 88
References 97
Bibliography 97

Part 2
REGULATORY FRAMEWORK – AN ATTEMPT TO
ACHIEVE UNIFORMITY 99

5 Financial reporting – evolution of the regulatory framework

in the UK 101
5.1 Introduction 101
5.2 Mandatory regulations 101
5.3 Arguments in support of standards 105
5.4 Arguments against standards 106
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page ix

Full Contents • ix

5.5 Structure of regulatory framework 107

5.6 The Operating and Financial Review (OFR) 110
5.7 The Financial Reporting Review Panel 116
5.8 The Financial Services Authority 119
5.9 The Revised Combined Code ( June 2008) 119
5.10 Interim reports following Cadbury 122
5.11 Developments for small companies 125
5.12 Evaluation of effectiveness of mandatory regulations 132
Summary 134
Review questions 134
Exercises 135
References 135

6 Financial reporting – evolution of international standards 137

6.1 Introduction 137
6.2 National differences 137
6.3 Reasons for differences in financial reporting 138
6.4 Classification of national accounting systems 142
6.5 Attempts to reduce national differences 143
6.6 The work of international bodies in harmonising and standardising
financial reporting 144
6.7 US GAAP 151
Summary 155
Review questions 155
Exercises 155
References 156

7 Conceptual framework 158

7.1 Introduction 158
7.2 Historical overview of the evolution of financial accounting theory 159
7.3 IASC Framework for the Presentation and Preparation of Financial
Statements 162
7.4 ASB Statement of Principles 1999 164
7.5 FASB Statements of Financial Accounting Concepts 174
7.6 Conceptual Framework developments 177
Summary 178
Review questions 180
Exercises 181
References 182

8 Published accounts of companies 184

8.1 Introduction 184
8.2 Introduction to published accounts 184
8.3 A public company’s financial calendar 186
8.4 Criteria for information appearing in a statement of comprehensive
income and statement of financial position 186
8.5 The prescribed formats – the statement of comprehensive income 187
8.6 What information is required to be disclosed in Format 1 and
Format 2? 188
8.7 Cost of sales 189
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x • Full Contents

8.8 Distribution costs 193

8.9 Administrative expenses 193
8.10 Other operating income or expense 193
8.11 What costs and income are brought into account after calculating
the trading profit in order to arrive at the profit on ordinary
activities before tax? 193
8.12 Does it really matter under which heading a cost is classified in the
statement of comprehensive income provided it is not omitted? 194
8.13 Discontinued operations disclosure in the statement of
comprehensive income 194
8.14 Items requiring separate disclosure 196
8.15 Other comprehensive income 197
8.16 The prescribed formats – the statement of financial position 198
8.17 Statement of changes in equity 201
8.18 US comprehensive income reporting 203
8.19 Segment reporting 203
8.20 The fundamental accounting principles underlying the published
statement of comprehensive income and statement of financial
position 205
8.21 Disclosure of accounting policies 205
8.22 Fair view treatment 210
8.23 Additional information in the annual report 213
8.24 What information do companies provide to assist comparison
between companies reporting under different reporting regimes? 215
Summary 219
Review questions 219
Exercises 221
References 228

9 Preparation of published accounts 229

9.1 Introduction 229
9.2 Stage 1: preparation of the internal statement of comprehensive
income from a trial balance 229
9.3 Stage 2: preparation of the statement of comprehensive income
of Illustrious SpA in Format 1 style 231
9.4 Stage 3: preparation of the statement of financial position 234
9.5 Preparation of accounts in Format 1 following IAS 8 and IFRS 5 235
9.6 Additional information value of IFRS 5 239
9.7 Additional information value of IAS 24 240
Summary 242
Review questions 243
Exercises 243
References 254

Part 3
STATEMENT OF FINANCIAL POSITION – EQUITY,
LIABILITY AND ASSET MEASUREMENT AND DISCLOSURE 255

10 Share capital, distributable profits and reduction of capital 257

10.1 Introduction 257
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xi

Full Contents • xi

10.2 Common themes 257

10.3 Total owners’ equity: an overview 258
10.4 Total shareholders’ funds: more detailed explanation 259
10.5 Accounting entries on issue of shares 262
10.6 Creditor protection: capital maintenance concept 263
10.7 Creditor protection: why capital maintenance rules are necessary 264
10.8 Creditor protection: how to quantify the amounts available to meet
creditors’ claims 264
10.9 Issued share capital: minimum share capital 265
10.10 Distributable profits: general considerations 265
10.11 Distributable profits: how to arrive at the amount using relevant accounts 267
10.12 When may capital be reduced? 267
10.13 Writing off part of capital which has already been lost and is not
represented by assets 267
10.14 Repayment of part of paid-in capital to shareholders or cancellation
of unpaid share capital 273
10.15 Purchase of own shares 274
Summary 276
Review questions 276
Exercises 277
References 281

11 Off balance sheet finance 282

11.1 Introduction 282
11.2 Traditional statements – conceptual changes 282
11.3 Primary financial statements: their interrelationship 283
11.4 Primary financial statements: changes in their interrelationship 283
11.5 Reasons that companies borrow 284
11.6 Capital gearing and its implications 285
11.7 Off balance sheet finance – its impact 287
11.8 Substance over form 287
11.9 Impact of converting to IFRS 291
11.10 Statement of financial position as a valuation document 293
11.11 Why companies take steps to strengthen their statements of
financial position 295
11.12 Definitions cannot remove uncertainty: IAS 10 and IAS 37 296
11.13 ED IAS 37 Non-financial Liabilities 304
Summary 310
Review questions 311
Exercises 313
References 316

12 Financial instruments 317

12.1 Introduction 317
12.2 Financial instruments – the IASB’s problem child 317
12.3 IAS 32 Financial Instruments: Disclosure and Presentation 320
12.4 IAS 39 Financial Instruments: Recognition and Measurement 325
12.5 IFRS 7 Financial Statement Disclosures 335
Summary 338
Review questions 339
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xii • Full Contents

Exercises 339
References 341

13 Employee benefits 342

13.1 Introduction 342
13.2 Greater employee interest in pensions 342
13.3 Financial reporting implications 343
13.4 Types of scheme 343
13.5 Defined contribution pension schemes 345
13.6 Defined benefit pension schemes 346
13.7 IAS 19 (revised) Employee Benefits 348
13.8 The liability for pension and other post-retirement costs 348
13.9 The statement of comprehensive income 351
13.10 Comprehensive illustration 352
13.11 Plan curtailments and settlements 354
13.12 Multi-employer plans 354
13.13 Disclosures 355
13.14 Other long-service benefits 355
13.15 Short-term benefits 356
13.16 Termination benefits 357
13.17 IFRS 2 Share-Based Payment 358
13.18 Scope of IFRS 2 359
13.19 Recognition and measurement 359
13.20 Equity-settled share-based payments 359
13.21 Cash-settled share-based payments 362
13.22 Transactions which may be settled in cash or shares 362
13.23 Transitional provisions 363
13.24 IAS 26 Accounting and Reporting by Retirement Benefit Plans 363
Summary 366
Review questions 366
Exercises 369
References 372

14 Taxation in company accounts 373

14.1 Introduction 373
14.2 Corporation tax 373
14.3 Corporation tax systems – the theoretical background 374
14.4 Corporation tax systems – avoidance and evasion 375
14.5 Corporation tax – the system from 6 April 1999 378
14.6 IFRS and taxation 379
14.7 IAS 12 – accounting for current taxation 380
14.8 Deferred tax 382
14.9 FRS 19 (the UK standard on deferred taxation) 390
14.10 A critique of deferred taxation 391
14.11 Examples of companies following IAS 12 394
14.12 Value added tax (VAT) 396
Summary 397
Review questions 397
Exercises 398
References 400
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Full Contents • xiii

15 Property, plant and equipment (PPE) 402

15.1 Introduction 402
15.2 PPE – concepts and the relevant IASs and IFRSs 402
15.3 What is PPE? 403
15.4 How is the cost of PPE determined? 404
15.5 What is depreciation? 406
15.6 What are the constituents in the depreciation formula? 409
15.7 How is the useful life of an asset determined? 409
15.8 Residual value 410
15.9 Calculation of depreciation 410
15.10 Measurement subsequent to initial recognition 414
15.11 IAS 36 Impairment of Assets 416
15.12 IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations 422
15.13 Disclosure requirements 422
15.14 Government grants towards the cost of PPE 423
15.15 Investment properties 425
15.16 Effect of accounting policy for PPE on the interpretation of the
financial statements 426
Summary 428
Review questions 428
Exercises 429
References 435

16 Leasing 436
16.1 Introduction 436
16.2 Background to leasing 436
16.3 IAS 17 (and its national equivalents) – the controversy 438
16.4 IAS 17 – classification of a lease 440
16.5 IAS 17 – accounting for leases by lessees 442
16.6 Accounting for the lease of land and buildings 447
16.7 Leasing – a form of off statement of financial position financing 448
16.8 Accounting for leases – a new approach 449
16.9 Accounting for leases by lessors 451
Summary 452
Review questions 452
Exercises 454
References 456

17 R&D; goodwill and intangible assets; brands 457

17.1 Introduction 457
17.2 Accounting treatment for research and development 457
17.3 Research and development 459
17.4 Introduction to goodwill and intangible assets 463
17.5 Accounting for goodwill under IFRS 3 463
17.6 Is there a correct treatment for amortising goodwill? 466
17.7 Accounting for intangible assets under IAS 38 471
17.8 Disclosure of intangible assets under IAS 38 473
17.9 Brand accounting 476
17.10 Emissions trading 478
17.11 Intellectual property 480
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xiv • Full Contents

17.12 Intellectual capital 483

17.13 Review of implementation of IFRS 3 484
Summary 486
Review questions 486
Exercises 488
References 496

18 Inventories 498
18.1 Introduction 498
18.2 Inventory defined 498
18.3 The controversy 499
18.4 IAS 2 Inventories 500
18.5 Inventory valuation 501
18.6 Work-in-progress 508
18.7 Inventory control 510
18.8 Creative accounting 511
18.9 Audit of the year-end physical inventory count 513
18.10 Published accounts 514
18.11 Agricultural activity 515
Summary 518
Review questions 519
Exercises 519
References 523

19 Construction contracts 524

19.1 Introduction 524
19.2 The accounting issue for construction contracts 524
19.3 Identification of contract revenue 525
19.4 Identification of contract costs 525
19.5 Recognition of contract revenue and expenses 526
19.6 Public–private partnerships (PPPs) 529
Summary 535
Review questions 535
Exercises 535
References 542

PART 4
CONSOLIDATED ACCOUNTS 543

20 Accounting for groups at the date of acquisition 545

20.1 Introduction 545
20.2 The definition of a group 545
20.3 Consolidated accounts and some reasons for their preparation 545
20.4 The definition of control 547
20.5 Alternative methods of preparing consolidated accounts 548
20.6 The treatment of positive goodwill 550
20.7 The treatment of negative goodwill 550
20.8 The comparison between an acquisition by cash and an exchange
of shares 550
20.9 Non-controlling interests 550
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Full Contents • xv

20.10 The treatment of differences between a subsidiary’s fair value and

book value 553
20.11 How to calculate fair values 554
Summary 555
Review questions 555
Exercises 556
References 561

21 Preparation of consolidated statements of financial position

after the date of acquisition 562
21.1 Introduction 562
21.2 Pre- and post-acquisition profits/losses 562
21.3 Inter-company balances 565
21.4 Unrealised profit on inter-company sales 566
21.5 Provision for unrealised profit affecting a non-controlling interest 570
21.6 Uniform accounting policies and reporting dates 570
21.7 How is the investment in subsidiaries reported in the parent’s own
statement of financial position? 570
Summary 571
Review questions 571
Exercises 571
References 574

22 Preparation of consolidated statements of comprehensive

income and consolidated statements of changes in equity 575
22.1 Introduction 575
22.2 Preparation of a consolidated statement of comprehensive income
– the Ante Group 575
22.3 The statement of changes in equity (SOCE) 578
22.4 Dividends or interest paid by the subsidiary out of pre-acquisition
profits 578
22.5 A subsidiary acquired part of the way through the year 579
22.6 Published format statement of comprehensive income 581
Summary 582
Review questions 582
Exercises 582
References 590

23 Accounting for associates and joint ventures 591

23.1 Introduction 591
23.2 Definitions of associates and of significant influence 591
23.3 The treatment of associated companies in consolidated accounts 592
23.4 The Brill Group – the equity method illustrated 592
23.5 The treatment of provisions for unrealised profits 594
23.6 The acquisition of an associate part-way through the year 594
23.7 Joint ventures 596
Summary 598
Review questions 598
Exercises 599
References 610
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xvi

xvi • Full Contents

24 Accounting for the effects of changes in foreign exchange

rates under IAS 21 611
24.1 Introduction 611
24.2 The difference between conversion and translation and the
definition of a foreign currency transaction 611
24.3 The functional currency 612
24.4 The presentation currency 612
24.5 Monetary and non-monetary items 612
24.6 The rules on the recording of foreign currency transactions carried
out directly by the reporting entity 613
24.7 The treatment of exchange differences on foreign currency
transactions 613
24.8 Foreign exchange transactions in the individual accounts of
companies illustrated – Boil plc 613
24.9 The translation of the accounts of foreign operations where the
functional currency is the same as that of the parent 615
24.10 The use of a presentation currency other than the functional currency 615
24.11 Granby Ltd illustration 616
24.12 Granby Ltd illustration continued 617
24.13 Implications of IAS 21 620
Summary 621
Review questions 621
Exercises 621
References 624

PART 5
INTERPRETATION 625

25 Earnings per share 627

25.1 Introduction 627
25.2 Why is the earnings per share figure important? 627
25.3 How is the EPS figure calculated? 628
25.4 The use to shareholders of the EPS 629
25.5 Illustration of the basic EPS calculation 630
25.6 Adjusting the number of shares used in the basic EPS calculation 631
25.7 Rights issues 633
25.8 Adjusting the earnings and number of shares used in the diluted
EPS calculation 638
25.9 Procedure where there are several potential dilutions 640
25.10 Exercise of conversion rights during financial year 642
25.11 Disclosure requirements of IAS 33 642
25.12 The Improvement Project 645
25.13 Convergence project 645
Summary 645
Review questions 646
Exercises 647
References 653

26 Statements of cash flows 654

26.1 Introduction 654
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xvii

Full Contents • xvii

26.2 Development of statements of cash flows 654

26.3 Applying IAS 7 (revised) Cash Flow Statements 656
26.4 IAS 7 (revised) format of cash flow statements 657
26.5 Consolidated cash flow statements 662
26.6 Analysing a cash flow statement 664
26.7 Critique of cash flow accounting 668
Summary 670
Review questions 670
Exercises 671
References 679

27 Review of financial ratio analysis 680

27.1 Introduction 680
27.2 Initial impressions 680
27.3 Accounting ratios 681
27.4 Six key ratios 682
27.5 Description of the six key ratios 684
27.6 Description of subsidiary ratios 686
27.7 Application of pyramid of ratios to JD Wetherspoon plc 695
27.8 Segmental analysis 698
27.9 Inter-firm comparisons and industry averages 705
27.10 Ensuring true inter-firm comparisons 707
27.11 Sources of company information 708
27.12 Non-financial ratios 708
27.13 Interpretation problems when using ratios and consolidated
financial statements 708
Summary 711
Review questions 711
Exercises 712
References 723

28 Trend analysis and multivariate analysis 724

28.1 Introduction 724
28.2 Horizontal analysis between two periods 724
28.3 Trend analysis over a series of periods 726
28.4 Historical summaries 727
28.5 Vertical analysis – common size statements 728
28.6 Multivariate analysis – Z-scores 730
28.7 H-scores 733
28.8 A-scores 733
28.9 Combining cash flow and accrual data 735
28.10 Accounting polices 735
28.11 Balanced scorecards 736
28.12 Valuing shares of an unquoted company – quantitative process 737
28.13 Valuing shares of an unquoted company – qualitative process 740
28.14 Shareholder value analysis (SVA) 741
28.15 Measuring and reporting values in the annual report 742
28.16 Shareholder information needs 747
28.17 Professional risk assessors 750
28.18 Aggressive earnings management 755
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xviii • Full Contents

28.19 Impact of differences between IFRSs and national standards on

trend analysis 756
Summary 757
Review questions 757
Exercises 759
References 768

29 An introduction to financial reporting on the Internet 770

29.1 Introduction 770
29.2 The reason for the development of a business reporting language 770
29.3 Reports and the flow of information pre-XBRL 771
29.4 What are HTML, XML and XBRL? 771
29.5 Reports and the flow of information post-XBRL 773
29.6 XBRL and the IASB 774
29.7 Why should companies adopt XBRL? 774
29.8 What is needed to use XBRL for outputting information? 775
29.9 What is needed when receiving XBRL output information? 777
29.10 Progress of XBRL development for published financial statements 778
29.11 Progress of XBRL development for internal accounting 779
29.12 Further study 780
Summary 780
Review questions 781
Exercises 781
Bibliography 782

PART 6
ACCOUNTABILITY 783

30 Corporate governance 785

30.1 Introduction 785
30.2 What do we mean by corporate governance? 785
30.3 What do we mean by good corporate governance? 786
30.4 What are the constraints on good governance? 786
30.5 How to encourage directors to act in the best interest of
the shareholders 786
30.6 Corporate governance in different countries 788
30.7 Corporate governance codes and guidelines 793
30.8 Codes of Hong Kong, Malaysia and Singapore 793
30.9 UK – role of non-executive directors in corporate governance 794
30.10 Review of the contribution of NEDs 798
30.11 Directors’ remuneration – Code provisions 799
30.12 Directors’ remuneration – performance criteria 800
30.13 Directors’ remuneration – illustration from the Annual Report of
Diageo plc 804
30.14 Share options 808
30.15 IFRS 2 Share-Based Payment – a brief discussion of its principles 813
30.16 Directors’ remuneration – conclusion 814
30.17 Relations with shareholders 815
30.18 Institutional investors 815
30.19 The Myners Report 816
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xix

Full Contents • xix

30.20 Corporate governance – directors’ remuneration summary 817

30.21 Audit committees and audit function 818
30.22 Principal qualities of an auditor 820
30.23 Current position on the auditor providing consultancy services 823
30.24 Future developments on auditors providing consultancy services 825
30.25 The Sarbanes–Oxley Act 2002 826
30.26 Review of corporate governance initiatives 827
30.27 How effective have the four pillars been in achieving good corporate
governance? 828
30.28 How effective have efforts been to control directors’ remuneration? 829
Summary 830
Review questions 830
Exercises 832
References 836

31 Sustainability – environmental and social reporting 838

31.1 Introduction 838
31.2 How financial reporting has evolved to embrace sustainability
reporting 838
31.3 The Triple Bottom Line (TBL) 839
31.4 The Connected Reporting Framework 840
31.5 IFAC Sustainability Framework 842
31.6 The accountant’s role in a capitalist industrial society 844
31.7 The accountant’s changing role 844
31.8 Sustainability – environmental reporting 845
31.9 Environmental information in the annual accounts 845
31.10 Background to companies’ reporting practices 846
31.11 European Commission recommendations for disclosures in annual
accounts 847
31.12 Evolution of stand-alone environmental reports 848
31.13 International charters and guidelines 852
31.14 Self-regulation schemes 854
31.15 Economic consequences of environmental reporting 856
31.16 Summary on environmental reporting 857
31.17 Environmental auditing: international initiatives 858
31.18 The activities involved in an environmental audit 859
31.19 Concept of social accounting 861
31.20 Background to social accounting 863
31.21 Corporate social responsibility 866
31.22 Need for comparative data 868
31.23 International initiatives towards triple bottom line reporting 870
Summary 873
Review questions 873
Exercises 875
References 881
Bibliography 882

32 Ethics for accountants 884

32.1 Introduction 884
32.2 What do we mean by ‘ethics’? 884
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xx • Full Contents

32.3 The nature of business ethics 885

32.4 Ethical codes for businesses 886
32.5 The background to business ethics 889
32.6 The role of ethics in modern business 890
32.7 International Accreditation Programme 893
32.8 The role of professional accounting ethics 894
32.9 National and international regulation 896
32.10 The role of the accountant as guardian of business ethics 899
32.11 Growth of voluntary standards 900
32.12 Conflict between Codes and Targets 903
Summary 903
Review questions 904
References 906
Bibliography 906

Appendix: Outline solutions to selected exercises 907

Index 913
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xxi

Preface and acknowledgements

Our objective is to provide a balanced and comprehensive framework to enable students

to acquire the requisite knowledge and skills to appraise current practice critically and to
evaluate proposed changes from a theoretical base. To this end, the text contains:
● current IASs and IFRSs,
● illustrations from published accounts,
● a range of review questions,
● exercises of varying difficulty,
● outline solutions to selected exercises in an Appendix at the end of the book,
● extensive references.
We have assumed that readers will have an understanding of financial accounting to a
foundation or first-year level, although the text and exercises have been designed on the
basis that a brief revision is still helpful.
Lecturers are using the text selectively to support a range of teaching programmes for
second-year and final-year undergraduate and postgraduate programmes. We have therefore
attempted to provide subject coverage of sufficient breadth and depth to assist selective use.
The text has been adopted for financial accounting, reporting and analysis modules on:
● second-year undergraduate courses for Accounting, Business Studies and Combined
Studies;
● final-year undergraduate courses for Accounting, Business Studies and Combined Studies;
● MBA courses;
● specialist MSc courses; and
● professional courses preparing students for professional accountancy examinations.

Changes to the thirteenth edition

Accounting standards
UK listed companies, together with those non-listed companies that so choose, have applied
international standards from January 2005.
For non-listed companies that choose to continue to apply UK GAAP, the ASB has stated
its commitment to progressively bringing UK GAAP into line with international standards.
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xxii

xxii • Preface and acknowlegements

For companies currently applying FRSSE, this will continue. The IASB launched field
tests of an SME Exposure draft in June 2007 with an IFRS for non-publicly accountable/
private entities due in 2009.

Accounting standards – thirteenth edition updates

Chapters 5 and 6 cover the evolution of the regulatory framework in the UK and the evolution
of international standards.
Topics and International Standards are covered as follows:
Chapter 4 Accounting for inflation IAS 29
Chapter 8 Published accounts of companies IAS 1, IAS 37, IFRS 1, IFRS 5
and IRFS 8
Chapter 9 Preparation of published accounts IAS 1, IAS 8, IAS 24 and IFRS 5
Chapter 11 Off statement of financial position finance IAS 37
Chapter 12 Financial instruments IAS 32, IAS 39 and IFRS 7
Chapter 13 Employee benefits IAS 19, IAS 26 and IFRS 2
Chapter 14 Taxation in company accounts IAS 12
Chapter 15 Property, plant and equipment (PPE) IAS 16, IAS 20, IAS 23, IAS 36,
IAS 40 and IFRS 5
Chapter 16 Leasing IAS 17
Chapter 17 R&D; goodwill and intangible assets;
brands IAS 38 and IFRS 3
Chapter 18 Inventories IAS 2
Chapter 19 Construction contracts IAS 11
Chapters 20 to 24 Consolidation IAS 21, IAS 27, IAS 28, IAS 31
and IFRS 3
Chapter 25 Earnings per share IAS 33
Chapter 26 Statements of cash flows IAS 7
Chapter 30 Corporate governance IFRS 2

Income and asset value measurement systems

Chapters 1 to 4 continue to cover accounting and reporting on a cash flow and accrual basis,
the economic income approach and accounting for changing price levels.

The UK regulatory framework and analysis

UK listed companies will continue to be subject to national company law, and mandatory and
best practice requirements such as the Operating and Financial Review and the Combined Code.

UK regulatory framework and analysis – thirteenth edition changes

The following chapters have been retained and updated as appropriate:
Chapter 10 Share capital, distributable profits and reduction of capital
Chapter 11 Off balance sheet finance
Chapter 27 Review of financial ratio analysis
Chapter 28 Trend analysis and multivariate analysis
Chapter 29 An introduction to financial reporting on the Internet
Chapter 30 Corporate governance
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xxiii

Preface and acknowlegements • xxiii

Chapter 31 Sustainability – environmental and social reporting

Chapter 32 Ethics for accountants
Our emphasis has been on keeping the text current and responsive to constructive comments
from reviewers.

Recent developments
In addition to the steps being taken towards the development of IFRSs that will receive broad
consensus support, regulators have been active in developing further requirements concern-
ing corporate governance. These have been prompted by the accounting scandals in the USA
and, more recently, in Europe and by shareholder activism fuelled by the apparent lack of
any relationship between increases in directors’ remuneration and company performance.
The content of financial reports continues to be subjected to discussion with a tension
between preparers, stakeholders, auditors, academics and standard setters; this is mirrored
in the tension that exists between theory and practice.
● Preparers favour reporting transactions on a historical cost basis which is reliable but does
not provide shareholders with relevant information to appraise past performance or to
predict future earnings.
● Shareholders favour forward-looking reports relevant in estimating future dividend and
capital growth and in understanding environmental and social impacts.
● Stakeholders favour quantified and narrative disclosure of environmental and social impacts
and the steps taken to reduce negative impacts.
● Auditors favour reports that are verifiable so that the figures can be substantiated to avoid
them being proved wrong at a later date.
● Academic accountants favour reports that reflect economic reality and are relevant in apprais-
ing management performance and in assessing the capacity of the company to adapt.
● Standard setters lean towards the academic view and favour reporting according to the
commercial substance of a transaction.
In order to understand the tensions that exist, students need:
● the skill to prepare financial statements in accordance with the historical cost and current
cost conventions, both of which appear in annual financial reports;
● an understanding of the main thrust of mandatory and voluntary standards;
● an understanding of the degree of flexibility available to the preparers and the impact of
this on reported earnings and the figures in the statement of financial position;
● an understanding of the limitations of financial reports in portraying economic reality;
and
● an exposure to source material and other published material in so far as time permits.

Instructor’s Manual
A separate Instructor’s Manual has been written to accompany this text. It contains fully
worked solutions to all the exercises and is of a quality that allows them to be used as over-
head transparencies. The Manual is available at no cost to lecturers on application to the
publishers.
A01_ELLI3325_13_SE_FM.QXD 13/7/09 11:24 Page xxiv

xxiv • Preface and acknowlegements

Website

An electronic version of the Manual is also available for download at www.pearsoned.co.uk/

elliott-elliott.

Acknowledgements
Financial reporting is a dynamic area and we see it as extremely important that the text
should reflect this and be kept current. Assistance has been generously given by colleagues
and many others in the preparation and review of the text and assessment material. This
thirteenth edition continues to be very much a result of the authors, colleagues, reviewers
and Pearson editorial and production staff working as a team and we are grateful to all
concerned for their assistance in achieving this.
We owe particular thanks to Ron Altshul of Leeds Metropolitan University, who has
updated ‘Taxation in company accounts’ (Chapter 14); Bala Balachandran of South Bank
University ‘Corporate governance’ (Chapter 30); Charles Batchelor formerly of FTC
Kaplan for ‘Financial instruments’ (Chapter 12) and ‘Employee benefits’ (Chapter 13); Steve
Dungworth of De Montfort University, for ‘Ethics for accountants’ (Chapter 32), which
first appeared in the third edition; Ozer Erman of Kingston University, for ‘Share capital,
distributable profits and reduction of capital’ (Chapter 10), which first appeared in the
second edition; Paul Robins of the Financial Training Company for ‘Property, plant and
equipment (PPE)’ (Chapter 15) and Consolidation chapters; Professor Garry Tibbits of the
University of Western Sydney for Leasing (Chapter 16); Hendrika Tibbits of the University
of Western Sydney for An introduction to financial reporting on the Internet (Chapter 29);
David Towers, formerly of Keele University, for R&D; goodwill and intangible assets
(Chapter 17); and Martin Howes for inputs to financial analysis.
The authors are grateful for the constructive comments received from the following reviewers
which have assisted us in making improvements: Iain Fleming of the University of Paisley,
John Morley of the University of Brighton, John Forker of Queen’s University, Belfast, Breda
Sweeney of Cork University, Patricia McCourt Larres of Queen’s University, Belfast, and
Dave Knight of Leeds Metropolitan University.
Thanks are owed to A.T. Benedict of the South Bank University, Keith Brown of De
Montfort University, Kenneth N. Field of the University of Leeds, Sue McDermott of
London Guildhall University, David Murphy of Manchester Metropolitan University,
Bahadur Najak of the University of Durham, Graham Sara of Coventry University, Laura
Spira of Oxford Brookes University, Ken Trunkfield, formerly of the University of Derby,
and Martin Tuffy formerly of the University of Brighton.
Thanks are also due to the following organisations: the Accounting Standards Board,
the International Accounting Standards Board, the Association of Chartered Certified
Accountants, the Association of International Accountants, the Chartered Institute of Manage-
ment Accountants, the Institute of Chartered Accountants of Scotland, Chartered Institute
of Public Finance and Accountancy, Chartered Institute of Bankers and the Institute of
Investment Management and Research.
We would also like to thank the authors of some of the end-of-chapter exercises. Some of
these exercises have been inherited from a variety of institutions with which we have been
associated, and we have unfortunately lost the identities of the originators of such material
with the passage of time. We are sorry that we cannot acknowledge them by name and hope
that they will excuse us for using their material.
Random documents with unrelated
content Scribd suggests to you:
A hateful look came into his eyes.
"I thought you were fond of fatherless babies," he sneered.
"Go," I said, hardly controlling myself, "and don't come here again
without Mr. Saychase."
"If I bring him it will be to marry you, Ruth."
Something in me rose up and spoke without my volition. I did not
know what I was saying until the words were half said. I crossed the
room and rang the bell for Rosa, and as I did it I said:—
"I see I must have a husband to protect me from your insults, and I
will marry Tom Webbe."
Before he could answer, Rosa appeared.
"Rosa," I said, and all my calmness had come back, "will you show
Mr. Weston to the door. I am not at home to him again until he
comes with Mr. Saychase."
She restrained her surprise and amusement better than I expected,
but before she had had time to do more than toss her head George
had rushed away without ceremony. By this time, I suppose, every
man, woman, and child in town knows that I have turned him out of
my house.
November 7. "And after the fire a still, small voice!" I have been
saying this over and over to myself; and remembering, not
irreverently, that God was in the voice.
I have had a talk with Tom which has moved me more than all the
trouble with George. The very fact that George so outraged all my
feelings and made me so angry kept me from being touched as I
might have been otherwise; but this explanation with Tom has left
me shaken and tired out. It is emotion and not physical work that
wears humanity to shreds.
Tom came to discuss the reading-room. He is delighted that it has
started so well and is going on so swimmingly; and he is full of plans
for increasing the interest. I was, I confess, so preoccupied with
what I had made up my mind to say to him I could hardly follow
what he was saying. I felt as if something were grasping me by the
throat. He looked at me strangely, but he went on talking as if he did
not notice my uneasiness.
"Tom," I broke out at last, when I could endure it no longer, "did you
know that Mrs. Weston is here, very ill?"
"Yes," was all he answered.
"And, Tom," I hurried on, "George won't remarry her."
"Won't remarry her?" he echoed. "The cur!"
"He was here yesterday," I went on desperately, "and he said he is
determined to marry me."
Tom started forward with hot face and clenched fist.
"The blackguard! I wish I'd been here to kick him out of the house!
What did you say to him?"
"I told him he had insulted me, and forbade him to come here again
without Mr. Saychase to remarry them," I said. Then before Tom's
searching look I became so confused he could not help seeing there
was more.
"Well?" he demanded.
He was almost peremptory, although he was courteous. Men have
such a way in a crisis of instinctively taking the lead that a woman
yields to it almost of necessity.
"Tom," I answered, more and more confused, "I must tell you, but I
hope you'll understand. I had a frightful time with him. I was
ashamed of him and ashamed of myself, and very angry; and when
he said he'd make me marry him sometime, I told him"—
"Well?" demanded Tom, his voice much lower than before, but even
more compelling.
"I told him," said I, the blood fairly throbbing in my cheeks, "that I
should marry you. You've asked me, you know!"
He grew fairly white, but for a moment he did not move. His eyes
had a look in them I had never seen, and which made me tremble.
It seemed to me that he was fighting down what he wanted to say,
and to get control of himself.
"Ruth," he asked me at last, with an odd hoarseness in his voice, "do
you want George Weston to marry that woman?"
"Of course I do," I cried, so surprised and relieved that the question
was not more personal the tears started to my eyes. "I want it more
than anything else in the world."
Again he was still for a moment, his eyes looking into mine as if he
meant to drag out my most secret thought. These silences were too
much for me to bear, and I broke this one. I asked him if he were
vexed at what I had said to George, and told him the words had
seemed to say themselves without any will of mine.
"I could only be sorry at anything you said, Ruth," he returned,
"never vexed. I only think it a pity for you to link your name with
mine."
I tried to speak, but he went on.
"I've loved you ever since I was old enough to love anything. I've
told you that often enough, and I don't think you doubt it. I had you
as my ambition all the time I was growing up. I came home from
college, and you were engaged, and all the good was taken out of
life for me. I've never cared much since what happened. But if I've
asked you to love me, Ruth, I never gave you the right to think I'd
be base enough to be willing you should marry me without loving
me."
Again I tried to speak, though I cannot tell what I wished to say. I
only choked and could not get out a word.
"Don't talk about it. I can't stand it," he broke in, his voice husky.
"You needn't marry me to make George Weston come up to the
mark. I'll take care of that."
I suppose I looked up with a dread of what might happen if he saw
George, and of course Tom could not understand that my concern
was for him and not for George. He smiled a bitter sort of smile.
"You needn't be afraid," he said. "I'll treat him tenderly for your
sake."
I was too confused to speak, and I could only sit there dazed and
silent while he went away. It was not what he was saying that filled
me with a tumult till my thoughts seemed beating in my head like
wild birds in a net. Suddenly while he was speaking, while his dear,
honest eyes full of pain were looking into mine, the still, small voice
had spoken, and I knew that I cared for Tom as he cared for me.
November 8. I realize now that from the morning when Tom and I
first stood with baby in my arms between us I have felt differently
toward him. It was at the moment almost as if I were his wife, and
though I never owned it to myself, even in my most secret thought,
I have somehow belonged to him ever since. I see now that
something very deep within has known and has from time to time
tried to tell me; but I put my hands to the ears of my mind. Miss
Fleming used to try to teach us things at school about the difference
between the consciousness and the will, and other dark mysteries
which to me were, and are, and always will be utterly
incomprehensible, and I suppose some kind of a consciousness
knew what the will wouldn't recognize. That sounds like nonsense
now it is on paper, but it seemed extremely wise when I began to
write it. No matter; the facts I know well enough. It is wonderful
how a woman will hide a thing from herself, a thing she knows
really, but keeps from being conscious she knows by refusing to let
her thoughts put it into words.
To myself I seem shamefully fickle,—and yet it seems also as if I had
never changed at all, but that it was always Tom I have been fond
of, even when I fully believed it was George. Of course this is only a
weak excuse; but at least I have been fond of Tom as a friend from
my childhood. He has always commanded me, too, in a way. He has
done what I wished and what I thought best; but I have always
known he could be influenced only so far, and that if I wanted what
he did not believe in he could be as stubborn as a rock. The
hardness of his mother shows itself in him as the stanch foundation
for the gentleness he gets from his father.
Miss Charlotte came in for a moment to-day, and by instinct she
knew that something had made me happy. She was full of sympathy
for a moment, and then, I think, some suspicion came into her dear
old head which she would not have there.
"Ruth, my dear," she said in her rough way, "you look too cheerful
for the head of a foundling asylum and a house of refuge. I hope
you've made George Weston promise to marry his own wife,—
though if I made the laws it wouldn't be necessary for a man to
marry a woman more than once. I've no idea of weddings that have
to come round once in so often like house-cleaning."
She was watching me so keenly as she spoke that I smiled in spite
of myself.
"No," I told her, "I haven't been able to make him; but Tom Webbe
has undertaken to bring him round, so I believe it will be all right."
Whether she understood or not I cannot tell, but from the loving
way in which she leaned over and kissed me I suspect she had some
inkling of it.
November 9. They are married. Just after dusk to-night I heard the
doorbell, and Rosa came in with a queer look on her face to say that
Mr. Saychase and Mr. Weston were in the hall. I went out to them at
once, and tried to act as if everything had been arranged between
us. George was pale and stern. He would not look at me, and I did
not exchange a word directly with him while he was in the house,
except to say good-evening and good-by. I kept them waiting just a
moment or two while I prepared Gertrude, and then I called them
upstairs. She behaved very well, acting as if she were a little
frightened, but accepting everything without a word. I suspect she is
too ill really to care for anything very much. The ceremony was over
quickly, and then George went away without noticing his wife further
except to say good-night.
Tom came in for a moment, later, to see that everything was well,
and of course I asked him how he had brought George to consent.
He smiled rather grimly.
"I did it simply enough," he said. "I tried easy words first, and
appealed to him as a gentleman,—though of course I knew it was no
use. If such a plea would have done any good, I shouldn't have
been there. Then I said he wouldn't be tolerated in Tuskamuck if he
didn't make it right for his wife. He said he guessed he could fix that,
and if other people would mind their own business he could attend
to his. Then I opened the door and called in Cy Turner. I had him
waiting outside because I knew Weston would understand he meant
business. I asked him to say what we'd agreed; and he told Weston
that if he didn't marry the woman before midnight we'd have him
ridden out of town on a rail. He weakened at that. He knew we'd do
it."
I could not say anything to this. It was a man's way of treating the
situation, and it accomplished its end; but it did affect me a good
deal. I shivered at the very idea of a mob, and of what might have
happened if George had not yielded. Tom saw how I felt, I suppose.
"You think I'm a brute, Ruth," he said, "but I knew he'd give in. He
isn't very plucky. I always knew that."
He hurried away to go to the reading-room, where he had to see to
something or other, and we said nothing about our personal
relations. I wonder if I fancied that he watched me very closely to
see how I took his account, or if he really thought I might resent his
having browbeaten George. He need not have feared. I was troubled
by the idea of the mob, but I was proud of Tom, and I could not
help contrasting his clear, straightforward look with the way George
avoided my eyes.
November 12. Now there are two babies in the house, and Cousin
Mehitable might think her prediction that I would set up an orphan
asylum was coming true in earnest. In spite of Mrs. Weston's
exposure everything is going well, and we hope for the best. I sent
George a note last night to tell him, and he came over for a minute.
He behaved very well. He had none of the bravado which has made
him so different and so dreadful, and he was more like his old self.
He was let into his wife's chamber just long enough to kiss her, but
that was all. I suppose to be the father of a son must sober any
man.
November 20. Tom never comes any more to see me or baby. When
I discovered I cared for him I felt that of course everything was at
last straightened out; and here is Tom, who only knows that he
cares for me, so the case is about as it was before except that now
he will never speak. I must do something; but what can I do? When
I thought only of getting out of the way of George's marriage it was
bad enough to speak to Tom, and now it seems impossible. I can't, I
can't, I can't speak to him again!
November 23. Cousin Mehitable and her telegram arrived this time
together, for the boy who drove her from the station brought the
message, and gave it to her to bring into the house. She was full of
indignation and amazement at what she found, and insisted upon
going back to Boston by the afternoon train.
"I never know what you will do, Ruth," she said, "so of course I
ought not to be surprised; but of all the wild notions you could take
into your head, I must say to have Mrs. Weston come here to have
her baby is the most incredible."
"You advised me to have more babies, as long as I had one," I
interposed.
"I've a great mind to shake you," was her response. "This is a pretty
reception when I haven't seen you since I came home. To think I
should be cousin to a foundling hospital, and that all the family I
have left!"
I suggested that if I really did set up a foundling hospital, she would
soon have as large a family as anybody could want, and she briskly
retorted that she had more than she wanted now. She had come
down to persuade me to go to Boston for the winter, to make up,
she said, for my not going abroad with her, and she brought me a
wonderful piece of embroidered crêpe for a party dress. She was as
breezy and emphatic as ever, and she denounced me and my doings
in good round terms.
"I suppose if you did come to Boston," she said, "you'd be mixed up
in all the dreadful charities there, and I should never see you."
"But you know, Cousin Mehitable," I protested, "you belong to two
or three charitable societies yourself."
"But those are parish societies," was her reply. "That is quite
different. Of course I do my part in whatever the church is
concerned in; but you just do things on your own hook, and without
even believing anything. I think it's wicked myself."
I could only laugh at her, and it was easy to see that her indignation
was not with any charitable work I did, but only with the fact I
would not promise to leave everything and go home with her.
Before she went home I told her I had a confession to make. She
commented, not very encouragingly, that she supposed it was
something worse than anything had come yet, but that as she was
prepared for anything I might as well get it out.
"If you've decided to be some sort of a Mormon wife to that horrid
Mr. Weston," she added, "I shouldn't be in the least surprised.
Perhaps you'll take him in with the rest of his family."
I said I did indeed think of being married, but not to him.
"Let me know the worst at once, Ruth," she broke out, rather
fiercely. "At my age I can't stand suspense as I could once. What
tramp or beggar or clodhopper have you picked out? I know you too
well to suppose it's anybody respectable."
When I named Tom, she at first pretended not to know him,
although she has seen him a dozen times in her visits here, and
once condescended to say that for a countryman he was really
almost handsome.
"I know it's the same name as that baby's father's," she ended, her
voice getting icier and icier, "but of course no respectable woman
would think of marrying him."
"Then I'm not a respectable woman," I retorted, feeling the blood
rise into my face, "for I'm thinking of it."
We looked for a moment into each other's eyes, and I felt, however
I appeared, as if I were defying anything she could say.
"So he has taken advantage of your mothering his baby, has he?"
she brought out at last.
I responded that he did not even suspect I meant to marry him. She
stared, and demanded how he was to find out. I answered that I
could think of no way except for me to tell him. She threw up her
hands in pretended horror.
"I dare say," she burst out, "he only got you to take the baby so that
you'd feel bound to him. I should think when he'd disgraced himself
you might have self-respect enough to let him alone. Oh, what
would Cousin Horace say!"
Then she saw she was really hurting me, and her eyes softened
somewhat.
"I shan't congratulate you, Ruth, if that's what you expect; but since
you will be a fool in your own obstinate way, I hope it'll make you
happy."
I took both her hands in mine.
"Cousin Mehitable," I pleaded, "don't be hard on me. I know he's
done wrong, and it hurts me more than I can tell you. I am so sorry
for him and I really, really love him. I'm all alone now except for
baby, and I am sure if Father were alive he would see how I feel,
and approve of what I mean to do."
The tears came into her eyes as I had never seen them. She drew
her hands away, but first she pressed mine.
"Ruth," she said, "never mind my tongue. If you've only baby, I've
nobody but you, and you won't come near me. Besides, you are
going to have him. I can't pretend I like it, Ruth; but I do like you,
and I do dearly hope you'll be happy. You deserve to be, my dear;
and I'm a selfish, worldly old woman, with a train to catch. Now
don't say another word about it, or I'll disinherit you in my will."
So we kissed each other, and she went away with my secret.
November 25. Kathie has come home for her Thanksgiving vacation,
and I never saw a creature so transformed. She is so interested in
her school, her studies, her companions, that she seems to have
forgotten that anybody ever frightened her about her soul; and she
is just a merry, happy girl, bright-eyed and rather high-strung, but
not in the least morbid. She hugged me, and kissed Tomine, and the
nonsense of her jealousy, as of her having committed the
unpardonable sin, was forgotten entirely. It is an unspeakable
comfort to me that the experiment of sending her away has turned
out so well.
Miss Charlotte came in while Kathie was here, and watched her with
shrewd, keen eyes as she rattled on about the things she is
studying, the games she plays, and the friends she has made. When
she had gone, Miss Charlotte looked at me with one of her friendly
regards.
"She's made over, like the boy's jackknife that had a new blade and
a new handle," was her comment. "I think, my dear, you've saved
her soul alive."
I was delighted that she thought Kathie so much improved, though
of course I realized I had not done it.
November 26. I have invited George to Thanksgiving dinner. I do
hope Gertrude will be able to come downstairs; if she is not I shall
have to get through as best I can without her. Miss Charlotte will
come, and that will prevent the awkwardness of our being by
ourselves.
George comes every day to see his wife, and I think his real feelings,
his better side, have been called out by her illness. She is the
mother of his son, and she is so extremely pretty and pathetic as
she lies there, that I should not think any man could resist her. She
is so softened by what she has gone through, and so grateful for
kindness, she seems a different person from the over-dressed
woman we have known without liking very much.
She told me yesterday a good deal about her former life. She has
been an orphan from her early girlhood, largely dependent upon an
aunt who wanted to be rid of her. It was partly by the contrivance of
her aunt, and partly because she longed to escape from a position of
dependence, that she married her first husband. She did not stop, I
think, to consider what she was doing, and she found her case a
pretty hard one. Her husband abused her, and before they had been
married a year he ran away to escape a charge of embezzlement.
Word was sent to her soon after that he was drowned. She took
again her maiden name, and came East to escape all shadow of the
disgrace of her married life. She earned her living as a typewriter,
until she saw George at Franklin, where she was employed in the
bank. She confessed that she came here to secure him, and she
wept in begging my pardon for taking him away from me.
If she can keep to her resolutions and if George will only be still fond
of her, things may yet go well with them. Aunt Naomi dryly observed
yesterday that what has happened will be likely to prevent Mrs.
Weston for a long time to come from trying to make a display, and
so it may be the best thing that could have befallen her. So much
depends upon George, though!
November 30. The dinner went off much better than I could have
hoped. Dr. Wentworth allowed Gertrude to leave her room for the
first time, and George brought her down to dinner in his arms. She
was given only a quarter of an hour, but this served for the topic of
talk, and George was so tender with his wife that Miss Charlotte was
quite warmed to him.
The two babies of course had to be produced, but it was rather
painful to see how thin and spindling the little Weston baby looked
beside my bonny Thomasine. Tomine has grown really to know me.
She will come scrambling like a little crab across the floor toward me
if I appear in the nursery. Hannah and Rosa are both jealous of me,
and I triumph over them in a fashion little less than inhuman.
I am glad Thanksgiving is over, for in spite of all any of us might do
to seem perfectly at ease, some sense of constraint and
uncomfortableness was always in the background. On the whole,
however, we did very well; and Miss Charlotte sat with me far into
the twilight, talking of Mother.
 XII

DECEMBER

December 1. I dreamed last night a dream which affected me so

strongly that I can hardly write of it without shivering. I dreamed
that George came with Mr. Saychase to remarry, as I thought,
Gertrude. When we all stood by the side of her bed, however,
George seized my hand, and announced that he had come to marry
me, and was resolved to have no other wife. Gertrude fell back on
her pillow in a faint. I struggled to pull away the hand George had
taken, but I was powerless. I tried to scream, but that horrible
paralysis which sometimes affects us in dreams left me speechless. I
felt myself helpless while Mr. Saychase went on marrying me to
George before the eyes of his own wife, in spite of anything I could
do to prevent it. The determination to be free of this bond struggled
in me so strongly against the helplessness which held me that I
sprang up in bed at last, awake and bursting into hysterical crying.
The strange thing about it all is that I seem to have broken more
than the sleep of the body. It is as if all these years I had been in a
drowse in my mind, and had suddenly sprung up throbbingly awake.
I am as aghast at myself as if I should discover I had unconsciously
been walking in the dark on the edge of a ghastly precipice,—yes, a
precipice on the edge of a valley full of writhing snakes! My very
flesh creeps at the thought that I could by any possibility be made
the wife of any man but Tom. I look back to-day over the long years
I was engaged, and understand all in a flash how completely George
spoke the truth when he used to complain I was an iceberg and did
not know what it was to be in love. He was absolutely right; and he
was right to leave me. I can only wonder that through those years
when I endured his bodily presence because I thought I loved his
mental being, he could endure me at all. He could not have borne it,
I see now, if he had been really in love with me himself. I am wise
with a strange new wisdom; but whence it comes, or why it has
opened to me in a single night, from a painful dream, is more than I
can say. I understand that George never loved me any more than I
did him. He will go back to Gertrude,—indeed I do not believe he
has ever ceased to be fond of her, even when he declared he was
tired of her and wanted me to take him back. He was angry with her,
and no human being understands himself when he is angry.
Last night after I waked I could not reason about things much. I was
too panic-stricken. I lay there in the dark actually trembling from the
horror of my dream, and realized that from my very childhood Tom
has stood between me and every other man. Now at last I, who
have been all these years in a dull doze, am awake. I might almost
say, without being in the least extravagant, that I am alive who was
dead; I, who have thought of love and marriage as I might have
thought about a trip abroad, know what love means. My foolish
dream has changed me like a vision which changes a mere man into
a prophet or a seer.
I cannot bear that Tom should go on suffering. I must somehow let
him know. December 2. Fortune was kind to me this morning, and
Tom knows. I had to go to take some flannel to old Peggy Cole, and
as I crossed the Foot-bridge Tom came out of Deacon Daniel's mill.
He flushed a little when he saw me, and half hesitated, as if he were
almost inclined to turn back. I did not mean to let him escape,
however, and stood still, waiting for him. We shook hands, and I at
once told him I had wanted to see him, so that if he were not in a
hurry I should be glad if he would walk on with me.
He assented, not very willingly I thought, and we went on over the
bridge together. The sun was shining until the snow-edges glistened
like live coals, and everywhere one looked the air fairly shimmered
with light. The tide was coming up in the river, and the cakes of ice,
yellowed in patches by the salt water until they were like unshorn
fleeces, were driven against the long sluice-piers, jostling and
pushing like sheep frightened into a corner. The piers themselves,
and every spar or rock that showed above the water, were as white
as snow could make them. It was one of those days when the air is
a tonic, so that every breath is a joy; and as Tom and I walked on
together I could have laughed aloud just for joy of the beautiful
winter day.
"How cold the water looks," Tom said, turning his face away from
me and toward the Rim. "It is fairly black with cold."
"Even the ice-cakes seem to be trying to climb out of it," I returned,
laughing from nothing but pure delight. "I suppose that is the way
you feel about me, Tom. You haven't been near Tomine or me for
ten days, and you know you wanted to get away from me this
morning."
He did not answer for a minute. Then he said in a strained voice:—
"It's no use, Ruth; I shall have to go away. I can't stand it here. It
was bad enough before, but now I simply cannot bear it."
"You mean," I returned, full of fun and mischief, "that the idea of my
offering myself to you was too horrible? You had a chance to refuse,
Tom; and you took it. I should think I was the one to feel as if it
wasn't to be borne."
He stopped in the street and turned to face me.
"Don't, Ruth," he protested in a voice which went straight to my
heart. "If you knew how it hurts me you wouldn't joke about it."
I wanted to put my arms about his neck and kiss him as I used to do
when we were babies; but that was manifestly not to be thought of,
at least not in the street in plain sight of the blacksmith shop.
"It isn't any joke," said I. "Just walk along so the whole town need
not talk about us, please."
He walked on, and I tried to think of a sentence which would tell
him that I really cared for him, yet which I could say to him there in
the open day, with the sun making a peeping eye of every icy crystal
on fence or tree-twig.
"Well?" he cried after a moment.
"O Tom," I asked in despair, "why don't you help me? I can't say it. I
can't tell you I"—
I did not dare to look at him, and I came to a stop in my speech
because I could feel that he was pressing eagerly to my side.
"You what, Ruth?" he demanded, his voice quivering. "Be careful!"
Perhaps his agitation helped me to master mine. Certain it is for the
moment I thought only that he must not be kept in suspense, and
so I burst out abruptly:—
"Tom, you are horrid! I've offered myself to you once, and now you
want me to protest in the open street that I can't live without you!
Well, then; I can't!"
"Ruth!"
It was all he said; just my name, which he has said hundreds and
hundreds of times ever since he could say anything; but I think I can
never hear my name again without remembering the love he put
into it. I trembled with happiness, but I would not look at him. I
walked on with my eyes fixed on the snowy hills beyond the town,
and tried to believe I was acting as if I had said nothing and felt
nothing unusual. I remember our words up to this time, but after
that it is all a joyful blur. I know Tom walked about and waited for
me while I did my errand with Peggy Cole; the droll old creature
scolded me because the flannel was not thicker, and I beamed on
her as if she were expressing gratitude; then he walked home with
me, and couldn't come in because as we turned the corner we saw
Aunt Naomi walk into the house.
One thing I do remember of our talk on the way home. Tom said
suddenly, and with a solemnity of manner that made me grave at
once:—
"There is one thing more, Ruth, we must be frank about now or we
shall always have it between us. Can you forgive me for being baby's
father?"
He had found just the phrase for that dreadful thing which made it
most easy for me to answer.
"Tom, dear," I answered, "it isn't for me to forgive or not to forgive.
It is in the past, and I want to help you to forget utterly what cannot
now be helped."
"But baby," he began, "she"—
"Baby is ours," I interrupted. "All the rest may go."
He promised to come in to-night, and then I had to face Aunt
Naomi. She looked me through and through with eyes that seemed
determined to have the very deepest secrets of my soul. Whether I
concealed anything from her or not I cannot tell; but after all why
should I care? The day has been lived through, and it is time for
Tom to come.
December 3. If I could write—But I cannot, I cannot! Ever since
Rosa rushed in last night, crying out that Tom was drowned, I have
seen nothing but the water black with cold, and the flocks of ice
cakes grinding—Oh, why should I torment myself with putting it
down?
December 5. We buried him to-day. Cousin Mehitable sent a wreath
of ivy. Nobody else knows our secret. If he remembers, it is sweet
for him to know.
December 13. The stars are so beautiful to-night they make me
remember how Tom and I in our childhood used to play at choosing
stars we would visit when we could fly. To-night he may be exploring
them, but for me they shine and shine, and my tears blur them, and
make them dance and double.
December 19. I have been talking with Deacon Richards and Mr.
Turner. They both think I can take Tom's place on the reading-room
committee without coming forward too much. Nothing need be said
about it, only so I can do most of Tom's work. Of course I cannot go
to the room evenings as he did; but Mr. Turner will do that. Tom was
so interested in this that I feel as if I were continuing his work and
carrying out his plans. I remember all he had told me, and it almost
seems like doing it with him. Almost!
December 20. Now I know all about Tom's death that anybody
knows. I could not talk about it before. Aunt Naomi and dear Miss
Charlotte both tried to tell me, but I would not let them. To-night Mr.
Turner came to talk about the library, and before he went away we
spoke about Tom. He was so homely in his speech, so honest, so
kindly, that I kept on, and could listen to him even when he told how
Tom died.
That night Tom had been down on the other side of the river, and
was coming up—coming to me—past the Flatiron wharf. Mrs.
Brownrig was on the wharf, crazy with drink, and threatening to
throw herself overboard. Two or three of the people who live near
there, men and women, were trying to get her away, and when Tom
appeared they asked him to see what he could do. As he came near
her the old woman shrieked out that he had killed her daughter and
would murder her; and before they realized what she was doing she
had jumped into the water. Tom ran to the edge, unfastening his
overcoat as he went, and just paused to tear it off before he leaped
in after her. The tide was running out, and the water was full of ice.
He had a great bruise on his forehead where he had evidently been
struck by a block. Mrs. Brownrig pinioned his arms too, so he had no
chance anyway. It was a mercy that the bodies were recovered
before the tide drifted them out.
"Tom was an awful good fellow," the blacksmith concluded, "an
awful good fellow."
I could not answer him.
December 23. Deacon Webbe has been here to-day. He was so
bowed and bent and broken I could hardly talk to him without
sobbing; and I had to tell him I was to have been his daughter, and
that if he would let me, I would be so still. He was greatly touched,
and he will keep our secret.
December 24. More than the death of Father, more, even, than that
of Mother who had been my care and comfort so long, the death of
Tom seems to leave me alone in a wide, empty universe. I cannot
conceive of a future without him; I cannot believe the bonds which
bound us are broken. I have his child, and I cannot take baby in my
arms without feeling I am coming closer to Tom. All my friends have
been very dear. I do not think any one of them, except perhaps Miss
Charlotte, suspects how much the loss of Tom means to me, but
they at least realize that we were life-long comrades, and that I
must feel the death of the father of baby very keenly. However much
or little they suspect, no one has betrayed any intimation that Tom
and I were more than close friends. Even Aunt Naomi has said
nothing to make me shrink. People are so kind in this world, no
matter what pessimists may say.
December 31. I have been very busy with all the Christmas work for
my poor people, the things Tom wanted done for the reading-room,
and the numberless trifles which need to be attended to. To-night I
think I am writing in my diary for the last time. The year has been
full of wonderful things, some of them terrible to bear, and yet, now
I look back, I see it has brought me more than it has taken away.
Tom is mine always, everywhere, as long as we two have any
existence in all the wide spaces between the stars we used to
choose to fly to; and his baby is left to comfort me and to hearten
me for the work I have all around me to do. I cannot keep the tears
back always, and heartache is not to be cured by any sort of
reasoning that I know; yet as long as I have his love, the memory of
Father and Mother, and dear baby, I have no right to complain. Just
to be in one's place and working, to go on growing,—dying when the
time comes,—what a priceless, blessed thing life is!
Transcriber's Note.
Repeated word "a" removed from page 228:
(Yours truly and with a a sad and loving)

Typos corrected:

page 35:
"fastastic" changed to "fantastic"
(fantastic bunches of snow in the willows)
page 119:
"be" changed to "he"
(clergyman with whom he)
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