Examiners commentaries 2014

Examiners commentaries 2014 Examiners commentaries 2014 AC3091 Financial reporting Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2013 14. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. General remarks Learning outcomes At the end of this course, and having completed the Essential reading and activities, you should be able to: explain and apply a number of theoretical approaches to financial accounting record and analyse data prepare financial statements under alternative accounting conventions describe a number of regulatory issues relating to financial accounting critically evaluate theories and practices of, and other matters relating to, financial accounting. What are the Examiners looking for? The combined questions in Section A will require you to prepare calculations on a variety of topics as well as show a critical grasp of the theories underlying the techniques. To do well, you need to be able both to explain and evaluate the theories and prepare a range of financial statements and calculations. For quantitative parts of questions, Examiners are looking for the accurate preparation of financial statements that follow generally accepted formats with clear headings and accurate application of accounting techniques to specific areas within financial reporting. Workings should always be clearly provided. Written components of combined questions require clear and coherent explanations of theories, techniques and practices. You must critically evaluate theories and practices. 1

AC3091 Financial reporting Good answers to essay-based questions in Section B will be structured coherently and logically. They should include an introduction, a main body and conclusion, and cover all parts of the question. Typically, an essay-based question will require an explanation of an issue within financial reporting and a critical analysis of the issue. Explanations should be clear and include a discussion of key definitions, with examples if appropriate. The analysis should show critical awareness of both sides of an argument or the application of a theory or concept to financial reporting, with an assessment of its appropriateness to financial reporting. Planning your time in the examination All questions in the examination paper carry equal marks and equal time should be devoted to each question. It is important that you attempt four questions and all parts of each question you answer. Marks for each section are shown and should be used to guide your work and time management. Where questions are in parts, you should avoid excessively long answers to some parts and missing out other parts. Key steps to improvement You can enhance your performance by improving the presentation of your work, providing clear workings, answering the required number of questions and attempting all sections of a question. Often candidates seem to focus attention on the preparation of financial statements and the financial calculations without being able to explain, discuss and evaluate the theories and practices central to financial reporting. 2

Examiners commentaries 2014 Question spotting Many candidates are disappointed to find that their examination performance is poorer than they expected. This can be due to a number of different reasons and the Examiners commentaries suggest ways of addressing common problems and improving your performance. We want to draw your attention to one particular failing question spotting, that is, confining your examination preparation to a few question topics which have come up in past papers for the course. This can have very serious consequences. We recognise that candidates may not cover all topics in the syllabus in the same depth, but you need to be aware that Examiners are free to set questions on any aspect of the syllabus. This means that you need to study enough of the syllabus to enable you to answer the required number of examination questions. The syllabus can be found in the Course information sheet in the section of the VLE dedicated to this course. You should read the syllabus very carefully and ensure that you cover sufficient material in preparation for the examination. Examiners will vary the topics and questions from year to year and may well set questions that have not appeared in past papers every topic on the syllabus is a legitimate examination target. So although past papers can be helpful in revision, you cannot assume that topics or specific questions that have come up in past examinations will occur again. If you rely on a question spotting strategy, it is likely you will find yourself in difficulties when you sit the examination paper. We strongly advise you not to adopt this strategy. 3

AC3091 Financial reporting Examiners commentaries 2014 AC3091 Financial reporting Zone A Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2013 14. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. Comments on specific questions Candidates should answer FOUR of the following SIX questions: at least one from Section A and one from Section B. All questions carry equal marks. Section A Answer at least one question from this section. Question 1 The income statements for Dance Ltd, Ballet Ltd and Tap Ltd for the year ended 31 December 2013 are given as follows: [For the full version of this question, please refer to the examination paper.] Reading for this question Subject guide, Chapter 5. Alexander, D., A. Britton and A. Jorissen International Financial Reporting and Analysis. (Andover: Centage Learning EMEA, 2011) fifth edition [ISBN 9781408032282] Chapters 25 28. (a) You need to outline the circumstances where consolidation is not required for subsidiaries: Parent is itself a subsidiary (wholly or partially owned) and parents do not object Parents debt or equity not traded in public market Parent did not file, and ultimate or intermediate parent produces consolidated financial statements 4

Examiners commentaries 2014 Control temporary. A good answer would include all the different situations. A weak answer would focus on just one situation or be unable to discuss any of the situations. (b) The consolidated income statement is shown below. You must provide workings for each item. A good answer would present the consolidated income statement clearly and be able to deal with the adjustments appropriately, showing detailed workings to support the answer. A weak answer would present some of the consolidated income statement, but with incorrect treatment of many of the figures. Sales (3,000 + 1,700 75) 4,625,000 Cost of sales (1,180 + 590 75 + 2) (1,697,000) Gross profit 2,928,000 Investment income (76 0.8 * 50) 36,000 Administration costs (186 + 140) (326,000) Distribution costs (104 + 226) (330,000) Interest receivable (10 + 5.2 * 1) 14,800 Interest payable (2 + 1.2 * 1) (2,800) Management fee from associate 60,000 Share of associate s earnings 0.25 * (585 10 60) 128,750 Goodwill impairment (87,500) Profit before tax 2,421,125 Tax (100 + 70 + 0.25 * 20) (175,000) Profit after tax 2,246,250 Non-controlling interest 20% (678 2 85) (118,200) Profit attributable to H 2,128,050 Dividends (90,000) Retained earnings for year 2,038,050 Retained earnings bfwd 2,059,250 Retained earnings cfwd 4,097,300 Workings Goodwill Goodwill of subsidiary = 150 0.8 * (80 + 25) = 66 Impairment = 33,000 against P+L bfwd Goodwill of associate = 200 0.25 * (100) = 175 Impairment = 87.5 in income statement Ret profit brought forward=1,600 + 80%(600 80) + 25%(400 95) 33 = 1,600 + 416 + 76.25 33 = 2,059.250 Students may end the income statement with profit attributable to H and NCI and give dividends and retained earnings in statement of equity as follows: Retained earnings bfwd 2,059,250 Earnings for year attributable to H 2,128,050 Dividends (90,000) Retained earnings cfwd 4,097,300 5

AC3091 Financial reporting Question 2 Puppet Ltd started trading on 1 January 2013. The income statement and the statement of financial position for the first year of trading are given as follows: [For the full version of this question, please refer to the examination paper.] Reading for this question Subject guide, Chapter 4 International Financial Reporting and Analysis. (2011) Chapters 5 7. (a) You need to outline current value and current purchasing power accounting. For each method, you need to discuss the technique and identify the concepts and key adjustments included within each method. You also need to discuss the advantages and disadvantages of each of the techniques, including in relation to the types of adjustments made, ease of calculation, consistency of unit of measurement, economic value, subjectivity, complexity, the use of indexes and how appropriate they are and which problems with historic cost are addressed and which are not. You may also discuss other issues with the alternatives. A good answer would explain each alternative clearly with appropriate examples and illustrations. Each method would be critically assessed, clearly discussing both advantages and disadvantages. A weak answer would not be able to explain the methods clearly and would not be able to discuss a range of advantages and disadvantages. (b) The current value financial statements are given below. You must provide workings for each item. A good answer would present the current value financial statements clearly and be able to deal with the adjustments appropriately, showing detailed workings to support the answer. A weak answer would present some of the current value financial statements but with incorrect treatment of many of the figures. Statement of financial position Adjustment Current value Non-current asset 1440,000 230/200 1,656,000 Inventory 480,000 250/215 558,140 Cash 800,000 800,000 Total assets 2,720,000 3,014,140 Share capital 2,000,000 2,000,000 Profit and loss account 400,000 From IS 286,853 Trade payables 320,000 320,000 6

Examiners commentaries 2014 Capital maintenance reserves Non-current 216,000 assets Inventory 78,140 Cost of sales 89,147 Depreciation 24,000 2,720,000 3,014,140 Income statement Adjustment Current value Sales 3,800,000 3,800,000 Opening inventory 600,000 190/180 633,333 Purchases 2,400,000 2,400,000 Closing inventory (480,000) 190/215 (424,186) (2,520,000) (2,609,147) 1,280,000 1,190,853 Expenses (720,000) (720,000) Depreciation (160,000) 230/200 (184,000) Net profit 400,000 286,853 Question 3 On 1 January 2013 Antler Ltd entered into the following lease agreements with Lease Ltd: 1. An asset, asset A, which could be purchased outright for 639,540, is instead leased for three years. The useful economic life of the asset is three years and at the end of this time, the asset will have no residual value. Antler Ltd is responsible for all maintenance and repairs and for all insurance costs for asset A. The lease for asset A provides for half-yearly payments in advance of 120,000, the first payment being made on 1 January 2013. 2. An asset, asset B, which could be purchased outright for 720,000, is leased for three years for annual payments of 180,000 per annum payable in advance. The useful economic life of asset B is eight years. At the end of the three years, Antler Ltd intends to return the asset. Antler Ltd is not responsible for maintaining and insuring asset B. [For the full version of this question, please refer to the examination paper.] Reading for this question Subject guide, Chapter 7. International Financial Reporting and Analysis. (2011) Chapter 15. 7

AC3091 Financial reporting (a) You should answer this question with as much detail as you can, discussing the concepts and giving examples as appropriate. A good answer would discuss the concepts of off balance sheet finance and substance over form, illustrating these concepts with operating and finance leases and one other example, which might include quasi subsidiaries, consignment stock, sale and lease back transactions, debt factoring or any other suitable example. A weak answer would outline leases but with little reference to the concepts of off balance sheet finance and substance over form. (b) The accounting treatment of both leases is shown below. A good answer would identify each lease correctly and show in detail how they should be accounted for. A weak answer would either not identify the leases correctly or, having identified the leases correctly, be unable to account for the leases correctly. Recognition that it is finance lease with reason Asset a = finance lease with reason To calculate Rate implicit in the lease 639,540 = 120,000 + 120,000 a 5 ]? a 5 ]? =519,540/120,000 a 5 ]? = 4.3295 which gives a rate of 5% from tables Rental payments Date Rental payment Finance charge Reduction in obligation Balance of obligation under finance lease 1.1.2013 639,540 1.1.2013 120,000 x 120,000 519,540 1.7.2013 120,000 25,978 94,022 425,518 1.1.2014 120,000 21,276 98,724 326,794 1.7.2014 120,000 16,340 103,660 223,134 1.1.2015 120,000 11,158 108,842 114,292 1.7.2015 120,000 5,714 114,286 6 Rounding difference Income statement 2013 finance charge = 25,978 + accrual of 21,276 which relates to prior period 2014 finance charges = 16,340 + accrual of 11,158 Statement of financial position Asset non-current asset at 639,540 with annual depreciation of 213,180 2013 net book value = 426,360 2014 net book value = 213,180 8

Examiners commentaries 2014 Liability 2013 Accrual of finance charge = 21,276 Lease obligation = 425,518 current = 202,384 non current = 223,134 2014 Accrual of finance charge = 11,158 Lease obligation = 223,134 all current Asset b Operating lease Lease payments in income statement. Identify disclosures. Question 4 Answer all parts of the question. [For the full version of this question, please refer to the examination paper.] (a) Reading for this question Subject guide, Chapter 10. International Financial Reporting and Analysis. (2011) Chapter 19. You should clearly discuss the difference between provisions and contingent liabilities and identify the correct accounting treatment for each. A good answer would discuss the differences between provisions and contingent liabilities clearly and be able to correctly identify the correct accounting treatment, including the different accounting treatment of contingent liabilities depending on the probability of occurrence. A weak answer would outline one of the two items and not be able to identify the correct accounting treatments. (b) Reading for this question Subject guide, Chapter 8. International Financial Reporting and Analysis. (2011) Chapter 13. You should present a precise definition of goodwill. You may wish to discuss different types of goodwill, for example, purchased and internally generated. You should discuss at least three considerations when accounting for goodwill and these may include the following: uncertainty and subjectivity whether goodwill can be realised separately from business conflicting accounting concepts in relation to goodwill useful economic life impairment fluctuation in value. 9

AC3091 Financial reporting (c) Reading for this question Subject guide, Chapter 6, International Financial Reporting and Analysis. (2011) Chapter 29. You should identify when the closing rate is used for translating the financial statements of an overseas company, explaining the functional currency and type of subsidiary. The foreign exchange is calculated as follows: Opening net assets at closing rate 400,000 / 5 80,000 Opening net assets at opening rate 400,000 / 10 40,000 Gain = 40,000 Profit at closing rate 16,000 / 5 3,200 Profit at average rate 16,000 / 2 8,000 Loss (4,800) Total fx = gain 35,200 (d) Reading for this question Subject guide, Chapter 12 International Financial Reporting and Analysis. (2011) Chapters 30 and 31. You should provide precise definitions of earnings per share and price earnings ratio. The calculations for these ratios are given below. A good answer would be able to present the calculations correctly and discuss possible reasons for the ratios calculated. A weak answer would not be able to calculate the ratios and would be unable to discuss possible reasons. company x gross profit = 10% * 3,250,000 = 325,000 pat =325,000 75,000 225,000 = 25,000 e/s = 25,000 / (50,000/2 + 80,000/2) = 0.38 per share p/e = 50/0.38 = 131.6 company y gross profit = 15% * 4,500,000 = 675,000 pat = 675,000 425,000 150,000 = 100,000 e/s = 100,000/(50,000/2 + 70,000/2) = 1.67 p/e = 25/1.67 = 14.9 10

Examiners commentaries 2014 Section B Answer at least one question from this section. Question 5 Either Compare and contrast the accountants and economists approach to income and asset measurement. Discuss the implications of Hick s definition of well-offness and measures of income for economists and accountants. Or Discuss the traditional and economic arguments for and against accounting regulation. Reading for the either question Subject guide, Chapter 3 International Financial Reporting and Analysis. (2011) Chapter 4 You should discuss the different approaches used for income and asset measurement used by accountants and economists. For accountants, you will need to discuss asset and income measurement, the income statement, statement of financial position and the key concepts used in these financial statements. For the economists view, you will need to discuss Hicks definitions of being well off and measures of income, explaining each measure clearly and giving examples. You should discuss the implications of Hicks measures for accountant, including the following: whether this is an objective income measure income measurement based on changes in assets is only a partial picture of changes in value; the use of ex post measures for decision making income measures are not uniquely defined the use of measures based on future expectations and revisions of future expectations ex ante and ex post measures subjectivity and budgetary control. You may also discuss other issues. A good answer would clearly discuss both the income statement and statement of financial position (as used by accountants) and Hicks concepts and measures. It would address a range of issues relating to these measures and concepts for accountants. A weak answer would just provide the formula for different measures with little discussion and explanation and with little discussion of the implications for accountants. Reading for the or question Subject guide, Chapter 1 International Financial Reporting and Analysis. (2011) Chapter 1 Beaver, W.H. Financial reporting: An accounting revolution. (Harlow: Prentice Hall, 1981) [ISBN 9780133161335] Chapter 7. You need to discuss both traditional and economic arguments for and against accounting regulation. Traditional arguments would include issues of stewardship, legal requirement, comparability, information asymmetry, fraud, public interest, capture and equity issues. Economic arguments 11

AC3091 Financial reporting include the questioning of whether any regulation is needed, contracting arguments, the complexity of financial information, private sector solutions, public good arguments and efficiency issues A good answer would define accounting regulation and may briefly outline different types of regulation. A good discussion of both traditional and economic arguments would be presented, with a wide range of arguments on both sides included. A weak answer would focus just on traditional arguments and would not be able to discuss a wide range of issues. Question 6 Either What is research and development? Discuss the main provisions of IAS 38 as it relates to research and development. Discuss the application of accounting concepts to the treatment of research and development and discuss the impact this has on financial statements. Or Define and discuss the accounting treatment under international accounting standards of inventories and construction contracts. Discuss the application of accounting concepts to these areas and discuss the difficulties in accounting for these areas. Reading for the either question Subject guide, Chapter 8 International Financial Reporting and Analysis. (2011) Chapter 13 You should provide a definition and explanation of research and development, possibly linked to the definitions of intangible assets. You need to discuss the main provisions of IAS 38 that relate to research and development. You need to discuss the application of accounting concepts to, and the accounting treatment of, research and development. You need to discuss the impact on financial statements and key accounting ratios of the treatment of research and development. You may also wish to discuss the wider economic consequences of different accounting choices. You may wish to include discussion of some of the following: definitions, identification of cost, uncertainty, relevance/matching versus reliability/ prudence, amortisation/impairment issues and subjectivity. A good answer would clearly define research and development, giving appropriate examples to illustrate the definition. The answer would summarise the key provisions of IAS 38 that relate to research and development and discuss the accounting treatment and impact on financial statements. A weak answer would focus on the definition of research and development without discussing the provisions of IAS 38 or discussing the impact on financial statements. Reading for the or question Subject guide, Chapter 9 International Financial Reporting and Analysis. (2011) Chapter 16 You should define both inventories and construction contracts and outline how they should be accounted for, including examples as appropriate. The accounting concepts applicable to each area should be identified and the application of the concepts to each of the areas should be explained. You should discuss the areas of difficulty, both theoretically and in practical 12

Examiners commentaries 2014 application, for each area. These may include issues with definitions, different types of assets consideration of which methods should be applied, issues of fair value, relevance and reliability, profit recognition, identification of completion of project and how to deal with foreseeable losses. You may also discuss other issues. A good answer should define both inventories and construction contracts and discuss the accounting treatment of each. A weak answer would not cover both inventories and construction contracts, not address accounting concepts and accounting treatments and would not discuss areas of difficulty in any depth. 13

AC3091 Financial reporting Table 1: Present value factors To determine the present value of a single payment of 1 received n periods from the present at a constant discount rate of x% per period Discount rate % 1 2 3 4 5 6 7 8 9 10 Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 Discount rate % 11 12 13 14 15 16 17 18 19 20 Period 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 14

Examiners commentaries 2014 Table 2: Cumulative present value factors ( annuity factors ) The tables give the present value of n annual payments of 1 received for the next n years with a constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual payments of 1 the present value is 4.6229. Discount rate % 1 2 3 4 5 6 7 8 9 10 Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 Discount rate % 11 12 13 14 15 16 17 18 19 20 Period 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 15

AC3091 Financial reporting Examiners commentaries 2014 AC3091 Financial reporting Zone B Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2013 14. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide and the Essential reading references Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). You should always attempt to use the most recent edition of any Essential reading textbook, even if the commentary and/or online reading list and/or subject guide refers to an earlier edition. If different editions of Essential reading are listed, please check the VLE for reading supplements if none are available, please use the contents list and index of the new edition to find the relevant section. Comments on specific questions Candidates should answer FOUR of the following SIX questions: at least one from Section A and one from Section B. All questions carry equal marks. Section A Answer at least one question from this section Question 1 The statements of financial position for Avocado Plc, Plum Ltd and Mango Ltd as at 31 December 2013 are given below: [For the full version of this question, please refer to the examination paper.] Reading for this question Subject guide, Chapter 5 Alexander, D., A. Britton and A. Jorissen International Financial Reporting and Analysis. (Andover: Centage Learning EMEA, 2011) fifth edition [ISBN 9781408032282], Chapter 25 28. (a) You need to provide a good definition of non-controlling interest and discuss the difference between non-controlling interests under the two different methods as identified in IFRS 3. A good answer would give a precise definition of non-controlling interest and discuss the differences in the two methods in relation to the treatment of goodwill. A weak answer would provide a basic definition of non-controlling interest but not discuss the difference in the two methods. 16

Examiners commentaries 2014 (b) Solutions for the consolidated statement of financial position are given below. You must provide workings for each item. A good answer would present the statement of consolidated financial position clearly and be able to deal with the adjustments appropriately, showing detailed workings to support the answer. A weak answer would present some of the consolidated statement of financial position, but with incorrect treatment of many of the figures. Non-current assets-land 2,580,000 580 + 1910 + 90 Investments 80,000 1920 920 120 800 Goodwill 449,600 Share in associate 1,105,000 Inventories 560,000 200 + 400 40 Trade receivables 1,080,000 Interco receivables from associate 160,000 Cash 280,000 6,294,600 Share capital 2,000,000 P+L reserves 2,583,400 Non-controlling interest 952,800 Trade payables 710,000 Bond interest payable 4,400 Bonds 44,000 20 +.3 * 80 6,294,600 Goodwill Shares in subsidiary = 920 60% (640 + 90) = 482,000. Impair = 96,400 Shares in associate = 800 25% (600 + 200) = 600,000. Impair = 120,000 Bonds in subsidiary = 120 70% * (80) = 64,000 Goodwill = goodwill of subsidiary = 482 + 64 96.4 = 449,600 h S A 000 000 000 Profit and loss account 1,380 1,740 2,000 Unrealised profit on inventory (40) (100) Bond interest receivable 5.6 Bond interest payable (2) (8) 1,383.6 1,692 1,900 Share capital 2,000 600 400 Revaluation 90 200 3,383.6 2,382 2,500 P + L account = 1,383.6 + 60% (1,692 40) + 25% (1,900 200 ) 96.4 120 = 1,383.6 + 991.2 + 425 96.4 120 = 2,583.4 Non-controlling interest = 40% * 2,382 =952.8 Share in associate = 800 + 25% (1,900 200) 120 = 1,105 17

AC3091 Financial reporting Question 2 On 1 January 2009, Lion Ltd acquired 80% of the ordinary shares of a subsidiary, Tiger Org. Tiger Org issued share capital and started trading on 1 January 2009. Tiger Org trades in the currency potts. [For the full version of this question, please refer to the examination paper.] Reading for this question Subject guide, Chapter 6 International Financial Reporting and Analysis. (2011) Chapter 29 (a) The translated income statement and statement of financial position are shown below. A good answer would clearly show both statements. Translate each item using the correct exchange rate and correctly calculate and present the foreign exchange difference. A weak answer would present some of the statements but not use the correct exchange rates or deal with the foreign exchange rate appropriately Statement of financial position Tiger potts Rate Tiger Non-current asset 980,000 10 98,000 Inventory 80,000 4 20,000 Cash 860,000 2 430,000 Interco receivable Interco payable (100,000) 2 (50,000) 1,820,000 498,000 Share capital 720,000 10 72,000 P+L bfwd 800,000 Given 151,000 Profit for year 300,000 Balancing figure 275,000 Capital and reserves 1,820,000 498,000 Income statement Tiger potts Rate Tiger Sales 760,000 5 152,000 Opening inventory 120,000 6 20,000 Purchases 300,000 5 60,000 Closing inventory (80,000) 4 (20,000) (340,000) (60,000) Gross profit 420,000 92,000 Expenses (50,000) 5 (10,000) Foreign exchange Balancing figure or calculated separately 207,000 Profit before tax 370,000 289,000 Tax (70,000) 5 (14,000) Profit after tax 300,000 From SFP 275,000 18

Examiners commentaries 2014 (b) The consolidated income statement in given below. A good answer would clearly show the consolidated income statement with correct consolidated figures, including goodwill impairment, non-controlling interest and the profit and loss account brought forward and the profit and loss account carried forward. A weak answer would present some of the consolidated income statement, but would not correctly show the consolidated figures, goodwill impairment, non-controlling interest and profit and loss account brought forward. Consolidated income statement Tiger Lion Consolidated Sales 152,000 1,140,000 1,292,000 Cost of sales (60,000) (330,000) (390,000) 92,000 810,000 902,000 Expenses (10,000) (118,000) (128,000) Foreign exchange 207,000 207,000 Impairment (8,000) Profit before tax 289,000 692,000 973,000 Tax (14,000) (140,000) (154,000) Profit after tax 275,000 552,000 819,000 Non controlling interest (55,000) Profit attributable to holding company 764,000 Profit and loss account brought forward 363,800 Profit and loss account carried forward 1,127,800 Ret profit bfwd = 248,000 + 80% * (151,000 0) 5,000 = 363,800 (c) You should compare different aspects of the temporal and closing rate method, including some of the following Which exchange rates are used? Where is the foreign exchange included? How is goodwill calculated? When should the methods be used? What is the Functional Currency? A good answer would include discussion of several of the differences suggested above. A weak answer would just focus on which exchange rates are used in the two methods. Question 3 On 1 January 2013 Salt Ltd entered into the following lease agreements with Lease Ltd: 1. An asset, asset A, which could be purchased outright for 959,310, is instead leased for three years. The useful economic life of the asset is three years and at the end of this time, the asset will have no residual value. Salt Ltd is responsible for all maintenance and repairs and for all insurance costs for asset A. The lease for asset A provides for half-yearly payments in advance of 180,000, the first payment being made on 1 January 2013. 2. An asset, asset B, which could be purchased outright for 1,080,000, is leased for three years for annual payments of 270, 000 per annum payable in advance. The useful economic life of asset B is eight years. At the end of the 19

AC3091 Financial reporting three years, Salt Ltd intends to return the asset. Salt Ltd is not responsible for maintaining and insuring asset B. [For the full version of this question, please refer to the examination paper.] Reading for this question Subject guide, Chapter 7 International Financial Reporting and Analysis. (2011) Chapter 15 (a) You should answer this question with as much detail as you can, discussing the concepts and giving examples as appropriate. A good answer would discuss the concepts of off balance sheet finance and substance over form, illustrating these concepts with operating and finance leases and one other example which might include quasi subsidiaries, consignment stock, sale and lease back transactions, debt factoring or any other suitable example. A weak answer would outline leases but with little reference to the concepts of off balance sheet finance and substance over form. (b) The accounting treatment of both leases are shown below. A good answer would identify each lease correctly and show in detail how they should be accounted for. A weak answer would either not identify the leases correctly or, having identified the leases correctly, be unable to account for the leases correctly. Asset a Recognition that it is finance lease with reason To calculate rate implicit in the lease 959,310 = 180,000 +180,000 a 5 ]? a 5 ]? = 779,310/180,000 a 5 ]? = 4.3295 which gives a rate of 5% from tables Rental payments Date Rental payment Finance charge Reduction in obligation Balance of obligation under finance lease 1.1.2013 959,310 1.1.2013 180,000 x 180,000 779,310 1.7.2013 180,000 38,967 141,033 638,277 1.1.2014 180,000 31,914 148,086 490,191 1.7.2014 180,000 24,510 155,490 334,701 1.1.2015 180,000 16,737 163,263 171,438 1.7.2015 180,000 8,571 171,429 9 Rounding difference 20

Examiners commentaries 2014 Income statement 2013 finance charge =38,967 + accrual of 31,914 which relates to prior period 2014 finance charges = 24,510 + accrual of 16,737 Statement of financial position Asset non-current asset at 959,310 with annual depreciation of 319,770 2013 net book value = 639,540 2014 net book value =319,770 Liability 2013 Accrual of finance charge = 31,914 Lease obligation = 638,277 current = 303,576; non-current = 334,701 2014 Accrual of finance charge =16,737 Lease obligation = 334,701 all current Asset b = operating lease Lease payments in income statement. Identify disclosures required. Question 4 Answer all parts of this question. [For the full version of this question, please refer to the examination paper.] (a) Reading for this question Subject guide, Chapter 10 International Financial Reporting and Analysis. (2011) Chapter 19 You should clearly discuss the difference between provisions and contingent liabilities and identify the correct accounting treatment for each. A good answer would discuss the differences between provisions and contingent liabilities clearly and be able to correctly identify the correct accounting treatment, including the different accounting treatment of contingent liabilities depending on the probability of occurrence. A weak answer would outline one of the two items and not be able to identify the correct accounting treatments. (b) Reading for this question Subject guide, Chapter 8 Alexander, D., A. Britton and A. Jorissen International Financial Reporting and Analysis. (Andover: Centage Learning EMEA, 2011) fifth edition [ISBN 9781408032282] Chapter 13 You should present a precise definition of goodwill. You may wish to discuss different types of goodwill, for example, purchased and internally generated. You should discuss at least three considerations when accounting for goodwill and these may include the following: 21

AC3091 Financial reporting uncertainty and subjectivity whether goodwill can be realised separately from business conflicting accounting concepts in relation to goodwill useful economic life impairment fluctuation in value. (c) Reading for this question Subject guide, Chapter 12 Alexander, D., A. Britton and A. Jorissen International Financial Reporting and Analysis. (Andover: Centage Learning EMEA, 2011) fifth edition [ISBN 9781408032282] Chapters 30 and 31. You should provide precise definitions of earnings per share and price earnings ratio. The calculations for these ratios are given below. A good answer would be able to present the calculations correctly and discuss possible reasons for the ratios calculated. A weak answer would not be able to calculate the ratios and would be unable to discuss possible reasons. company x gross profit = 10% * 6,500,000 = 650,000 pat = 650,000-150,000-475,000 = 25,000 e/s = 25,000 / (50,000/2 + 80,000/2) = 0.38 per share p/e = 50/0.38 = 131.6 company y gross profit = 15% * 9,000,000 = 1,350,000 pat = 1,350,000 850,000 400,000 = 100,000 e/s = 100,000/(50,000/2 + 70,000/2) = 1.67 p/e = 25/1.67 = 14.9 (d) Reading for this question Subject guide, Chapter 11 International Financial Reporting and Analysis. (2011) Chapter 20. You should provide a precise definition of capital allowances and then calculate the income statement tax charge. The calculations are shown below. A good answer would provide a good definition of capital allowances, be able to calculate the current tax, the deferred tax and the income statement tax charge. A weak answer would not be able to define capital allowance and would not present any calculations or would present incorrect calculations. 22

Examiners commentaries 2014 Profit before tax 2,000,000 Add: Depreciation 150,000 Entertaining 40,000 General debt provision 50,000 Legal costs 100,000 Deduct capital allowances (300,000) Taxable profits 2,040,000 Tax at 20% 408,000 Income statement Tax charge Current tax 488,000 Deferred tax 20,000 Total 508,000 Current tax charge Tax for year 408,000 Under provision 80,000 Deferred tax charge Excess of capital allowance general provision = 150,000 50,000 = 100,000 Deferred tax = 20% * 100,000 = 20,000 23

AC3091 Financial reporting 24 Section B Answer at least one question from this section Question 5 Either What is historic cost accounting and what are its advantages and limitations? Discuss and critically assess the following alternatives to historic cost accounts: i. current purchasing power accounting. ii. current value accounting. iii. fully stabilized current value accounting. Or Discuss Hicks definition of well-offness and measures of income. Assess the value of these concepts for financial reporting. Reading for the either question Subject guide, Chapter 3 International Financial Reporting and Analysis. (2011) Chapter 4. You should discuss historic cost accounting and possibly illustrate with examples. You may recognise that, in practice, financial accounts do not completely follow historic cost accounting. Both the advantages and limitations of historic cost accounting should be discussed, for example, discussion of relative objectivity, relevance, comparability, holding gains, additivity, time lag, changing prices and incomplete data. You may refer to other issues too. For each of the alternatives, you need to discuss the method, identify the concepts and key adjustments included within each method. You also need to discuss the advantages and disadvantages of each of the techniques, including discussing the advantages and disadvantages of the types of adjustments made, ease of calculation, consistency of unit of measurement, economic value, subjectivity, complexity, the use of indexes and how appropriate they are, and which problems with historic cost are addressed and which are not. You may also discuss other issues with the alternatives. A good answer would explain each alternative clearly with appropriate examples and illustrations. Each method would be critically assessed, clearly discussing both advantages and disadvantages. Historic cost and the alternatives would all be covered in detail. A weak answer would focus on historic cost or one or two of the alternatives only, would not be able to explain the methods clearly and would not be able to discuss a range of advantages and disadvantages. Reading for the or question Subject guide, Chapter 3 International Financial Reporting and Analysis. (2011) Chapter 11 You should discuss the different definitions of being well off and measures of income, explaining each measure clearly and giving examples. You should discuss the value of the measures for financial reporting, including whether this is an objective income measure. Income measurement based on changes in assets is only a partial picture of changes in value. You should consider the use of ex-post measures for decision making, income not uniquely defined, the use of measures based on future expectations and revisions of future expectations, ex ante and ex-post measures, subjectivity and budgetary control. You may also discuss other issues.

Examiners commentaries 2014 A good answer would clearly discuss the Hicks concepts and measures and address a range of issues of these measures and concepts with regard to financial reporting. A weak answer would just provide the formula for different measures with little discussion and explanation and with little discussion of the value of the concepts for financial reporting. Question 6 Either Define and discuss the accounting treatment of investment properties and construction contracts in accordance with international accounting standards. Discuss the application of accounting concepts to these areas and discuss the difficulties in accounting for these areas. Or Define intangible assets and discuss how they should be accounted for in accordance with international accounting standards. Discuss the accounting treatment of two intangible assets of your choice and the impact that accounting for these intangibles has on financial statements. Discuss the areas of difficulty in accounting for intangible assets. Reading for the either question Subject guide, Chapters 7 and 9 International Financial Reporting and Analysis. (2011) Chapters 12 and 16 You should define both investment properties and construction contracts and outline how they should be accounted for, including examples as appropriate. The accounting concepts applicable to each area should be identified and the application of the concepts to each of the areas should be explained. You should discuss the areas of difficulty, both theoretically and in practical application, for each area. These may include issues with definitions, consideration of which methods should be applied, issues of fair value, revenue and reliability, profit recognition, identification of completion of project and how to deal with foreseeable losses. You may also discuss other issues. A good answer should define both investment properties and construction contracts and discuss the accounting treatment of each. A weak answer would not cover both investment properties and construction contracts, not address accounting concepts and accounting treatments and not discuss areas of difficulty in any depth. Reading for the or question Subject guide, Chapter 8 International Financial Reporting and Analysis. (2011) Chapter 13 You should provide a general definition of an intangible asset and outline the general principles in determining the accounting treatment of intangibles. You may wish to refer to IAS 38. Two intangibles of your choice should be defined and the accounting treatment outlined. You may choose any two intangibles, for example, goodwill, research and development, and brands. You need to discuss the impact on financial statements and key accounting ratios. You may also wish to discuss the wider economic consequences of different accounting choices. Areas of difficulty in each of the intangibles chosen need to be fully discussed and may include issues in relation to definitions, identification of cost, 25

AC3091 Financial reporting uncertainty, relevance/matching versus reliability/prudence, amortisation/ impairment issues, subjectivity and internally generated versus purchased. A good answer would provide a good discussion of intangible, in general, discussing how these should be treated. Two examples of intangibles would be clearly discussed covering accounting treatment, impact on financial statements and areas of difficulty for both examples. A weak answer would focus on one intangible, providing a description of that intangible and its accounting treatment, but not address its impact on financial statements or difficulties. 26