CPA FR FAQs 2021 S2 29 July 2021 PDF

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Knowledge equity FAQ to help pass FR 2021...

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Financial Reporting (Semester 2 2021) Frequently Asked Questions (FAQs)

Published:

22 July 2021

General How do I access the PDF study guide? Log into My Online Learning > select the Financial Reporting subject ➔ Scroll down to the Primary Resources area ➔ Click on the ‘Access’ button next to ‘Study Guide PDF’. Where are the suggested answers in the study guide? The suggested answers are at the very back of the study guide, not at the end of each module. How do I search for a word or term in the study guide? If you can’t find the relevant text - before posting a question on the forum - use Ctrl + F to do a search on the PDF version of the study guide. This is how you will find specific words or terms you are unsure of. Then, check Guided Learning (Search Knowledge Base) and also do a web-search of the key words to find out more. Do I need to read and/or print the relevant legislation? It is recommended that all candidates become familiar with how to locate and read the relevant sections of legislation referred to in the study guide. However, note that only the content in the study guide is examinable. It is a personal preference as to whether candidates print any legislation for the purposes of the exam, but it is not necessary. Is Quitch available this semester? No. All the Quitch questions are now inside Guided Learning. Where are the webinar solutions? Do we get to see the quiz solutions? The webinar task solutions are in the webinar recordings (we don’t publish the solutions in the PDF). The quiz answers and solutions are published and available once you complete the quiz. You can print out a quiz after you have completed it by highlighting and copying it into a word document.

Guided Learning Questions When are the mid-semester test (MST) and practice exams released? (Do they contribute to my final result?) The MST is released at the end of week 5 (Friday 20 August at 2pm) and is available for 10 days until Tuesday 31 August. The MST is 15 Multiple-Choice Questions (MCQs) and you have 1 hour. It covers content from Modules 1 – 4. You do not need to book the MST. It will just appear in Guided Learning on Friday 20 August. Just do it like you do the module quizzes. It does not contribute to your final result. It is just for practice & feedback. Practice exam 1 is available from 2pm on 7 September. Practice exam 2 is available from 2pm on 10 September. Practice exams are full length (3.25 hours and the same number of questions / structure as your final exam). They cover every module. The questions are randomised. You should book your practice exam dates (in the Get Started unit) but you don’t have to sit it on the date. The booking is to help with planning your time. These will appear in Guided Learning on these dates. What happens if I need to move my practice exam dates? If you can’t sit your practice exams on the original dates booked, you do not need to reschedule - you can do it anytime you want. There is no closing date. They will be available until the very end of the CPA semester. What happens if I disagree with an answer in a Quiz? 1. Read the question really carefully again. 2. Read the solution really carefully again. 3. Assume that the answer is correct – so work on what you might have got wrong and understand that, rather than first assuming that your answer is correct. It is possible that the answer is wrong. But…it is most likely correct. So, the first thing to do is ask yourself: Why is this answer correct? What information have I missed? [instead of first trying to prove it wrong] This is a more effective learning strategy than just immediately challenging something because you came up with a different approach. Once you have done this – if you are still 100% sure that there is an issue, please post a query on the forum outlining why you think it is an error, your reasons and page references and justification to support your own analysis, and we will review it and give you a response. (If we find an error or area of confusion we update it as soon as possible).

The Final Exam – materials | calculators | questions What is the final exam worth? 100% of your result. All other quizzes and activities are just for guidance, including the mid-semester test and practice exams. Where do I get help on how to answer an exam question? We have tasks listed to prepare before each webinar. You should attempt these tasks before watching the webinar and then watch as we discuss how to answer these types of questions. You get further practice in the practice exams when they are released in Week 8. What materials can I take into the exam? It is an open book exam. You can take in your hard copy study guide and other written or printed notes, along with a calculator. You can tag or highlight your book and notes as well. You cannot use a soft-copy (electronic) of the study guide or your notes. Only hard copy notes are allowed. Is my ‘calculator’ acceptable? Yes. If it is a regular scientific / financial calculator it is definitely fine. It just can’t be a full-on computer that connects to the internet, or is a graphical calculator with a full text storage (QWERTY keyboard). You should have a calculator with brackets ( ), and to the power of (xY) so you can do NPV calculations. There is an on-screen calculator in your final exam as well – so use this if you are concerned. If you are not sure get a Texas Instruments Scientific Calculator TI-30XB Multiview for approximately $22. How many Questions are there? What type of questions should I expect? Are they in module order? There are 41 single option MCQs, 1 Multiple option MCQ and 18 marks of Extended Response Questions in worksheet style response. CPA does not tell you how many extended response questions there are. The practice exams have a range of extended response questions for you to become familiar with what to expect. The questions are in random order not module order. What modules are the extended response exam questions based on? They can be based on any module. CPA do not publish guidance on this – so you need to be prepared to answer a question from any part of the study guide. Can I use pen and paper in my exam? No. Please read the CPA exam rules carefully. You will get a physical whiteboard and marker in a test centre, and if you sit an online proctored exam you will get an online whiteboard. You can practice with the online whiteboard in the mid-semester test and practice exams. If there are readings - are the readings examinable? No.

Asking a forum question Can I ask about the answer to a quiz question? Yes. But, follow these steps first: 1. Read the question really carefully again. 2. Read the solution really carefully again. 3. Assume that the answer is correct – so work on what you might have got wrong and understand that, rather than first assuming that your answer is correct. 4. Post the full question / solution into the forum post using a screen-shot. This will make it much easier to provide you with a response. It is possible that the answer is wrong. But…it is most likely correct. So, the first thing to do is ask yourself: Why is this answer correct? What information have I missed? [instead of first trying to prove it wrong] This is a more effective learning strategy than just immediately challenging something because you came up with a different approach. Once you have done this – if you are still 100% sure that there is an issue, please post a query on the forum outlining why you think it is an error, your reasons and page references and justification to support your own analysis, and we will review it and give you a response. (If we find an error or area of confusion we update it as soon as possible).

Module 1 What are the journals for David’s phone service? (See ‘Step 6 in the M1 unit of guided learning called Qualitative characteristics of financial information’) Month 1: DR Phone Expense $80 | CR Accrued Expenses $80 Month 2: DR Phone Expense $60 | CR Accrued Expenses $60 Month 3: DR Phone Expense $110 | DR Accrued Expenses $140 | CR Cash $250 In month 3 you do not need to accrue for the expense, as you pay the month 3 amount in month 3. So, this component would be DR Phone Expense $110 | CR Cash $110. In month 3 you pay off the Month 1 & 2 accrued expenses, so is DR Accrued Expenses $140 | CR Cash $140. The Month 3 journal entry combines these 3 items together. Are all revaluation gains on PPE to be recognised in OCI? How is the downward revaluation treated differently and is there different treatment for reversals? (see ‘Expenses’, pages 24 – 25, Module 2 Part B, Sections 2.7 – 2.8) There are different rules and requirements depending on whether it is an upward or downward revaluation and whether it is the first revaluation or a reversal of a previous revaluation. We have produced a webinar recording for Module 2 that provides specific examples and journals and table explanations to make it clear how to treat each situation. Please review this carefully (in the Week 2 tab of the Webinars unit). How can I calculate the effective interest rate of 12% utilised in Example 1.4 of the Study guide? (See ‘Example 1.4’, page 30) You are not required to calculate the effective interest rate but rather to be able to apply it. For this question, you should be able to utilise the present value (PV) of the cash flows based on the PV formula. In Example 1.6 how do I know that the PV factor of an annuity at 9% over 3 years is 2.5313 and the PV factor of a lump sum in 4 years is at 9%=0.7084? (See ‘Example 1.6’, page 40) Use the PV tables in guided learning (or the PV formulas for a single cash flow of annuity). If you look at the PV table for an annuity it shows the 9% column / 3 years row gives you 2.5313. It also shows the formula. An annuity is different to the PV of a single cash flow that is received 4 years into the future. An annuity is when you receive the same amount of cash every year for a period of time. The PV of a single cash flow is a different table. Look at this for the 9% column and 4 years row and you will see 0.7084. In Example 1.6 why are executory costs deducted when we calculate PV of the future lease payment? (See ‘Example 1.6’, page 40) Please review the video recording on leases in the Module 1 unit in guided learning that explains this. The executory costs of $1800 are not part of the lease asset, even though they must be paid each year.

In Question 1.10 why is it $6000 for the depreciation residual value not the NPV of the $6000? (See ‘Question 1.10’, page 41, page 460) We do not discount the residual value of plant and equipment when calculating straight-line depreciation. The right of use asset has an original carrying amount of $67 183 and a guaranteed residual of $6000 which is the expected value of the underlying asset to be returned to the lessor at the end of the term of the lease. Depreciation is calculated as (Cost - Residual value)/Useful life. This depreciation process results in a carrying amount of $6000 at the end of the term of the lease when the underlying asset is returned to the lessor as settlement of the guaranteed residual component of the lease liability, which will also be $6000. Charging depreciation based on ($67,813-$4,250)/4, would result in a carrying amount of 4 250 to settle the remaining lease obligation of 6000, so this would not be accurate. Can you explain the difference between a finance lease versus an operating lease and IFRS 16 para. 63(d)? (See Recognition criteria for the Lessor, page 41) Where it states: “an option for the lessee to purchase the underlying asset at a price that is sufficiently lower than its fair value at the date the option becomes exercisable for it to be reasonably certain - the present value of the lease payments amounts to substantially all of the fair value of the underlying asset also, If the present value of the lease payments at the inception date is substantially less than the fair value of the underlying asset then it could be considered that the risks and rewards incidental to ownership are remaining with the lessor and not being transferred to the lessee. This would normally lead to classification as an operating lease (IFRS 16 Leases, para. 63(d)).” So, from this we can ask: • •

why when the purchase price of the asset is lower than its FV means that it is a Finance lease? why by comparing the PV and FV of the underlying asset can determine if the lease is a finance lease or an operating lease?

The principle behind the classification of leases as financial or operating for purposes of lessor accounting, is that the risks and rewards of ownership of the underlying asset are transferred to the lessee. If it is reasonably certain that the lessee will exercise the bargain purchase option, then risks and rewards of ownership will pass to the lessee. Similarly, if the lessor is able to recover the investment in the underlying asset over the term of the lease, the lessor is not retaining risks and rewards of the underlying asset beyond the term of the lease. This is in contrast to a short term lease, where the lessor bears the risks and rewards of ownership after the expiry of the lease, and would seek to recover the investment by selling the asset or leasing it to someone else. How can I obtain the figures provided under Example 1.8 relating to the probability that an employee will become entitled to long service leave payments? (See ‘Example 1.8’, pages 46 - 48) You are not required to calculate the shown probabilities. They have been calculated by an actuary who is a specialist in assessing large volume of data and behaviour. The Study guide does not therefore go through how these were obtained. In Example 1.9 how do you calculate the bonus expense of $39,000? (See ‘Example 1.9’, page 49) There were 6 executives and they were each paid 100 times the share price of $65. 100 x $65 = $6500. There are 6 executives so $6500 x 6 executives = $39,000.

Must a company use net realisable value if they are not a going concern? (See ‘Going concern’, page 15, and Module Quiz Question) No, it does not have to do this, but it can use it. Where the going concern assumption is not appropriate, the financial statements should be prepared on some other basis. The Conceptual Framework does not specify an alternative basis. However, one approach may be to state assets at their net realisable value.

Module 2 Are the references to the Explore further and Techworks Appendix wrong? (for example, Note 20?) (See Errata and ‘Explore Further’, page 64, Question 2.4, page 78, Appendix, page 426 & 445) Yes. CPA Australia have published an errata that clarifies the Techworks tasks and activities. Are the references to the Techworks Notes in the ‘Explore Further’ on page 68 correct? (See ‘Explore Further’, page 68) No, these should say: Refer to Note 1 ‘Accounting policies’ in the notes to financial statements of the financial statements of Techworks Ltd. Note how the accounting policies enable the financial statement user to determine the basis of preparation of the financial report and the accounting policies adopted in relation to various items, such as the Basis of preparation (Note 1(c)), Significant management judgements in applying accounting policies (Note 1(d)), Plant and equipment (Note 1(e)(ix)) and revenue recognition (Note 1(e)(i)), to give a few examples." Is Example 2.1 incorrect? (See Errata and ‘Example 2.1’, page 70) There should be no bracket to Profit before tax of $26,000 on the table on page 71. Can you please help me understand the journal entries relating to Example 2.1? I am wondering why there is an increase of closing inventory of $26,000. I am also not sure how to calculate the change in inventories for 20X5? This is a challenging question as you have to consider the effect of the prior year adjustments (20X4) on the opening balances of 20X5 and the impact of the change in policy on year end balances. In 20X4, it is straightforward that inventories will increase (cost of sales will decrease) and hence retained earnings and inventories will increase by $52K. In 20X5, the opening balance of both retained earnings and inventory will need to be increased by $52K due to the prior year adjustment. The entry would be: Dr: Opening balance of inventories $52K Cr: Retained earnings $52K At the end of 20X5 the change in policy had the impact of increasing closing inventories by $26K. Since inventories had however increased by $52K at the beginning of the period, we need to reduce this by $26K to have a net increase of $26K.

Consequently, the entry will be: Dr: Retained earnings/P&L $26K Cr: Inventories $26K You can however simplify this by combining the two journals which will result in the below journal entry Dr: Inventories $26K Cr: Retained earnings/P&L $26K Is the solution to Question 2.2(b) incorrect? (See Errata and ‘Question 2.2’, pages 72 & 464) The Errata changes the wording of the question and provides a correct answer. Further explanation of the solution - IFRS 16 does have transition provisions and Techworks has not applied IFRS 16 retrospectively. Instead, it adopted the partial retrospective method permitted by the transition provision specified in IFRS 16, as stated in note 1 (c) (ii) on page 433. "IFRS 16 has been applied to the office building leases by recognising the cumulative effect of applying the standard for the first time as an adjustment to the opening balance of retained earnings for the current period. The prior period comparative has not been restated." An Accounting Standard is issued when it is approved and published by the relevant Board, such as the International Accounting Standards Board (IASB) or the Australian Accounting Standards Board. When the Standard is issued an effective date is determined by the IASB. The effective date refers to the time from which it must be applied when preparing financial statements in accordance with IFRSs. For example, IFRS 16 is effective for annual reporting periods commencing on or after 1 January 2019. Thus an entity with an annual reporting period ending 31 December is required to apply IFRS 16 in its financial statements for the year ended 31 December 2019. Whether early adoption is permitted is determined by the Standard setters and can vary between Standards. Where is the JB Hi-Fi annual report? (See ‘Question 2.2’, page 72) Web-search the term "JB Hi-Fi annual report". It brings up the annual reports, which have the financials. Is Question 2.4 and its solution correct? (See Errata and ‘Question 2.4’, page 78) The Errata updates this question and the Appendix. Is the Question 2.6 solution correct? Why are both land and building revaluations included in OCI? (See ‘Question 2.6’, pages 89 & 466-7) Yes, it’s correct. The study guide and webinar of Module 2 (under specific rules about P&L or OCI) states that for Non-current asset revaluations, the increase will be recognized in OCI and decrease will be recognized in P&L. But in the solution of Question 2.6 both revaluation of Land and Building were included in OCI. This is a tricky area, because the general principle of recognising a decrease in the P&L does not always apply because sometimes there is a previous revaluation. So, if a decrease occurs it usually goes to P&L, but not if it reverses a previous increase.

The webinar provides some detailed step by step examples of this. You will see on page 467 that there have been previous revaluation increases, because the revaluation surplus shows an amount for both Land and Buildings. What is the difference between restating comparative amounts if they relate to affected reporting periods and restating the opening balances for the earliest period presented of the error occurred before the earliest prior period presented? (See ‘Material errors in a prior period’, page 73) Comparative amounts are balances from the prior period but are also reflected in the current period because it provides useful information to users. For example, Entity A has a 30 June 2020 year end. The financial statements for the year ended 30 June 2020, would include columns with the same information (i.e. the same assets and liabilities) for the 30 June 2019 and 30 June 2018. These would represent the comparative informat...