S 11 M - FAR PDF

Preview

Summary

PROFESSIONAL STAGE FINANCIAL ACCOUNTING – OT EXAMINER’S COMMENTSThe performance of candidates in the September 2011 objective test questions section for the Professional Stage Financial Accounting paper was consistent with recent sittings although this is below the long-term average.When practising ...

Description

Financial Accounting – Professional Stage – September 2011

PROFESSIONAL STAGE FINANCIAL ACCOUNTING – OT EXAMINER’S COMMENTS The performance of candidates in the September 2011 objective test questions section for the Professional Stage Financial Accounting paper was consistent with recent sittings although this is below the long-term average. When practising OT items, care should always be taken to ensure that the principles underlying any particular item are understood rather than rote learning the answer. In particular, candidates should ensure that they read all items very carefully. The following table summarises how well* candidates answered each syllabus content area. Syllabus area

Number of questions

Well answered

Poorly answered

LO1

3

3

0

LO2

6

4

2

LO3

6

5

1

Total

15

12

3

*If 50% or more of the candidates gave the correct answer, then the question was classified as „well answered‟. Comments on the three poorly answered questions, two on LO2 (preparation of single company financial statements) and one on LO3 (preparation of consolidated financial statements), are given below: Item 1 This item required candidates to calculate the value at which inventories should be recognised in the statement of financial position in accordance with IAS 2, Inventories. The correct values were generally calculated for raw materials and finished goods, although the valuation of work-in-progress seemed to cause a problem. Candidates valued the work-in-progress using cost rather than by deducting the additional cost needed to complete the inventories from the selling price per unit, which was lower than cost. Item 2 This item tested candidates‟ understanding of the impairment (downward valuation) of a revalued noncurrent asset. Candidates correctly identified the value of the impairment, by calculating the carrying amount of the asset following an earlier revaluation and subsequent revised depreciation. However, candidates then failed to calculate the balance on the revaluation surplus and therefore the balancing impairment that should be recognised in the income statement. Item 3 This item required candidates to calculate the purchase consideration of a business combination in accordance with IFRS 3, Business Combinations. Candidates correctly calculated the share issue and the cash consideration at the date of acquisition as well as correctly ignoring the issue costs. However, the consideration included deferred consideration in the form of shares and candidates valued these at the year end market value rather than the market value at the date of acquisition.

Copyright © The Institute of Chartered Accountants in England and Wales 2011

Page 1 of 14

Financial Accounting – Professional Stage – September 2011

MARK PLAN AND EXAMINER’S COMMENTARY The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion and to award partial marks where a point was either not explained fully or made by implication. More marks were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid points which were made by candidates.

Question 1 General comments This was a typical question that tested the preparation of an income statement and statement of financial position from a trial balance plus a number of narrative notes. Matters to be adjusted for included a fixed price contract, an adjustment to closing inventory, movement on the bad debt allowance, accounting for the current year tax charge and accruing for the dividend on irredeemable preference shares. In addition there were a number of issues relating to non-current assets – an asset held for sale, a revaluation in the year, accounting for a finance lease and calculating the current year depreciation charge.

Brador Ltd Income statement for the year ended 30 June 2011 Revenue (1,703,800 + (11,000 – 5,000)) Cost of sales (W1)

£ 1,709,800 (477,000)

Gross profit Administrative expenses (W1) Other operating expenses (W1)

1,232,800 (470,580) (165,000)

Operating profit Finance costs (W3) Profit before tax Income taxation Net profit for the period

Copyright © The Institute of Chartered Accountants in England and Wales 2011

597,220 (480) 596,740 (115,300) 481,440

Page 2 of 14

Financial Accounting – Professional Stage – September 2011 Statement of financial position as at 30 June 2011 £ Assets Non-current assets Property, plant and equipment (W2)

£

1,953,120

Current assets Inventories (W1) Trade and other receivables ((36,800 – 4,000 + 6,000) Cash and cash equivalents

47,000 38,800 9,350 95,150 9,800

Non-current asset held for sale

104,950 2,058,070

Total assets Equity and liabilities Equity Ordinary share capital 5% Irredeemable preference shares Revaluation surplus (508,000 + 258,000(W5)) Retained earnings (W4)

300,000 150,000 766,000 672,690 1,888,690

Non-current liabilities Lease liability

3,878

Current liabilities Trade and other payables Lease liability (4,980 – 3,878) Irredeemable preference dividend (150,000 x 5%) Taxation

41,600 1,102 7,500 115,300 165,502 2,058,070

Total equity and liabilities Workings (1) Allocation of expenses Cost of sales

Trial balance Opening inventory Less: closing inventory (45,000 + (400 x £5)) Bad debt allowance (4,000 – 2,200) Held for sale asset (12,800 – 9,800) Depreciation charge (W2)

£ 476,000 48,000 (47,000)

477,000

Admin expenses £ 390,000

Other operating costs £ 165,000

1,800 3,000 75,780 470,580

165,000

(2) Property, plant and equipment £ Land and buildings – valuation (1,200,000 + 600,000) Plant & machinery – cost – acc dep b/f Less: carrying amount of held for sale asset (at 1 July 2010) Leased machine Depreciation for year – buildings (600,000 ÷ 20) – plant (220,900 x 20%) – leased machine (8,000 / 5yrs)

£ 1,800,000

278,200 (44,500) (12,800) 220,900 8,000 30,000 44,180 1,600 (75,780) 1,953,120

Copyright © The Institute of Chartered Accountants in England and Wales 2011

Page 3 of 14

Financial Accounting – Professional Stage – September 2011 (3) Lease Year to 30 June 2011 (8,000 – 2,000) 2012

B/f £ 6,000 4,980

Interest accrued 8% £ (6,000 x 8%) 480 (4,980 x 8%) 398

Payment £ (1,500) (1,500)

C/f £ 4,980 3,878

(4) Retained earnings At 1 July 2010 5% irredeemable preference dividend Profit for the period Revaluation depreciation reserve transfer At 30 June 2011

£ 184,750 (7,500) 481,440 14,000 672,690

(5) Revaluation surplus Valuation (1,200,000 + 600,000) Carrying amount at 1 July 2010 (1,600,000 – 72,000) Revaluation depreciation reserve transfer (30,000 (W2) – (400,000 / 25yrs))

£ 1,800,000 (1,528,000) (14,000) 258,000

The majority of candidates produced a good answer to this question, successfully completing the two statements and presenting them in accordance with IAS 1, although few candidates gave sub totals in the statement of financial position and therefore lost available presentation marks. Nearly all candidates dealt correctly with the adjustment to closing inventory and the recognition of the current year tax charge and most also calculated the correct movement on the bad debt allowance. A significant number of candidates produced an accurate finance lease liability table, although a good number of candidates failed to deduct the deposit from the opening balance. The most common errors related to the fixed price contract and the calculation of the revaluation gain. With regard to the former a significant number of candidates simply ignored the information and made no adjustment to revenue. Those candidates that did attempt to deal with this simply recognised a proportion of the total contract price rather than recognising revenue equal to recoverable contract costs, as the outcome of the contract was uncertain. The main error with the revaluation was to compare the latest valuation to cost rather than carrying amount. A significant number of candidates also showed poor exam technique and wasted significant time in this area by producing unnecessarily complicated workings often spreading over a full page. There were also many answers where it was impossible to reconcile the final figure on the statement of financial position with the large expanse of disorganised workings (ie a lack of clear audit trail.) It was also unusual to see the held for sale asset presented completely correctly, with sub totals, on the face of the statement of financial position. Other common errors included depreciating the revalued building over the total original life rather than the remaining life, failing to include the leased asset in property, plant and equipment, allocating costs to the wrong category (despite clear guidance in the question), treating the dividend on the irredeemable preference shares as a finance cost rather than deducting it from retained earnings and then failing to include this dividend in current liabilities. The bad debt allowance was often included in current liabilities rather than deducting it from receivables and a significant minority of candidates charged the lease payments as an expense (even where they had calculated and recognised the finance cost). This was particularly disappointing as this issue has been flagged up in recent exam reports. Finally, although most candidates do produce clear workings there are still a number who lose potential marks by not showing the breakdown of numbers such as closing retained earnings. There is also a minority who waste a considerable amount of time by writing out lengthy journals / explanations rather than simply posting the relevant adjustments straight on to the face of the financial statements or into the relevant working. Total possible marks Maximum full marks

Copyright © The Institute of Chartered Accountants in England and Wales 2011

25 24

Page 4 of 14

Financial Accounting – Professional Stage – September 2011

Question 2 General comments This question required the preparation of a single company statement of cash flows and supporting note. Missing figures to be calculated included tax paid, interest received and paid, payments for non-current assets and dividends paid in the year. In addition, new shares had been issued in the year, some of these were issued for cash and the remaining shares were issued to redeem debentures. Finally, candidates also needed to correct an error included in the draft financial statements relating to a dividend incorrectly treated as a finance cost.

Dalma plc (a) Statement of cash flows for the year ended 30 June 2011 £ Cash flows from operating activities Cash generated from operations (Note) Interest paid (W1) Income tax paid (W2) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sales of property, plant and equipment Interest received (W4) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital (W5) Preference dividend paid (W6) Ordinary dividends paid (W6) Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

£

223,270 (11,300) (28,590) 183,380 (175,700) 57,000 2,150 (116,550) 11,250 (2,000) (75,000) (65,750) 1,080 4,980 6,060

Note: Reconciliation of profit before tax to cash generated from operations Profit before tax (94,400 + (4% x 50,000)) Finance costs (11,500 – (4% x 50,000)) Interest received Depreciation charge Profit on disposal of property, plant and equipment Impairment of PPE (scrapped machine) Decrease in inventories (31,760 – 20,890) Decrease in trade and other receivables ((41,800 – 4,700) – (61,600 – 5,650)) Decrease in provisions (24,780 – 23,390) Increase in trade and other payables ((17,915 – 4,100) – (9,385 – 5,900)) Cash generated from operations

Copyright © The Institute of Chartered Accountants in England and Wales 2011

£ 96,400 9,500 (1,200) 82,600 (3,700) 1,010 10,870 18,850 (1,390) 10,330 223,270

Page 5 of 14

Financial Accounting – Professional Stage – September 2011 Workings (1) Interest paid Cash (β) C/d

£ 11,300 4,100 15,400

B/d IS (11,500 – (4% x 50,000))

£ 5,900 9,500 15,400

£ 28,590 24,900 53,490

B/d IS

£ 27,890 25,600 53,490

(2) Tax paid

Cash (β) C/d

(3) PPE

B/d Additions (β)

£ 528,460 175,700

Disposals (57,000 – 3,700) Depreciation Scrapped asset (w/off) C/d

704,160

£ 53,300 82,600 1,010 567,250 704,160

(4) Interest received

B/d IS

£ 5,650 1,200

Cash (β) C/d

6,850

£ 2,150 4,700 6,850

(5) Ordinary share capital and premium £ B/d (175,000 + 137,500) Redemption of debt (170,000 – 50,000) C/d (250,000 + 193,750)

443,750 443,750

Cash (β)

£ 312,500 120,000 11,250 443,750

(6) Retained earnings

Preference dividend paid Ordinary dividend paid (β) C/d

£ 2,000

B/d IS (68,800 + 2,000)

75,000 61,045 138,045

Copyright © The Institute of Chartered Accountants in England and Wales 2011

£ 67,245 70,800

138,045

Page 6 of 14

Financial Accounting – Professional Stage – September 2011

There were some very good attempts at this question and most candidates produced a well presented statement of cash flows complete with sub totals and opening and closing cash and cash equivalents. This question was generally the one answered best on the paper by most candidates. A few candidates were confused by their double entry and included entries on the wrong side of the T accounts. A majority of candidates correctly calculated tax and interest paid and payments for non-current assets. Most also made a good attempt at the reconciliation note and correctly dealt with the movements in working capital and the necessary adjustments for items such as finance costs, investment income and depreciation. Virtually no students managed to correctly adjust the figures in the reconciliation note to correct the error (some corrected the finance cost but failed to adjust profit before tax). The next most common error related to the calculation of the net cash inflow from the share issue with the treatment of the non-cash issue. Even where the correct cash issue had been calculated a large number of candidates then incorrectly included not only that amount but the movement in debentures (the non-cash element already dealt with) on the face of the statement of cash flows as well. The presentation of dividends paid was also an area that confused a significant number of candidates. Other common errors related to the calculation of interest received where many candidates simply took the movement between the brought forward and carried forward figures and failed to post investment income into the T-account, adjustments to profit for the movement on the provision and the loss on property, plant and equipment scrapped in the year and failing to adjust receivables and payables for interest receivable and payable. Finally, and despite regularly referring to this issue in exam reports, there are still a number of candidates who fail to show outflows of cash in brackets, which often leads to candidates adding interest and tax paid to profit from operations.

Total possible marks Maximum full marks

Copyright © The Institute of Chartered Accountants in England and Wales 2011

18 18

Page 7 of 14

Financial Accounting – Professional Stage – September 2011

Question 3 General comments This question required the preparation of a consolidated income statement and extracts from the consolidated statement of changes in equity. There had been a disposal of a subsidiary during the period which constituted a discontinued operation. Adjustments were required for an inter-company management charge, a fair value adjustment on acquisition and the incorrect capitalisation of development expenditure. The question also featured an impairment of goodwill.

Consolidated income statement for the year ended 30 June 2011 £ 2,445,900 (1,489,950) 955,950 (524,200) 431,750 126,000 557,750 (196,300) 361,450

Revenue (W1) Cost of sales (W1) Gross profit Operating expenses (W1) Profit from operations Investment income (W1) Profit before tax Income tax expense (W1) Profit for the year from continuing operations Discontinued operations Profit for the year from discontinued operations (24,595 (W6) + 143,175 (W2)) Profit for the year

167,770 529,220

Attributable to Equity holders of Weiler plc (β) Non-controlling interest (W3)

433,950 95,270 529,220

Consolidated statement of changes in equity for the year ended 30 June 2011 (extract) Retained earnings

At 1 July 2010 (W4 & W5) Ordinary share dividends (160,000 x 20%) Total comprehensive income for the year Eliminated on disposal of subsidiary (W6) At 30 June 2011

Copyright © The Institute of Chartered Accountants in England and Wales 2011

£ 590,780 (325,000) 433,950 – 699,730

Noncontrolling interest £ 408,960 (32,000) 95,270 (312,270) 159,960

Page 8 of 14

Financial Accounting – Professional Stage – September 2011 Workings (1) Consolidation schedule Revenue – per Q - Inter-co management charge

Weiler plc £ 1,532,500

Cost of sales – per Q – Dep on FV adj (3,500 / 7yrs)

(996,450)

Op expenses – per Q - Inter-co management charge – GW impairment – Development costs (479,000 – 300,000)

(312,300)

Adj

Consol £

(56,000)

2,445,900

969,400

(493,000) (500)

(1,489,950)

(98,650) 56,000

(35,000) (179,000) 44,750

– Amort re adj dev costs (179,000 \ 4yrs) Investment income – (160,000 x 80%) Tax

Mondor Ltd

(524,200)

254,000 (128,000) (143,300)

(53,000) 190,000

126,000 (196,300)

* Elimination of intragroup dividend (80% x 160,000) (2) Profit for Paniel Ltd for year to disposal 190,900 x 9/12

143,175

(3) Non-controlling interest in year Mondor Ltd (20% x 190,000 (W1)) Paniel Ltd (40% x 143,175 (W2))

£ 38,000 57,270 95,270

(4) Retained earnings b/fwd Weiler plc Mondor Ltd (80% x ((268,300 – (3,500/7yrs x 4yrs) – 59,700)) Less: impairment losses Paniel Ltd (60% x (237,500 – 85,000)) Less: impairment losses

389,000 165,280 (15,000) 91,500 (40,000) 590,780

(5) Non-controlling interest b/fwd Mondor Ltd (20% x (500,000 + 268,300 + 3,5 00 – (3,500 x 4/7 yrs))) Paniel Ltd (40% x (400,000 + 237,500))

Copyright © The Institute of Chartered Accountants in England and Wales 2011

153,960 255,000 408,960

Page 9 of 14

Financial Accounting – Professional Stage – September 2011 (6) Group profit on disposal of Paniel Ltd Sale proceeds Less: carrying amount of goodwill at disposal Goodwill at a...