Examiners report

F7 Financial Reporting December 2007

Introduction This was the first Financial Reporting paper under ACCAs new syllabus. Most markers and other commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination which have been extended by the introduction of 15 minutes reading and planning time. The report has two main functions for candidates and tutors; it gives an assessment of the actual performance that candidates achieved and, secondly, the report should be of use to candidates intending to attempt the paper in the near future as it will highlight areas of poor examination technique and some of the common errors made by previous candidates. The new Financial Reporting paper consists whollyof compulsory questions, with questions 1, 2 and 3 being worth 25 marks each, question 4 worth 15 marks and question 5, 10 marks. As this is the first paper, the overall performance of candidates cannot be compared with an exact equivalent historic trend; however I was rather disappointed in the overall pass rate. A number of markers reported that they believed the poor performance was in part due to the poor performance on the answers requiring written comment and analysis. It must be stressed that it is highly unlikely a candidate will pass this paper by relying entirely on their computational ability. In extreme cases some candidates did not attempt any of the written elements of the paper and many others displayed an inability to express themselves clearly. This combined with poor handwriting (almost illegible in some instances) and question planning (despite the additional time allowance) contributed to attaining fewer marks. A common error of poor examination technique on several questions in this diet, was that many candidates simply did not answer the question that was asked. Instead they discussed, often at length, a related topic. This shows an inability to apply learned material to specific circumstances. A great deal of attention is paid to the wording of a questions requirements and candidates should read these very carefully and only answer what is specifically asked for. No matter how good or accurate a candidates answer is, it will only attract marks if it relates to the question asked. The overall performance can be summarised: The first two questions (on group accounting and preparing financial statements from a trial balance) were widely expected and generally done very well. Question three required the calculation and analysis of company ratios. Candidates scored well on the ratios, but their analysis was generally poor. The remaining two questions, on average, gained significantly less than half of the available marks. Another important aspect adversely affecting performance was the number of candidates not answering all five questions (or large parts of some of the questions). There was also evidence that a minority of candidates have not progressed their studies beyond that required in the Knowledge module of the earlier Financial Accounting paper. Another unwelcome feature of a minority of answers was the tendency to start a question, leave it unfinished and go on to a different question, then return to the first question later in the script. This makes a script difficult to mark and review and shows a lack of planning and preparation. A large number of candidates also did not follow ACCA instruction to start each question at the top of a new page. The composition and topics of the questions was such that on this diet there was very little difference in substance between the International Paper (the primary paper) and all other adapted papers and therefore these comments generally apply to all versions of the paper.

Examiners report F7 December 2007

Report on individual questions Question 1 Required the preparation of a consolidated balance sheet for a parent, subsidiary and an associate (equity accounted) followed by a short 5 mark section requiring an explanation of why fair values are used for the subsidiarys assets on its acquisition. The consolidated balance sheet was well answered, but few candidates got to grips with the written section and many did not attempt it at all. The main areas where candidates went wrong were: In part (a) most candidates incorrectly deducted a $500,000 reduction in the fair value of the land from the property, plant and equipment. This effectively double counted the fall in value as the question clearly stated that the land had already been written down in the post acquisition period. The point of the information is that the fall in the value of the land should have been treated as an adjustment between pre and post acquisition profits (affecting goodwill). Also many candidates failed to adjust for the $100,000 additional deprecation on the plant. some confusion existed over the value of the associate with many simply showing it in the balance sheet at cost rather than using equity accounting. A very small minority proportionally consolidated the associate (some even proportionately consolidated the subsidiary). many candidates did correctly calculate the unrealised profit on inventory (stock), but did not always eliminate it from retained earnings. surprisingly, many candidates failed to adjust share capital and premium for the share issue relating to the acquisition. generally candidates scored well in the calculation of retained earnings, but the most common errors were not adjusting the subsidiarys post acquisition profit for the revaluation of land (mentioned earlier), failing to adjust for the unrealised profit in the plant and not including the gain on investments (often incorrectly shown as a revaluation reserve). In part (b) the answers were quite disappointing. Generally candidates stated that the use of fair values was simply a requirement of accounting standards or discussed, sometimes at length, the definition of fair values. Most answers did not even try to address the inconsistency between the value of the subsidiarys assets and those of the parent. Better answers did refer to fair presentation of the balance sheet and the effect that the use of fair values had on consolidated goodwill. Question 2 This question asked candidates to prepare an income statement and balance sheet from a trial balance after dealing with several notes. A calculation of earnings per share (eps) was also required. Most candidates did well on this question scoring good marks even if they did not fully understand all the issues or were not able to complete all the parts. The main adjustments contained in the question were generally well understood and correctly accounted for. Again, in order to assist future studies, the common errors were: confusion over the timing of the revaluation of the land and buildings. The question clearly stated that the revaluation was at the end of the year. This meant that the annual deprecation charge for the buildings should be based on the value at the beginning of the year (i.e. the value included in the trial balance) and the revaluation (giving a impairment/deficit in this example) should be based on the carrying amount of the asset after the years depreciation had been deducted. It was common to see candidates performing the revaluation at the beginning of the year. Another surprisingly common error was calculating depreciation of the plant based on cost rather than the reducing balance. Most candidates did correctly identify the capitalisation of the internally manufactured plant, although many did not realise that this occurred half way through the year necessitating time-apportioned depreciation. another common error was to reduce cost of sales by the closing inventory; by definition cost of sales has already been adjusted for closing inventory. Examiners report F7 December 2007 2

 the gain in the fair value of the investments was often treated as part of the revaluation reserve, rather than as income in the period. a number of candidates did not appreciate that the loan interest paid was for only six months and that the years finance costs should be based on the effective interest rate of 6% rather than the nominal rate of 2%. Those that did correctly account for the accrued finance costs in the income statement often forgot to add it to the carrying amount of the loan in the balance sheet. the tax calculation was often confused. The opening credit balance of $400,000 was often treated as charge (debit) and the adjustment for deferred tax was often taken as $40 million rather than 25% of $40 million. similar to question 1, many candidates could not correctly account for the share capital and share premium of a rights issue, often showing a combined figure or showing it as a suspense account in the balance sheet. the revaluation reserve was often left at its opening balance without taking account of the revaluation of the land and buildings. a very common and basic error was to include the bank overdraft in current assets. answers to the calculation of the eps were very mixed. A significant number of candidates did not attempt it and those that did often struggled with effect of the rights issue on the ex-rights price and the weighting exercise. Question 3 Part (a) required the calculation of eight ratios for 2007 equivalent to given ratios for 2006 and part (b) required candidates to assess the performance of the company in light of the given financial statements and calculated ratios. In general candidates did well in the calculation of the ratios typically gaining six to eight marks (the maximum). The ROCE and gearing calculations were the most troublesome for candidates. Unfortunately the performance assessment report that followed was usually quite poor. Many candidates did not take sufficient notice of the questions requirement which specifically asked candidates to refer to the Chief Executives comments and the effect of the acquisition of the net assets of a separate business (Fatima). Weaker answers did not even point out the rather obvious issues below; whilst the Chief Executives comments may have been factually correct, they were very selective (biased) and potentially misleading. Few candidates recognised the fact that the focus of the Chief Executives report hid the underlying poor performance; some candidates even said the company was doing well without the favourable purchase of Fatima, the underlying business would have made a loss the payment of the high (cover only 1.2 times) and increased dividend (calculated as $10 million) exacerbated the poor liquidity position the purchase of Fatima has left the company with high gearing (46.7%) and its subsequent risks including much increased finance costs As with similar questions in the past, many candidates attempt at interpretation was simply to reiterate in words what the movement in the ratios had been, without any attempt to suggest what may have caused the change in the ratio or what it may indicate for the companys future prospects. Interpretation is an area where the majority of candidates need to improve their understanding and technique. Question 4 Part (a) asked candidates to explain how faithful representation related to reliability followed by an example designed to illustrate (amongst other things) how the use of the principle of substance over form gives a more faithful representation of a lease transaction. Answers to this question were very mixed and covered the whole range of marks. Good answers to part (a) recognised the important issues; however weaker candidates could not adequately identify that faithful Examiners report F7 December 2007 3

representation necessitated reflecting the commercial substance of transactions rather than their legal form. Many answers dealt with the qualitative characteristics of financial information discussing relevance, completeness of information, comparability, accuracy and freedom from bias. These seemed more a regurgitation of what had been taught/learned rather than answering the question asked. Part (b)(i) required candidates to assess the differential effect of treating a lease as an operating lease compared to a finance lease and relating this to the directors comments in relation to ROCE. There were a number of good answers to this section, most recognising that the lease was in fact a finance lease along with the effect that this would have on the financial statements and the ROCE. Weaker answers spent too much time defining a finance lease (this was not required) and not addressing the issue of the effect on ROCE. In a few very poor answers the point was missed altogether with candidates discussing leasing as a means of purchasing assets when cash was unavailable. In the answers to part (b)(ii) the most common errors were: when treated as an operating lease; taking the lease agreement as at the beginning of the year therefore not time apportioning the annual rental and not including the prepayment on the balance sheet (2) when treated as a finance lease; treating the rental as being in arrears (it was in advance). This meant that finance costs were based on a $350,000 liability (it should have been on $250,000) and again not realising that the lease agreement was dated half way through the year requiring time apportionment of the finance cost and depreciation. Many candidates also had difficulty with the split of the lease obligation between current and non-current liabilities. Question 5 This question required candidates to apply the definition of an asset to the issue of research and development expenditure, followed by a calculation of the effect of changing from writing off development costs to capitalising them. This was often the last question attempted and answers were generally quite poor. In part (a) many candidates recited the definition of an asset then listed the criteria to be applied to determine whether development expenditure should be written off or deferred as two quite separate and unrelated issues. In other words, they did not attempt to apply the definition of an asset to the point at issue. Some candidates who attempted part (b) assumed that amortisation commenced in the year of capitalisation rather than in the year following. Generally candidates found the approach to this question difficult, the answers were often confused and very rarely mentioned the prior period adjustment Conclusion As reported in the introduction, the overall performance of candidates was a little disappointing with too many candidates relying on passing by just learning the main topics or relying on numerical skills alone. There was some evidence of poor examination technique, including poor planning and time management. Markers reported that the weaker candidates did not seem to have mastered the understanding and techniques examinable at the previous Knowledge level. The above comments on the individual questions have tended to concentrate on where candidates went wrong. This has been done for reasons of directing future study and highlighting poor techniques such that candidates can improve future performance. This may appear to give an overly pessimistic view of performance. This is not the intention, nor is it the case. There were many excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately. Examiners report F7 December 2007 4

Examiners report
F7 Financial Reporting June 2008
Introduction This was the second Financial Reporting paper under ACCAs new syllabus. Most markers and other commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination which have been extended by the introduction of 15 minutes reading and planning time. The report has two main functions; it gives an assessment of the actual performance that candidates achieved and, secondly, to be of use to candidates attempting the paper in the near future to highlight areas of poor examination technique and some of the common errors made by previous candidates. The structure of the paper is that of all compulsory questions, with questions 1, 2 and 3 are 25 marks each, question 4 is 15 marks and question 5 is 10 marks. I have to report my disappointment in the overall performance of candidates. Many markers reported that they believed the poor performance was in part due to weak answers to those sections requiring written comment and analysis. A significant number of candidates did not attempt any of the written sections at all. On this paper 33 marks were for written/interpretive answers; clearly anyone not attempting these sections was trying to obtain a pass mark of 50 out 67 marks a very tall order. It must be stressed that it is highly unlikely a candidate will pass this paper by relying entirely on their computational ability. Another important issue raised by many markers was poor handwriting (almost illegible in some instances) and poor question planning (despite a 15 minute time allowance). A common error of poor examination technique on several questions was that many candidates simply did not answer the question that was asked, Candidates should read question requirements very carefully. Many answered displayed a rote learning approach and a lack of interpretive and application skills. The overall performance can be summarised: The first two questions (on group accounting and redrafting financial statements) were widely expected and generally done quite well by many candidates. Question three required the preparation of a cash flow statement followed by its interpretation, candidates often scored well on the cash flow, but their interpretation was generally weak. Question 4 on accounting concepts was more mixed, but the remaining question dealing with the accounting treatment of a financial instrument was very badly answered by most candidates. An unwelcome feature of a minority of answers was the tendency to start a question, leave it unfinished and go on to a different question, then return to the first question later in the script. This makes a script difficult to mark and review and shows a lack of planning and preparation. A large number of candidates also did not follow ACCA instructions to start each question at the top of a new page. The composition and topics of the questions was such that on this diet there was very little difference in substance between the International Paper (the primary paper) and all other adapted/variant papers and therefore these comments generally apply to all streams of paper. Report on individual questions Question 1 Required the calculation of goodwill and the preparation of a consolidated income statement for a parent, subsidiary and an associate (equity accounted) followed by a short 4 mark section requiring an explanation of how an investment in an associate should be treated after it became a subsidiary of another company. The consolidation was generally well answered, but answers to the written section were more patchy. Examiners report F7 June 2008 1

The main areas where candidates went wrong were: In part (a) goodwill calculation most candidates correctly calculated the share exchange consideration, but failed to discount (for two years) the deferred cash consideration correctly. The calculation of the pre-acquisition equity was also done quite well, but the most common mistakes were not including an apportionment (4 months) of the current years profit as part of the pre-acquisition figure and incorrectly including post acquisition adjustments for additional depreciation and unrealised profits as pre-acquisition items. It was also common for candidates to forget to include the subsidiarys share capital in the calculation of equity. Part (b) consolidated income statement a surprisingly common error was not time apportioning (for 8 months) the subsidiarys results, instead a full years results were often included. This is a fundamental error showing a lack of understanding of the principle that a subsidiarys results are only included the consolidated accounts from date it becomes a member of the group. A small minority of candidates proportionally consolidated, rather than equity accounted, the associate (some even proportionately consolidated the subsidiary), however this error is now becoming much less common. many candidates did not correctly eliminate the intra-group trading; either no adjustment at all or eliminating pre-acquisition trading as well. the unrealised profit in inventory was often calculated as a gross profit percentage, whereas the question stated it was a mark up was on cost. It was also common for this adjustment to be deducted from cost of sales rather than added. impairment/amortisation of goodwill was often omitted. the finance cost relating to the unwinding of the deferred consideration was omitted by most candidates. the calculation of the minority interest (now called non-controlling interest) was sometimes ignored or did not take account the post acquisition additional depreciation adjustment or time apportionment. In part (c) the answers were very disappointing; many not attempting it all. The question was based on how an associate, that had previously been equity accounted, would be treated in the following year when it had lost its significant influence due to the associate becoming a subsidiary of another entity. Of those that did attempt this section many wasted time by reproducing (as an answer) the scenario given in the question rather than actually answering the question. Others did not think the investment should be treated any differently in the following year saying that the percentage of share ownership is all that matters (despite the loss of a seat on the board). Some candidates thought the question asked for an explanation of how the investment should be treated in the current year. The correct answer is that it should be treated as an 'ordinary investment' (no longer an associate) under IAS 39. Question 2 This question asked candidates to recalculate the annual profit, prepare a statement of changes in equity (SOCIE) and redraft a given statement of financial position (balance sheet) after accounting for a series of adjustments. The adjustments required were for: reversing a sale or return transaction, depreciation (after a revaluation), an increase in the value of investments, correcting for a discovered fraud, tax and deferred tax and dealing with the effects of a share issue and dividend payments. For those that knew how to tackle this type of question, the recalculation/restatement of the annual profit was done quite well with many candidates gaining 5 or 6 out of the 8 marks available. The most common errors were: failing to add back the dividends to the retained earnings for the year to give a starting point for the profit for the year Examiners report F7 June 2008 2

 adjusting for the sales revenue rather than the profit made on goods subject to an outstanding sale and return agreement (some adjusted for both the sales revenue and the cost of sales which was marked as correct) taking the revaluation of the land and buildings as if it were at the beginning of the year (the question clearly stated it was at the end of the year) deducting the whole of the cost of a fraud from the current years profit (part of it related to the previous year and should have been treated as a prior period adjustment in the SOCIE) taking the whole of the increase in deferred tax to the income statement (part of it related to the property revaluation and should also have been included in the SOCIE) Many of the errors made in the recalculation of the profit for the year were carried on to the SOCIE or/and the statement of financial position. Additionally in the SOCIE many candidates did not realise that the share issue had already been accounted for (the question made this quite clear) thus they treated the figures in the statement of financial position as if they were at the beginning of the year rather than at the end of the year and consequently calculated the wrong share capital and share premium movements. Very few included the deferred tax effect of the revaluation and an incorrect calculation of the dividends was also common (or omitted completely). The statement of financial position was generally well done and most of the errors that were made generally related to the following through of earlier (previously mentioned) errors. For example it was common not to eliminate the sale and return receivable and not to include the related inventory in current assets. Strangely a few candidates spent time trying to calculate an ex-rights price for the share issue. This was not asked for. Question 3 Part (a) required the preparation of a cash flow statement followed by an interpretation of the companys cash flow management. Cash flows are generally a popular question and this one proved no exception with many candidates scoring well. A significant number of candidates had very little idea of which item should be included in which section of the statement (poor format knowledge). A number of candidates had difficulty with the fact that the tax cash flow was a refund rather than the usual payment and the revaluation of a property was often not taken into account when calculating the cash outflow on non-current assets. Weaker answers did not seem to know the difference between cash and non-cask flows, for example reserve movements, provisions (for a warranties) and the loss on the disposal of plant were treated as cash flows. Other common errors included getting the cash movements the wrong way round and incorrectly calculating the dividend as $30,000 instead of $150,000 by not realising the shares were 20 cents each. Part (b), the interpretive part of the question, often lacked depth by failing to draw valid conclusions from correctly calculated figures and not really making any attempt to analyse/interpret the cash flow statement. Many candidates calculated and commented on ratios, even though the question specifically gave instructions not to calculate ratios and that no marks would be awarded for them. This led to discussion of many aspects of performance such as return on capital employed, asset utilisation and profit margins that are not part of cash management which was the topic of the question that was asked, thus illustrating the dangers of question spotting. Many important issues were not mentioned at all such as the good operating cash flow generating capacity of the company, the effects of a huge investment in non-current assets, the changes in the capital structure due to issuing new shares and redeeming a loan. Hardly anyone mentioned that the company had benefited from a tax refund of $60,000 (implying losses in the previous year) and that a tax payment estimated at $160,000 would be expected next year.

Examiners report F7 June 2008

Very weak answers simply described the figures in the cash flow statement such as inventories have increased by $400,000 or finance cost incurred were $50,000 this is not interpretation. Question 4 Part (a) asked candidates to explain the meaning of five common accounting concepts/assumptions followed by a section requiring candidates to illustrate how these could be applied to a specific item, namely inventory. The first part of this question really bordered on the level of the lower paper F3 Financial Accounting. Not surprisingly many candidates did very well on this section, but there were a significant number of candidates that showed a very poor and deeply worrying lack of knowledge of basic concepts. There was also evidence of further poor examination; the question asked candidates to explain the concepts whereas many answer gave unsupported examples of the concepts. For example an answer that says providing for bad debts is an example of prudence is quite true, but it is not an explanation of prudence. Other weak answers said things like income and expenditure should be matched or accountants use substance over form; again these are not explanations of the concepts. A few candidates got carried away with this section not realising that there was only 1 mark for each explanation. Part (b), requiring the application of the concepts to inventory, was very mixed. Well-prepared candidates often gained full marks and weaker candidates scored very little. Many markers reported that candidates were repeating their answers to part (a) and made no attempt to relate the concepts to inventory. Some candidates related the concepts to other accounting items, for example leasing was often cited as an example of substance over form; it is, but this is nothing to with inventory. Other candidates wrote all they new about the rules for inventory without relating it to which concepts the rules were applying. Neither of the above examples would gain any marks because they are not answering the question asked. A few candidates seemed to think it was an auditing paper and described the audit work they would do in relation to inventory. Question 5 This question proved to be the most difficult question for the majority of candidates with a significant percentage not even attempting it. A few answers were very good, although the majority were very poor. The question required candidates to account for the issue of a $10 million convertible loan and comment on some misguided views expressed by a financial assistant in relation to its issue. The convertible loan note had a coupon (nominal) interest rate of 3%, but an effective rate of 8%. The proceeds of the loan had to be split between debt and equity by discounting the future cash flows at 8% to give the debt element with the balance being the value of the equity option. Common mistakes were to project the cash flows with an interest rate of 8% (rather then 3%), to discount them at 3% (rather than 8%) and to calculate the interest charge to the income statement as 3% of $10 million (rather than 8% of the debt element). The financial assistant suggested that the profit would be higher (implying he/she assumed the interest cost would be only 3%) and the loan note could be included as equity because most loan note holders would be expected to choose the equity option. Both of these comments are wrong, but many weaker candidates found themselves agreeing with them, thus showing a complete lack of understanding of this type of financial instrument. Taken as a whole this was by far the worst answered question, which is surprising as this topic has been asked on many occasions, often as part of a larger question.

Examiners report F7 June 2008

Conclusion As reported in the introduction, the overall performance of candidates was rather disappointing with too many candidates pinning their hopes on passing by just learning the main topics or relying on numerical skills alone. There was evidence of poor examination technique, including poor planning and time management. Markers reported that the scripts of weaker candidates did not seem to have mastered the understanding and techniques examinable at the F3 level. In fairness, many of the above comments on the individual questions have concentrated candidates weak areas. This has been done for reasons of directing future study and highlighting poor techniques such that candidates can improve future performance. This may appear to give an overly pessimistic view of performance. This is not the intention, nor is it necessarily the case. There were a good number of excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately.

Examiners report F7 June 2008

Examiners report
F7 Financial Reporting December 2008
Introduction I am pleased to report that the overall performance of this diet saw a much needed improvement in the recent trend of lower pass rates. Feedback from markers, tutors and other interested parties believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination (including 15 minutes of reading and planning time). The report has two main functions; it gives an assessment of the actual performance that candidates achieved and, secondly, to be of use to candidates attempting the paper in the near future to highlight areas of poor examination technique and some of the common errors made by previous candidates. General comments on the paper The structure of the paper is that of all compulsory questions, with questions 1, 2 and 3 are 25 marks each, question 4 is 15 marks and question 5 is 10 marks. Despite the welcomed improvement in performance, there are many areas where candidates can improve still further, both in terms of application of their knowledge and examination technique. The best answered sections of the paper were invariably the computational elements; sadly the analysis and discursive areas of the paper were again generally much weaker. A significant number of candidates did not even attempt these sections which accounted for 32 marks in this paper therefore it must be stressed that it is highly unlikely that a candidate will pass this paper by relying entirely on their computational ability. A small number of candidates wrote in their paper that they were short of time. Sensible time allocation and the avoidance of time wasting activities is an important part of examination technique. Examples of time wasting in this paper were: Over-elaborate workings, unnecessary journals and needless written explanatory comments. Whilst it is important that complex figures need referencing and clear workings, some candidates take this to an extr eme and waste a lot of time producing workings for almost every figure in their answers. In many cases simply putting the make up of a figure in brackets as part of the line answer is sufficient to enable markers to award the appropriate marks. Question 3 part (a), required the calculation of ratios, candidates often produced an unnecessary summary of the ratios after they had calculated them. Then in the comparative analysis of the ratios (part (b)), they again repeated the ratios immediately before the commentary. Marks for the ratios can only be given once, yet some candidates wrote them down three times. Some candidates, who are perhaps running low on time, give a blank pro-forma answer (to say the income statement and statement of financial position (balance sheet) in question 2). Such an answer would gain little if any marks and as such is a waste of time. It would be far better to complete the numerical elements of only part of a required statement than to produce a complete statement with no figures. Another important issue raised by several markers was the difficulty in marking poor handwriting (almost illegible in some instances). In a few extreme cases markers returned scripts to me reporting that, despite spending a good deal of time, they could not read parts of candidates scripts. Put simply, if any part of a script cannot be read, it cannot be given any marks. A general comment regarding many scripts was that they displayed a much disorganised approach with confusingly presented workings. In some cases these scripts are very difficult to mark as markers cannot work out what candidates are doing. These candidates need to spend more time thinking and organising their answers. Examiners report F7 December 2008 1

Another common error of poor examination technique, perhaps caused by poor timing and planning, was that many candidates did not answer all five questions (and sometimes parts of questions). A summary of the overall performance would be: The first two questions on group accounting and production of financial statements were widely expected and generally done quite well by many candidates. Question three required the calculation of specified ratios and comparing them to another companys equivalent ratios. Candidates often scored well on the ratios, but the comparative assessment was poor. Question 4 on liabilities/provisions was more mixed and Question 5 on aspects of the capitalisation and depreciation of a non-current (fixed) asset was done either well or poorly. The composition and topics of the questions was such that on this diet there was very little difference in substance between the International paper (the primary paper) and all other adapted/variant papers and therefore these comments generally apply to all streams of paper. An exception to this was that in question 1 the new requirements of IFRS 3 Business Combinations, required the goodwill and non-controlling interest to be a different calculation to some variant papers. Report on individual questions Question 1 Required the preparation of a consolidated income statement and statement of financial position for a parent and a single subsidiary that had been acquired half way through the accounting period. The question involved a share exchange, fair value adjustments and the elimination of intra-group trading and current accounts. This was generally well answered by most candidates with a number achieving full marks. There was evidence of a rote learned/mechanical approach to parts of the question which is not necessarily a bad thing, as it can increase speed and accuracy, but several candidates clearly did not understand the principle of such an approach and came unstuck with some of the more challenging adjustments. There were two areas of particularly serious errors which demonstrated a poor understanding of the principles of consolidation: Failure to time apportion the results of the subsidiary to include only its post-acquisition results (many candidates included a full years results in the consolidated income statement) Incorrectly consolidated 60% of the subsidiary figures (proportional consolidation). This perhaps is the most worrying of the errors. The above are fundamental errors that display a lack of understanding of consolidation procedure and principles. The main areas where candidates made more routine errors: In part (a), income statement o eliminating the cost of the intra-group sales from the cost of sales (the selling (transfer) price of the goods should be deducted from both sales and cost of sales) o incorrect calculation of the URP in inventories o charging a full years additional depreciation, when it should have been only for the post-acquisition period of six months o non-controlling interest in the income statement was often confused with the figure for the statement of financial position Examiners report F7 December 2008 2

unrealised profit on inventory and the additional depreciation as an adjustment to the parent's profit (it should have been to the subsidiaries).

Part (b), statement of financial position o goodwill calculation: many candidates had difficulty determining the pre-acquisition reserves; often taking 6/12 of the entire subsidiarys retained earnings (the 6/12 adjustment should been applied to the profit of the year of acquisition to obtain its pre and post acquisition split). o In the INT based papers was the new requirement to include in goodwill the non-controlling interests share (of $1.5 million as given in the question). This was ignored or sometimes deducted (rather than added) to the parents goodwill. A similar error occurred in calculating the noncontrolling interest for inclusion in the statement of financial position. o recording the new share capital and share premium created by the share exchange o difficulties with eliminating cash in transit and intra- group payables/receivables o group retained earnings were often not adjusted for the URP in inventory and additional deprecation As said, and despite the above, this was the best answered question and many candidates gained good marks. Question 2 This was a fairly standard question requiring candidates to prepare an income statement, a statement of financial position and a statement of changes in equity (SOCIE) after accounting for a series of adjustments. The adjustments required were for depreciation (after a revaluation), correcting a sale of plant included as a revenue sale, capitalisation of development costs, dealing with a contingent liability, using the effective interest rate on preference shares and current and deferred tax. As with question 1 this was a popular question and many candidates scored well. The ability to produce financial statements from a trial balance seems well understood, but some of the adjustments created difficulties: careless mistake was to add back the sale proceeds of the plant to revenues (it should have been deducted) timing of the revaluation of a leasehold property was at the end of the period, but many candidates answered as if it was at the beginning of the period research and development caused many problems. Development costs can only be capitalised from the point at which management become confident of the success of the project. Up to this point they must be written off along with research expenditure. Very few candidates could put this into practice. reversal of a provision for a contingent liability (they should not be provide for); however the associated unrecoverable legal costs should have been provided for. Candidates often only got one of these two adjustments correct. A similar error occurred with the related current liability. Most candidates did realise that the effective interest rate should be used for the preference shares, but made common errors of adding the nominal rate as well (thus double counting it) and/or not realising the shares were issued half way through the year thus only 6 moths interest was required. deferred tax caused problems; ether the movement was credited to income (it should have been debited) or the whole of the provision was charged to income (rather than the movement). The statement of financial position was generally well answered when allowing for knock on errors from the income statement calculations. The SOCIE was more mixed; it was often completely ignored and errors such as including in the SOCIE the issue of the redeemable preference shares and their dividend (they are debt) and not including the equity dividend.

Examiners report F7 December 2008

Question 3 Part (a) required candidates to calculate ratios (8 marks) for a company equivalent to those given for another company and then do a comparative assessment of the two companies from the prospective of a potential acquisition (12 marks). This was followed by a 5 mark section explaining the limitations of ratios and what further information would be useful. Most candidates scored well when calculating the ratios, but there were some very worrying papers that showed even simple ratio calculations were not understood. Analysing and interpreting the ratios was a different matter. Weaker scripts simply reiterated what the ratios were or that one companys ratio was higher (or lower) than the others. Some did not even say which was better; a higher or a lower ratio. There also seemed to be an over emphasis on working capital ratios which was not a fundamental difference between the two companies and therefore not of particular importance. Much of the information in the scenario, which should be used as clues, was often ignored. Fore example: one company revalued it assets the other did not; this could (partly) explain the difference in the ROCEs one company owned its premises; the other (presumably) rented its premises one company owned its plant (and therefore obtained governments grants); the other company leased its plant not many candidates picked up that the plant of one company was old (and would therefore need replacing in the near future) or that its dividend policy was risky given a low the cash balance All these are very relevant factors affecting the interpretation of the ratios and which company may be the best company to acquire, but very few candidates spent much time, if any, commenting on them. The final part was either ignored, thereby throwing away some relatively easy marks, or answered very well, many gaining the full 5 marks. Question 4 Part (a) asked candidates to define liabilities and provisions and describe when and when they should not be recognised, along with giving two examples of how the definitions have enhanced the reliability of financial statements. In general this was well answered with most candidates scoring well on the definitions, but many of the examples given were rather trivial such as accrued audit fees or trade creditors. These types of liability have never been at issue in terms of the reliability of financial statements, whereas when and if environmental provisions should be recognised and the use of big bath and profit smoothing provisions do need robust definitions in order to ensure their correct treatment. Part (b) (i) asked candidates how the construction of an oil platform and the related environmental clean up costs should be treated. It required candidates to discount the future clean up costs and provide for them immediately with the same amount being added to the cost of the oil platform. On the whole most candidates that attempted this question had the right idea, if not a perfect understanding. Common errors were not to include the clean up costs in non-current assets (some even deducted them), failure to discount the clean up costs and it was very common not to unwind the liability to arrive at a finance cost. Weaker candidates thought this was a construction contract question. In part (ii) of this section, the question asked how the answer would differ if there was no requirement to undertake the environmental costs. Most candidates did say that the company would not have to provide for the costs, but stopped at that. An important aspect of this subject area is whether, in the absence of a legal requirement, there may be a constructive obligation. Only a few candidates discussed this aspect.

Examiners report F7 December 2008

Question 5 This question was rather better answered than the equivalent question of recent diets, although a significant number did not attempt it. This was possibly a timing issue, it being the last question. The question gave details of the purchase of a machine with related expenditures and its estimated life expressed in machine hours. Candidates had to identify which related expenses should be capitalised and which should be expensed. Most candidates did reasonably well on this question, but common errors were; treating an early settlement discount as a reduction of cost rather than discounts received failing to deduct the residual value before calculating the machine hour depreciation even when items where correctly excluded from the cost of the asset, candidates often forgot to include them in the income statement thus missing out on some easy marks During year three there was additional expenditure on the machine and revisions to its estimated residual value and life. Most candidates that got this far correctly identified the expenditure as an improvement (and capitalised it) and also correctly accounted for the revisions. Conclusion As reported in the introduction, the overall performance of candidates was rather pleasing reversing a decline in pass rates over the last two diets. However, there are still too many candidates trying to pass by just learning the main topics or relying on numerical skills alone. Markers reported that the scripts of ill-prepared candidates did not seem to have mastered the understanding and techniques examinable F3 level, let alone progressed to F7 level. Thankfully these were fewer in number this diet. It should be borne in mind that many of the above comments on the individual questions have concentrated candidates weak areas. This has been done for reasons of directing future study and highlighting poor techniques such that candidates can improve future performance. This may appear to give an overly pessimistic view of performance. This is not the intention, nor is it necessarily the case. There were a good number of excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately.

Examiners report F7 December 2008

Examiners report
F7 Financial Reporting June 2009
General Comments Many markers, tutors and other commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination which include 15 minutes reading and planning time. The report has two main functions; it gives an assessment of the actual performance that candidates achieved and, secondly, to be of use to candidates attempting the paper in the near future to highlight areas of poor examination technique and some of the common errors made by previous candidates. The structure of the paper is that of all compulsory questions, with questions 1, 2 and 3 being for 25 marks each, question 4 is 15 marks and question 5 is 10 marks. I have to report my disappointment in the overall performance of candidates on this diet. After an encouraging increase in the pass rate in December 2008, success levels are back to the disappointing levels of June 2008. The causes of the poor performance are familiar, but they seem to present on a much more widespread basis than ever before. One marker commented that it seemed like when some candidates reached the end of question 3 (a), they stopped writing. This rather pointedly illustrates that a significant number of candidates did not attempt either question 4 or 5 or even both. Questions 1, 2 and 3 on groups, company financial statements and interpretation/cash flow respectively are considered the core topics whereas questions 4 and 5 cover the reminder of the syllabus. Another marker commented that she had never had as many scripts that had scored 20 or more on question 1 and yet failed to achieve an overall pass mark. It is clear more than ever that large numbers of candidates believe they can pass the paper by just learning the core topics or that they engaged in unsuccessful question spotting. It is probably true to say that poor time management meant that some candidates ran out of time on their last question. Another factor contributing to poor performance was weak or non-existent answers to the sections of the paper requiring written comment, interpretation and analysis. Once again there was evidence that many candidates did not answer the question that was asked; candidates must read the question requirements very carefully. Restating the scenario and facts given in the question as an answer will not earn marks. This was particularly prevalent in Question 3 (b) (see detailed comments below). Overall candidates performance can be summarised as very good on question 1, good (but not as good as past diets) on question 2, good on the cash flow element of question 3 with questions 3(b), 4 and 5 being very poor. It is worth mentioning a number of factors that make marking the examination difficult for markers: - poor, sometimes illegible handwriting - starting a question, leave it unfinished, then going on to a different question, then returning to the first question later in the script (an example of poor planning) - a large number of candidates did not follow ACCA instructions to start each question at the top of a new page and indicate at the top of each page which question it related to - unnecessary workings. Only the more complex calculations need (referenced) workings. In extreme cases some candidates produced pages and pages of unhelpful workings this is very time consuming for both candidates and markers - the converse of this is also a problem; many incorrect figures were not supported by workings, meaning markers could not give partial credit where it may have been merited. The composition and topics of the questions was such that on this diet there was very little difference in substance between the International Paper (the primary paper) and all other variant papers and therefore these comments generally apply to all streams of paper

Examiners report F7 June 2009

Specific Comments Question One This question required the preparation of a consolidated statement of financial position (balance sheet) for a parent, a subsidiary (line-by-line consolidation) and an associate (equity accounted). The question required the calculation of goodwill with the consideration based on a cash payment and loan note issue (that had already been accounted for) and included some fair value adjustments. This was the best answered question demonstrating that most candidates have a sound knowledge of consolidation techniques. The main areas where candidates went wrong were: - goodwill calculation: a failure to account for loan note element of the consideration and/or the non-controlling interest element of the goodwill (not applicable to UK stream) and incorrectly accounting for the new property by using its fair value rather than the excess of fair value over cost - not realising the post-acquisition period was two years, many candidates only accounted for one years additional depreciation on the new property and amortisation of the brand - the detailed components of the consolidated retained earnings were often missed; depreciation adjustments, unrealised profit (URP) in inventory (often calculated wrongly as well - see below), gain/loss on available-for-sale investments - many candidates did not calculate the non-controlling interest under the revised Standard by taking the fair value at acquisition (as given) and then adjusting for post-acquisition profits/losses (not applicable to UK stream) - the URP was often calculated as a gross profit percentage, whereas the question stated it was a mark up was on cost. Some candidates eliminated the cost of the inventory rather than the URP in the inventory and many incorrectly split the URP between the parent and the subsidiary even though the parent had made the sale- a small minority of candidates are still proportionally consolidating the associate (some even proportionally consolidated the subsidiary); others fully consolidated the associate and computed a non-controlling interest of 70% - many candidates did not account for the effect of the share exchange on acquisition of the interest in the associate on the share capital and share premium. Question Two This was a familiar question of preparing financial statements from a trial balance with various adjustments. These involved a revaluation of a non-current asset, dealing with a finance lease agreement, accounting for a construction contract, a revenue recognition issue, an effective rate finance cost for a financial instrument and taxation. This question was the second best answered question, but it was not as well answered as I have come to expect. The most common errors were: - deducting from revenue the agency sales, without recognising the commission earned - rather worryingly, a number of candidates deducted the closing inventory from the cost of sales (by definition it has already been deducted) - basing calculations of the depreciation and impairment reversal of the leasehold property on the revaluation as if it had been at the beginning of the year (the question clearly stated it was at the end of the year) - taking the reversal of the impairment to reserves rather than through the income statement as, on this occasion, this reversed a previous impairment loss recognised in the income statement - also worryingly, a number of candidates depreciated the owned plant and equipment using cost rather than carrying value; the distinction between straight line and reducing balance depreciation should be very familiar to candidates at this stage - a number of candidates decided that the leasehold property and the leased plant (and hence the finance lease payment) were the same asset; this produced some very unhelpful workings and balances - many complex (and unnecessary) lease calculations were provided - if future payments are to be discounted, the appropriate factors will be provided as part of the question - the finance cost of the redeemable preference shares was incorrectly calculated at the nominal rate of its dividend rather than at the effective rate based on the Examiners report F7 June 2009 2

carrying amount at the start of the period. Also the dividends are part of the finance cost in the income statement and the shares themselves are classified as debt on the statement of financial position; redeemable preference shares do not have the characteristics of an equity instrument - there were errors in the treatment of the taxation in both the income statement and the statement of financial position, these included: crediting the under provision of tax from the previous year to the income statement (as a debit balance it should have been charged); treating the closing provision for deferred tax as the charge in the income statement (it should be the movement on the provision that appears in the income statement); showing the current tax net of the under-provision as a current liability (only the current year's tax is a current liability). - many candidates made a fair attempt at the construction contract figures in the workings (credit was given for this), but often did not follow them through to the financial statements - the treatment of the finance lease caused problems, many candidates based the finance cost and current/noncurrent liability on the carrying amount of the leased asset rather than on the opening liability for the lease obligation - a number of candidates are still showing equity dividends in the income statement rather than as part of the retained earnings (or statement of changes in equity if it had been required). The statement of financial position was generally well done and most of the errors that were made generally related to the following through of errors from the income statement. Question Three Part (a) required the preparation of a statement of cash flows for 15 marks followed by some targeted interpretation for 10 marks. Cash flows are generally popular with candidates and many scored well, however, again the overall performance was not as good as I would have expected with surprisingly few candidates earning the maximum marks. Less well-prepared candidates showed poor format knowledge with little idea of which items should appear in which section of the statement nor did they know the difference between cash and noncash flows, for example reserve movements, provisions (for warranties) and the loss on the disposal of the displays were sometimes treated as cash flows. A number of candidates had difficulty with the accumulated depreciation being reset to zero after a revaluation and the cost of the disposal of an asset was often treated as the sale proceeds. Many candidates could not work out the movement on the accumulated depreciation as they could not follow the impact of the disposal of the displays which gave them a depreciation amount to be credited to the income statement. An area causing many marks to be lost was getting the cash movements the wrong way round (signing errors). For example, the marks for the movement in working capital items are normally for correctly identifying them as inflows or outflows rather than for correct arithmetic. Some candidates split the two finance costs both within the adjustments and the cash outflows (often in different sections of the statement) which was not necessary. Part (b), gave information about percentage changes in the sales and the cost of sales instigated by the directors actions which was accompanied by information on changes in credit periods. Part (b)(i) required candidates to calculate the gross profit margin that should have resulted from the cost and revenue changes. Many candidates got this correct, but a number did not seem to read the requirement correctly and calculated the actual profit margin (rather than the theoretical margin). A number of candidates made the adjustments to the 2008 revenue and cost of sales figures rather than to the 2009 figures, which may have been caused by not reading the question carefully enough. Part (ii) was a written section effectively requiring candidates to identify other factors (apart from the cost and revenue changes) that could have caused the change in gross profit margin. This was generally very badly answered; many candidates discussed exclusively the cost changes instigated by the directors as being solely responsible for the overall change in the margin, despite the previous section having already identified the effect of those changes. The same candidates were usually convinced that the changed credit periods were the cause of the changes in the gross margin which shows a lack of understanding between profit and cash. Those candidates that did realise the question required other examples of causes of changes in gross profit margin often Examiners report F7 June 2009 3

gave examples of items that do not affect gross profit such as higher bad debt charges, cash discounts and additional finance costs these do affect net profit, but not gross profit. A number of candidates did refer to quality issues and returns of goods to suppliers and from customers, with a small number of very perceptive candidates even noting the latter was reinforced by the disproportionate increase in the warranty provision. Part (iii) was again a targeted area of ratio understanding related to the changes in the credit periods (for payables and receivables). The question wanted candidates to quantify the effect it would have had on the bank balance if the previous years (2008) credit periods been maintained in the current year (2009). This involved calculating 2008s credit periods and then applying those to the credit sales and credit purchases of 2009 to give theoretical receivables and payables balances for 2009. These could then be compared to the actual payables and receivables balances of 2009 to identify the theoretical effect on the bank balance. Many candidates presented a simple comparison of this years credit periods with those of the previous year; either those candidates did not read the requirement properly or they only have a mechanical understanding of the ratios and cannot adapt to a different scenario. Weaker candidates decided to calculate the inventory turnover figures for both years and then compute the working capital cycle which was of no relevance to the question set. Question Four I was particularly disappointed with candidates performance on this question. Part (a) was straightforward for anyone who had read IAS 10 Events after the Reporting Period (or variant equivalents) and the three illustrative examples are well documented in the Standard and text books. In part (a) many candidates attempted to distinguish between adjusting and non-adjusting events through the use of examples rather than by description. Examples were not asked for in Part (a) and therefore did not earn marks. In part (a) there was a lot of confusion over the period covered by the Standard, many candidates thought there is a set time (e.g. 3 or 6 months) or that the period extends to the AGM. To state that an adjusting event requires adjustment - and a non-adjusting event doesn't - did not earn any marks as it says nothing and certainly does not relate to the issues raised by IAS 10. Many candidates also thought that the determining factor regarding whether to adjust or not lies with whether the item is material or not. Several candidates suggested that examples (ii) and (iii) were not material, despite the note to the question providing clear guidance on this point. Weaker candidates confused the topic with prior period adjustments and the use of provisions and contingent items. Unsurprisingly, if candidates were not able to correctly answer part (a), they did not gain many marks in the examples in part (b), however many candidates who did know the definitions in (a) still could not apply the circumstances to the part (b) scenarios. There were a lot of comments in (b) that contradicted definitions given in part (a). (b)(i) This example dealt with the consequences a fire after the reporting period. The common errors were to say this was an adjusting event (it was non-adjusting), most candidates netted off potential insurance proceeds from the losses and did not appreciate that the losses and the related insurance claim required different considerations. Hardly anyone realised that the subsequent disruption of trading may have brought into question the going concern of the company (which would then make it an adjusting event). Even those candidates who correctly stated this was a non-adjusting event proceeded, often at great length, to itemise the journal entries needed as if it was an adjusting event (without any mention of the going concern aspects). (ii) This was an example of sale of inventory at a loss after the reporting period. Most candidates focused on the sale itself and said it should be dealt with in the following year therefore no adjustment was required. Some correctly appreciated that the relevant issue was that the inventory's value should be adjusted because its net realisable value was below cost. However two further errors were common; either they did not extend the lower of NRV or cost principle to the whole of the inventory (instead just the 70% that had been sold) or they wanted to put the sale through the current years accounts rather than just write the inventory down. Weaker candidates stated the transaction was a non-adjusting event, as it took place after the reporting date, but, in contradiction, then proceeded to explain at great length the adjustments that the sale and commission would create. (iii) This concerned a change in taxation legislation after the financial statements had been authorised. The main point of this example was the timing of the event, specifically after the financial statements had been authorised Examiners report F7 June 2009 4

by the board and was thus neither an adjusting nor non-adjusting event (it was outside the scope of the Standard). Most candidates did not appreciate the timing of the event and even those that did still wanted to adjust for it and proceeded to explain the nature and purpose of deferred tax. I would also point out that there were many candidates that were on the right lines with this question, but simply did not discuss all the elements of the scenarios which inevitably limited the marks gained. Question Five This question required candidates to depreciate the separate components of a complex asset (an aircraft) dealing with different methods of depreciation and distinguishing between capital and revenue expenditures. A significant number of candidates did not start this question and many more that did appeared to run out of time. There were no general issues here with candidates not understanding what they were meant to do or not reading the requirements properly, however many answers lacked a methodical approach meaning they got hopelessly lost in the detail. Generally the exterior structure of the aircraft was dealt with correctly although many capitalised the repainting costs (which is revenue expenditure). For the cabin fittings, the upgrade was often correctly capitalised but then the depreciation was calculated on (total) cost, not the new carrying amount and also over the wrong period. The engines caused the most problems. Candidates often tried to perform the calculations of them together, instead of separating them, and then became confused in what they were doing. Conclusion As reported in the introduction, the overall performance of candidates was rather disappointing with too many candidates pinning their hopes on passing by just learning the main topics or relying on numerical skills alone. There was evidence of poor examination technique, including poor planning, time management and question spotting. Markers reported that the scripts of poorly prepared candidates did not seem to have mastered the understanding and techniques examinable at F3. Basic depreciation, accruals and an inability to correctly classify items in the financial statements (e.g. receivables included in the income statement) were notable weaknesses of some of these candidates. In fairness, many of the above comments on the individual questions have concentrated candidates weak areas. This has been done for reasons of directing future study and highlighting poor techniques such that candidates can improve future performance. This does give a pessimistic view of performance, but I would like draw attention to a good number of excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately.

Examiners report F7 June 2009

Examiners report
F7 Financial Reporting December 2009
The overall performance of candidates in this diet was much improved on the poor performance in June 2009; however there is still considerable room for improvement. The main drawback to candidates performance is once again a lack of syllabus coverage. This is evidenced by many scripts only answering four, or sometimes only three, of the compulsory five questions. It is also the case that even where five questions had been attempted the answers to the non-core questions (four and five) were usually worse than those of the three more expected questions. Feedback from the Examination Review Board, tutors and markers was favourable believing this to be a fair paper, challenging in some areas, with good syllabus coverage. A well-prepared and questionpracticed candidate should have had no real difficulty in obtaining a pass mark. There was some evidence from candidates of running out of time, however this seemed due more to poor answer planning and time wasteful examination techniques (unnecessary and over elaborate workings, repetition of points etc). There were a significant number of scripts where candidates had crossed out the first page (sometimes more) of their answers; this demonstrates poor answer planning and a consequent inevitable waste of valuable time. The reports function is to give a critical review of candidates performance focussing on common errors made. This is intended to be of beneficial use to candidates attempting the paper in the near future such that they may avoid the pitfalls of poor examination technique and errors made by previous candidates. The structure of the paper is that of all compulsory questions, with questions 1, 2 and 3 being 25 marks each, question 4 is 15 marks and question 5 is 10 marks. Once again it was the computational elements of the paper that were best answered; analysis and discussion were generally weaker. A significant number of candidates did not even attempt the written elements of the paper effectively sacrificing nearly 30 potential marks. It is very difficult for a candidate to pass this paper by relying entirely on their computational ability. A relatively small number of candidates did not give workings for some of the complex figures, making it very difficult for markers to award proportionate credit if the calculations were incorrect. By contrast some candidates took the provision of workings to an unnecessary extreme thereby wasting considerable time with no real gain. For many calculations (say in the income statement) it is sufficient to show the make up of the figures in brackets as part of the line item, only complex calculations need separate workings. Poor handwriting, bordering on illegible, continues to be a problem for a minority of candidates, if a marker cannot read (part of) a script, it cannot be given any marks. A summary of the overall performance would be: The first two questions on group accounting and production of financial statements were widely expected and generally done quite well by many candidates. Question three was on the customary topic of cash flows and interpretation, but was more focussed than some recent questions and returned mixed results. Question 4 on the definition and application of non-current assets scored reasonably well where it was attempted. The remaining question 5 on different measures of
General Comments

Examiners report F7 December 2009

profit/earnings performance and earnings per share calculations was the least attempted question and rather polarised in its answers (from either 1 or 2 or jumping to 7 or more). The composition and topics of the questions was such that on this diet there was very little difference in substance between the International paper (the primary paper) and all other adapted papers and therefore these comments generally apply to all streams of paper. An exception to this was that in question 1 the requirements of IFRS 3 Business Combinations required the goodwill and noncontrolling interest to be a different calculation to that of UK based answers.
Specific Comments Question One

Required calculation of consolidated goodwill (a)(i), the carrying amount of an associate (a)(ii) and the preparation of a consolidated income statement (b) of a parent and a single subsidiary and an associate that had been acquired half way through the accounting period. The question involved a share exchange, fair value adjustments and the elimination of intra-group trading and unrealised profits on inventory. This was generally well answered; most candidates have grasped the main principles of consolidation with only the more complex aspects posing problems. There were a very small minority of candidates that used proportional consolidation (for the associate and some even for the subsidiary) and a similar number failed to time apportion the consolidation. This gave the impression that such candidates have never practised any past questions. The main areas where candidates made errors were: In part (a) calculation of goodwill and associate: - generally well answered (gaining 4 or 5 from 6 marks), but very few candidates correctly allowed for the interest on an 8% loan being entirely charged to the post-acquisition period (it was treated as accruing evenly throughout the period) when calculating the retained earnings at the date of acquisition. A significant number of candidates sitting International Standards based papers did not calculate the non-controlling interest at its (full) fair value ( the new method under IFRS 3), instead calculating it at the proportionate share of the fair value of the subsidiarys net assets. - the calculation of the carrying amount of the associate was also very good, often gaining full marks. The main problems were not apportioning (by 6/12) the losses in the year of acquisition and not applying the 40% group holding percentage. Some treated the losses as profits. The consolidated income statement (b). Again well-prepared candidates gained good marks with most understanding the general principles. The main errors were with the more complex adjustments: - a full years additional depreciation of the plant was charged, but it should have been only for the post-acquisition period of six months - many candidates incorrectly amortised the domain name; its registration was renewable indefinitely at negligible cost so it should not have been amortised - surprisingly a number of candidates incorrectly calculated the URP on inventory by treating the gross profit of 25% as if it were a mark up on cost of 25% - the elimination of intra-group dividend was often ignored or the full $8 million was eliminated instead of 80% of it; similar problems occurred with the elimination of intra-group interest
Examiners report F7 December 2009 2

- often the trading and impairment losses of the associate were ignored in preparing the income statement - the non-controlling interest was frequently ignored and where it was calculated, many forgot to adjust for the additional depreciation on the fair value of the plant. Despite the above, this was the best answered question and many candidates gained good marks.
Question Two

A familiar question requiring candidates to prepare a statement of comprehensive income and a statement of financial position. A series of adjustments were required: for deferred revenue, a dividend paid, an effective interest rate calculation, gains on an available-for-sale investment, basic depreciation, taxation and the impairment and amortisation of a brand. As with question 1 this was a popular question and many candidates scored well. The ability to produce financial statements from a trial balance seems well understood, but some of the adjustments created difficulties: - few candidates correctly calculated the amount of revenue to be deferred in relation to a sale (of $16 million) with ongoing service support. Most candidates deferred the whole of the revenue rather than the amount of the support costs (plus appropriate profit) relating to the remaining two years of service support. Some candidates increased revenue rather than defer it and some thought it was an insubstance loan - many candidates applied the effective rate of interest (8%) to the nominal amount ($20 million) of a convertible loan rather than its carrying amount of $18.44 million. A few candidates made complicated calculations of the split between debt and equity for the loan not realising that it was the second year after its issue and the split had been made a year before - most candidates correctly calculated the gains on the available-for-sale investment but had difficulty in knowing where it should appear in the financial statements, in particular, few correctly reclassified the previous gains from the comprehensive income statement (other reserve for UK based papers). - most candidates got the taxation aspects correct, but there were still some basic errors such as charging the whole of the deferred tax provision to income (rather than the movement) and treating the underpayment of tax in the previous period as a credit. - it was worrying that a number of candidates made basic errors on straight forward depreciation calculations. Some used the straight line method for the plant (not reading the question properly which stated the use of the reducing balance method) and some charged the accumulated depreciation to cost of sales rather than the charge for the period. Amortisation and impairment of the brand caused many problems; not calculating two 6 month charges (before and after the impairment) and not using the (higher) realisable value of the brand as the basis for the impairment charge. The statement of financial position was generally well answered; most problems were follow on errors from mistakes made in the income statement. A number of candidates are still incorrectly treating dividends as part of the income statement. Overall a well-answered question.
Question Three

This question was on the usual topic of cash flows and the calculation and interpretation of ratios, but was somewhat different to many previous questions in that it was more targeted on particular items. Part (a) required a statement of the movement in the companys non-current assets followed by the

Examiners report F7 December 2009

(partly) related cash flows of investing and financing activities. Part (b) then required candidates to focus on the calculation and cause of the deterioration in the companys ROCE. Many candidates gave a good attempt at the movement of non-current assets; most coped with an increase in the cost of an asset due to an environmental provision and recognising (per the question) that the balance of the movement represented the purchase of plant. Weaker candidates showed poor layouts often using ledger accounts with no summary showing the movement on the assets. A number did not include the movement on the development costs. The required cash flows proved more problematic; common errors were the environmental cost increase being treated as a cash flow and very few accurately accounted for the cash flow aspects of a partial loan to equity conversion. Again there were a small minority of poor (and sometimes non-existent) answers; some included revaluations, depreciation and reserve movements as cash flows. A number of candidates attempted a full cash flow statement instead of the required extracts. Part (b) was very poorly answered, though there were some notable exceptions. Very few correct answers were given for the calculation of ROCE (despite the question giving the formula to apply) and even fewer attempted to calculate the components of the ROCE (profit margins and asset turnover) in order to identify the cause of its deterioration. Many candidates mentioned the new lease agreement; changes in capital structure and the asset revaluation without saying what effect these had had on the ROCE. Many candidates showed poor understanding by saying the return had deteriorated due to higher finance cost when the return was, by definition, before finance costs.
Question Four

Part (a) asked candidates to criticise the definition included in the question of non-current assets that had been given by an assistant. Many candidates did not directly criticise the points in the assistants definition, instead they gave the definition of non-current assets as per the IASB Framework without comparing it to the given definition. This is a classic example of not answering the question that was asked. Good answers did focus on issues of control (rather than ownership) and reference to intangible assets as well, as physical assets. Some answers rambled on giving examples of every type of noncurrent assets the candidate could think of (again nothing to do with the question asked). Part (b) gave three examples of how the assistant had treated items in the financial statements and asked candidates to comment (and advise) on their treatment. Item (i) was expenditure on staff training costs that the assistant wanted to treat as an intangible assets. Most candidates realised that such costs could not be treated as an asset and should be expensed, but very few said why. Item (ii) gave two examples of research expenditure. Again most candidates correctly said that (in most cases) research cannot be treated as an asset. Despite saying this some candidates thought that as the company had a successful history of bringing projects similar to the first example to profitable conclusions, it was acceptable to treat these research costs as an asset. The second example was research commissioned by a customer and as such was in fact work-in-progress and therefore should not have been written off (as suggested by the assistant). Even where candidates did advocate the correct treatment, they rarely explained why.

Examiners report F7 December 2009

The last item (iii) caused most difficulty. It was about whether expenditure on a partially completed non-current asset (a satellite dish system) was impaired. The assistant thought it was because the expected profit from the asset was less than the amount already spent on it. What most candidates failed to realise was that the asset would only be impaired where the recoverable amount, being the value in use (based on future cash flows, not profit), was less than the carrying amount (ignoring the possibility of selling the asset). Many candidates thought this was a (long-term) construction contract, presumably because the asset would be used to earn revenue for at least three years. In fact the period of construction of the asset was only two months and the contract was for the rental (not the construction) of the asset (the question specifically said that it was not a finance lease). This showed a fundamental lack of understanding of what construction contracts are.
Question Five

Part (a) of this question asked candidates to explain why three different measures of performance for the same company (profit after tax, basic EPS and diluted EPS) gave different impressions of increased performance. This seemed to baffle most candidates. Where candidates did try to explain this, they gave examples of improvements in profit performance that would apply to the other measures of performance. An increase in profit of 80% (as per the question) would also give an increase of 80% in the EPS if there was no change in the capital structure. Few candidates could relate the given differentials to new shares being issued. A number of candidates did realise that the diluted EPS was something to do with convertible shares or share options. Part (b) of the question was a calculation of basic and diluted EPS. Encouragingly this was answered much better and redeemed the question for many. There were some poor answers showing basic errors, commonly thinking that the rights issue caused the dilution rather than the existence of the convertible loan stock. Less worrying errors were incorrect weighting of the rights issue and getting the dilution factor the wrong way round (the inverse). Weaker candidates calculated many meaningless figures that were scattered, seemingly randomly, all over the page and expected the marker to make sense of them. Conclusion As reported in the introduction, the overall performance of candidates was a welcome reversal of the poor pass rate in June 2009. However, there are still too many candidates trying to pass by just learning the main topics or relying on numerical skills alone. Weaker candidates were making some basic errors that revealed a lack of understanding of F3 level topics and as such could not give this F7 paper a fair attempt. It should be borne in mind that many of the above comments on the individual questions focus on the errors made by candidates. This has been done for reasons of directing future study and highlighting poor techniques such that candidates can improve future performance. This may appear to give an overly pessimistic view of performance. This is not the intention, nor is it necessarily the case. There were a good number of excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately.

Examiners report F7 December 2009

Examiners report
F7 Financial Reporting June 2010
General Comments I am very disappointed to have to report a marked deterioration in candidates overall performance for this diet of the F7 Financial Reporting examination. Most commentators considered the paper to be no more complex or demanding than in recent previous diets. The majority of the papers topics had been examined before and candidates who had studied the full syllabus and revised using recent past questions should have had no difficulties obtaining a pass mark. It was particularly worryingly that so many candidates failed to gain enough marks to demonstrate any progression of understanding from that required at paper F3. Indeed some of the easier computations on this paper such as basic depreciation and accruals were not done correctly, in extreme cases some candidates made fundamental errors such as including non-current assets as income and conversely showing investment income as an asset. This report has two main functions; firstly, it gives an assessment of the actual performance that candidates achieved and, secondly, to be of use to candidates attempting the paper in the near future to highlight areas of poor examination technique and some of the common errors made by previous candidates. Other causes of the poor performance are familiar, but more prevalent than in the past. The most common of these was a failure to answer all the questions. A significant number of candidates gave answers to only half of the paper and thus had no hope of passing. One marker reported that she had lost count of the number of candidates that had scored 35 40 marks after completing the paper up to Q3 (a)(i) (which is 62 marks into the paper) and then failed to score more than another 5 marks on the rest of the questions (accounting for the remaining 38 marks). Many answers to written questions did not address the specific points asked for indicating a lack of focus or simply not reading the requirement properly. As on all recent sittings the written elements were answered much worse (if at all) than the computational elements. A number of candidates displayed evidence of poor time management by producing pages of unnecessarily detailed workings for even simple calculations. A consequence of this was running out of time on the later questions. The structure of the paper is that of all compulsory questions, with questions 1, 2 and 3 being for 25 marks each and questions 4 and 5 are for 15 and 10 marks respectively. The first three questions cover the core topics of consolidated accounts, preparing single company financial statements (on this paper, from a trial balance) and performance appraisal/cash flows. Questions 4 and 5 cover the reminder of the syllabus. Overall candidates performance can be summarised as good to very good on questions 1(a), question 2 and the statement of cash flows of 3(a)(i); beyond this the rest of the answers were poor, very poor or non-existent. Candidates should be aware that markers may not be able to give credit to answers that displayed poor, sometimes illegible, handwriting. There were also many unreferenced or non-titled/labelled workings which can hinder the marking process. The composition and topics of the questions was such that on this diet there was very little difference in substance between the International Paper (the primary paper) and all other adapted papers and therefore these comments generally apply to all streams of paper. Specific Comments Question One This question required (in part (a)) the preparation of a consolidated statement of financial position (balance sheet) for a parent, a subsidiary and an equity accounted associate. The question specifically required the calculation of consolidated goodwill (involving contingent consideration and two fair value adjustments), intragroup adjustments and an impairment of goodwill. Part (b) was a 4 mark written section. Examiners report F7 June 2010 1

The preparation of the consolidated statement of financial position was generally well answered, but answers to the written section were very mixed. The main errors by candidates in the consolidation were: goodwill calculation: using an incorrect share price for the share issue and incorrectly revising the value of the contingent consideration as a goodwill adjustment (it should be to retained earnings) [Note: for UK-based papers it is correct to adjust the goodwill]. Incorrectly or not adjusting for software that had no recoverable value. Also a number of candidates failed to include the non-controlling interest at its fair value with the consequential effect on goodwill [not applicable to UK-based papers]. the adjustment to the value of the software was also often written off the value of non-currents (even though the question said it had already been written off) and rarely was it accounted for as part of the subsidiarys post acquisition profit calculation. the intra-group adjustments for goods-in-transit, URP (often calculated incorrectly) and current account balances were often wrong with no clear pattern of mistakes; just about every combination of error was reported the profit of the associate was often not time apportioned the impairment of goodwill was not apportioned between the parent and non-controlling interest [not applicable to UK-based papers] a lot of errors/omissions made in earlier calculations were carried through to the calculation of consolidated retained earnings some candidates accounted for the share exchange issue (effectively double counting it) even though the question said it had already been accounted for some answers used proportional consolidation for the associate (some even proportionally consolidated the subsidiary); others consolidated the associate (rather than using equity accounting) - thankfully this is now only a tiny minority of candidates. Despite the above this section was well answered. Part (b) was a short (4 marks) written section testing candidate knowledge of the legal position of a subsidiary within the context of group financial statements. The subsidiary provided a copy of the groups consolidated financial statements to support an application for credit. Answers to this were generally poor and even alarming. The majority of candidates thought that a parent (or other subsidiaries) was responsible for the debts of its subsidiary. This is not the case. Without a guarantee from the parent, a strong group statement of financial position does not give any assurance to a potential creditor of a subsidiary. It is essential to base any extension of credit on the individual (entity) financial statements of the subsidiary itself. Another misinterpretation of this section was that some candidates thought it was a question on ratio analysis and described the ratios they would calculate to determine the liquidity position of the group. Question Two This was a familiar question of preparing financial statements from a trial balance with various adjustments required. These involved the dealing with a sales cut off error, the use of the effective interest rate for a loan, a fair valued investment, an impairment of a leasehold property (including presenting it as held for sale International variants only), a construction contract and accounting for taxation. As with question 1, this question was competently answered by the majority of candidates showing good knowledge of the format and presentation of the two financial statements. To help with future preparation, the most common errors were: 'cut off error': generally dealt with quite well, but there were errors in grossing up the cost (or only adjusting by the profit element) to give the correct revenue/turnover figure loan: the issue costs were often ignored (they should have been deducted from the proceeds and also deducted from administrative expenses) and calculating the finance charge at the nominal rate of 5% Examiners report F7 June 2010 2

instead of the effective rate of 10%. Omission of accrued interest from current liabilities or including it at the incorrect amount despite the investment being described as fair value through profit and loss, many candidates credited the gain directly to equity leasehold property: a failure to depreciate it up to the date it became held for sale'; not calculating the subsequent impairment loss and most candidates continuing to show it as a non-current (rather than a current) asset [the latter point not applicable to UK based papers] construction contract: often completely ignored, incorrect calculation of cost (usually omitting the plant depreciation), incorrect (or non-existent) presentation in current assets (amount due from customers) or non-current assets (carrying amount of the plant). A lot of candidates who prepared workings for the contract then made no attempt to include the relevant figures in their financial statements. there were many errors in the treatment of the taxation in both the income statement and the statement of financial position, these included: debiting (should be credited) the over provision of the previous years tax; treating the closing provision (rather than the movement) of deferred tax as the charge in the income statement; and confusion over which amounts of tax should appear as non-current and current liabilities. a number of candidates are still showing equity dividends in the income statement (as an expense) rather than as part of the calculation of retained earnings.

Question Three This question was on the familiar topic area of cash flows and interpretation and was widely expected. Part (a)(i) required the preparation of a statement of cash flows for 12 marks followed by some focused interpretation to be able to advise the loan provider on the possible renewal of a loan (8 marks). Cash flows remain popular with candidates and those that had practiced past questions generally scored well. There were a couple of tricky areas that confused candidates: non-current assets had only increased by new finance lease agreements (which candidates did not take into account when calculating the payment of the finance lease liability); and the taxation cash flow involved tax relief and a future refund to compute the tax paid during the year. A surprising error was that several candidates did not think the interest on the finance leases was a cash outflow. An analysis of retained earnings would have shown that a dividend had been paid, however only a tiny minority of candidates picked this up. Although most candidates scored well on the cash flows, a significant number showed a lack of understanding including poor format knowledge. In part (a)(ii) candidates were asked to review the available information (including their statement of cash flows) to advise on the renewal of the loan due three months after the year end. Although there were a few really good answers to this, i.e. those that focussed on the requirement, many candidates answered this as if it were a general interpretation of financial performance giving little regard to addressing the issue of whether they would advise that the loan renewal be granted. The answer should have concentrated on the expectations of a lender: does the company have good liquidity, interest cover, acceptable gearing and securitisable assets. Good answers referred to the company selling its leasehold property and renting it back as a sign of an inability to generate cash flows from trading activity and that there was a year-end overdraft despite selling the property and issuing shares. Many weaker answers were dominated by profitability issues, such as profit ratios and cost control, and a detailed commentary on inventory and receivables policies, with hardly any reference to the position as portrayed by the statement of cash flows. Another problem was not understanding that the loan had moved from non-current to current liabilities: many candidates thought that the non-current loan had been paid off and a new loan taken out. This error was also commonly presented in the answer to part (a)(i) although no cash flow(s) had taken place.

Examiners report F7 June 2010

For the first time part (b) examined an issue relating to a not-for-profit organisation. It was a similar issue to that in part (a)(ii) in that it asked for what ratios could be calculated to decide whether to grant a loan to such an organisation. Many candidates did recognise and state that a not-for-profit organisation doesnt have profits, but despite this then went on to describe many profit-related ratios without even trying to relate them to the types of income, expenses, assets and liabilities of a sports club. The question clearly stated that this was a separate matter to the earlier question. Despite this many candidates calculated (routine) ratios using the figures from the companys financial statements (Deltoid) in part (a) often referring to the sports club as "the company". What was required in answering this section was a recognition that although the sports club is a not-for-profit organisation, granting it a loan is a commercial activity and should be decided based on similar principles to that of a commercial organisation. Thus the ability to pay interest, capital and the availability of any security is still relevant. A number of answers completely ignored what the question had asked and instead just gave a rote-learned page of everything they could remember about not-for-profit organisations such as the three Es. Question Four This question tested the much-examined and important topic of the principle substance over (legal) form with reference to the ASBs Framework. Part (a) was a written section that should have been straightforward. It asked why this principle is important and what features may indicate that the substance of a transaction may be different from its legal form. Most answers started well referring to matters such as relevance, reliability and faithful representation. However the discussion of finance leases dominated many answers (to the exclusion of other issues) and few attempted to describe the features that may indicate a difference between substance and form such as the separation of ownership and control, the use of options and linked transactions. Part (b) was a numerical test of the substance principle which required a short series of linked transactions to be accounted for both in their legal form and in their substance. Again, although many candidates did score some marks, it was clear that very few really understood the issues. The example was of a sale and 'repurchase' of maturing inventory. When treated in its legal form a sale (and profit) should have been recorded in years one and three with no finance costs charged. The substance of the transaction was that of a secured loan where interest was the only relevant item in the income statement in years 1 and 2 and a single sale/profit (as well as further finance costs) recorded in year three. Many candidates got very confused between the two and integrated elements of the two answers, particularly incorrectly including finance costs in the answer to the legal form. Many candidates either showed statement of financial position extracts, or mixed up items to be reported, when the question clearly stated only income statement extracts were required. Part (c) asked how the two different treatments might affect an interpretation of the companys performance. Where candidates had got the numbers correct in part (b) they tended to do quite well in this section; not surprisingly, if candidates did not understand the numbers they couldnt understand their interpretation. The main points were that neither method affected the overall profit (over the three years) on the transactions (although many thought it did) with the main differences being in the timing of recognising profit and the classification of costs in the income statement. The more substantial differences being in the statement of financial position where, under the substance method, inventory and the loan were included as assets and liabilities respectively. This would have 'knock on' effect on ratios such as ROCE, gearing and inventory utilisation. Question Five This question was based on the relatively infrequently examined topic of borrowing costs and as such caught out many candidates who had not covered this in their revision. A considerable number of candidates did not attempt this question. Those that had studied the topic scored well thus answers tended to be very polarised, either very good or very poor.

Examiners report F7 June 2010

Part (a) asked for the circumstances when borrowing costs should be capitalised. This should have proved straightforward. An answer such as Borrowing costs relating to assets that take a substantial time to complete are capitalised at the effective rate interest from the date construction starts and should end when the asset is ready for use. would alone have attracted at least three of the five marks available for this part. Further discussion of the suspension of capitalisation where construction activity is suspended and the deduction of any (temporary) investment income from capitalised cost would have been all that was necessary to gain the full marks. Instead many answers just guessed at the rules or interpreted the requirement to be about what other costs could be capitalised during the construction of non-current assets (the topic of a recent past question). Part (b) was a numerical example designed to put the above rules into practice. The main errors made by candidates were using the nominal/coupon rate of 6% instead of the effective rate of 7.5% to calculate the interest to be either capitalised or expensed and not correctly calculating the period of capitalisation. A number of candidates spent time calculating what the liability for the loan would be in the statement of financial position this was not asked for and gained no marks. Conclusion As reported in the introduction, the overall performance of candidates was very disappointing with too many candidates simply not doing enough studying to prepare themselves for answering questions across the breadth of the syllabus, in effect hoping to pass by answering three questions. Poor examination technique was much to fore, particularly not reading or interpreting several of the question requirements properly, especially in respect of the written questions. The worst performing candidates did not show an understanding of F3 material and could not therefore do themselves justice. It was also apparent that many candidates had done little if any practising of recent past examination questions. The above comments should not detract from the very able candidates who obviously worked hard and were rewarded with good marks.

Examiners report F7 June 2010

Examiners report
F7 Financial Reporting December 2010
General Comments I am delighted to say that the overall performance of candidates on this diet was much improved from the disappointing results of recent diets. Most commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination. As with past papers, the best answered questions were the consolidation in question 1 and financial statements preparation in question 2. An important difference in this diet was that there were many good answers to the performance appraisal in question 3. Even the normally low-scoring questions 4 and 5 that related to the wider syllabus areas provided many reasonable attempts. Despite the above, there a still a significant number of candidates that did not answer question 4 or 5 and sometimes both, but not on as large a scale as previously reported. I am pleased to report that as a reflection of the above, there were many strong marks in the 70s and even higher from some truly impressive candidates. There were some examination technique issues that caused problems for some candidates. Answers with no or unreferenced workings to support them were common. Markers cannot allocate any marks to an incorrect figure unless they can see how the figure has been arrived at. Poor handwriting was a particular problem on the interpretation section of question 3 with markers reporting difficulty reading (and therefore awarding marks to) several scripts. There was also evidence of candidates not answering the question that was asked, which I refer to in the individual question commentary below. The composition and topics of the questions was such that on this diet there was very little difference between the International Paper (the primary paper) and all other variant papers, thus these comments generally apply to all streams. Specific Comments Question One This required the preparation of consolidated statements of comprehensive income and financial position. It included a fair value adjustment for a downward valuation of the subsidiarys property and the related reduction in the post-acquisition depreciation. Further adjustments required the elimination of current account balances and intra-group trading, including unrealised profit (URP), and an increase in the value of available-for-sale investments. The majority of candidates clearly have a good working knowledge of consolidation techniques which showed through in good marks for this question. As usual it was the more complex aspects where errors occurred: Consolidated statement of comprehensive income Intra-group sales should only be eliminated for the post-acquisition period (4 months), many deducted $12 million (being for 12 months) or $2 million (being the amount remaining in closing inventory). Several candidates calculated the URP as $500,000 ($2 million x 25%), but the 25% was a stated as a markup on cost which gave $400,000 ($2 million x 25/125). The fair value reduction in the depreciation charge was often added rather than deducted from cost of sales.

Examiners report F7- December 2010

One or both other comprehensive income gains were often shown in the income statement rather than under other comprehensive income Most candidates understood the principle of calculating the non-controlling interest (NCI); however, the adjustments to the subsidiarys post-acquisition profit for the URP and/or reduced depreciation were frequently omitted from the calculation. Consolidated statement of financial position As with the income statement most candidates scored well, however the problem areas were: Treating the fair value reduction of the property as an increase. Some candidates used the subsidiarys share value (of $3.50) to value the consideration paid by the parent (Premier) ($5 should have been used) and several did not include the consideration (fair value) of the NCI, effectively only calculating the parents share of the goodwill (note this does not apply to UK based answers). A surprising number did not correctly calculate the subsidiarys net assets at the date of acquisition due to either an incorrect pre- and post-acquisition apportionment of the profit for the year and/or including the postacquisition depreciation adjustment (and sometimes the URP in inventory) as pre-acquisition. The majority of candidates did not eliminate the loan notes given as part of the purchase consideration from the carrying amount of the available-for-sale investments. Many did not attempt to record the increase in the parents share capital and premium as a result of the share exchange. A considerable number of candidates added the increase in the value of the parents property to the land revaluation reserve, not realising it had already been included (note this does not apply to UK based answers). As already stated, despite these errors, there were many good scores on this question. However, it should be said that there were a small minority of candidates that appeared to have done very little study or preparation and made fundamental errors. These included using proportional consolidation and/or not time apportioning the relevant income statement items, whilst some candidates even time apportioned the statement of financial position balances, revealing a complete misunderstanding of the subject. Question Two This question was a traditional preparation of financial statements from a trial balance combined with several adjustments including: a rights issue of shares and the accompanying dividend calculation, the issue of loan note in a prior year, revaluation of land and buildings, accounting for an environmental provision as part of the cost of a non-current asset and accounting for taxation. As with question 1, this was attempted by nearly all candidates and was well answered by most with many high scores. Most of the problems were with the adjustments and even where candidates did not get them fully correct, they often picked up some of the marks. The frequent problems areas were: Statement of comprehensive income. Many candidates got the dividend calculations wrong mainly because the first dividend was paid before the rights issue and therefore based on a different number of shares to those in issue at the year end. Weaker candidates added the dividends to the administrative expenses which shows a serious lack of understanding and some candidates deducted the dividends in the income statement rather than in their answer to part (b). A high number of candidates did not capitalise the future decontamination (environmental) costs related to the acquisition of some new plant, this had a knock on effect with depreciation, the creation of the related provision and the unwinding of the first year's discount (see below).

Examiners report F7 December 2010

Some candidates treated the revaluation of the land and building as being at the beginning of the year rather than at the end of the year and some did not account for depreciation before calculating the revaluation gain (effectively combining the two). This is an issue I have reported on repeatedly. Very few candidates got the finance costs totally correct, many did not use the effective interest rate (they instead used the nominal rate) on the loan note, and even fewer included the unwinding of the environmental provision as a finance cost and some even omitted the bank interest. Most scored well on the tax, but there was the usual error with deferred tax of charging the closing provision to the income statement rather than the movement in the provision, a number also got the sign of the various components wrong (i.e. adding rather than deducting or vice versa). Many candidates misclassified one or both items of other comprehensive income by including them in the income statement. Statement of changes in equity This was generally very well done. I should mention that although many of the figures (profit for year dividends paid, share issue, etc) were incorrect as a result of earlier errors they were not penalised in this statement and marked as correct under the principles of method marking. The most common problem was treating the share issue as being in addition to the $50 million shown in the trial balance, in fact this figure already included the new issue and candidates should have worked back to calculate the opening share capital. There were also a many errors in the actual calculation of the share capital and share premium. Statement of financial position This was again generally well done with most errors being due to the knock on effect of errors made in the statement of comprehensive income which, as noted above, were not generally penalised. The omission of the environmental provision (and its accumulated finance cost) was the most common error and many candidates still have difficulty with calculating and correctly classifying taxation (current and deferred) balances in this statement. Weaker candidates showed the bank overdraft as a current asset and/or the available-for-sale investments at their trial balance (rather than their fair)value. Question Three This question was a full 25 mark performance appraisal question. The question required candidates to calculate ratios (of their choice) for up to 10 marks in order to assess the performance of a company against the background of a global recession. Important information in the scenario, in addition to the challenging market conditions, included mention of losses sustained by the company due to falls in property prices, the reduced carrying amounts of investments, redundancy costs and some cost savings in advertising and administrative costs. A good answer should have considered the effects of this information and look to see beyond the reported figures at what the underlying performance would have been but for the economic problems. A number of candidates did try to calculate some underlying ratios (i.e. assuming the one-off costs had not occurred) and comment on these comparing performance with 2009, but most did not attempt this analysis. I am pleased to report that the average mark on this question was much higher than the equivalent in many recent diets; this is especially so as normally I expect weaker marks on interpretation when compared to the alternative equivalent cash flow question. Most candidates scored well on the calculation of ratios, although unpractised candidates showed a distinct lack of understanding of the definitions and meaning of some ratios, particularly return on capital employed and gearing (for example, using just the share capital as equity is not acceptable). Markers did allow some flexibility within the definitions of some ratios.

Examiners report F7 December 2010

Overall many candidates did make intelligent comments about the change in the ratios and what might have caused them, however there were too many candidates who that thought that saying a ratio had gone up or down amounted to interpretation it does not. There were also answers that did not refer the events in scenario at all. A small, but significant number of candidates produced a statement of cash flows as their answer to this question. This was a pointless exercise; it is not what was asked and gained no marks (even if it was correct). Clearly these candidates had gambled on statements of cash flows coming up - question spotting is often a fatal error. Question Four The introductory section (part (a)) of this question required candidates to explain the basis on which accounting policies must be selected and to distinguish between (with an example) changes in accounting policies and changes in accounting estimates. Those candidates that had studied this area did well, with the opposite being true for those that had not; thus answers where rather polarised into good and weak. A common area where many candidates went off topic was that they spent considerable time explaining the circumstances where an entity should change its accounting policy and the procedures to be followed if it did. A question like this had been asked in a previous diet, but it was not what this question asked. I believe this illustrates well the point that while it is important to study and practice past questions, do not to expect them to be repeated in exactly the format. Although there were many good scores on this section, a very common point of misunderstanding is that many candidates thought that changing from straight-line to reducing balance depreciation was a change of policy; this would be an example of a change of an accounting estimate. A few candidates chose to discuss the correction of errors aspects which was not relevant to the question asked. Part (b) contained two examples related to part (a), the first was a proposal to increase the life over which an asset should be depreciated (from an original five years to eight years in total) and the second was a change in the basis for valuing inventory (from FIFO to average cost). Answers to both were very mixed. In part (i) some candidates stated that companies could not change the depreciation life of their assets (and left the answer at that) this is clearly wrong. There is an annual requirement for companies to review the remaining lives of their assets and if they are believed to be incorrect, they must be changed and depreciation charged accordingly. The accounting for the change suggested by the assistant accountant resulting in a credit for depreciation in the income statement for the current period was incorrect, but many thought it was acceptable. Another common error was for candidates to recalculate the depreciation over the total new life of eight years, whereas the correct calculation was to depreciate the carrying amount at the beginning of the period over the remaining new life (which was six years). Many candidates incorrectly treated the example given as an asset revaluation and hence discussed the need for all plant to be subject to a revaluation exercise again this was not what the question was about. Answers to part (ii) (the inventory change) were weaker than to part (i). Often the only mark some candidates got was for realising that it was a change of accounting policy. Weaker candidates thought this was a question about inventory being valued at the lower of cost or net realisable value - it wasn't. Many did not attempt to quantify the effect of the change in policy (despite the question specifically asking for it and giving all the relevant information) and some of those that did again agreed with the assistant accountant that the change would improve profit by $2 million (the difference in value between FIFO and average cost of the closing inventory). In fact, the change in profit would be the movement in the difference between the opening and closing inventory values ($400,000) and this would reduce rather than increase the profit for 2010. Question Five This question examined the area of provisions, in particular a provision for closure costs and the related area of discontinued operations. This was not a well-answered question, but many candidates did pick up some marks Examiners report F7 December 2010 4

on it. The question contained information on the redundancy and retraining costs, future trading losses and the expected sale price of the assets of a furniture making operation that was to be closed down four months after the current year end. The information in the question pointed to the closure being irrevocable and from this most candidates correctly concluded that a provision was required. What caused most problems was which losses should be provided for and, more importantly, in which period the provisions should be made. The closure would create an expected profit on the disposal of a factory and a loss on the sale of the plant. Many candidates offset these providing for a net amount in the year to 30 September 2010, however only the loss (an impairment) should have been provided for (the profit should be reported only when it arose: in the year ended 30 September 2011).The related costs were for redundancy and retraining, again often both were provided for together, but only the redundancy should have been provided for in the year to 30 September 2010 with the retraining costs charged as they were incurred (the following year). The final item was trading losses: $600,000 up to the year ending 30 September 2010 and a further $1million in the following period. Again many of candidates wanted to provide for all the losses in the year to 30 September 2010. IFRS rules say entities cannot provide for future trading losses (unless as a result of an onerous contract). The most disappointing aspect of this question was that most candidates did not attempt to allocate the reporting of the losses between the two accounting periods, despite the question specifically asking for this. Indeed most of the marks were for knowing the period in which the items should be reported, whereas most candidates seemed to think that listing and quantifying the losses/expenses was all that was required. The last aspect of the question was to consider whether the closure qualified as (and if so when) a discontinued operation. Most candidates wanted to treat it as discontinued in the year to 30 September 2010, whereas it would (probably) be treated as such in the following year. Conclusion Overall this was a much improved performance. Candidates scored better on the wider topic areas of questions of 4 and 5 than in recent diets. Hopefully this means more effort is being made to cover the full range of syllabus topics. Many of the above comments on the individual questions focus on where candidates made errors. This is intended to guide candidates future studies and to highlight poor techniques with a view to improving future performance. This may appear to give an overly pessimistic view of candidates performance. This is not the intention, nor is it the case. There were many excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately.

Examiners report F7 December 2010

Examiners report
F7 Financial Reporting June 2011
General Comments The I am disappointed to report that, after a much improved performance in December 2010, the pass rates for the current diet have reversed significantly. The main cause of the decline seems to be a return of the bad habit of candidates trying to pass on the first three questions. Once again, questions 4 and 5 were not attempted by a large number of candidates. The topics of these two questions were far from being on the periphery of the syllabus. Question 4 was on the IASBs Framework, discontinued operations and earnings per share (EPS) which have all been examined many times in past papers, as too has subject matter of question 5, construction contracts. I am at a loss to explain why these topics are answered so poorly, or not at all. Most commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination. True to past performances, the best answered questions were the consolidation in question 1 and financial statements preparation in question 2. Answers to question 3 were also generally good, particularly the statement of cash flows and ratio calculations. There are still some examination technique issues that need to be improved upon which, on their own, I feel confident would have lifted many marginal fails into the pass category. What is important about this statement is that I am saying that many candidates are failing because of technique rather than knowledge or ability. I find it difficult to believe that a candidate who can achieve scores of around 18 to 20 out of 25 in both questions 1 and 2 does not have the ability to pass; this happens all too frequently. In this paper a common theme of poor technique was wasting time. This is caused by number factors: Giving an answer to a question that was not asked. Question 1 specifically stated that consolidated goodwill should NOT be calculated. Amazingly a significant number of candidates did calculate goodwill; it was often the very first thing they did. Conversely, not answering a question that was asked. Question 4 required candidates to explain the predictive role of financial statements within the aspect of relevance of the IASBs Framework. Many candidates wrote everything they knew about relevance (and reliability and the other qualitative characteristics) without any reference to a predictive role. More minor aspects of technique were: unnecessary and very detailed workings, repetition and writing down the definitions of ratios which was not asked for. Some candidates who did this did not even calculate the ratios. Other technique aspects were a lack of workings for some (complex) figures. Please be aware that markers cannot allocate any marks to an incorrect figure unless they can see how the figure has been arrived at. Poor handwriting and an inability to clearly express oneself continue to be particular problem for discussion answers. The composition and topics of the questions was such that on this diet there was very little difference between the International Paper (the primary paper) and all other variant papers, thus these comments generally apply to all streams. Specific Comments Question One This required the preparation of a consolidated statement of comprehensive income in (a) (i) and the equity section of the statement of financial position in (a) (ii). This was followed by a short written section on the effect on goodwill (and its impairment) of the alternative ways of calculating non-controlling interests. Part (a) (i) included a fair value adjustment for a revaluation of the subsidiarys property, and eliminating intra-group sales together with unrealised profits on plant and inventory. Pleasingly, the majority of candidates showed a good knowledge of consolidation techniques which led to many good scores. The main problem areas were:

Examiners report F7 June 2011

Many candidates eliminated the cost ($30 million) of the intra-group sales from cost of sales; it should be the selling price ($40 million) that is eliminated as this is the cost of the purchases to the subsidiary. A failure to adjust (correctly) for the additional depreciation to the plant caused by it being transferred at a value above its cost and the unrealised profit on the transfer. Although most candidates did calculate the non-controlling interest (NCI) in the profit for the year, few carried on this principle to calculate the NCI in the total comprehensive income. There was also some confusion between the principle of the NCI calculation in the income statement and in the statement of financial position (part of the equity in (a) (ii)). A surprising number of candidates did not adjust for the share exchange when calculating the share capital and share premium (share capital only in SGP paper). Very few candidates correctly calculated the other equity reserve. In most cases candidates just added together the figures for this reserve at 1 April 2010 (the beginning of the year). This meant two errors; the pre-acquisition balance on the subsidiarys reserve should not appear at all in the consolidated reserve (it would be part of the goodwill calculation if it had been required) and the groups share of current years movement in the reserve (as shown in the comprehensive income statement) was completely ignored. Similar errors were made in calculations for the land revaluation reserve. As already mentioned, many candidates unnecessarily calculated consolidated goodwill, no marks were awarded for this as it was specifically stated as not being required. Also when calculating the NCI in the equity section of the statement of financial position, many candidates worked this by calculating the NCI's share of capital and reserves, often getting hopelessly lost. A much simpler method, as this was the year in which the controlling interest had been acquired, was to add the fair value of the NCI at the date of acquisition ($100 million as given in the question) to the NCI in the statement of comprehensive income (which should have already been calculated in (a)(i)). Poorly prepared candidates failed to time apportion (for six months) the subsidiarys results and a lesser number proportionally consolidated (at 75%) the subsidiarys results. The written section of part (b) was very disappointing. About half of the candidates gave no answer at all and of those that did, a lot missed point of the question. Instead of explaining the effect the two treatments (of valuing NCI) have on goodwill and its impairment, many candidates simply described what the two treatments were (rather than their effect). UK and IRL papers had an alternative section on the requirement to produce group financial statements which was generally well answered where attempted, but again it was often ignored. Question Two This question was a traditional preparation of financial statements (including a statement of changes in equity) from a trial balance, combined with several adjustments including: the issue of a convertible loan note, a revaluation of land and buildings, an inventory adjustment calculation, factored receivables and accounting for current and deferred taxation. This was the best scoring question on the paper and attempted by nearly all candidates. Most candidates are well practised in knowing the format of the financial statements and as usual the problem areas were with the required adjustments. Even where candidates did not get all the adjustments fully correct, many marks were still earned for the method of their workings.

Examiners report F7 June 2011

The frequent problems areas were: Statement of comprehensive income The question required an adjustment to the given value of closing inventory because it was counted several days after the year end. A number of candidates got the movement of these adjustments the wrong way round and reduced the year end inventory rather than increasing it. Surprisingly a lot of candidates adjusted the sales revenue for one of the inventory adjustments despite the question clearly indicating this was not necessary. Some candidates incorrectly stated that this was an event after the reporting date and so no adjustments were required The administrative expenses required the reversal of a financing/administration costs of factored debtors because the risk of collection had not been transferred to the factor. Many candidates correctly recognised this, but failed to realise that they then had to recognise a receivables allowance (doubtful debt provision). Many candidates had difficulty with the finance cost of the convertible loan, common errors were: using a discount rate of 8% instead of the effective rate of 10%, double counting the finance costs by adding the effective finance cost to the finance cost that had been paid or just taking the interest paid as the finance cost with no reference to the nature of the financial instrument. The gain on the revaluation of the property to be included in other comprehensive income was generally well done (although many candidates just included the land element), however most candidates included the deferred tax on this gain as part of years income tax expense rather than as part of other comprehensive income. Statement of changes in equity (SOCIE) When attempted this was generally very well done with many candidates gaining full marks. Where errors did occur they were mainly not including the equity component of the convertible loan and not adjusting the opening retained earnings for the dividend that had been paid during the year. As a point of reassurance, if a candidate makes an error in an earlier calculation (say of the dividend or the revaluation surplus) then they are not penalised again in the SOCIE; an incorrect figure will be marked as correct under the principle of "method marking" (or "own figure rule"). Statement of financial position (SOFP) This was again generally well done with most errors being due to the knock-on effect of errors made in the statement of comprehensive income which were also not penalised under method marking, this particularly applied to non-current assets, inventory, receivables and the convertible loan note. There is still some confusion over the deferred and current tax figures that should appear in the SOFP. A very common error was not including the liability to the factor (Easyfinance) as a current liability and a careless, but common, error was the inclusion of the bank overdraft as a current asset. Question Three This question was an integrated statement of cash flows and interpretation question with candidates being directed to addressing an issue raised by a shareholder concerning an increase in revenue not being matched by an increase in profit. As usual the statement of cash flows proved popular and was well answered by most candidates, the only recurring errors were: failure to take account of an asset held-for-sale when calculating the cash flow for noncurrent asset expenditure and, very frequently, omitting to calculate the dividend paid by investigating the movement of retained earnings. Answers to the interpretation were more mixed. Five marks were available for calculating relevant ratios (which gives some measure of how many should have been calculated) and again many candidates scored well on these (often the maximum). The assessment of the performance of the company was less well answered. Weaker candidates did not attempt to explain why the revenue had gone up by 48% whereas profit for the year had Examiners report F7 June 2011 3

increased by only 20%. Surprisingly, some candidates correctly calculated that the gross profit margin had increased (by 2%) and then said this partly explained the anomaly; obviously not realising that an increase in gross margin would have led to a proportionate increase in profit rather than the decrease actually reported. The operating margin was down very slightly, but did not account for the relative decline in profit. The real explanation of why the profit had decreased was due to higher finance costs (due to a new loan) and a much higher rate of taxation. Other aspects of performance were attempted reasonably well, many candidates observed the increase in tangible and intangible non-current assets suggesting acquisition/expansion and that this had been financed by additional borrowings which had increased gearing. Comments on the current and quick ratios were common, but few recognised the impact that the non-current asset held-for-sale had on the liquidity. In this type of question many candidates become obsessed with calculating ratios for inventory, receivables and payables. In some cases these were the only ratios calculated although in this scenario they were not particularly important issues to support an answer to the question. Overall many candidates did make intelligent comments about what the ratios they had calculated might indicate, however there were too many candidates who merely reported that a ratio had gone up or down, which does not amount to an assessment of performance. Question Four The introductory section (part (a)) of this question was related to the Frameworks characteristic of relevance and how the predictive role of financial statements enhances relevance. Candidates were asked to give examples of how the presentation of historical financial statements can assist users to assess future performance (the predictive role). The majority of candidates did not attempt this section and those that did had very little idea of what the question was about. Many of the answers gave the impression that the candidate thought it was a discussion of historical cost accounts (which is not the same as historical reporting). Also, most candidates missed the clue of part (b); simply mentioning the two examples in part (b) (discontinued operations and diluted EPS) would have gained two marks alone. Some other relevant disclosures would be: Non-current assets held-for-sale (these will not generate future profits). Separately disclosed material (sometimes called extraordinary) items; these are basically unusual often one-off or non-recurring gains or losses. Comparative results; these establish past trends of performance which may be used to predict future performance. Part (b)(i) Was a short section requiring candidates to estimate the next years profit of a company based upon its current year's results which included discontinued operations. Most candidates scored well, the main mistake was not pro-rating the currents years newly acquired operations (of 8 months) for a full year. Part (b) (ii) required a diluted EPS calculation on continuing operations allowing for convertible loan stock and directors share options for the current and comparative year. A surprisingly common mistake was for candidates to use the figures they had calculated in (b)(i), which were a prediction of 2012s earnings, as the basis of the EPS calculation of 2011. That aside, many good candidates did correctly allow for the interest adjustment (net of tax) for the convertibles and correctly calculated the number of shares on conversion. The treatment of the share options was less well understood; many just used the number of shares covered by the options, without reducing it by the number of shares that the proceeds of the option would theoretically buy, and very few weighted the option for the six months that it had been granted. Many candidates prepared a basic EPS calculation for both years and others got very confused in their determination to include the effects on EPS of a rights issue at below market price; neither were part of the question. The most disappointing aspect of the question was the sheer number of candidates that did not attempt it (especially part (a)).

Examiners report F7 June 2011

Question Five This question focused on the regularly examined the area of construction contracts. It was a fairly standard question requiring candidates to produce extracts from the financial statements on the second years progress of the contract; the first years results were given in the question. Candidates that gave this question serious attention scored quite well. In the income statement most calculated the total estimated profit and percentage of completion correctly, but did not take into account the previous years results when reporting the current years results, in other words they produced an accumulated income statement (for 2011 plus 2010). Many also tried to calculate a cost of sales when it should have simply been a balancing figure (of revenue less profit). Some candidates chose to calculate the percentage of completion based on a cost formula rather than work completed/contract price as specified in the question. Common errors in the statement of financial position were not including amounts for the contact plant or contract receivables and then, in the note of the amounts due from customers, candidates often deducted the progress payments received rather than the progress billings. Conclusion Overall this was a disappointing performance after last diets very good pass rate; however there was much to take heart from. There was a solid performance on questions 1 and 2 and a good understanding of cash flows. It seems to be the old problem of a lack of syllabus coverage that is preventing many marginal candidates from achieving a pass. As usual, many of the above comments on the individual questions focus on where candidates made errors. This is intended to guide candidates future studies and to highlight poor techniques with a view to improving future performance. This may appear to give an overly pessimistic view of candidates performance. This is not the intention and should not detract from the efforts of many candidates who performed well.

Examiners report F7 June 2011

Examiners report
F7 Financial Reporting December 2011
General Comments I am delighted to say that the overall performance of candidates on this diet was very good. Most commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the examination. As with past papers, the best answered questions were the consolidation in question 1 and financial statements preparation in question 2. This was closely followed by the cash flow element of question 3. Answers to questions 4 and 5 (relating to the wider syllabus areas) were more mixed and rather polarised into either very good or very poor attempts. The overall effect was that there were many solid scripts scoring 70 or more; a truly impressive performance. One area of concern was that there appears to be a return to the practice of a significant number of candidates not attempting all questions, particularly questions 4 or 5 (and sometimes both). There were some examination technique issues that caused problems: Several figures needed detailed workings, notably the cost of sales in question 2. Many candidates wrote down a long line of figures with no written description of what the figures represented or how they had arrived at them. When this happens it is almost impossible for markers to determine whether incorrect totals deserve any credit. Not reading the question properly, or answering a different aspect of a question from the one set. Poor handwriting is still an important concern for many markers (particularly for the written elements): put simply, markers cannot award marks if they cannot read what has been written. The composition and topics of the questions was such that on this diet there was very little difference between the International Paper (the primary paper) and all other variant papers, thus these comments generally apply to all streams. Specific Comments Question One This required the preparation of a consolidated statement of financial position, including an associate. There were fair value adjustments for plant and the need to recognise a customer relationship intangible asset. Further adjustments required the elimination of current account balances and unrealised profit (URP) on inventory due to intra-group trading. The majority of candidates clearly have a good working knowledge of consolidation techniques which showed through in very good marks for this question; there were a noticeable number of full marks. As usual it was the more complex aspects where errors occurred: Consolidated goodwill Some candidates did not discount the deferred consideration (or ignored it altogether) when calculating the purchase consideration. Also the non-controlling interest's consideration was sometimes calculated as $35 million (10 million shares x $3.50 x 100%), rather than as 20% of this figure). Many candidates did not include the customer relationship as an asset at the date of acquisition, and many deducted the post-acquisition additional depreciation/amortisation charges when calculating goodwill. As a point of technique, many candidates are calculating goodwill as a two-stage process; the parents element and the noncontrolling interest's element. Whilst this does give the same answer (if done correctly) it over complicates the calculation and wastes time. Other consolidation errors: Occasionally candidates added (rather than deducted) the additional depreciation/amortisation charges. Examiners report F7 December 2011 1

Incorrect calculation of the associates post-acquisition profit; either not time apportioning it or using the retained earnings figure rather than the profit for the year. Taking a 25% share of the impairment loss (rather than all of it) on the investment in the associate without understanding it was the investment itself that was impaired. Unrealised profit in inventory was often taken as $2.6 million (which was the intra-group sales figure, not the profit) or $300,000 (based on the profit in the current account balance rather than the sales) or $780,000 (based on 30% as the margin rather than mark up). The correct figure was $600,000 ($2.6 million x 30%/130%). A common error was to offset the subsidiarys overdraft against the bank balance (in hand) of the parent. This is incorrect; there is no right of offset, they are two different legal entities. Some candidates managed to account for a non-existent outstanding share issue by recognising the shares issued by the parent on acquiring the subsidiary, although the question stated this had already been recorded. The calculation of retained earnings proved problematic. The share of the subsidiarys and associate's post-acquisition profit was often incorrect and the non-inclusion of URP, unwinding of deferred consideration and the impairment loss was common. There were some instances of candidates using proportionate consolidation (and consolidation of the associate), but thankfully these were very few. Despite the above errors, as said earlier, many candidates achieved high marks for this question. Question Two This question was a traditional preparation of financial statements from a trial balance combined with several adjustments including: a goods on sale or return transaction, manufacture of own plant, property revaluation, a dividend calculation, fair value of a financial instrument and accounting for taxation. This question was very well answered and many candidates achieved high scores. Most candidates have a sound knowledge of preparing financial statements in this format and, as expected, most of the problems involved the required adjustments. The most common of these were: Statement of comprehensive income Surprisingly, an inability to correctly apply a gross profit margin to a sales figure; many candidates grossed up the sales figure and others took 25% as a mark up on cost rather a gross profit margin. The question required the cost of an item of manufactured plant for own use to be removed from the related costs in the trial balance figures and capitalised. The question said that normally the company adds a profit margin of 40% to cost to arrive at a selling price. Many candidates proceeded to add 40% to the manufactured cost to arrive the capitalised value. This is not permitted; a company cannot make a profit out of itself. Many candidates did not include production labour and factory overheads as part of costs of sales. A surprising number of candidates did not appreciate that the cost of sales calculation required the inclusion of opening and closing inventories - the former was often ignored completely. A smaller number of candidates noted the increase in inventory and reported it as a revaluation in other comprehensive income which has no logical basis. Many did not add back the cost of the goods on sale or return to the closing inventory. An incorrect calculation of the dividend was common with most making the mistake of not realising the shares had a nominal value of 25 cents each (they assumed $1 instead). There were a lot of problems in calculating the deferred tax, particularly in relation to the deferred tax on the revaluation of property. This lack of understanding also fed through to the statement of financial position figures and the revaluation figure in other comprehensive income. Examiners report F7 December 2011 2

The loss on fair value of a financial asset (equity investment) should have been charged to the income statement, but it was often shown in other comprehensive income. Only a minority of candidates correctly deducted the deferred tax element of the revaluation as part of other comprehensive income. Statement of financial position This was again generally well done with some errors being due to the knock on effect of those made in the statement of comprehensive income which are not generally penalised under the method marking principle. A very common error (more than 50%) was to take the date of the revaluation of the leased property as being at the end of the year rather than the beginning. The adjustment to revenue for the sale or return was not followed through to the receivables. Many candidates omitted the revaluation reserve, even though they had calculated the figure in other comprehensive income. Not surprisingly, weaker candidates reported a credit bank balance as an asset. Despite the above comments, this was high scoring question. Question Three Most of the marks for this question (19) were for the preparation of a statement of cash flows. In general this was very well answered with many candidates scoring full marks. The main errors were: - incorrect adjustment for depreciation (this surprised me as the charge for the year was given in note (ii) of the question and did not need calculating) - the disposal proceeds of a property was often shown as the profit on disposal (and vice versa) - the decrease in product warranties provision was treated as an increase (other elements of the cash flows also were often incorrectly signed) - several problems in the calculation of the tax paid (often ignoring the effect of the deferred tax) - many treated the new finance lease additions ($6.7 million) as a cash outflow, perhaps confusing this with the repayment of the finance leases (which was also often calculated incorrectly) - all of the investment income ($1.1 million) was treated as a cash flow when in fact only the dividend received of $200,000 was a cash flow - various incorrect figures for the shares issued; the increase in the share capital of $6 million should have been reduced by $3.6 million for the effect of a bonus issue (which is not a cash flow) Although this is a long list, most candidates only made two or three of these errors such that it was a good scoring question. Part (b) (International) required candidates to focus on two aspects of the statement of cash flows they had produced in part (a); operating performance and the investment in property, plant and equipment. The question required candidates to assess the different perspective of the above two areas that the accruals based financial statements (the income statement and the statement of financial position) gave when compared to the equivalent information in the statement of cash flows. The majority of candidates seemed to misinterpret this requirement. The main issue of operating performance was that the income statement reported a profit of $3.3 million whereas the cash generated from operations was a deficit of $4.9 million, clearly a very different indication of performance. The question wanted candidates to discuss what had caused this difference (mainly depreciation, working capital adjustments, product warranties and profit on disposal of property), but few candidates got beyond a mention of depreciation and working capital items. Similarly the statement of financial position showed a net increase in property, plant and equipment of $8.5 million, but the net cash actually spent was only $200,000, again very different perspectives. Here the main differences were due to non-cash finance lease acquisitions and the profit on disposal, but few candidates gave Examiners report F7 December 2011 3

such an explanation. Some candidates completely ignored the questions wording and did a rote-learned interpretation including calculating lots of accounting ratios. Overall part (b) was badly answered, and often not at all. Question Four This was on the topic of IAS 37 Provisions, contingent liabilities and contingent assets. Section (a) asked for a definition of provisions and contingent liabilities and how these definitions improve consistency in financial reporting. Most candidates had learned the definitions well and scored appropriate marks, but were not as good at explaining the consistency aspects. Weaker candidates guessed at the definitions getting confused between which were probable and which were possible and between constructive obligations and contingent liabilities. Some just gave examples of provisions and contingencies without attempting to define the terms (this was not answering the question and gained no marks) and others defined contingent assets which was not asked for. Very few mentioned that requiring companies to provide for certain types of provisions (e.g. decommissioning/environmental costs, taking a cue from part (b) of the question), that prior to the IAS had often not been provided for, was an example of improving consistency. Part (b) tested two examples of the application of IAS 37; environmental costs and a contingent liability. The environmental provision was made up of a fixed amount ($20 million) and a variable amount that was based on the amount of oil extracted annually. Most candidates correctly accounted for the fixed element by adding it to the cost of the licence (thereby amortising it over ten years) and treating it as a non-current liability. The treatment of the variable amount was not as well answered with many treating it the same as the fixed cost; the variable element is a liability, but it is not added to the cost of the licence, instead it is charged to the income statement annually on an accruals basis. Many candidates tried to discount the values given in the question despite the question clearly stating they were already discounted values. In effect the provision should have been increased (compounded) each year by 8% representing the unwinding of the discount as a finance cost. The second example was a guarantee given by a parent for part of a loan held by its subsidiary. The guarantee was for $10 million out of a total loan of $25 (the other $15 million was secured on the subsidiarys property). An interesting aspect of the question was that it asked candidates to consider the issue in the consolidated financial statements and the parents own (entity) financial statements. Candidates often assumed that Borough had lent the money to Hamlet, and discussed intra-group elimination issues, but the question did not state this and Borough would not need to guarantee its own loans. This was badly answered showing a lot of misunderstanding on the part of candidates. Many completely ignored consolidated/parent aspect and some answered from the perspective of the subsidiary, which was not asked for. Many did appreciate that there was a contingent liability somewhere, but could not identify in which financial statements it should be disclosed. The correct answer was that from a group point of view there is no contingent liability, the whole $25 is an actual liability, and it is from the parents own perspective that there is a discloseable contingent liability. A further complication is that the going concern of the subsidiary was in doubt; this meant that the parent might need to treat the contingent liability as an actual (current) liability. Many candidates discussed aspects of how a potential loss on the value of the subsidiarys securing property should be treated. The question specifically said that this should not be considered; indeed the point was that the shortfall in the value of the secured property had no effect on the treatment of the loan or the contingency. Question Five This question tested candidates understanding of a compound financial instrument: a convertible loan note. Section (a) was a two-part written element asking why a convertible loan had a lower interest rate than a loan without conversion rights followed by a requirement to comment on the directors proposal of treating the loan note as equity (on the basis that conversion to equity was expected) and using the nominal interest rate for the charge to the income statement. Candidates who had studied this topic could explain that there was an expected Examiners report F7 December 2011 4

benefit in having the share option on the convertible loan which justified a lower interest rate and went on to say that the directors proposals were not acceptable; the instrument needed to be split between a debt and an equity element. Fewer candidates referred to the interest rate issue (i.e. the requirement to use the effective interest rate for a non-convertible loan) and fewer still discussed the impact of this on the financial statements (improved earnings, lower gearing, etc). Section (b) required candidates to show how the convertible loan should be treated in the financial statements. Strangely, some candidates correctly explained how the loan note should be treated in part (a), but could not put this into practice in part (b). Broadly, candidates either got full marks on this section or wrote down meaningless figures for the marker to try and make some sense of. The latter type of answer gained few, if any, marks. Conclusion Overall this was an excellent performance with many candidates scoring well on the wider topic areas of questions of 4 and 5 indicating appropriate coverage of the full range of syllabus topics. Many of the above comments on the individual questions focus on where candidates made errors. This is intended to guide candidates future studies and to highlight poor techniques with a view to improving future performance. This may appear to give an overly pessimistic view of candidates performance. This is not the intention, nor is it the case. There were many excellent papers where it was apparent that candidates had done a great deal of studying and they were rewarded appropriately.

Examiners report F7 December 2011