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Examiners commentaries 2012
AC3091 Financial reporting
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 20112012.
From 20122013 the format of the examination paper will change. The
paper will be divided into two sections, Section A and Section B. Section
A will contain four questions, which will combine numerical and written
components, and Section B, which will contain two essay questions.
Candidates will be required to answer four questions with at least one
question from each section. All questions will carry equal marks. The
style of questions will remain unchanged.
Information about the subject guide
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012).
General remarks
Learning outcomes
At the end of this course, and having completed the Essential reading and
activities, you should be able to:
explain and apply a number of theoretical approaches to financial
accounting
record and analyse data
prepare financial statements under alternative accounting conventions
describe a number of regulatory issues relating to financial accounting
critically evaluate theories and practices of, and other matters relating
to, financial accounting.
What are the Examiners looking for?
The combined questions in Section A will require candidates to prepare
calculations on a variety of topics as well as showing a critical grasp of the
theories underlying the techniques. To do well, candidates need to be able
both to explain and evaluate the theories and prepare a range of financial
statements and calculations.
For quantitative parts of questions, Examiners are looking for the accurate
preparation of financial statements that follow generally accepted formats
with clear headings and accurate application of accounting techniques
to specific areas within financial reporting. Workings should always be
clearly provided.
Written components of combined questions require clear and coherent
explanations of theories, techniques and practices. Candidates must
critically evaluate theories and practices.
AC3091 Financial reporting
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Good answers to essay-based questions in Section B will be structured
coherently and logically. It will include an introduction, a main body and
conclusion, and cover all parts of the essay question.
Typically, an essay-based question will require an explanation of an issue
within financial reporting and a critical analysis of the issue. Explanations
should be clear and include a discussion of key definitions, with examples
if appropriate. The analysis should show critical awareness of both sides
of an argument or the application of a theory or concept to financial
reporting, with an assessment of its appropriateness to financial reporting.
Planning your time in the examination
All questions in the examination paper carry equal marks and equal time
should be devoted to each question. It is important that candidates attempt
four questions and all parts of each question they answer. Marks for each
section are shown and should be used by candidates to guide their work
and time allocation. Where questions are in parts, candidates should avoid
excessively long answers to some parts and missing out other parts.
Key steps to improvement
Candidates can improve their performance by improving the presentation
of their work, providing clear workings, answering the required number
of questions and attempting all sections of a question. Often candidates
seem to focus attention on the preparation of financial statements and the
financial calculations without being able to explain, discuss and evaluate
the theories and practices central to financial reporting.
Question spotting
Many candidates are disappointed to find that their examination
performance is poorer than they expected. This can be due to a number
of different reasons and the Examiners commentaries suggest ways
of addressing common problems and improving your performance.
We want to draw your attention to one particular failing question
spotting, that is, confining your examination preparation to a few
question topics which have come up in past papers for the course. This
can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus in
the same depth, but you need to be aware that Examiners are free to
set questions on any aspect of the syllabus. This means that you need
to study enough of the syllabus to enable you to answer the required
number of examination questions.
The syllabus can be found in the Course information sheet in the section
of the VLE dedicated to this course. You should read the syllabus very
carefully and ensure that you cover sufficient material in preparation
for the examination.
Examiners will vary the topics and questions from year to year and may
well set questions that have not appeared in past papers every topic on
the syllabus is a legitimate examination target. So although past papers
can be helpful in revision, you cannot assume that topics or specific
questions that have come up in past examinations will occur again.
If you rely on a question spotting strategy, it is likely you
will find yourself in difficulties when you sit the examination
paper. We strongly advise you not to adopt this strategy.
Examiners commentaries 2012
3
Examiners commentaries 2012
AC3091 Financial reporting Zone A
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 20112012.
From 20122013 the format of the examination paper will change. The
paper will be divided into two sections, Section A and Section B. Section
A will contain four questions, which will combine numerical and written
components, and Section B, which will contain two essay questions.
Candidates will be required to answer four questions with at least one
question from each section. All questions will carry equal marks. The
style of questions will remain unchanged.
Information about the subject guide
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012).
Comments on specific questions
Candidates should answer FOUR of the following SEVEN questions. All questions
carry equal marks.
Question 1
The income statements for the year ended 31 December 2011 and the
statements of financial position as at 31 December 2011 for J Plc, L Ltd and R Ltd
are given as follows:
Income statements for the year ended 31 December 2011
J Plc L Ltd R Ltd
000 000 000
Turnover 2,900 2,100 1,200
Cost of sales (600) (900) (800)
Gross profit 2,300 1,200 400
Operating expenses (650) (480) (90)
Dividend receivable 180
Profit before tax 1,830 720 310
Tax (720) (210) (250)
Profit after tax 1,110 510 60
Dividends payable (150) (120) (10)
Net profit for the year 960 390 50
Retained profit brought forward 1,500 900 200
Retained profit carried forward 2,460 1,290 250
[For the full question please refer to the Examination paper]
AC3091 Financial reporting
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Reading for this question
Subject guide, Chapter 5.
Alexander, D., A. Britton and A. Jorissen International Financial Reporting and
Analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN
9781408032282] Chapter 24.
Approaching the question
You are required to prepare a consolidated statement of financial position
and a consolidated income statement. These are presented below with
workings on how to obtain the figures. Please ensure you record your
workings in your answer.
Statement of financial position
Non current assets 3,300,000 Working 1
Investments 1,500,000 Working 2
Goodwill 320,000 Working 3
Share in R (associate) 135,200 Working 4
Inventories 890,000 Working 5
Interco from R 15,000
Mgt fee from R 12,000
Cash 1,075,000 Working 6
7,247,200
Share capital 600,000 H only
Retained earnings 2,593,400 Working 7
NCI 363,800 Working 8
Trade payables 990,000 H+S
Bonds 2700,000 H+S
7,247,200
Income statement
Revenue 4,900,000 Working 9
Cost of sales (1,410,000) Working 10
Gross profit 3,490,000
Investment income/ Div rec 80,000 Working 11
Operating expenses (1,130,000) H+S
Mgt fee from R 12,000
Share in R 119,200 Working 12
impairment (320,000)
Profit before tax 2,251,200
Tax (1,030,000) Working 13
Profit after tax 1,221,200
NCI (97,800) Working 14
Profit after tax and mint 1,123,400
Dividends (150,000) H only
Profit for the year 973,400
Retained profit bfwd 1,620,000 Working 15
Retained profit cfwd 2,593,400
Examiners commentaries 2012
5
Key workings (In 000)
Working 1 non current assets = H + S + revaluation of S = 600 +
2,400 + 300
Working 2 investments = total investments less cost of S less cost of
A = 300 1,200 600
Working 3 Goodwill = cost of investment Hs share of group
companies net assets at fair value at acquisition impairment
Shares in R 1,200 80% * 1,200 = 240
Shares in L 600 40% * 500 = 400
Goodwill = 640 320 = 320
Working 4 share in associate
Either Hs share in As net assets at SFP date at SFP date at fair value =
40% * 338 = 135.2
(reserves table given at end)
Or SFP share in R calculated as cost + share of post acqn reserves
impairment = 600 + 40% * (238 400) 200 = 335.2
Working 5 inventories
H+S provision for unrealised profit
Working 6 cash
H+S+cash in transit = 795 + 270 + 10
Working 7 retained earnings
= H + Hs share of Ss post acquisition reserves + Hs share of Ss post
acquisition reserves impairment =
2,483 + 80% * (1,269 650) + 40% * (238 400) 350 = 2,483 +
495.2 64.8 320 = 2,593.4
Working 8 non controlling interest
= NCI % of Ss net assets at SFP date at fair value
= 20% * 1,819 = 363.8
Reserves table
J L R
P+L 2,460 1,290 250
Purp (10)
Mgt fee payable (21) (12)
Mgt fee rec from s 21
Mgt fee rec from a 12
Revised P+L 2,483 1,269 238
Share cap 600 250 100
Revaln res 300
Revised capital and reserves 3,083 1,819 338
Income statement
Working 9 sales
H + S intercompany sales = 2,900 + 2,100 100
Working 10 cost of sales
H+S-intercompany sales + unrealised profit on inventory between H and
S = 600 + 900 100 + 10
AC3091 Financial reporting
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Working 11 investment income
Total investment income dividends receivable from S dividends
receivable from A = 180 (0.80 * 120) (0.4 * 10)
Working 12 share in R
Hs share of As profit before tax unrealised profit on inventory between
H and A = 40% * (310 12)
Working 13 tax
H + S + Hs share of A = 720 + 210 + 0.4 * 250
Working 14 Non-controlling interest (NCI)
NCI % of Ss profit after tax less unrealised profit on inventory =
20% * (510 21)
Working 15 retained profit brought forward
= H + Hs share of S post acquisition + Hs share of A post acquisition
impairment to start of period = 1,500 + 80% * (900 650) + 40% *
(200 400) = 1,500 + 200 80
Question 2
On 1 January 2011, Fast Ltd acquired 80% of the ordinary shares of a subsidiary,
Slow Org, which operates in the currency potts, when Slow Org was
incorporated with share capital of 1,840,000 potts. No shares have been issued
by Slow Org since acquisition.
The summary statements of financial position and income statements of Fast Ltd
and Slow Org are as follows:
[For the full question please refer to the Examination paper]
Reading for this question
Subject guide, Chapter 6.
Britton and Jorissen (2011) Chapter 29.
Approaching the question
In part (a) you are required to describe the different foreign exchange
methods and to compare these methods. Both methods should be outlined
and clear comparisons between the two methods identified. These
comparisons should include which rates to use, where FX is included and
the treatment of goodwill.
The calculations for parts (b), (c) and (d) on translating the foreign
exchange subsidiary using the closing rate method and calculating foreign
exchange on net assets and goodwill and the consolidated foreign reserve
and non-controlling interest are given as follows:
Part (b)
SFP Rate Trans slow
Nca 2,380,000 5 476,000
Invest
Interco rec
Other net assets 400,000 5 80,000
Inteco pay (240,000) 5 (48,000)
Net assets 2,540,000 508,000
Examiners commentaries 2012
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Share cap 1,840,000 2 920,000
Profit for year 700,000 P+L 175,000
FX loss Bal (587,000)
Cap + res 2,540,000 508,000
Income statement
Rate
Sales 4,000,000 4 1,000,000
Cost of sales (2,000,000) 4 (500,000)
2,000,000 500,000
Depn (600,000) 4 (150,000)
Other exp (200,000) 4 (50,000)
pbt 1,200,000 300,000
tax (500, 000) 4 (125,000)
Pat 700,000 175,000
Part (c): Calculation of how the differences arise
Opening net assets
Opening net assets at opening rate 1,840,000/2 920,000
Opening net assets at closing rate 1,840,000/5 368,000
FX loss (552,000)
Profit / income
Pat at average rate 700,000/4 175,000
PAT at closing rate 700,000/5 140,000
FX loss (35,000)
Total FX loss = (587,000)
Part (d)
FX reserve = 80% * (587,000) = 469,600
NCI = 20% * 2,540,000 = 508,000 Potts = 508,000/5 = 101,600
AC3091 Financial reporting
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Question 3
Construction Plc has entered into a construction contract, contract X and Build
Plc has entered into a construction contract, contract Y. Contracts X and Y started
on 1 January 2011. The position on each contract at 31 December 2011 was as
follows:
X Y
Contract price 48,000 9,000
Value of work certified to date 40,000 4,500
Cost of work to date 30,420 3,600
Estimated additional costs to
completion
8,580 13,200
Payments on account 37,200 4,320
Construction Plc uses the cost method for assessing percentage completion
and Build Plc uses the value of work certified method for assessing percentage
completion.
[For the full question please refer to the Examination paper]
Reading for this question
Subject guide, Chapter 9.
Britton and Jorissen (2011) Chapter 15.
Approaching the question
Part (a)
You are required to give a clear definition of construction contracts.
The concepts of relevance and reliability need to be defined and the
accounting treatment following from each of these concepts needs to be
identified. The impact of the application of the different treatments needs
to be discussed.
Part (b)
Workings for how contract x and contract y should be accounted for are
given below:
Contract X
In the income statement
Profit on contract = 48,000 30,420 8,580 =9,000
% completion = 30,420/39,000 =
Sales = 0.78 * 48,000 = 37,440
Cost of sales = 30,420
Attributable cumulative profit = 7,020
In the statement of financial position
Construction contract balance = costs to date + attributable profit
payments on account = 30,420 + 7,020 37,200 = 240
Contract Y
In the income statement
Loss on contract = 9,000 3,600 13,200 = (7,800)
Foreseeable loss = (7,800)
Sales = 50% * 9,000 = 4,500
Examiners commentaries 2012
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Cost of sales = 50% * (3,600 +13,200) = 8,400
Provision for F loss = (3,900)
In the statement of financial position
Construction contract balances = costs to date foreseeable loss
payments on account =3,600 7,800 4,320 = (8,520)
Question 4
Foam Ltd started trading on 1 January 2011. The income statement and the
statement of financial position for the first year of trading are given as follows:
Income statement for 2011
Sales 950,000
Cost of sales:
Opening inventory 150,000
Purchases 600,000
Closing inventory (120,000)
(630,000)
Gross profit 320,000
Depreciation (40,000)
Other expenses (180,000)
Net profit 100,000
Statement of financial position at 31 December 2011