ACCA FR –

FINANCIAL REPORTING
REVISION KIT
PART 1 – EXAMINER’S REPORTS
 Financial Reporting
September/
December 2023
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments ..................................................................... 2
Section A........................................................................................ 2
Question 1 ................................................................................. 3
Question 2 ................................................................................. 4
Question 3 ................................................................................. 6
Question 4 ................................................................................. 8
Section B........................................................................................ 9
Question 1 ............................................................................... 11
Question 2 ............................................................................... 12
Question 3 ............................................................................... 14
Question 4 ............................................................................... 15
Question 5 ............................................................................... 17
Section C...................................................................................... 18
Plundell Co .............................................................................. 18
Requirement (a) – 5 marks ............................................ 19
Requirement (b) – 4 marks ............................................ 20
Requirement (c) – 11 marks .......................................... 21
Gibraltar Co............................................................................. 23
Requirement (a) – 12 marks .......................................... 24
Requirement (b) – 5 marks ............................................ 30
Requirement (c) – 3 marks ............................................ 34

Examiner’s Report – FR September/December 2023 1

General comments

This examiner’s report should be used in conjunction with the published

September/December 2023 sample exam, which can be found on the ACCA
Practice Platform.

In this report, the examining team provide constructive guidance on how to

answer the questions whilst sharing their observations from the marking
process, highlighting the strengths and weaknesses of candidates who
attempted these questions.

Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform and
reviewing the published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE).

The model of delivery for the CBE means that candidates do not all receive the
same set of questions.

This report includes the following:

• Section A: Objective test questions – we focus on four specific questions
that caused difficulty in these sittings of the exam.
• Section B: Objective test case questions – here we look at one specific
question that was challenging for candidates.
• Section C: Constructed response questions – here we provide detailed
commentary around two constructed response questions and identify
some of the main issues that affected candidates’ performance in this
section, identifying common knowledge gaps and offering guidance on
where exam technique could be improved, including in the use of the
CBE functionality where appropriate.

Section A

Here we look at FOUR Section A questions which proved to be challenging for

candidates. These objective test questions examine syllabus learning outcomes
in a lower level of detail than that of Sections B and C.

Examiner’s Report – FR September/December 2023 2

Question 1

At 31 March 20X3, Algernon Co had equipment in its inventories which was

manufactured to a customer’s specific requirements and had originally cost
$380,000.

The selling price has been agreed as $420,000 but new regulations mean that safety
measures must be added at a cost of $60,000 before the equipment may be sold.
The customer has agreed to pay for half of these modification costs through an
increase in the overall selling price.

In accordance with IAS 2 Inventories, what is the value of these inventories to

be presented in the statement of financial position as at 31 March 20X3?

A. $380,000

B. $390,000

C. $410,000

D. $440,000

What does this test?

This question tests syllabus learning outcome B4(a) and IAS® 2 Inventories.
Candidates needed to know that, in accordance with IAS 2, inventories shall be
measured at the lower of cost and net realisable value.

What is the correct answer?

The correct answer is A.

The cost of inventories is stated as $380,000. In accordance with IAS 2, net

realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.

The selling price will increase as agreed with the customer and the modification
costs are included as a cost necessary to make the sale:
• Net realisable value = ($420,000 + [50% x $60,000]) - $60,000 =
$390,000

Examiner’s Report – FR September/December 2023 3

The cost is lower than the net realisable value and, therefore, the inventories
are measured at $380,000 (A).

Where did candidates go wrong?

Approximately half of Candidates selected options C or D. Those Candidates
had incorrectly added the costs necessary to make the sale to the original cost
of $380,000:
• Distractor = $380,000 + (50% x $60,000) = $410,000 (C)
• Distractor = $380,000 + $60,000 = $440,000 (D)

Very few Candidates selected the net realisable value of $390,000 (B).

Question 2

Scotswood Co purchased a herd of 600 bison on 1 February 20X5 and correctly

recognised this transaction at $90,000. At 30 June 20X5, the year-end date, the
market price for a similar size of herd was $175 per bison.

All trading of bison incurs costs of 8% plus an additional fixed charge of $1 per bison.

In accordance with IAS 41 Agriculture, what is the carrying amount for the
herd of bison at 30 June 20X5?

A. $90,000

B. $96,000

C. $96,600

D. $104,400

What does this test?

This question tests syllabus learning outcome B4(b) and IAS 41 Agriculture.
Candidates needed to know that, in accordance with IAS 41, a biological asset
shall be measured on initial recognition and at the end of each reporting
period at its fair value less costs to sell.

Examiner’s Report – FR September/December 2023 4

What is the correct answer?
The correct answer is B.

The fair value at year end is $175 per bison and the selling costs include an
8% deduction on selling price as well as a fixed charge of $1 per bison:
• Fair value less costs to sell = (600 bison x [92% x $175]) - (600 bison x
$1) = $96,000 (B)

Where did candidates go wrong?

Over a quarter of candidates ignored the fixed charge of $1 per bison:
• Distractor: 600 bison x (92% x $175) = $96,600 (C)

Unlike IAS 2 Inventories, a biological asset is not valued at the lower of ‘cost’
and net realisable value. Some candidates selected ’cost’:
• Distractor = $90,000 (A)

A small number of candidates chose to ignore selling costs and only considered
the fixed charge:
• Distractor = 600 bison x ($175 - $1) = $104,400 (D)

Examiner’s Report – FR September/December 2023 5

Question 3

On 1 February 20X7, Kahama Co invested in the ordinary (equity) shares of

Bagamoyo Co, paying $7.2m for the shares and an additional $0.8m in broker’s fees.
The shareholding was less than 1% of Bagamoyo Co’s ordinary (equity) share
capital.

Kahama Co made the irrevocable election to classify this investment as ‘’fair value
through other comprehensive income” at the recognition date.

At 31 December 20X7, the fair value of the investment was $8.4m and this was
correctly accounted for. On 31 March 20X8, Kahama Co sold the entire investment
for a cash consideration of $8.9m.

Calculate the gain (or loss) on the investment, to be recognised in Kahama

Co's statement of profit or loss and other comprehensive income for the year
ended 31 December 20X8 (to one decimal place).

$ _____ m

What does this test?

This question tests syllabus learning outcome B5(d) and IFRS® 9 Financial
Instruments. Candidates needed to know that a fair value exercise is performed,
at the date of disposal, to compare the carrying amount of the financial asset to
the cash consideration. The investment is subsequently disposed of at its
updated carrying amount (now equal to the cash consideration).

What is the correct answer?

The correct answer is $0.5m.

In accordance with IFRS 9, at initial recognition, an entity may make an

irrevocable election to present in other comprehensive income subsequent
changes in the fair value of an investment in an equity instrument. Therefore,
the change in fair value at 31 March 20X8 is recognised in other
comprehensive income:
• Fair value gain at disposal date = $8.9m - $8.4m = $0.5m

The prior, cumulative fair value changes are not recognised in other
comprehensive income for the year nor are they reclassified from the statement
of financial position. In accordance with IFRS 9, the entity may transfer the

Examiner’s Report – FR September/December 2023 6

cumulative gain or loss within equity (i.e., it may be transferred to retained
earnings if not previously recognised here).

Where did candidates go wrong?

In accordance with IFRS 9, at initial recognition, an entity shall measure a
financial asset at its fair value plus, in the case of a financial asset not at fair
value through profit or loss, transaction costs that are directly attributable to the
acquisition or issue of the financial asset. Therefore, the original carrying
amount was $8.0m ($7.2m + $0.8m).

Some candidates chose to incorrectly calculate the cumulative fair value gain,
up to and including the date of disposal, without transaction costs; or incorrectly
deducted transaction costs on initial recognition and calculated the cumulative
fair value gain:
• Without recognition of transaction costs = $8.9m - $7.2m = $1.7m
• Transaction costs deducted = $8.9m - ($7.2m - $0.8m) = $2.5m

Other candidates chose to incorrectly calculate the cumulative fair value gain,
up to and including the date of disposal, with the initial recognition of transaction
costs in the financial asset:
• With recognition of transaction costs = $8.9m - $8.0m = $0.9m

Examiner’s Report – FR September/December 2023 7

Question 4

Kasulu Co's operating profit margin has decreased from 15% for the year ended 30
September 20X1 to 11% for the year ended 30 September 20X2.

Which TWO of the following could explain this decrease?

A. Kasulu Co’s providers of finance increased the rate of interest on loans payable

B. Following a review of non-current assets, Kasulu Co revised the useful lives of

plant and equipment downwards

C. Kasulu Co successfully negotiated trade discounts for bulk buying raw

materials from its existing suppliers

D. Kasulu Co increased the salaries of administrative staff following new

government guidance on a ‘living wage’

What does this test?

This question tests syllabus learning outcome C2(c) and the interpretation of
financial statements. Candidates needed to know the constituent parts of
operating profit margin (i.e., operating profit ÷ revenue) but only how operating
profit (the numerator) was affected by each statement. None of the statements
impacted revenue (the denominator).

What are the correct answers?

The correct answers are B and D.

A decrease in the useful life of plant and equipment means that depreciation
charges increase; in turn, cost of sales/operating expenses increase and
the operating profit margin decreases (B).

An increase in the salaries of administrative staff means that administrative

expenses increase; in turn, operating expenses increase and the operating
profit margin decreases (D).

Examiner’s Report – FR September/December 2023 8

Where did candidates go wrong?
Most candidates correctly identified that D was correct but less than 20% of
candidates correctly identified that B was also correct.

Many candidates failed to identify the impact of negotiating supplier discounts.

Supplier discounts on raw materials mean that purchases (i.e., cost of sales)
decrease and the operating margin increases (C).

A small number of candidates failed to identify that operating profit is stated

prior to deducting finance costs and, therefore, an increase in interest rates on
borrowings has no direct impact on operating profit (A).

Section B

Section B tests candidates’ knowledge on several IFRS Accounting Standards

in more depth than Section A, with three case questions worth 10 marks each.
Each case contains five, two-mark objective test questions.

We have selected a case that examined IFRS 15 Revenue from Contracts with
Customers.

Candidates must read the case scenario and its requirements carefully.
Each objective test question is worth two marks and so it is important that
candidates do not misread or miss information in the scenario. Close reading
of the requirements is also important to identify any specific instructions, such
as rounding.

Examiner’s Report – FR September/December 2023 9

 Scenario

Pingshan Co manufactures plant and equipment. Its revenue for the year ended 31
August 20X4 was analysed as follows:

Revenue $’000
Luoho Co contract 900
Dapeng Co contract 3,000
Futian Co contract 4,000
7,900

Luoho Co
A large item of plant is being constructed for Luoho Co. The plant is controlled by
Luoho Co and is being constructed directly on its premises.

The total contract price is $1.8m and, at 31 August 20X4, progress was assessed at
50%. Pingshan Co invoiced Luoho Co a total of $1.0m and this invoice was settled by
31 August 20X4. Pingshan Co incurred recoverable contract costs of $0.7m to 31
August 20X4 and total expected contract costs are $1.3m.

Dapeng Co
Equipment was sold to Dapeng Co on 1 March 20X4, allowing Dapeng Co credit terms
of one year, interest free. This is a significant benefit for Dapeng Co. Pingshan Co's
cost of capital is 7%.

Pingshan Co recognised the full and final amount of $3.0m, to be paid on 1 March
20X5, within revenue for the year ended 31 August 20X4.

Futian Co
An item of plant with a stand-alone selling price of $4.0m was sold to Futian Co on 1
June 20X4. Specifically for this contract, the transaction price of $4.0m includes a one-
year servicing contract at no extra cost to Futian Co. $4.0m was invoiced to Futian Co
on the date of delivery, which was 1 June 20X4.

The cost of servicing plant is $0.3m per year and Pingshan Co ordinarily charges a
markup of one third on the servicing of plant.

Yantian Co
From 1 September 20X4, the next financial period, Pingshan Co are combining two
items of equipment into one single ‘package’ for Yantian Co, which is currently the
only customer for these two items. The package will be sold at a discount when
compared to the sum of the stand-alone selling prices for the individual items and the
individual items of equipment will no longer be sold. Servicing is not included.

Examiner’s Report – FR September/December 2023 10

Question 1

Various methods had been proposed by Pingshan Co for measuring the progress
of the contract with Luoho Co:

(1) Fair value method

(2) Input method
(3) Output method
(4) Effective interest method

In accordance with IFRS 15, which of the above methods would be

appropriate methods for measuring the progress of the contract with Luoho
Co?

A. 2 or 3

B. 1 or 3

C. 1 or 4

D. 2 or 4

What does this test?

This question tests syllabus learning outcome B10(c) and IFRS 15. Candidates
needed to know that only two of the listed methods are appropriate for
measuring the progress of a contract.

What is the correct answer?

The correct answer is A.

In accordance with IFRS 15, appropriate methods of measuring progress

include output methods and input methods.

Examiner’s Report – FR September/December 2023 11

Where did candidates go wrong?
Some candidates believed the fair value method was appropriate, a
measurement basis used across various financial statement balances such as
investment property and financial instruments.

Very few candidates believed the effective interest method was appropriate, a
measurement method applied to leases and financial instruments.

Question 2

In accordance with IFRS 15, calculate the contract asset (or liability) to be
presented at 31 August 20X4 for the Luoho Co contract.

A. Contract asset of $0.1m

B. Contract liability of $0.1m

C. Contract asset of $0.9m

D. Contract liability of 0.9m

What does this test?

This question tests syllabus learning outcome B10(f) and IFRS 15. Candidates
needed to recognise that the calculation of a contract asset (i.e., accrued
income) or a contract liability (i.e., deferred income) is based on revenue earned
compared to amounts invoiced to the customer.

What is the correct answer?

The correct answer is B.

More than half of candidates selected the correct answer.

In accordance with IFRS 15, when either party to a contract has performed, an
entity shall present the contract in the statement of financial position as a
contract asset or a contract liability, depending on the relationship
between the entity’s performance and the customer’s payment.

Examiner’s Report – FR September/December 2023 12

An entity shall present any unconditional rights to consideration separately as a
receivable (i.e., amounts invoiced to customers are presented as trade
receivables):
• Contract liability = $1.0m - (50% x $1.8m) = $0.1m (B)

Where did candidates go wrong?

Over a third of candidates selected the revenue recognised to date of $0.9m as
either a contract asset (C) or a liability (D).

Fewer candidates calculated the correct amount but incorrectly selected a

contract asset (A).

Examiner’s Report – FR September/December 2023 13

Question 3

The amount of income recognised by Pingshan Co in relation to the Dapeng Co

contract is incorrect.

What is the correct total income to be recognised in Pingshan Co’s

statement of profit or loss for the year ended 31 August 20X4, in respect of
the Dapeng Co contract?

A. $2.8m

B. $2.9m

C. $3.0m

D. $3.2m

What does this test?

This question tests syllabus learning outcome B10(b) and IFRS 15. Candidates
needed to recognise the existence of a significant financing component.

What is the correct answer?

The correct answer is B.

This was the most poorly performed question in the case.

In accordance with IFRS 15, in determining the transaction price, an entity shall
adjust the promised amount of consideration for the effects of the time
value of money if the timing of payments agreed to by the parties to the
contract (either explicitly or implicitly) provides the customer or the entity
with a significant benefit of financing the transfer of goods or services to the
customer:
• Revenue = $3.0m ÷ 1.071 = $2.8m (A)

Examiner’s Report – FR September/December 2023 14

Furthermore, an entity shall present the effects of financing (interest revenue or
interest expense) separately from revenue from contracts with customers in the
statement of comprehensive income; meaning that finance income must also
be recognised, proportionately, up to 31 August 20X4:
• Finance income = $2.8m x 7% x 6/12 months = $0.1m

The requirement is to calculate total income:

• Total income = $2.8m + $0.1m = $2.9m (B)

Where did candidates go wrong?

Most candidates selected revenue of $2.8m, only (A).

Remaining candidates were evenly split across the remaining options:

• Undiscounted revenue = $3.0m (C)
• Discount added to revenue = 107% x $3.0m = $3.2m (D)

Question 4

There is no significant financing component in the contract with Futian Co.

What is the correct amount of revenue to recognise in Pingshan Co’s

statement of profit or loss for the year ended 31 August 20X4, in respect of
the Futian Co contract?

A. $3.73m
B. $3.91m
C. $3.96m
D. $4.00m

What does this test?

This question also tests syllabus learning outcome B10(b) and IFRS 15 but, in
this instance, covers the allocation of revenue across two performance
obligations within one contract. Candidates needed to recognise that the
transaction price must be allocated based on stand-alone selling prices.

Examiner’s Report – FR September/December 2023 15

What is the correct answer?
The correct answer is A.

In accordance with IFRS 15, the entity shall allocate a discount proportionately
to all performance obligations in the contract.

Although we are given the stand-alone selling price of the plant, we must (using
the markup of one third) calculate the stand-alone selling price of the servicing:
• Stand-alone selling price of servicing = $0.3m x 4/3 = $0.40m

The discount can then be calculated:

• Discount = $0.40m ÷ ($4.00m + $0.40m) = 9%

We can now calculate revenue up to 31 August 20X4:

• Total revenue = (91% x $4.00m) + (91% x $0.40m x 3/12 months) =
$3.73m (A)
Alternatively, the calculation may be performed as follows:
• Plant component = $4.00 ÷ ($4.00m + $0.40m) = 91%
• Servicing component = $0.40 ÷ ($4.00m + $0.40m) = 9%
• Total revenue = (91% x $4.00m) + (9% x $4.00m x 3/12 months) =
$3.73m (A)

Where did candidates go wrong?

Each incorrect answer was selected by approximately one fifth of candidates.

The most common error made by candidates was to include 9/12 months of the
servicing revenue:
• Total revenue = (91% x $4.00m) + (91% x $0.40m x 9/12 months) =
$3.91m (B)

The other errors were to state only the plant revenue of $4.0m (D) or to use
margin instead of markup when calculating the discount:
• Stand-alone selling price = $0.4m x 1/3 = $0.13m
• Discount = 3.3%
• Revenue = (96.7% x $4.00m) + (96.7% x $0.40m x 3/12 months) =
$3.96m (C)

Examiner’s Report – FR September/December 2023 16

Question 5

For the Yantian Co contract, combining two items of equipment but no

servicing contract, which of the following describes the correct accounting
treatment?

A. Apply the discount to the equipment with the highest individual stand-alone
selling price only

B. Apply the discount to the equipment with the lowest individual stand-alone
selling price only

C. Allocate the discount proportionately to both items of equipment

D. Recognise revenue as the sum of the stand-alone selling prices with the
discount allowed recognised separately as an expense

What does this test?

This question also tests syllabus learning outcome B10(b) and IFRS 15 but, in
this instance, addresses the theory of a contract with more than one
performance obligation.

As previously noted, in accordance with IFRS 15, the entity shall allocate a
discount proportionately to all performance obligations in the contract.

What is the correct answer?

The correct answer is C.

Where did candidates go wrong?

Over one third of candidates selected option D and recognised the discount
allowed separately as an expense. A small number of candidates selected A or
B.

Examiner’s Report – FR September/December 2023 17

Section C

We have selected two constructed response questions, Plundell Co and

Gibraltar Co, that are available on the ACCA Practice Platform.

Plundell Co is a financial statements analysis and interpretation question for a

group entity, including the disposal of a subsidiary. This tests mainly syllabus
learning outcome C2(c) and, briefly, D2(b) for the calculation of a gain (or loss)
on disposal of a subsidiary.

Gibraltar Co is a single-entity financial statements preparation question but also

includes earnings per share (EPS). This tests syllabus learning outcome D1(a)
as well as syllabus area B. Specifically, syllabus learning outcome B9(f) is
examined for the calculation of EPS.

When using the following detailed commentary, it would be helpful to consult

the questions and answers available to you here. The scenario is not re-
produced in this report.

Plundell Co

Plundell Co required candidates to demonstrate and apply knowledge from the

analysing and interpreting financial statements area of the syllabus (section C).
The question had both numerical information and additional information relating
to a company that had disposed of a subsidiary during the year. Candidates
were asked to complete several tasks using this information.

Examiner’s Report – FR September/December 2023 18

The analysis and interpretation of a group is an important area of the syllabus
and will continue to be examined. As in previous examination sessions, most
candidates failed to score high marks on this question. The reason for this
seemed to be poor exam technique:
• not addressing the requirement; or
• not adequately using the information in the scenario.

The focus for this detailed commentary, rather than simply recreating the
suggested solution, will highlight the importance of using the scenario when
constructing an answer to an interpretation question.

Plundell Co contains three requirements.

Requirement (a) – 5 marks

Calculate the Plundell Group's potential gain or loss on the disposal of

Holloway Co
This requirement tests syllabus learning outcome D2(i) and IFRS 10
Consolidated Financial Statements. Candidates needed to know how to
calculate a gain (or loss) on the disposal of a wholly-owned a subsidiary.

Although the context was less common (as the disposal itself had not yet taken
place), the potential gain or loss used balances at the reporting date in the
‘usual’ format for a disposal calculation. Performance on this question was
mixed. Some candidates achieved full marks on this part of the question.
However, many candidates achieved limited or no marks, while others ignored
the requirement completely.

When calculating a gain (or loss) on the disposal of a subsidiary, candidates

should compare the disposal proceeds to the carrying amount of the subsidiary
at the disposal date (the related goodwill and net assets of the subsidiary at the
date of disposal). It was surprising that several candidates attempted to adjust
for non-controlling interests despite the case stating that “Plundell Co acquired
all of the share capital of Holloway Co”.

A disposal calculation would be performed as follows:

• (+) Proceeds
• (+) Carrying amount of the non-controlling interests at the date of disposal

Examiner’s Report – FR September/December 2023 19

 • (-) 100% of the carrying amount of net assets of the subsidiary at the date
of disposal
• (-) The carrying amount of goodwill at the date of disposal
• (=) Gain (+ve) or Loss (-ve)

Net assets at the date of disposal were not stated in the case and needed to be
calculated. This was often done incorrectly. When workings were shown, marks
were awarded accordingly, however, the marking team noted that many
candidates did not show workings and marks could not be awarded. It is
essential for candidates to show their workings.

Common errors in this calculation of net assets included the omission of the
fair value adjustment for land and not using the retained earnings at the
‘disposal’ (reporting) date. Retained earnings were often adjusted for the impact
of impairment but this had already been accounted for.

The calculation of the carrying amount of goodwill was non-complex and was
generally well attempted. Some candidates, however, omitted the fair value
adjustment for land when calculating the fair value of net assets at the date of
acquisition.

For some candidates that had correctly calculated the goodwill at acquisition,
the incorrect amount of impairment was deducted; some candidates only
deducting the current year impairment; and some only deducting the historical
impairment.

Requirement (b) – 4 marks

Make the necessary adjustments and recalculate the following ratios for
20X8:
• Gross profit margin
• Operating profit margin
• Interest cover
This requirement tests syllabus learning outcome C2(a). Candidates needed to
know how to compute three common financial ratios.

To achieve full marks, candidates were required to remove all transactions

associated with Holloway Co from the consolidated statement of profit or loss
for the year ended 31 December 20X8 to calculate a comparable ratio for the

Examiner’s Report – FR September/December 2023 20

current year (should Holloway Co have been disposed of). Some candidates
ignored this part of the requirement and calculated ratios using unadjusted
amounts and so were unable to achieve marks – the unadjusted ratios were
already provided in the case.

For candidates that did adjust profit or loss, many simply removed the extracts
for Holloway Co that were presented in the case – ignoring the impact of the
current year impairment of goodwill.

Where operating profit was adjusted for the impairment, the marking team noted
that candidates often incorrectly deducted the impairment or adjusted for the
incorrect amount (only the current year impairment was relevant). Some credit
was awarded for the attempt at adjustment.

Most candidates knew the formula for the three ratios and an increasing number
showed appropriate workings for the calculations when compared with previous
examination diets; therefore, scoring well. However, the marking team noted that
many candidates continue to calculate the ratios without showing workings.

Where the ratios have been calculated correctly, even without workings, marks
will be awarded. However, an incorrect ratio will score no marks when
workings are not provided. The examining team continue to stress the
importance of showing workings for all calculations.

Requirement (c) – 11 marks

Analyse the performance of the Plundell Group for the years ended 31
December 20X8 and 20X7

Your answer should specifically refer to the potential disposal of Hollway

Co
This requirement tests syllabus learning outcomes C2(c) and C2(d). Candidates
needed to provide a plausible rationale for changes in the ratios, year-on-
year.

The marking team noted that many candidates made generic comments to
analyse the results and provided a ‘textbook’ rationale that was not linked to
the case. This resulted in a low-scoring, weak analysis.

Examiner’s Report – FR September/December 2023 21

As in previous examination sessions, the marking team noted that several
candidates copied content directly from the scenario into their answer with no
attempt to draw upon it as an explanation for changes. This will not be
awarded marks.

There were also many candidates that provided either an extremely brief
analysis or did not provide any analysis at all. It is not clear whether this
was due to poor time management or to not being prepared to answer this style
of question.

There was a lot of information in the case for candidates to provide a well-
structured, meaningful analysis; for example:
• The potential disposal of Holloway Co in the coming period and how
excluding these results will impact revenue and profitability.
• The adjusted ratios that indicate when Holloway Co is removed, the
results become poorer.
• The impact of the disposal of Holloway can also be considered when
looking at the individual performance of Holloway Co compared to the
performance of the group.
• Calculating the individual ratios for Holloway Co shows that it is
outperforming the group from a profitability and interest cover
perspective; and this is currently having a positive impact on the results
of the Group.
• The ratios already presented in the case show that, even without the
disposal of Holloway Co, performance for the group year-on-year has
declined.

A good answer would address these points and the scenario provided useful
information to draw upon, such as increased competition, increased research
and development costs and the reduction in the useful life of the games.

Candidates are reminded that all analysis questions should reach a formal
conclusion. It should be clear that a conclusion is being reached and a
heading should be provided. It was expected that candidates would conclude
on whether the Plundell Group should dispose of Holloway Co.

Examiner’s Report – FR September/December 2023 22

Gibraltar Co

Gibraltar Co is a typical example of a financial statements preparation question

– covering syllabus areas D and B. This style of question will provide you with a
trial balance (or an extract from a trial balance) and additional information that
will require adjustment in accordance with relevant IFRS Accounting Standards
and accounting principles.

The requirements of the question will vary; however, you can expect to be
asked to prepare one or more of the following:
• statement of profit or loss (SPL);
• statement of profit or loss and other comprehensive income (SPLOCI);
• schedule of adjusted profit;
• statement of financial position (SFP);
• statement of changes in equity (SCE); and/or
• part of a statement of cash flows (SCF).

Gibraltar Co contains three requirements.

Examiner’s Report – FR September/December 2023 23

Requirement (a) – 12 marks

Prepare the statement of profit or loss and other comprehensive income

for Gibraltar Co for the year ended 31 October 20X3
This requirement tests syllabus learning outcomes D1(a) and several areas
across syllabus area B.

Candidates are not provided with a pro forma for a SPLOCI and are advised to
firstly create this in the response area provided. The amounts relating to profit
or loss in the trial balance can then be transferred across into the workspace,
ready for adjustments as some figures will not have adjustments and non-
complex marks can be achieved by entering the trial balance amount.
Candidates may:
• include these amounts within the cell, ready for adjustment (markers
check cell contents);
• use columns for draft amounts, adjustments and final amounts; or
• show in a manual working (as shown below).

Examiner’s Report – FR September/December 2023 24

Each adjustment will now be addressed in turn. Although not required, the
manual journal entries will be shown as additional learning materials.

Note 1: Principal versus agent – B10(e)

Gibraltar Co has incorrectly recognised the full $350,000 for arranging the
provision of maintenance services as revenue. Gibraltar is acting as an agent
rather than the principle in this scenario and should only record the commission
$42,000 (12%) as revenue. Therefore, revenue must be reduced by $308,000.

$ $

Dr Revenue 308,000

Cr Trade and other payables 308,000

being correction to recognise only the agent’s commission to 31 October 20X3

and the amount owed to principal, to be paid by 30 November 20X3

Some candidates deducted the $308,000 from revenue while others deducted
the full $350,000 before then adding back the commission. Both alternatives are
shown below:

Examiner’s Report – FR September/December 2023 25

Note 2: Inventories – B4(a)

Recognition of the cost element on the sale of goods on 31 October 20X3 must
be made. Candidates were given the selling price of goods and so could
calculate the original cost, using the markup, as $9,258 ($12,035 x [100% ÷
130%]). The marking team noted that most candidates that attempted the
calculation did so correctly. Common errors in the calculation arose when
candidates used margin as the basis for calculation (70% ÷ 100%) and some
adjusted for the profit element only rather than the cost.

Once calculated, the $9,258 should be recognised in cost of sales and the
inventories removed.

$ $

Dr Cost of sales 9,258

Cr Inventories 9,258

being cost of goods sold, not initially recognised on 31 October 20X3

Some candidates incorrectly deducted the amount from cost of sales.

Note 3: Financial instruments – B5(d)

The first financial instruments in the case are classified as fair value through
profit or loss (FVTPL).

The disposal of investments has not been correctly accounted for in the trial
balance. $59,000 has been recognised in cash and cash equivalents and
removed from investments.

However, immediately prior to the disposal, a final valuation should have

been performed (based on the proceeds) and a fair value loss of $3,000
($59,000 - $62,000) recognised.

The case states that this must be recognised in administrative expenses.

Examiner’s Report – FR September/December 2023 26

 $ $

Dr Administrative expenses 3,000

Cr Investments – FVTPL 3,000

being final valuation exercise on financial instrument, prior to disposal

We must then perform a valuation on the remaining investments classified as

FVTPL. The fair value gain at 31 October 20X3 is $8,900 ($184,300 - [$178,400
- $3,000]):

Dr Investments – FVTPL 8,900

Cr Finance/Investment income 8,900

being year-end valuation on remaining financial instruments classified as

FVTPL

Many candidates did not adjust for the loss on disposal and so arrived at an
incorrect fair value gain. Own figure marks were still awarded accordingly,
provided there were workings. Other errors included recording the fair value
gain incorrectly as fair value through other comprehensive income.

Note 3: Financial instruments – B5(f)

There are also financial instruments classified as fair value through other
comprehensive income (FVTOCI).

The costs associated with the purchase of FVTOCI investments have been
incorrectly charged to administrative expenses. If an investment is classified as
FVTOCI, the transaction costs must be capitalised at the acquisition date:

Dr Investments – FVTOCI 8,000

Cr Administrative expenses 8,000

being correction to transaction costs incorrectly recognised as an expense

Examiner’s Report – FR September/December 2023 27

At the year-end date, we must perform a valuation and recognise the fair value
loss of $3,250 ($124,750 - [$120,000 + $8,000]), presented in OCI:

$ $

Dr Revaluation surplus – FVTOCI 3,250

Cr Investments – FVTOCI 3,250

being year-end valuation on financial instruments classified as FVTOCI,

presented in other comprehensive income

Some candidates incorrectly recognised a fair value gain of $4,750 where the
associated purchase costs had not been capitalised but, again, own figure
marks were awarded for this providing that workings were shown.

Note 5: Revaluation – B1(d)

The adjustment for the initial revaluation in Gibraltar Co was non-complex. The
trial balance includes the land and buildings balances at the reporting date of 31
October 20X3 which means that buildings have already been depreciated for
the year. The revaluation increase can be calculated as follows:

Examiner’s Report – FR September/December 2023 28

Once calculated, the revaluation increase must be recognised in equity and
presented in OCI:

$ $

Dr Land and buildings – carrying amount 424,000

Cr Revaluation surplus – tangible assets 424,000

being revaluation of non-current assets, before tax, presented in other

comprehensive income

Next, deferred tax must be calculated on the revaluation increase at $89,040

(21% x $424,000), which is also presented in OCI as a reduction in the
revaluation increase:

Dr Revaluation surplus – tangible assets 89,040

Cr Deferred tax liability 89,040

being deferred tax on revaluation, presented in other comprehensive

income

Common errors included recognising the deferred tax expense in profit or loss
or adjusting both SPL and OCI. Candidates that did this earned some marks
for the deferred tax calculation only.

The remaining notes only impact the second requirement.

From notes 1-5, we must present in the statement of changes in equity the:
• fair value loss on financial instruments classified as FVTOCI (Note 4)
• total comprehensive income (profit to retained earnings and the
revaluation increase to the revaluation surplus)

Examiner’s Report – FR September/December 2023 29

Requirement (b) – 5 marks

Prepare the statement of changes in equity for Gibraltar Co for the year
ended 31 October 20X3
This requirement tests syllabus learning outcome D1(b). Candidates needed to
know to follow through any relevant amounts calculated in Requirement (a) into
the statement of changes in equity (SCE).

Candidates are advised to leave space between Requirements so that it is clear

to the marking team where one part of the question ends and the next begins.

Candidates are advised to transfer the opening balances in equity into the SCE
where possible to achieve some of the less complex marks.

In the case, there was an issue of ordinary (equity) shares that is yet to be
recognised and so the equity balances from the trial balance can be
transferred accordingly:

The remaining movements will now be addressed in turn. Although not required,
the manual journal entries will be shown as additional learning materials.

Examiner’s Report – FR September/December 2023 30

Note 6: Issue of ordinary (equity) shares – B5(f)

A rights issue of shares took place on 1 February 20X3 and had not been
recognised. This has no impact on the statement of profit or loss and other
comprehensive income and did not require to be adjusted for.

When calculating the amount associated with the share issue, it is important to
note that the amount in the trial balance of $900,000 is the monetary amount
of the £0.50 shares and not the number of shares in issue (1.8m shares).
The share issue can be calculated as follows:

Once calculated, the share capital and premium amounts of $180,000 may be
transferred into the SCE as follows:

Examiner’s Report – FR September/December 2023 31

 $ $

Dr Cash and cash equivalents 360,000

Cr Share capital 180,000

Cr Share premium 180,000

Being rights issue of ordinary (equity) shares

Note 7: Dividends – assumed knowledge

The dividend was declared after the rights issue on 1 February 20X3 and was
paid before the reporting date. The dividend, therefore, needs to be accounted
for in the financial statements as a reduction in retained earnings. This would
need to be presented in the SCE.

The dividend can be calculated as follows:

Where candidates had made an error in the issue of shares calculations, own
figure marks were awarded providing there were workings. Some candidates
incorrectly calculated the dividend by basing the $0.10 on the opening share
capital or the number of shares issued during the year.

The dividend can then be entered into the SCE as a reduction in retained
earnings.

Examiner’s Report – FR September/December 2023 32

 $ $

Dr Retained earnings 216,000

Cr Cash and cash equivalents 216,000

being dividends paid

Examiner’s Report – FR September/December 2023 33

Requirement (c) – 3 marks

Restate the basic EPS at 31 October 20X2 to take account of the rights
issue made during the year ended 31 October 20X3
This requirement tests syllabus learning outcome B9(e). Candidates needed to
know how to calculate the impact of a rights issue on the prior year using
current year information.

The final requirement to this question required candidates to calculate the

restated earnings per share (EPS) of the prior year of $0.20 to consider the
rights issue made on 1 February 20X3. To restate the prior year’s EPS following
a rights issue of shares, you multiply the prior year EPS by the inverse of the
‘bonus fraction’. The rights issue bonus fraction (RIBF) is the market price
before the rights issue divided by the theoretical ex-rights price. This can be
calculated as follows:

Now the RIBF is known, the 20X2 EPS can be restated at $0.1875 ($0.20 x
[$1.50 ÷ $1.60]).

Alternatively, candidates could calculate the profit in the financial statements for
the prior year and divide this by the weighted average of ordinary shares (as
can be seen in the suggested solution). However, this would be a more time-
consuming method.

Examiner’s Report – FR September/December 2023 34

 Financial Reporting
March/June 2023
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in Candidates’ performance, to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments ..................................................................... 2
Section A ..................................................................................... 3
Question 1 ............................................................................... 3
Question 2 ............................................................................... 4
Question 3 ............................................................................... 5
Question 4 ............................................................................... 6
Section B ..................................................................................... 7
Question 1 ............................................................................... 9
Question 2 ............................................................................. 10
Question 3 ............................................................................. 11
Question 4 ............................................................................. 12
Question 5 ............................................................................. 13
Section C ................................................................................... 14
Vroom Co .............................................................................. 15
Requirement (a) – 4 marks ............................................. 15
Requirement (b) – 3 marks ............................................. 16
Sphinx Co .............................................................................. 18
Requirement (a) – 4 marks ............................................. 19
Requirement (b) and (c) – 6 marks and 10 marks ...... 19

Examiner’s Report – FR March/June 2023 1

General comments

This examiner’s report should be used in conjunction with the published March/June
2023 sample exam which can be found on the ACCA Practice Platform.

In this report, the examining team provide constructive guidance on how to answer the
questions whilst sharing their observations from the marking process, highlighting the
strengths and weaknesses of candidates who attempted these questions. Future
candidates can use this examiner’s report as part of their exam preparation, attempting
question practice on the ACCA Practice Platform and reviewing the published answers
alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The
model of delivery for the CBE means that candidates do not all receive the same set of
questions.

This report includes the following:

• Section A: Objective test questions – we focus on four specific questions that
caused difficulty in these sittings of the exam.
• Section B: Objective test case questions – here we look at one specific question
that was challenging for candidates.
• Section C: Constructed response questions – here we provide detailed
commentary around two constructed response questions and identify some of the
main issues that affected candidates’ performance in this section, identifying
common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality where appropriate.

Examiner’s Report – FR March/June 2023 2

Section A

Here we look at FOUR Section A questions which proved to be challenging for candidates.

Question 1

For several years, Jaswinder Co has applied the cost model to its investment
properties. From 1 April 20X3, the fair value model was applied to investment
properties. As fair values were greater than carrying amounts across all investment
properties, a fair value gain of $30m was recognised in the financial statements.

There has been no change in the useful life of investment properties.

What effect will this change in accounting policy have on the financial
statements for the year ended 31 March 20X4?

A. Both operating profit margin and gearing will increase

B. Other Comprehensive Income will increase and gearing will decrease
C. Profit before tax will increase and gearing will decrease
D. Profit before tax will not change and gearing will increase

What does this test?

This question tests learning outcome C3(b) and IAS 40 Investment Property.

Candidates needed to understand that, under the fair value model, increases in the fair
value of investment properties are recognised in the statement of profit or loss. They also
needed to consider the impact on very commonly examined ratios – operating margin
and gearing.

What is the correct answer?

The correct answer is C.

Under the fair value model, a fair value increase in investment property increases both
non-current asset carrying amounts and the statement of profit or loss.

Operating margin would increase because of the fair value increase in investment
properties. This is due to the increase in operating profit (numerator) with no change in
revenue (denominator).

An increase in the statement of profit or loss increases profit and, ultimately, also
increases retained earnings. This means that the ‘Equity’ element of the gearing ratio
(denominator) increases whilst debt (numerator) remains the same; therefore, the
gearing ratio decreases.

Although not required, the journal entry (in $’000) for the above information is:

Examiner’s Report – FR March/June 2023 3

Dr Investment properties 30,000
Cr Operating expenses/Other income 30,000
being fair value increase on investment properties

Where did candidates go wrong?

Most candidates believed the fair value increases on investment property should be
included in other comprehensive income (B). A similar but smaller number of candidates
selected the correct answer with very few candidates selecting other options (A) (D).

Question 2

Kajak Co manufactures canoes and kayaks for the European market. It is,
consistently, a highly profitable company. This trend is expected to continue.

Most revenue is earned during the Northern Hemisphere’s warmer months of March
to August. All sales are on credit terms of 30 days.

Upon incorporation, Kajak Co chose between an annual reporting date of 31

January and 31 August; selecting the 31 January.

Which TWO of the following would be true if Kajak Co had, instead, chosen a
reporting date of 31 August?

A. The statement of financial position as at 31 August would show Kajak Co at its

most liquid
B. The time and costs of counting inventories should be minimised at or near 31
August compared to 31 January
C. Profits for the year ended 31 August would be higher than it would for 31
January
D. Net cash generated from operations would be higher for the year ended 31
August than it would for 31 January

What does this test?

This question tests learning outcome C1(c).

Candidates needed to understand the impact of a seasonal industry on the financial

statements (excluding the statement of changes in equity).

What is the correct answer?

The correct answers are A and B.

In a seasonal industry, it would be expected that the year-end trade receivables would be
relatively high whilst the inventories would be low. Trade payables would also be
relatively low compared to earlier in the year. This would lead to a strong, liquid position.

Examiner’s Report – FR March/June 2023 4

If we take each in turn, assuming a year-end date of 31 August:

• With a high number of sales transactions on credit (30-day term), it would be

expected that trade receivables remain high in the final months of the financial
year and into the first month of the next financial year (i.e., the 30 days following
the end of the busy period).

• With a high number of sales, it would be expected that inventories are low by the
year end (i.e., the end of the busy period)

• Manufacture would be lower coming towards the end of the busy period as you
would not expect an inflow of raw materials at year end – therefore, trade
payables would be expected to be low as would raw materials and work in
progress inventories.

If inventories are lower at the year end, it would be expected that the time and costs of
inventory counting are minimised due to reduced volume.

Where did candidates go wrong?

Most candidates chose (A), (C) and (D) as their options (two of the three) and so failed
to consider the impact of holding less inventories by the end of the busy period, at
year end.

Profits and cash generated for the year would be no different under a January or August
year end as both incorporate a full 12 months, therefore, both have a full busy period
within the year (C) (D). This holds true as we are told that profits are consistently high
and that this is expected to continue.

Question 3

Bubber Co acquired 60% of Randit Co on 1 April 20X6. On that date, the carrying
amount of Randit Co's net assets equalled the fair value, except for property.

Randit Co’s property with a carrying amount of $1,800,000 had a fair value of
$3,200,000 and a remaining useful life of 50 years. This is the only property within
the Bubber Group.

What is the impact of the fair value adjustment on the Bubber Group’s
consolidated retained earnings as at 31 March 20X7?

A. $16,800
B. $28,000
C. $38,400
D. $64,000

Examiner’s Report – FR March/June 2023 5

What does this test?

This question tests learning outcome D2(e) and both:

• IFRS 3 Business Combinations; and
• IFRS 10 Consolidated Financial Statements.

Candidates needed to recognise that fair value adjustment and not the total fair value
is being tested. Furthermore, candidates needed to recognise that non-controlling
interests take a share of the increased depreciation charge.

What is the correct answer?

The correct answer is A.

Fair value adjustment = $3,200,000 - $1,800,000 = $1,400,000

Total depreciation adjustment = $1,400,000 x 1/50 years = $28,000

Impact on Group retained earnings = 60% x $28,000 = $16,800

Where did candidates go wrong?

The most common error made was to ignore non-controlling interests, selecting the total
depreciation adjustment of $28,000 only (B).

Some candidates considered the total fair value instead of just the fair value increase in
property ($3,200,000 x 1/50 years x 60%) (C). A small number of candidates combined
these errors ($3,200,000 x 1/50 years) (D).

Question 4

On 1 January 20X6, Causeway Co acquired property through a seven-year lease.

The following information is relevant:
• On 1 January 20X6, an initial lease payment of $6m was made.
• Annual lease payments of $12m are due on 31 December each year.
• The rate of interest implicit in the lease is 5%.
• The present value of lease payments on 1 January 20X6 (before the initial
lease payment) was $75m.

What will be the finance costs in respect of this lease in Causeway Co's
statement of profit or loss for the year ended 31 December 20X7 (to the
nearest $)?

$ _____________

Examiner’s Report – FR March/June 2023 6

What does this test?

This question tests learning outcome B6(a) and IFRS 16 Leases.

Candidates needed to identify that finance costs were required for the second year of
the lease. They also needed to understand the impact of making payments in arrears.

What is the correct answer?

The correct answer is $3,022,500

Initial lease liability = $75m - $6m = $69m

Lease calculations:

Year Opening liability Finance costs ($) Payment in Closing liability

($) arrears ($) ($)
20X6 69,000,000 3,450,000 (12,000,000) 60,450,000
20X7 60,450,000 3,022,500 (12,000,000) 51,472,500

Although not required, the journal entries (in $’000) for the first year only are:

Dr Right-of-use asset – cost 75,000

Cr Lease liability 69,000
Cr Bank 6,000
being recognition of right-of-use asset and lease liability, including initial
lease payment

Dr Finance costs 3,450

Dr Lease liability 8,550
Cr Bank 12,000
being lease payment in arrears

At 31 December 20X6, the current and non-current elements of the lease liability would
have been:
• $51,472,500 (non-current); and
• $8,977,500 (current) ($60,450,000 - $51,472,400)

Where did candidates go wrong?

The most common error was for candidates to provide the first year’s finance costs
($3,450,000).

Section B

Section B tests candidates’ knowledge on several IFRS® Accounting Standards in more

depth than Section A, with three case questions worth 10 marks each. Each case
contains five, two-mark objective test questions.

We have selected a case that examined two IFRS® Accounting Standards:

Examiner’s Report – FR March/June 2023 7

• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
and
• IAS 33 Earnings per Share.

Candidates must read the case scenario and its requirements carefully.

Each objective test question scores either two marks or zero marks and so it is important
that candidates do not misread or miss information in the scenario.

Close reading of the requirements is also important to identify any specific instructions,
such as rounding.

Scenario

Gammon Co manufactures and sells a wide variety of furniture. Its year-end date is
31 October 20X4.

During the year, Gammon Co commenced restructuring and, as part of this, the
Garden Furniture division was classified as held for sale. The Garden Furniture
division was sold on 12 January 20X5. Prior to its classification as ‘held for sale’, the
division’s current assets were realised and the proceeds were used to settle its
liabilities.

Relevant information on the non-current assets of the Garden Furniture division at 31

October 20X4 is presented below:

$’000
Carrying amount 31,350
Value in use 20,010
Fair value 26,940
Selling costs 2,040

On 1 August 20X4, to partly-fund the restructuring:

(1) 18m equity (ordinary) shares were issued at market value.
(2) $60m of 8% convertible loan notes were issued at par. The effective interest
rate was also 8%.

Additional relevant information for Gammon Co:

(1) 60m equity (ordinary) shares were in issue on 1 November 20X3.
(2) On 1 March 20X4, a one-for-four issue of bonus shares was made.
(3) Profit for the year from continuing operations for the year ended 31 October
20X4 was $103.8m.
(4) The income tax rate is 20%.

Examiner’s Report – FR March/June 2023 8

Question 1

Assuming it has been sold in the reporting period, which of the following
would meet the definition of a discontinued operation in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations?
(1) A component of an entity that represents a separate major line of business
(2) An associate acquired exclusively with a view of resale

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

What does this test?

This question tests learning outcome B9(b).

Candidates needed to be aware of the definition of a discontinued operation.

What is the correct answer?

The correct answer is A.

IFRS 5 defines a discontinued operation, in part, as “A component of an entity that either

has been disposed of or is classified as held for sale and represents a separate major
line of business … ”.

Where did candidates go wrong?

Most Candidates selected both statements (C) with very few candidates selecting other
options (B) (D).

Equity accounting and not acquisition accounting is applied when accounting for an
associate; this means that it is not consolidated. Treatment as a discontinued operation
would not, generally, faithfully represent the economic reality (B) (C).

IFRS 5 does, however, state that a “subsidiary acquired exclusively with a view to resale
must be classified as a discontinued operation”.

The final part of the definition for a discontinued operation is a component of an entity
that “represents a separate … geographical area of operations”.

Examiner’s Report – FR March/June 2023 9

Question 2

Assuming it has been sold in the reporting period, which of the following
should be disclosed in accordance with IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations?
(1) The gain or loss recognised on the measurement or on the disposal of the assets
(2) The post-tax profit or loss of discontinued operations
(3) The related income tax expense on any taxable gains or profits

A. 1 only
B. 1 and 3
C. 2 and 3
D. 1, 2 and 3

What does this test?

This question tests learning outcome B9(a).

Candidates needed to recognise the basic disclosure requirements for discontinued

operations.

What is the correct answer?

The correct answer is D.

IFRS 5 requires that “An entity shall disclose:

(a) a single amount in the statement of comprehensive income comprising the total of:
(i) the post-tax profit or loss of discontinued operations and
(ii) the post-tax gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:
(i) the revenue, expenses and pre-tax profit or loss of discontinued operations;
(ii) the related income tax expense as required by paragraph 81(h) of IAS 12.
(iii) the gain or loss recognised on the measurement to fair value less costs to sell
or on the disposal of the assets or disposal group(s) constituting the
discontinued operation; and
(iv) the related income tax expense as required by paragraph 81(h) of IAS 12”.

Where did candidates go wrong?

Without the knowledge of required disclosure, most candidates selected “The gain or loss
recognised on the measurement or on the disposal of the assets” only (A).

Examiner’s Report – FR March/June 2023 10

Few candidates selected statements from other options (B) (C).

Question 3

At what amount should the Garden Furniture division be measured at in the

statement of financial position as at 31 October 20X4?

A. $20.01m
B. $24.90m
C. $26.94m
D. $31.35m

What does this test?

This question also tests learning outcome B9(b) but, unlike Question 1, it is numerical.

Candidates needed to recognise that the lower of carrying amount and fair value less
costs of disposal is required when measuring non-current assets held for sale.

What is the correct answer?

The correct answer is B.

IFRS 5 states that “An entity shall measure a non-current asset (or disposal group)
classified as held for sale at the lower of its carrying amount and fair value less costs to
sell”.

Fair value less costs to sell = $26.94m - $2.04m = $24.9m

Where did candidates go wrong?

Most candidates selected the correct answer, with only a small number of candidates
selecting other options.

Value in use (A) is not relevant. Value in use is a measurement basis used when
assessing impairment in accordance with IAS 36 Impairment of Assets and not IFRS 5.

Fair value (C), without subtracting costs to sell, is not relevant. Fair value without
consideration for selling costs is a measurement basis used, for example, when non-
current assets are measured in accordance with the revaluation model per IAS 16
Property, Plant and Equipment.

Carrying amount (D) is inappropriate as this is the higher of the disposal group’s carrying
amount and fair value less costs to sell.

Examiner’s Report – FR March/June 2023 11

Question 4

What is the weighted average number of shares to be applied when calculating

basic earnings per share for the year ended 31 October 20X4??

A. 64.5m
B. 74.5m
C. 75.0m
D. 79.5m

What does this test?

This question tests learning outcome B9(e).

Candidates needed to recognise that weighted average shares can be calculated using
one of two methods and, also, that an issue of bonus shares is included from the start of
the year in question.

What is the correct answer?

The correct answer is D.

In accordance with IAS 33 Earnings per Share, “For the purpose of calculating basic
earnings per share, the number of ordinary shares shall be the weighted average
number of ordinary shares outstanding during the period”. Further, per IAS 33, “The
weighted average number of ordinary shares outstanding during the period and for all
periods presented shall be adjusted for events, other than the conversion of
potential ordinary shares, that have changed the number of ordinary shares
outstanding without a corresponding change in resources.”

An issue of bonus shares in an event which changes the number of ordinary shares
without a corresponding change in resources (as they are issued at no cost to existing
shareholders).

IAS 33 continues that the “number of ordinary shares outstanding before the event is
adjusted for the proportionate change in the number of ordinary shares outstanding as
if the event had occurred at the beginning of the earliest period presented”.

This means that we consider the issue of bonus shares to have occurred on 1 November
20X3, being the beginning of the year ended 31 October 20X4.

Issue of bonus shares = 1/4 issue x 60m = 15m

Examiner’s Report – FR March/June 2023 12

Per IAS 33, the weighted average number of shares is calculated either methods:
(1) (75m x 9/12 months) + (93m x 3/12 months) = 79.5m; or
(2) (75m x 12/12 months) + (18m x 3/12 months) = 79.5m

Where did candidates go wrong?

Although most candidates answered correctly, an equal number of candidates selected

each of the incorrect answers.

If the issue of bonus shares is, incorrectly, accounted for from the date of issue (B):
(1) (60m x 4/12 months) + (75m x 5/12 months) + (93m x 3/12 months) = 74.5m; or
(2) (60m x 12/12 months) + (15m x 8/12 months) + (18m x 3/12 months) = 74.5m

A similar number of candidates selected the other incorrect answers.

If the issue of bonus shares is, incorrectly, ignored (A):

(1) (60m x 9/12 months) + (78m x 3/12 months) = 64.5m; or
(2) (60m x 12/12 months) + (18m x 3/12 months) = 64.5m

If the issue of bonus shares is treated correctly but the issue of shares for consideration
ignored (C):
75m x 12/12 months = 75m

Question 5

What are the earnings to be applied when calculating diluted earnings per
share from continuing operations for the year ended 31 October 20X4?

A. $105.00m
B. $104.76m
C. $107.76m
D. $108.60m

What does this test?

This question also tests learning outcome B9(e) but, unlike Question 4, this tests
earnings and, specifically, dilutive earnings instead of basic weighted average number
of shares.

Candidates needed to recognise the need to adjust earnings for the potentially dilutive,
after-tax effect of the finance costs in relation to the compound instrument.

What is the correct answer?

The correct answer is B.

Examiner’s Report – FR March/June 2023 13

Per IAS 33, “For the purpose of calculating diluted earnings per share, an entity shall
adjust profit or loss attributable to ordinary equity holders of the parent entity … for the
effects of all dilutive potential ordinary shares”.

Convertible loan notes were issued at par. At the issue date, the liability component was
measured at $60m and the effective rate of interest was 8%. As we are not required to
calculate dilutive potential ordinary shares, we do not require information on future
conversion.

The required adjustment to the $103.8m profit for the year ended 31 October 20X4, per
IAS 33, is to account for the “after-tax effect of any interest recognised in the period
related to dilutive potential ordinary shares”. Therefore, we must adjust for the after-tax
effect of interest on convertible loan notes. The after-tax effect will be 80% as income tax
is charged at 20%.

Earnings = $103.8m + (80% x [$60m x 8% x 3/12 months]) = $104.76m

Where did candidates go wrong?

Most candidates ignored the apportionment of the interest.

If the apportionment is ignored (B):

Earnings = $103.8m + (80% x $60m x 8%) = $107.64m

An equal number of candidates selected the correct answer and the remaining two
incorrect answers.

If the income tax expense is ignored (A):

Earnings = $103.8m + ($60m x 8% x 3/12 months) = $105m

If both the income tax expense and apportionment are ignored (D):
Earnings = $103.8m + ($60m x 8%) = $108.6m

Section C

We have selected two constructed response questions, Vroom Co and Sphinx Co, that
are available on the ACCA Practice Platform.

Vroom Co is a financial statements analysis and interpretation question for a group

entity, while Sphinx Co is a single-entity financial statements preparation question. When
using the following detailed commentary, it would be helpful to consult the questions and
answers available to you on the ACCA Practice Platform.

Examiner’s Report – FR March/June 2023 14

Vroom Co

Vroom Co required candidates to demonstrate and apply knowledge from the analysing
and interpreting financial statements area of the syllabus (Section C). The question had
both numerical information and additional information relating to a company that had
acquired a subsidiary during the year. Candidates were asked to complete several tasks
using this information.

The analysis and interpretation of a group is an important area of the syllabus and will
continue to be examined. As in previous examination sessions, most candidates failed to
score high marks on this question. The reason for this seemed to be poor exam technique:
• not addressing the requirement; or
• not adequately using the information in the scenario.

The focus for this detailed commentary, rather than simply recreating the suggested
solution, will highlight the importance of using the scenario when constructing an answer
to an interpretation question.

Requirement (a) – 4 marks

Calculate the goodwill that arose on the acquisition of Sleek Co .

Part (a) of this question specifically addresses syllabus area D2(g) “Describe and apply
the required accounting treatment for consolidated goodwill”.

Overall part (a) was well done but there were common mistakes noted by the marking
team and these are discussed below.

The cost of investment includes the immediate cash payment of $650m and the
contingent consideration. The contingent consideration for the goodwill calculation should
be included at its fair value at the acquisition date of $210m. Many candidates incorrectly
included the contingent consideration as either $300m or $160m and marks were not
awarded for these amounts.

Examiner’s Report – FR March/June 2023 15

Vroom Co measures non-controlling interests at fair value at the date of acquisition. This
is to be calculated at $136m ([100m shares x 20%] x $6.80). This was often calculated
incorrectly, with candidates using the full 100m shares or 80m shares in error (100m
shares x 80%). Some candidates also incorrectly calculated non-controlling interests by
applying the proportion of net assets method in error.

The net assets at acquisition were calculated as:

Net assets were generally calculated correctly; however, some candidates omitted the fair
value adjustment and others incorrectly adjusted the fair value for the post-acquisition
amortisation.

Requirement (b) – 3 marks

Using the preformatted table provided, calculate the following ratios for the years
ended 31 December 20X3 and 31 December 20X2 for the Vroom Group and Vroom
Co respectively:
• Gross profit margin;
• Operating profit margin; and
• Return on capital employed (ROCE).

Part (b) required candidates to calculate three non-complex profitability ratios. Gross profit
and operating profit margins were mostly correct. However, ROCE was sometimes
calculated incorrectly or omitted completely which indicated that some candidates were
not well prepared for the ratio calculations.

Candidates must ensure they are familiar with and have practiced all ratio calculations
ahead of the FR examination.

It was noted that some candidates continue to exclude workings for the ratio calculations.
In the absence of a working, an incorrect ratio will score zero. However, it may be a simple
arithmetical error that has been made and, if a working was provided, full marks could be
awarded.

For example, a candidate may have calculated gross profit margin for 20X3 as 16.0%.
This would score zero without a working. However, if a candidate included a working
either on the spreadsheet or using the software functionality (see below) then ‘own figure’
marks may be awarded.

In the example below the candidate has included revenue as $14,350 rather than
$13,450. The marking team would note this as a simple transposition error and would

Examiner’s Report – FR March/June 2023 16

award the mark accordingly. This highlights the importance of ensuring all workings are
visible.

Requirement (c) – 13 marks

Analyse the performance for the Vroom Group for the year ended 31 December
20X3 compared to the performance of Vroom Co for the year ended 31 December
20X2.

As in previous examination sessions, candidates who used the scenario to provide a

plausible rationale for changes in the ratios year on year generally performed well in
section (c).

Unfortunately, many candidates continue to make generic comments and provide a

‘textbook’ rationale that bears little or no resemblance to the scenario. This results in a
low-scoring, weak analysis. The marking team noted that an increasing number of
candidates are copying and pasting content from the scenario into their answer with no
attempt to draw upon it as an explanation for changes. This will not achieve any marks.

The marking team also noted that many candidates provided either an extremely brief
analysis or did not provide any analysis at all. It is not clear whether this was due to time
management or not being prepared to answer this style of question.

Vroom Co acquired its first subsidiary at the beginning of the financial year. Surprisingly,
many candidates failed to make the link that it was Vroom Co’s individual performance
from 20X2 that was now being compared to the group performance in 20X3. A good
answer would consider the fact that the new subsidiary would distort the ratios year on
year and that a better assessment could be made in the following year.

When comparing the performance for 20X3 and 20X2, it can be noted that all profitability
ratios have declined. Candidates would need to explore why this may be the case. There
were many clues in the scenario that could be considered. For example, Sleek Co made
operating losses in the year that reduced consolidated profit. Also, following the
acquisition of Sleek Co, capital employed increased and this had a further detrimental
impact on ROCE.

A plausible reason for the increase in capital employed could relate to the acquisition of
Sleek Co and the consolidation of any non-current liabilities that they may have.
Candidates are encouraged to review the suggested solution to gather ideas as to how
the scenario can be used to form sensible discussion.

Finally, when completing the analysis part of the question, please ensure that you always
provide a conclusion linked to the requirement. Ideally, you should give this a

Examiner’s Report – FR March/June 2023 17

‘Conclusion’ heading to make it clear to the marking team that a conclusion is being
reached.

Sphinx Co

Sphinx Co is a typical example of a published accounts preparation question – covering

syllabus areas D and B. This style of question will provide you with a trial balance (or an
extract from a trial balance) and additional information that will require adjustment in
accordance with relevant IFRS® Accounting Standards and accounting principles.

The requirements of the question will vary; however, you can expect to be asked to
prepare one or more of the following:
• statement of profit or loss;
• statement of profit or loss and other comprehensive income;
• schedule of adjusted profit;
• statement of financial position (SFP); and/or
• statement of changes in equity (SCE) or part of a statement of cash flow.

Sphinx Co contains three requirements.

Examiner’s Report – FR March/June 2023 18

Requirement (a) – 4 marks

Prepare a schedule of adjusted profit for the year ended 31 December 20X5.

The examining team advise you to set up your answer/layout for the requirements first.
For example, for Sphinx Co, set up some space for the adjustments to profit and include
the draft profit from the trial balance of $166,450 as the starting point for adjustment. We
would advise you to then put in an entry for ‘Adjusted profit’ as this amount will be
subsequently transferred to retained earnings within the SFP and SCE.

$’000
Draft profit 166,450
* Adjustment 1
* Adjustment 2 etc. Transfer to retained
Adjusted profit earnings in the SFP and
the SCE

Requirement (b) and (c) – 6 marks and 10 marks

Prepare Sphinx Co's statement of changes in equity for the year ended 31
December 20X5.

Prepare the statement of financial position of Sphinx Co as at 31 December 20X5.

Next, layout the SCE and SFP within the response area. A well-presented answer will
leave a small amount of space between each working/statement to clearly present the
response.

It is important to note that you do not have to deal with the adjustments in the order
presented in the question, although this is a logical approach. For example, in this
question, you may be most confident in adjusting for the interest on the loan notes in note
(3) and be less confident with the foreign currency issue in note (2). Dealing with the
adjustments that you are most familiar with first could be beneficial to you.

The following discussion will look at each of the adjustments in more detail and may help
when you work through the question for practice.

(1) Non-current assets

This note contains information relating to both land, buildings, plant, and equipment.

Plant and equipment

The depreciation of plant and equipment is the least time-consuming adjustment in
note (1) and you may choose to deal with this first. Most candidates calculated the
depreciation and adjusted part (a) and the SFP correctly.

The most common error noted by the examining team was adding the depreciation of
$31.32m ([$320m - $111.2m] x 15%) to adjusted profit in error. Depreciation is an
expense and, therefore, reduces profit. A small number of candidates incorrectly
calculated depreciation using the straight-line method but partial credit for ‘own figure’
amounts was awarded in the SFP.

Examiner’s Report – FR March/June 2023 19

 Land and buildings
When dealing with revaluations, it is important to determine the date of the revaluation
before calculating the revaluation increase/decrease. Some candidates incorrectly
adjusted the revaluation in Sphinx Co as if it took place at year end. The question is
clear – the revaluation took place on 1 January 20X5 and, therefore, the revaluation
increase should be calculated before depreciation is considered.

The revaluation gain can be calculated as follows:

Once calculated, the revaluation surplus of $140m is presented in the SCE. Many
candidates calculated the gain correctly but did not adjust the appropriate financial
statements.

Before dealing with remaining adjustments, it is a good idea to calculate the deferred
tax as the relevant tax rate will be applied to the revaluation increase calculated. The
deferred tax of $28m ($140m x 20%) should be accounted for as follows:

$’000
Dr Revaluation surplus 28,000
Cr Deferred tax liability 28,000

Many candidates correctly calculated deferred tax based on their own revaluation
increase but often did not deduct this from the revaluation surplus in the SCE.

Depreciation of buildings is a non-complex adjustment as the question states that,

following revaluation, the buildings have a remaining useful life of 20 years.

Depreciation of $8.5m ([$250m - $80m] x 1/20 years) will reduce profit in part (a) and
the carrying amount of land and buildings in the SFP.

The final adjustment required to complete note (1) relates to the annual reserve
transfer and can be calculated in two ways:

Examiner’s Report – FR March/June 2023 20

 (i) Difference between the old and new depreciation calculations:

$’000
Old depreciation 3,000
([$200m - $50m] x 1/50 years)
New depreciation 8,500
Amount to transfer 5,500

(ii) The balance on the revaluation surplus (relating to the buildings only) is
transferred, annually, over the remaining useful life:

$’000
Amount to transfer 5,500
($110m x 1/20 years)

The reserve transfer will reduce (debit) the balance on the revaluation surplus and
increase (credit) the balance on retained earnings.

Do not forget to complete the SCE to take these adjustments into account and
achieve marks:

(2) Foreign currency adjustment

This adjustment requires you to demonstrate your understanding of the monetary and
non-monetary balances that are included in the SFP at the reporting date. Inventories
are an example of a non-monetary item and, therefore, will not be re-stated at the
reporting date. However, the trade payable is an example of a monetary item that will
need to be re-translated at the closing rate as follows:

Examiner’s Report – FR March/June 2023 21

 The exchange gain should be accounted for as follows:

$’000
Dr Trade and other payables 2,000
Cr Exchange gain – part (a) 2,000

Many candidates correctly calculated the exchange gain but did not adjust parts (a)
and (c). It is important to think about the impact that the calculation will have on the
financial statements to earn full marks.

The marking team noted that some candidates incorrectly calculated the using the
wrong rates or by multiplying the dinars by the exchange rate. In this instance, the
calculation marks were lost but credit was still awarded for the correct adjustment in
the financial statements, based on ‘own figure’ rule.

(3) Loan note interest accrual

The loan note interest for the last six months of the financial year is not due to be paid
until 1.1.X6. Therefore, the interest should be accrued at the reporting date.

When performing calculations in the exam, it is recommended that you make use of
the spreadsheet functionality as follows:

$’000
Dr Loan interest – part (a) 1,050
Cr Trade and other payables 1,050

The marking team noted that this adjustment was dealt with well by many candidates;
however, some ignored the adjustment altogether. Others did not time-apportion the
interest and accrued for a full 12 months. In this instance, marks were awarded in the
SFP based on the ‘own figure’ rule.

Examiner’s Report – FR March/June 2023 22

(4) Income tax

The opening balance on current tax payable in the trial balance is an example of an
under-provision. The examining team recommend that you clear the balance on the
current tax payable first. To do this you should credit the current tax payable with
$2.5m to reset it to zero and the debit would go to profit or loss. A debit entry will
reduce profit and, therefore, the $2.5m should be deducted in part (a).

The provision for the year-end estimate of $30m should be deducted as an expense
from part (a) and recognised as a current liability in the SFP.

Common errors included adding the $2.5m into part (a) or leaving it on the SFP within
current liabilities. The marks in the SFP for current tax were not awarded when the
$2.5m was not removed; the current liability should always be the year end estimate
only.

(5) Share issue

The share issue has already been correctly accounted for and is included in both the
share capital and share premium balances in the trial balance.

In the SCE, the share issue and the opening balances will need to be recorded. To do
this it is advised that you work out how many shares were in issue before the 1
September 20X5 and then you can determine the number of shares that were issued
via the rights issue. Finally, calculate the monetary amounts that were taken to share
capital and share premium.

An example of the working is:

Once the share issue has been determined, you will need to update the SCE
accordingly. For example:

Examiner’s Report – FR March/June 2023 23

The marking team noted that the most common mistake in this adjustment was not
recognising the trial balance amounts as the closing share capital and share premium.

Many candidates calculated the share issue by using the closing balances in error. This
further highlights the need to read the information in each note, carefully.

In this question, you were required to prepare both a SCE and SFP. The mark for the
equity section in the SFP was only awarded when the balances agreed to the SOCIE.

For example, the closing balances highlighted in yellow below, should agree to the totals
recorded in the equity section of the SFP:

Finally, as a general comment, you must ensure that all trial balance amounts are
included either in the relevant working or within the financial statements themselves. It is
often noted by the marking team that some amounts are not transferred from the trial
balance into the answer and, therefore, less complex marks are lost.

Examiner’s Report – FR March/June 2023 24

Financial
Reporting
September/
December 2022
Examiner’s report
The examining team share their observations
from the marking process to highlight strengths
and weaknesses in candidates’ performance, and
to offer constructive advice for those sitting the
exam in the future.

Contents
General comments ....................................................... 2
Section A ...................................................................... 3
Question 1 ................................................................ 3
Question 2 ................................................................ 4
Question 3 ................................................................ 6
Question 4 ................................................................ 7
Section B ...................................................................... 9
Question 1 .............................................................. 11
Question 2 .............................................................. 12
Question 3 .............................................................. 13
Question 4 .............................................................. 14
Question 5 .............................................................. 15
Section C.................................................................... 17
Treats Co ................................................................ 17
Requirement (a) – 5 marks ................................. 18
Requirement (b) – 15 marks ............................... 19
Perd Co .................................................................. 21
Requirement (a) – 15 marks ............................... 22
Requirement (b) – 5 marks ................................. 25
General comments
This examiner’s report should be used in conjunction with the published September/
December 2022 sample exam which can be found on the ACCA Practice Platform.

In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process, highlighting
the strengths and weaknesses of candidates who attempted these questions. Future
candidates can use this examiner’s report as part of their exam preparation,
attempting question practice on the ACCA Practice Platform and reviewing the
published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The
model of delivery for the CBE means that candidates do not all receive the same set
of questions.

This report includes the following:

• Section A: Objective test questions – we focus on four specific questions that
caused difficulty in these sittings of the exam.

• Section B: Objective test case questions – here we look at one specific case
that was challenging for candidates.

• Section C: Constructed response questions – here we provide detailed

commentary around two constructed response questions and identify some of
the main issues that affected candidates’ performance in this section,
identifying common knowledge gaps and offering guidance on where exam
technique could be improved, including in the use of the CBE functionality
where appropriate.
Section A
Here we look at FOUR Section A questions which proved to be challenging for
candidates.

Question 1

Saguaro Co acquired 25% of the equity shares in Cactus Co for $400,000 on 1 March
20X1. In July 20X1, Cactus Co paid a dividend of $36,000. Cactus Co's profit for the
year ended 31 December 20X1 was $115,200. All profits accrued evenly over the
year.

What is the carrying amount of the investment in the associate in Saguaro Co's
consolidated statement of financial position as at 31 December 20X1?

$ ____________

What does this test?

This question tests learning outcome D2(a).

Candidates needed to recognise that the time apportioning of profit was relevant but
that the dividend is not time apportioned, being that this is a transaction from the
associate’s statement of financial position (as at a point in time) and not the
statement of profit or loss.

The group share of dividend income received after the purchase of shares is based
on the full amount of $36,000.

What is the correct answer?

The correct answer was $415,000 and candidates were required to simply type
415000.

The investment in the associate was made two months into the financial year and so
only 10 months’ profit is accrued during the current financial year (for consolidation
purposes).

The initial cost of investment of $400,000 is increased by the group’s share of profit
of $24,000 (25% x 10/12 months x $115,200) and decreased by the group’s share of
the dividend of $9,000 (25% x $36,000).

Although not required, selected journal entries (in $’000) for the above information
are:
Dr Investment in associate 24
Cr Share of profit of associate 24
being share of profit of associate

Dr Investment income 9
Cr Investment in associate 9
being elimination of dividend from associate

Where did candidates go wrong?

The most common error was that candidates did not apportion the profit. A similar
number of candidates did apportion the profit correctly but removed the entire
dividend instead of just the group share.

Question 2

Theo Co acquired new plant on 1 January 20X3 for $6m. This was partly funded by
the receipt of a $2m government grant on the same date. The plant has a useful life
of 10 years. Theo Co is unsure whether to deduct the grant to calculate the carrying
amount of the plant or to use the deferred income method.

Based on the different ways to account for government grants, which TWO of
the following options can be recognised in the statement of financial position
for the year ended 31 December 20X3?

A. Non-current liability of $1.8m

B. Non-current liability of $1.6m
C. Non-current asset of $4m
D. Non-current asset of $3.6m

What does this test?

This question tests learning outcome B11(a).

Candidates needed to calculate both the non-current asset (plant, at carrying

amount) and the non-current liability (deferred income) for each method of
recognising a government grant.

Calculating the non-current asset included depreciating for 12 months to 31

December 20X3.
What is the correct answer?
The correct answers were B (a non-current liability of $1.6m) and D (a non-current
asset of $3.6m).

Method 1: Amend the non-current asset

• Liability = nil; no deferred income is created (not an option above)
• Undepreciated non-current asset = $6m - $2m = $4m (C)
• Non-current asset = 9/10 years x ($6m - $2m) = $3.6m (D)

Although not required, journal entries (in $’000) for the above information are:

Dr Plant – cost 6,000

Cr Bank/ Trade payables 6,000
being purchase of plant

Dr Bank 2,000
Cr Plant – cost 2,000
being receipt of grant, netted against the cost of the related non-current asset

Dr Depreciation charge 400

Cr Plant – accumulated depreciation 400
being depreciation of plant (1/10 years x $4m)

Method 2: Deferred income

• Total liability = 9/10 years x £2m = $1.8m (A)
• Non-current liability = 8/10 years x $2m = $1.6m (B) (£0.2m is the current
liability)
• Non-current asset = 9/10 years x $6m = $5.4m (not an option above)

Although not required, journal entries (in $’000) for the above information are:

Dr Plant – cost 6,000

Cr Bank/ Trade payables 6,000
being purchase of plant

Dr Bank 2,000
Cr Deferred income 2,000
being receipt of grant, creating deferred income

Dr Depreciation charge 600

Cr Plant – accumulated depreciation 600
being depreciation of plant (1/10 years x $6m)

Dr Deferred income 200

Cr Depreciation charge 200
being release of deferred income against depreciation (1/10 years x $2m)

Alternatively, the release of deferred income could be recognised in other income.

Where did candidates go wrong?
Most candidates chose A in their selection – wrongly selecting the total liability
instead of the non-current element only.

The next most common error was to select C and leave the asset undepreciated at
$4m.

Question 3

Barlow Co owns a property which it rents to third parties and does not occupy itself.
It acquired the property on 1 January 20X5 for $10m. At 31 December 20X5 the fair
value is estimated to be $10.6m, with expected selling costs of $0.2m.

At 1 January 20X5, the property had an estimated useful life of 40 years. Barlow Co
uses the fair value model to measure the carrying amount of the property.

In accordance with IAS 40 Investment Property, identify the correct gain to be

recognised in Barlow Co's financial statements at 31 December 20X5 and where
that gain should be presented in the financial statements.

What does this test?

This question tests learning outcome B1(g).

Candidates needed to recognise that IAS 40 applies the fair value method and that,
under this method, fair value gains/ losses are presented in the statement of profit or
loss each year. The fair value of an asset is not the same as its fair value less costs
to sell (IAS 36) and an investment property is not an asset classified as fair value
through other comprehensive income (IFRS 9).
What is the correct answer?
The correct answer was a $600,000 gain, presented in the statement of profit or
loss ($10.6m fair value at year end considered against the initial capitalised amount
of $10m).

Although not required, the journal entries (in $’000) for the above information are:

Dr Investment property 10,000

Cr Bank/ Trade payables 10,000
being recognition of investment property at 1 January 20X5

Dr Investment property 600

Cr Other income 600
being recognition of fair value gain on investment property at 31 December 20X5

Alternatively, the credit to the statement of profit or loss could be investment income
or could net against administrative or operating expenses.

Where did candidates go wrong?

The most common error was to incorrectly depreciate the asset under IAS 16 as
opposed to no depreciation under IAS 40 when using the fair value model.

A less common error was to incorrectly calculate a gain by comparing fair value less
costs to sell to the initial capitalised amount; the treatment under IAS 36 and not IAS
40 – sometimes compounded with the error above.

Few candidates presented the gain in other comprehensive income (IFRS 9).

Question 4

A company commenced work on the construction of a significant asset for one of its
customers on 1 May 20X5. Construction is scheduled to run for two years and the
total contract price is $5m.

At 31 December 20X5, the following details are obtained in relation to the contract:
• The percentage complete was 50%.
• Amounts invoiced to the customer totaled $1.7m.
• Amounts received from the customer totaled $0.8m.

What is the total amount that should be included in the statement of financial
position as at 31 December 20X5 as a contract asset or contract liability?

$ ____________
What does this test?
This question tests learning outcome B10(f).

Candidates needed to recognise that the balance in a contract account (i.e., a

contract asset or a contract liability) is not impacted by overall profitability or by
customer receipts. The relevant information, per IFRS 15, includes the amounts
invoiced to the customer and the revenue earned to date.

What is the correct answer?

The correct answer was a contract asset of $800,000 and candidates would have
been required to simply type 800000.

There is a contract asset as the revenue earned of $2.5m (50% x $5m) exceeds the
amounts invoiced of $1.7m. This gives, effectively, accrued income (a type of
contract asset) of $0.8m ($2.5m - $1.7m).

Although not required, the journal entries (in $’000) for the above information are:

Dr Contract asset 2,500

Cr Revenue 2,500
being recognition of revenue based on percentage completion

Dr Trade receivables 1,700

Cr Contract asset 1,700
being amounts invoiced to customer

Dr Bank 800
Cr Trade receivables 800
being amounts received from customer

Where did candidates go wrong?

The most common error was for candidates to simply provide the amounts invoiced
of $1.7m with the next most common answer being the trade receivables balance of
$0.9m ($1.7m - $0.8m).

Other errors included stating the revenue earned to date of $2.5m.

Section B
Section B tests candidates’ knowledge on several IFRS Standards in more depth
than Section A, with three case questions worth 10 marks each. Each case contains
five, two-mark objective test questions.

We have selected one of the cases that examined three IFRS Accounting Standards:
• IAS 16 Property, Plant and Equipment;

• IAS 21 The Effects of Changes in Foreign Exchange Rates; and

• IAS 36 Impairment of Assets.

Candidates must read the case scenario and its requirements carefully.

Each objective test question scores either two marks or zero marks and so it is
important that candidates do not misread or miss information in the scenario.

Close reading of the requirements is also important to identify any specific

instructions, such as rounding.
Scenario

NovAir Co is an airline and prepares its financial statements to 31 December each

year.

NovAir Co purchased a new aircraft for $15m on 1 January 20X5 with the following
details:

Aircraft components Cost Residual value Useful life

($'000) ($'000) (years)
Airframe 8,000 500 20
Engines 5,000 600 8
Engine testing costs 600 - 8
Interior of aircraft 1,400 - 5
Total 15,000

NovAir Co depreciates its assets on a straight-line basis.

To fund the purchase of the aircraft, NovAir Co borrowed 10 million euros on 1

January 20X5. The interest on the loan is insignificant and should be ignored. The
loan was due to be repaid in four annual equal instalments with the first repayment
being made on 1 January 20X6.

Information relating to the exchange rate is as follows:

1 January 20X5 1 euro = $1.00

31 December 20X5 and 1 January 20X6 1 euro = $1.25
Average rate for the year ended 31 December 20X5 1 euro = $1.20
31 December 20X6 and 1 January 20X7 1 euro = $1.10
31 December 20X7 1 euro = $1.00

NovAir Co's functional currency is the $.

On 31 December 20X5, a significant engine malfunction was discovered. As a result of

this, the aircraft was grounded. NovAir Co cannot reliably estimate a recoverable
amount for the engines. The aircraft, including the engines, can be treated as a cash-
generating unit.
Question 1

In accordance with IAS 16 Property, Plant and Equipment (PPE), which TWO of
the following statements are correct?

A. The depreciation charge should be recognised in profit or loss unless it is

included in the carrying amount of another asset
B. When fair value is used to measure PPE then all other assets must be measured
using the same principle
C. The costs of safety inspections that are legally required to operate PPE can
never be capitalised as the cost of an asset
D. At the very least, the residual value and useful life of an asset should be
reviewed at the end of each financial year

What does this test?

This question tests learning outcome B1(e).

Candidates needed to recognise some of the more complex and specific rules of IAS
16 to answer this knowledge-based question.

What is the correct answer?

The correct answers are A and D.

Depreciation is usually recognised in the statement of profit or loss but, in

circumstances such as an item of plant being used in the construction of an entity’s
held-for-use property, the depreciation charge for the plant becomes a direct and
capitalised cost of the property. A is, therefore correct.

The residual value and useful life of non-current assets should be reviewed, at the
very least, at year end. D is, therefore, correct.

Where did candidates go wrong?

If the revaluation model is applied to a classification of property, plant or equipment,
then it must be applied to that entire classification. It does not need to be applied
across the entirety of property, plant and equipment nor does it need to be applied
across all types of assets. B is, therefore, incorrect. Most candidates selected this
option.

Any safety measures, equipment or inspections must be capitalised as a direct cost,

even though they are unlikely to enhance the economic benefit generated by an
asset. C is, therefore, incorrect.

Examiner’s report – FR September/December 2022 11

Question 2

In accordance with IAS 16 Property, Plant and Equipment, what is the total
aircraft depreciation to be charged to profit or loss for the year ended 31
December 20X5 (to the nearest $'000)?

$ ____________ ,000

What does this test?

This question tests learning outcome B1(e).

Candidates needed to recognise that each element was a significant component of

the asset and must be depreciated separately. Residual value also needed to be
accounted for when calculating depreciation for the airframe and engines
components.

What is the correct answer?

The correct answer was $1,280,000 and candidates would have been required to
simply type 1280.

Aircraft Cost Residual Depreciable Useful Depreciation

components ($’000) value amount life charge
($’000) ($’000) ($’000) ($’000)
Airframe 8,000 500 7,500 20 375
Engines 5,000 600 4,400 8 550
Interior of aircraft 600 - 600 8 75
Engine tests 1,400 - 1,400 5 280
Total 15,000 1,280

There is no rounding of decimal points required in any of the depreciation charges;

that is, all depreciation charges are exactly rounded to $’000.

Where did candidates go wrong?

Although generally well performed, the most common error made by candidates was
to ignore the interior of aircraft component, assuming this not to be part of the asset.
Also, a similar number of candidates ignored residual value and incorrectly
calculated the depreciable amount for the airframe and engines components.

A less common error was to ignore the engine tests component.

Another error made by some candidates was not rounding to $’000 as instructed in
the question, incorrectly entering 1280000.

Examiner’s report – FR September/December 2022 12

Question 3

In accordance with IAS 21 The Effect of Changes in Foreign Exchange Rates,

what is the total balance of the loan liability at 31 December 20X5?

A. $10m
B. $12m
C. $8m
D. $12.5m

What does this test?

This question tests learning outcome B12(b).

Candidates needed to recognise that a loan liability is a monetary liability and,

therefore, must be retranslated at each year-end date. The correct exchange rate
was also required to be identified.

What is the correct answer?

The correct answer was D.

Using the year-end exchange rate, we calculate the liability to be $12.5m (10m euros
x $1.25).

Although not required, the journal entries (in $’000) for the above information are:

Dr Bank 10,000
Cr Loan liability 10,000
being recognition of loan on 1 January 20X5 at spot rate of 1 euro = $1

Dr Exchange loss 2,500

Cr Loan liability 2,500
being exchange loss on loan payable, recognised in the statement of profit or loss
and based on a spot rate at 31 December 20X5 of 1 euro = $1.25

Where did candidates go wrong?

The most common errors were to incorrectly divide by $1.25 and not multiply (C) or
to incorrectly use the average rate for the year of 1 euro = $1.20 (B).

Many candidates failed to restate the year-end balance at all (A).

Examiner’s report – FR September/December 2022 13

Question 4

At 31 December 20X6, the balance on the liability for the loan is 7.5 million euros. At
31 December 20X7, the balance is 5 million euros.

In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates,

which TWO of the following correctly reflect how the foreign currency
transaction should be reflected in the financial statements of NovAir Co for the
year ended 31 December 20X7?

A. The liability at 31 December 20X7 should be stated at $5m

B. A foreign currency exchange gain of $500,000 should be reported
C. The liability at 31 December 20X7 should be stated at $4.545m
D. A foreign currency exchange loss of $455,000 should be reported

What does this test?

This question also tests learning outcome B12(b), however, it addresses the impact
of changes in foreign exchange rates on both the statement of financial position and
the statement of profit or loss.

What is the correct answer?

The correct answers are A and B.

At 31 December 20X7, the loan liability is $5m as the spot rate at that date is 1 euro
= $1 (5m euros x $1).

As the equivalent loan liability at 31 December 20X6 was $5.5m (5m euros x $1.1),
there has been an exchange difference of $0.5m. This represents a gain as there is
a decrease in the fair value of the loan liability.

Although not required, the journal entry (in $’000) for the above information is:

Dr Loan liability 500

Cr Exchange gain 500
being exchange gain on loan payable, recognised in the statement of profit or loss
and based on a spot rate at 31 December 20X7 of 1 euro = $1

Where did candidates go wrong?

A candidate could incorrectly calculate a loan liability of $4.545m by dividing (not
multiplying) by the opening (not closing) spot rate (C). A candidate could,
subsequently, incorrectly calculate a loss of $0.455m (D) – the most common error.

Examiner’s report – FR September/December 2022 14

Question 5

In accordance with IAS 36 Impairment of Assets, which of the following

statements is correct?

A. NovAir Co must not recognise an impairment loss for the engines since the
recoverable amount cannot be estimated reliably
B. NovAir Co must determine the recoverable amount of the engines using the
depreciated replacement cost method
C. NovAir Co must write the carrying amount of the engines down to the residual
value since the recoverable amount cannot be estimated reliably
D. NovAir Co must determine the recoverable amount of the aircraft and allocate
a proportion of any impairment losses to the engines based on their carrying
amount

What does this test?

This question tests learning outcome B3(d).

Candidates needed to recognise the specific conditions of IAS 36 on recoverable

amount and that, if it is not possible to estimate the recoverable amount of the
individual asset, an entity shall determine the recoverable amount of the cash-
generating unit to which the asset belongs (the asset’s cash-generating unit). In this
case, the aircraft itself.

What is the correct answer?

The correct answer is D.

As recoverable amount cannot be estimated reliably for all parts of the aircraft, the
aircraft must be considered overall, as a cash-generating unit. Impairment is not
simply ignored for one element (A) and, instead, impairment is apportioned based on
the carrying amounts of each asset within the aircraft.

Although depreciated replacement cost is a method of valuation, it is not that it must

be used. Furthermore, as we are told that the aircraft is a cash-generating unit, we
wouldn’t be calculating the recoverable amount of this component individually for
impairment purposes – although it would be relevant when apportioning an
impairment loss (B).

The residual value is not necessarily a reliable estimate of recoverable amount and
so it cannot be mandatory to use this for valuation (C).

Examiner’s report – FR September/December 2022 15

Where did candidates go wrong?
The most common error was that candidates thought residual value was mandatory
in the absence of recoverable amount (C).

Examiner’s report – FR September/December 2022 16

Section C
We have selected two constructed response questions, Treats Co and Perd Co, that
are available on the ACCA Practice Platform.

Treats Co is a financial statements analysis and interpretation question for a single

entity, while Perd Co is a consolidated financial statements preparation question.
When using the following detailed commentary, it would be helpful to consult the
questions and answers available to you on the ACCA Practice Platform.

Treats Co

Treats Co required candidates to demonstrate and apply their knowledge from the
analysis and interpretation of financial statements (Section C of the FR Syllabus). The
question had both numerical information and additional information relating to a single
entity. Candidates were asked to calculate ratios for this entity and to analyse its
performance and position compared to sector averages.

The analysis of a single entity is an important area of the syllabus and will continue to
be examined in the interpretation question. There are many ways that candidates
may be required to compare the performance of a single entity, typically this could
include comparisons:
• year-on-year;

• to a competitor; or

• to sector averages.

As in previous examination sessions, candidates often failed to score highly on this

question. The main reason for this was often due to the analysis provided being of
poor quality and not addressing the information in the scenario to provide a plausible
discussion.

Examiner’s report – FR September/December 2022 17

The focus for this detailed commentary will be on how candidates can approach the
question in a logical manner to earn marks in the exam. It is not intended that all
candidates will recreate the model answer but, instead, will be able to draw upon the
information provided in the question to provide a valid analysis.

Requirement (a) – 5 marks

Calculate for Treats Co the equivalent ratios to those provided for the
confectionery manufacturing sector.

This part of the question required candidates to calculate eight ratios for Treats Co
and was generally well answered. Many candidates were able to score full marks.
Typical errors in the calculations provided by some candidates related to both return
on capital employed and net asset turnover.

The examining team continue to remind candidates to show both the formula for the
relevant ratio and all workings so that markers can allocate marks accordingly.

For example, where candidates had the incorrect denominator for return on capital
employed (ROCE), if workings were shown, when this error followed through to the
denominator for net asset turnover, markers were able to award the marks for net
asset turnover in full. If no workings were shown for either ratio, candidates would
lose the mark not only for ROCE but also for asset turnover.

Not providing workings continues to be an issue reported by the FR

examinations team.

Another common mistake (that also relates to other interpretation questions) is the
calculation of gearing. The question specifically stated, 'debt to equity”. Many
candidates calculated gearing as “debt, to debt + equity”. Even though this is a valid
way to calculate gearing, it was incorrect within the requirement of this question and,
therefore, was not awarded any marks.

Another error noted by the FR examinations team relating to gearing was where
some candidates included the overdraft as part of debt. Note (3) in the additional
information told candidates that the overdraft did not form part of long-term financing
and, therefore, the overdraft should not have been included in the calculation of
gearing.

Examiner’s report – FR September/December 2022 18

Requirement (b) – 15 marks
Analyse the performance and financial position of Treats Co in comparison to
its sector averages.

The FR examinations team noted that many candidates did not allocate sufficient
time to this part of the question with some only providing short sentences or bullet
points. Others omitted this part of the answer entirely.

Time management is crucial in all ACCA examinations. In a three-hour exam there

are 1.8 minutes per mark available (180 minutes / 100 marks).It may be beneficial to
allocate at least twenty-seven minutes to this part of the question. This time should
mostly be used to provide plausible explanations for the differences in performance
and position compared to the sector averages using information in the scenario.

Candidates are advised to structure their answer in a manner that addresses the
requirement. This question requires analysis of both the performance and position of
Treats Co compared to the sector and so it would be advised to have a ‘performance’
heading and a ‘financial position’ heading.

Under ‘performance’, candidates would typically discuss the profitability ratios (e.g.,
ROCE, net asset turnover and margins) and under position the efficiency and
solvency ratios (e.g., current ratio, working capital ratios and gearing). By using
headings to structure discussion, candidates should be encouraged to explore the
possible reasons for the ratio results.

As discussed in previous FR examining team reports, many candidates continue to

answer these questions with explanations that are rote learnt from a textbook and
bear no resemblance to the question scenario. This results in weak, largely generic
analysis.

For example, a typical comment on the reason that the current ratio for Treats Co is
lower was due to either “smaller assets or bigger liabilities” and no rationale was
provided as to why this may be the case, such as the large overdraft held by Treats
Co.

The FR examining team also noted that there are several candidates that are simply
copying out information from the question. This would appear to be because of
reading previous examiner reports where candidates have been advised to use the
scenario, however, to score marks this information must be used in the context of the
scenario and ratio results rather than just copy and paste.

Weaker candidates sometimes misunderstood the scenario and provided

commentary which was consistent with a year-on-year analysis rather than providing

Examiner’s report – FR September/December 2022 19

an explanation between the potential differences between Treats Co and the rest of
the sector.

A good answer covered the range of ratios and attempted to provide possible,
plausible reasons for the differences between Treats Co and the rest of the sector.
For example, it was pleasing to see that some candidates were able to recognise that
most of Treats Co’s profitability ratios were worse than the rest of the sector except
for asset turnover. Many candidates were able to use note (4) to identify that Treats
Co’s products were sold both via its own stores and through supermarket chains and,
therefore, margins were likely to be lower.

Very few candidates picked up on the information in note (1) where a low carrying
amount on property, plant and equipment, when compared to its original cost, likely
meant that the assets were old and may need replacing soon. This information meant
that asset turnover is likely to be artificially high and will fall in the future if/ when
these assets are replaced. For those candidates that did recognise this, some were
able to explore this further when analysing gearing.

Overall, the standard of the narrative on this question was disappointing, with many
candidates missing the obvious clues in the question scenario. As discussed above,
answers were generally too brief or too generic and lacked focus.

To produce an answer that scores well, candidates should consider the following:
• Use the scenario – when discussing the differences in the ratios, this should
be supported with information from the scenario.

• One mark will be awarded for a well-explained point.

• Talk about all areas in the scenario – for Treats Co this means coverage of
both performance and financial position.

• Always consider why results are different and do not simply state that a result
has increased/ decreased.

• Always provide a conclusion that is relevant to the requirement – for Treats

Co, following your analysis, comment on whether Treats Co is performing
better or worse that the sector average.

If a candidate follows these rules, they will be able to score well in this question.
Sadly, too many candidates have only learned ratio definitions and repeat these in
the exam.

Examiner’s report – FR September/December 2022 20

Perd Co

Perd Co is a consolidated financial statements question from syllabus area D2. This
type of question may ask you to prepare a consolidated statement of profit or loss and
other comprehensive income or a consolidated statement of financial position for a
simple group (parent and subsidiary) and may include an associate company.

Overall, this question is worth 20 marks and you should prepare to spend
approximately 36 minutes of your exam time to answer the entire question (180
minutes/100 marks = 1.8 minutes per mark x 20 marks).

It is suggested that you break this down further into the component requirements of
the question. For example, Requirement (a) is worth 15 marks overall and, therefore,
you should allocate 27 minutes of your exam time to this. Part (b) is worth five marks
and so 9 minutes should be spent here. Please note, you are not expected to answer
the requirements in chronological order so if you wish to complete part (b) first that is
acceptable. However, this may not be possible for some questions, depending on
the nature of the requirements.

In this type of question, it is vital that you present your workings clearly for the
examining team. Workings can either be shown separately or can be included within
a cell in the spreadsheet. If you calculate an amount on the calculator tool
incorrectly and do not show the working, the marking team will not be able to
award any ‘own figure’ marks.

Examiner’s report – FR September/December 2022 21

Requirement (a) – 15 marks
Prepare the consolidated statement of profit or loss and other comprehensive
income for the Perd group for the year ended 31 March 20X8.

When asked to prepare a consolidated statement of profit or loss and other

comprehensive income (SPLOCI) the FR examining team recommend that you set up
the proforma for the consolidation immediately. At the foot of the consolidation, it is
advised that you also include the split between the profit and the total comprehensive
income (TCI).

The FR examining team note that the most common omission in a SPLOCI is this
split of profit and this can often result in a significant number of marks being lost.

For example:
$’000
Profit for the period

Other comprehensive income

Revaluation gains etc.
Total comprehensive income (TCI)

Profit for the period attributable to:

Shareholders of parent company
Non-controlling interest (NCI)

TCI for the period attributable to:

Shareholders of parent company
NCI

In Perd Co, many candidates did not attempt to split the profit or TCI between the
parent shareholders and NCI. By not completing the split, candidates immediately lost
marks. If you spend a small amount of time laying out the split in the early part of your
answer, this will act as a reminder to attempt to complete this later and, in doing, so
help score valuable marks.

For candidates that did attempt the split, many failed to split both the profit for the
year and the TCI. Some candidates incorrectly took 80%:20% of the profit for the
year and the total comprehensive income. As a simpler approach, NCI must be
calculated and the parent share is always a balancing amount.

This is an area that candidates must revise and practise.

Candidates are advised to get some of the less complex marks from the question
once the proforma consolidation has been laid out. These marks are earned in the
initial consolidation process.

Examiner’s report – FR September/December 2022 22

You should add together all income and expenses and other comprehensive income
for the parent and subsidiary. Be careful though, it is extremely important to establish
how long you have had control over the subsidiary company. If control of the
subsidiary was acquired mid-way through the period, it will be necessary to time
apportion the subsidiary’s income and expenses only. This is vital in a
consolidated profit or loss question and is an area that many candidates often forget.
For Perd Co, however, the subsidiary was acquired two years ago and so the results
of Sebastian Co did not need to be time apportioned.

The FR examining team noted that, despite commentary in previous examiner

reports, several candidates continue to use proportional consolidation and applied
80% to Sebastian Co’s income, expenses and other comprehensive income. This is
fundamentally incorrect and relates to the basic consolidation marks. Do not
proportionately consolidate the results of the subsidiary based on ownership.

When the initial consolidation process is complete per the guidance above,
candidates are advised to consider the basic consolidation adjustments that may be
required. In this question there is:
• A deferred consideration – note (1).

• An impairment charge – note (2).

• A calculation of fair value depreciation – note (3)

• An intra-group sale and purchase with adjustment for unrealised profit on the
goods that remain in inventory at the reporting date – note (4).

• Other comprehensive income – note (5).

• An internal dividend that must be eliminated – note (6).

These are standard consolidation adjustments for the FR exam and, overall, were
well attempted. However, some common errors or omissions were noted by the
examining team:
• The unwinding of the discount from note (1) was generally dealt with well.
This transaction was relatively straightforward as the discounting of the
deferred consideration had already been performed and the prior year liability
at its (then) present value was given. Candidates needed to calculate 6% of
this opening liability and include it as a finance cost. A small number of
candidates attempted to discount the $7.547m incorrectly before unwinding.
This wasted time and resulted in those candidates not achieving full marks for
this part of the question.

• The impairments in note (2) relate to both the current and previous year. In
the SPLOCI, candidates needed to include the $300,000 expense for the

Examiner’s report – FR September/December 2022 23

 current year which most did correctly. However, there were several
candidates that incorrectly included both impairments at $700,000 or the
$400,000.

• Fair value depreciation in note (3) was generally calculated well but many
candidates failed to time apportion the depreciation, despite specifically being
told depreciation is charged on a pro-rata basis. A less common group
adjustment in note (3) related to the disposal of the property. The examining
team noted that many candidates did not attempt the disposal calculations
and, for those that did, they simply calculated the subsidiary gain or the group
gain (rather than both). Another common mistake when the gain(s) was/ were
calculated was to include the adjustment the wrong way (i.e., as a loss).
Marks were awarded accordingly.

• The examining team noted that many candidates are still unsure as to what
should and shouldn’t be included in other comprehensive income. Note (5)
indicated that group assets were revalued at the reporting date and the gains
were given for both Perd Co and Sebastian Co. A small number of candidates
correctly included both the $4.1m and the $0.7m in other comprehensive
income. There were many instances where the revaluation gains were omitted
completely and several candidates incorrectly included 80% of Sebastian Co’s
gain only.

• The dividend paid by Sebastian Co in note (6) was $1m and Perd Co only
received 80% of this, so $800,000 should be eliminated from investment
income. A significant number of candidates removed the full $1m and,
therefore, did not earn the full mark available. Some credit for elimination was
still awarded.

Consolidations are an integral part of the FR syllabus. The examining team note that
performance on a consolidated statement of financial position is generally better than
a consolidated SPLOCI. There is an equal likelihood that a consolidated SPLOCI
may be tested and, therefore, it is vital that you prepare for all aspects of the
syllabus.

Examiner’s report – FR September/December 2022 24

Requirement (b) – 5 marks
Calculate the total assets that would be recognised in the consolidated
statement of financial position for the Perd Group as at 31 March 20X8.

To answer this part of the question, candidates needed to determine which notes
from the further information would have an impact on the consolidated assets. This
included both current and non-current assets.

Performance on this part of the question was mixed. Disappointingly, many

candidates did not attempt this part of the question and, for others that did, it was
largely incomplete. This may indicate poor time management and so candidates are
advised to spend the appropriate amount of time on each part of the question.

To answer this question, candidates should begin by adding together the total assets
for both Perd Co and Sebastian Co. This gave the starting total asset balances that
would then be adjusted for the relevant information in the question.

Working through the notes in order, candidates should consider if any of the
information would adjust the consolidated total assets:
• Note (1) simply required candidates to unwind the discount on the deferred
consideration and this would have no impact on assets. Some candidates did
attempt to adjust for this in part (b) but this was ignored by the examining
team and marks were not impacted by this error.

• Note (2) required candidates to include the goodwill of $3.2m in total assets –
this was generally done well. The impairment charge would reduce the
goodwill asset and this, therefore, reduced total assets. Many candidates
correctly adjusted for the $700,000, whereas others reduced goodwill by one
of the impairment expenses only.

• Most candidates attempted to adjust total assets for the fair value depreciation
and the disposal outlined in note (3). This was not required as the disposal
had taken place during the year and had already been accounted for in the
financial statements of Sebastian Co. No marks were lost for any adjustments
made but adjusting for this will have wasted candidates’ time.

• The adjustment for unrealised profit in note (4) would reduce inventories in the
consolidated statement of financial position and so this would be deducted
from total assets. This was often overlooked in the adjustments. For
candidates that did adjust for the unrealised profit, it was common to see it
being added to total assets rather than deducted. Where candidates had
incorrectly calculated unrealised profit in part (a), own figure marks were
awarded accordingly in part (b).

Examiner’s report – FR September/December 2022 25

 • Note (4) also contained an intra-group receivable and payable that needed to
be eliminated from receivables. This adjustment was often ignored but it was
pleasing to see that some candidates made the adjustment for the $7m.
Others incorrectly adjusted for the $9m but some merit was awarded for this.

• Finally, many candidates did correctly adjust for the revaluation gains and
added these onto the total consolidated assets. The marks were consistent
with the adjustments made to other comprehensive income in part (a) and
own figures were awarded for this adjustment.

Examiner’s report – FR September/December 2022 26

Financial Reporting
(FR)
March/June 2022
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Section A ............................................................................. 3
Question 1 ....................................................................... 3
Question 2 ....................................................................... 4
Question 3 ....................................................................... 5
Question 4 ....................................................................... 6
Section B ............................................................................. 9
Question 1 ..................................................................... 10
Question 2 ..................................................................... 11
Question 3 ..................................................................... 12
Question 4 ..................................................................... 13
Question 5 ..................................................................... 14
Section C ........................................................................... 16
Venus Co ....................................................................... 16
Requirement (a) – 3 marks ........................................ 16
Requirement (b)(i) – 5 marks ..................................... 17
Requirement (b)(ii) – 3 marks .................................... 17
Requirement (c) – 9 marks ........................................ 18
Print Co .......................................................................... 19
Requirement (a) – 8 marks ........................................ 19
Requirement (b) – 12 marks ...................................... 19
General comments

This examiner’s report should be used in conjunction with the published March/June 2022 sample
exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer the questions
whilst sharing their observations from the marking process, highlighting the strengths and
weaknesses of candidates who attempted these questions. Future candidates can use this
examiner’s report as part of their exam preparation, attempting question practice on the ACCA
Practice Platform and reviewing the published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The model
of delivery for the CBE means that candidates do not all receive the same set of questions.
This report includes the following:
• Section A objective test questions – we focus on four specific questions that caused
difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at one specific question that
was challenging for candidates.
• Section C constructed response questions – here we provide detailed commentary
around two constructed response questions and identify some of the main issues that
affected candidates’ performance in this section of the exam, identifying common
knowledge gaps and offering guidance on where exam technique could be improved,
including in the use of the CBE functionality where appropriate.
Section A

Here we look at FOUR Section A questions which proved to be challenging for candidates.

Question 1

On 1 January 20X5, Factman Co acquired a piece of equipment at a cost of $25m.

The equipment has a useful life of five years and the company must decommission
the equipment at the end of the five-year period. The estimated cost of this
decommissioning in five years' time is $10m. Factman Co's cost of capital is 10% per
annum.

The present value of $1 receivable in five years' time at a discount rate of 10% per
annum is $0.621.

Factman Co has correctly capitalised the equipment and recognised a provision for
decommissioning costs at the correct amount.

What is the total charge to profit or loss relating to the equipment

and decommissioning provision which will be required for the year ended 31
December 20X5 (to the nearest $'000)?

$ ____________ ,000

What does this test?

This question tests learning outcome B7(f)(iii) and candidates needed to recognise that the
decommissioning provision should be capitalised as part of the cost of the equipment and to consider
how this would then affect the charges to profit or loss in the year.

What is the correct answer?

The correct answer was $6,863,000 and candidates would have been required to simply type 6863.

The decommissioning provision should have been capitalised as part of the cost of the equipment at
its present value of $6,210,000 ($10m x 0.621) on 1 January 20X5.

This means that the depreciation for the year ended 31 December 20X5 would have been $6,242,000
(($25m + $6.21m) x 1/5 years)

In addition to the depreciation of the equipment, the discount on the decommissioning provision would
need to be unwound and a finance cost of $621,000 ($6,210,000 x 10%) should be recognised in the
statement of profit or loss.

Therefore, the total charge to profit or loss relating to the equipment and decommissioning provision
required for the year ended 31 December 20X5 would be $6,863,000 ($6,242,000 depreciation +
$621,000 finance cost).

Where did candidates go wrong?

The most common error was that candidates did not depreciate the capitalised decommissioning
provision so ended up with a total expense of $5,621,000 ($25m x 1/5 years + $621,000). This was
an unfortunate error as the candidates in question likely recognised that the decommissioning costs
were not expensed to the statement of profit or loss in full so either forgot or were unsure about
depreciating the capitalised amount.

Other common errors included putting the finance cost as the answer, putting the depreciation
expense as the answer or putting the carrying amount of the asset at the date of acquisition as the
answer. These are also unfortunate mistakes as the candidates clearly understood what they were
doing, but were not answering the requirement. It is very important that you read the requirement
carefully so that you are clear about what is being asked of you.

Question 2

Sagan Co acquired a brand name with an estimated useful life of ten years on 1
January 20X2 for $10m. On 1 January 20X5 a brand specialist believed the brand
to have a fair value of $14m.

Sagan Co also ran a training course on 1 January 20X5 for all staff on how to use
a new software system. This training cost Sagan Co $450,000. On average the
employees are expected to remain with Sagan Co for three years.

How much should be recognised as an expense in the statement of profit or

loss for the year ended 31 December 20X5 in respect of each item?

What does this test?

This question tests learning outcome B2(c) relating to the criteria for the initial recognition and
measurement of intangible assets.

What is the correct answer?

The correct responses were:

• Brand amortisation - $1m

• Training costs - $450,000

Candidates were required to recognise that, in accordance with IAS 38 Intangible Assets, the
revaluation model for intangible assets can only be applied when an active market exists upon which
fair value can be based. IAS 38 specifically states that an active market cannot exist for brands.
Although brands may be bought and sold, contracts are negotiated between individual buyers and
sellers with transactions being relatively infrequent. For these reasons, the price paid for one asset
may not provide sufficient evidence of the fair value of another and prices are often not available to
the public.
On this basis, despite a valuer believing that the brand is worth $14m, it should continue to be
recognised at its cost of $10m and be amortised over 10 years, resulting in an amortisation expense
in the year ended 31 December 20X5 of $1m ($10m x 1/10 years).

Similarly, costs of staff training are specifically identified in IAS 38 as being an example of expenditure
that is not part of the cost of an intangible asset. Although an entity may have a team of skilled staff
and may be able to identify incremental staff skills leading to the future economic benefits from
training, there is not sufficient control over such economic benefits for an intangible asset to be
recognised. Therefore, staff training costs should always be expensed in full as they are incurred and
an expense of $450,000 should be recognised for Sagan Co’s training costs in the year ended 31
20X5.

Where did candidates go wrong?

Most candidates knew that the training costs should be expensed in full rather than being capitalised
and amortised over three years. However, the most common answer also included amortising the
brand at $2m for the year, which implies that those candidates believed that the brand would have
been revalued to $14m at 1 January 20X5 and amortised over its remaining seven-year useful life.

It is important that candidates are comfortable with the requirements around revaluing intangible
assets and know when information in the question should not be used.

Question 3

Which TWO of the following statements are true regarding the Conceptual
Framework for Financial Reporting (Conceptual Framework) of the International
Accounting Standards Board?

A. It is principles-based rather than rules-based but it is not an IFRS Standard

B. The principles contained in the Conceptual Framework overrides any IFRS Standard
that exists

C. It requires accountants to evaluate and address threats to compliance with

fundamental ethical principles

D. If it is revised it will not automatically lead to changes to the IFRS Standards

What does this test?

This question tests learning outcome A1(a) where candidates must be able to describe what is meant
by a conceptual framework for financial reporting.

What is the correct answer?

The correct responses were:

A – It is principles-based rather than rules-based but it is not an IFRS Standard

D – If it is revised it will not automatically lead to changes to the IFRS Standards

The Conceptual Framework is principles-based rather than rules-based and its purpose is to assist
the International Accounting Standards Board (Board) to develop IFRS Standards that are based on
consistent concepts; assist preparers to develop consistent accounting policies when no IFRS
Standard applies to a particular transaction or other event, or when an IFRS Standard allows a choice
of accounting policy; and to assist all parties to understand and interpret the IFRS Standards.

The Conceptual Framework is not an IFRS Standard and nothing in the Conceptual framework
overrides any IFRS Standard or any requirement in an IFRS Standard.

The Conceptual Framework may be revised from time to time on the basis of the Board’s experience
of working with it, but such revisions will not automatically lead to changes to the IFRS Standards.
Any decision to amend an IFRS Standard would require the Board to go through its due process for
adding a project to its agenda and developing an amendment to that IFRS Standard.

Finally, although accountants should always consider ethics and evaluate and address any threats to
compliance with fundamental ethical principles, the requirements to do so would be a feature of a
code of ethics and conduct rather than the Conceptual Framework.

Where did candidates go wrong?

While most candidates demonstrated that they knew that the Conceptual Framework is principle’s
based and is not an IFRS Standard by selecting option A, the most common incorrect response was
C. Although it is a positive sign that candidates are thinking about ethics since it is a vital part of the
accountancy profession, the Conceptual Framework itself does not have an ethical component and
statement C does not fall within the well-defined status and purpose of the Conceptual Framework.

Question 4

Pearl Co has controlled an 80% owned subsidiary, Silver Co, for many years. Silver Co
sold goods to Pearl Co for $120,000 at a mark-up of 20% during the year.

Pearl Co had sold half of these goods by the year end.

Which of the following statements regarding intra-group transactions in the

consolidated financial statements are true or false?
What does this test?
This question tests learning outcome D2(d) and is an example of how it is possible for elements of
candidates’ consolidation knowledge can be tested in other sections of the exam apart from section
C.

What is the correct answer?

The correct responses were:

• Revenue must be reduced by a total of $120,000 - True

• Cost of sales must be reduced by a total of $110,000 - True
• Non-controlling interest must be reduced by $2,000 - True

A mark-up of 20% means that the selling price will be 20% higher than the cost of the goods being
sold.

This means that cost of sales can be calculated as $100,000 ($120,000 x 100/120) and gross profit
can be calculated as $20,000 ($120,000 x 20/120 or $120,000 - $100,000). This has been
demonstrated in the table below:

$ %
Sales 120,000 120
Cost of sales 100,000 100
Gross profit 20,000 20

Whenever there is intragroup trading of goods, there will always need to be an adjustment to revenue
and cost of sales to remove the effects of the sale. In this case, Silver Co has recorded a sale of
$120,000 and Pearl Co will have recorded a purchase (i.e. cost of sales) of $120,000, which will need
to be eliminated:

$ $
Dr Revenue 120,000
Cr Cost of sales 120,000

Similarly, since Pearl Co has only sold half of these goods to a third party by the year end, it means
that half of the inventory remains in the group financial statements. The carrying amount of these
unsold goods will be inflated from a group perspective because it includes the unrealised intragroup
profit. Therefore $10,000 ($20,000 gross profit x 50%) of unrealised profit should be eliminated
through an adjustment to the carrying amount of inventories and, consequently, an increase in cost
of sales:

$ $
Dr Cost of sales $10,000
Cr Inventories $10,000

This means that, in total, revenue has been reduced (debited) by $120,000 and cost of sales has
been reduced (credited) by $110,000 ($120,000 - $10,000).

As the sale was made by the subsidiary, it means that the unrealised profit on the inventories relates
partly to the group and partly to the non-controlling interest. Therefore, the non-controlling interest in
the subsidiary will be reduced by its percentage ownership of the subsidiary. In this case, the non-
controlling interest would be reduced by $2,000 ($10,000 unrealised profit x 20%). Note that if the
subsidiary was wholly owned or it was the parent who made the intragroup sale, this final adjustment
to the non-controlling interest would not be required.

Where did candidates go wrong?

The most common incorrect answer was to state that cost of sales should not be reduced by
$110,000. Some candidates may have realised that the first adjustment should have been for
$120,000 but then not realised that the adjustment for the unrealised profit would have effectively
reduced this to $110,000. Alternatively, it is common for candidates to confuse cost of sales in the
selling company’s individual accounts ($100,000), with the cost of sales which should be eliminated
on consolidation, which may also have led to this part being answered incorrectly.

This question provided an effective test as to whether or not candidates understood the processes
which underly adjustments for intragroup sales, rather than relying on the production of standard
workings without fully understanding the impact or reasoning behind these workings.
Section B

Section B tests candidates’ knowledge on a number of IFRS Standards in more depth than section
A, with three case questions containing five two-mark objective test questions.

We have selected one of the cases that primarily examined IFRS 15 Revenue from Contracts with
Customers. You should note that a case will be a mixture of narrative and calculation questions and
can also include different styles of objective test questions similar to those used in section A.
Candidates must read the case scenario and its requirements carefully. As these questions score
either two marks or zero marks, it is important that candidates do not misread or miss any information
in the scenario. Close reading of the requirements is also important to identify any specific instructions
such as rounding.

Section B – Scenario

Bargi Co is in the process of preparing its financial statements for the year ended 31
December 20X6. There are three transactions which have not yet been accounted
for:

1 October 20X6 A sale was made for a large piece of technical equipment
which included a three-year service plan. The total sales
price was $1.8m which was paid on 1 October 20X6 and
the technical equipment was delivered on that date.

On its own, the technical equipment would normally be sold

for $1,750,000 and a three-year service plan would
normally be sold for $165,000.

18 November 20X6 Machinery sold by Bargi Co in January 20X6 was found to

be faulty and various parts were replaced by Bargi Co
under warranty. Bargi Co would normally sell the
replacement parts for $80,000. The total cost to Bargi Co of
these replacement parts was $60,000.

1 December 20X6 Bargi Co entered into a contract for the sale of goods for
$200,000. Bargi Co received $200,000 on 1 December
20X6. Bargi Co has the right to repurchase these goods on
1 April 20X7 for $240,000.
Question 1

Which TWO of the following criteria are required before an entity should account
for a contract in accordance with IFRS 15 Revenue from Contracts
with Customers?

A. All parties to the contract have approved the contract

B. The contract must be in writing

C. The contract must have commercial substance

D. It is possible that the consideration will be collected from the customer

What is the correct answer?

The correct responses were:

A – All parties to the contract have approved the contract

C – The contract must have commercial substance

This question specifically draws on a candidate’s knowledge of IFRS 15 paragraph 9,

which outlines the criteria which must be met before an entity can account for a
contract with a customer that is within the scope of IFRS 15.

Although all parties to the contract must approve it, the contract itself does not need
to be in writing. Although it may be in writing, and there are often good legal or
commercial reasons for doing this, a contract could also be oral or in accordance with
other customary business practices.

When it comes to the consideration that will be collected from the customer, it is not
sufficient for it simply to be ‘possible’ that consideration will be collected. Instead, it
must be ‘probable’ that the consideration will be collected. In evaluating whether the
collectability of an amount of consideration is probable, an entity must consider only
the customer’s ability and intention to pay that amount of consideration when it is due.

Where did candidates go wrong?

Most candidates answered this question correctly, and in particular recognised that
the contract must have commercial substance by correctly selecting C. The concept
of ‘commercial substance’ is one that exists in other areas of financial reporting so it
is good for candidates to understand what this term means.

However, a large proportion of candidates incorrectly selected D. There is a subtle,

but important, distinction as to whether something is possible or whether it is probable.
This demonstrates the importance of reading the question carefully and considering
all of the response options available before answering.

Examiner’s report – FR March/June 2022 10

Question 2

IFRS 15 Revenue from Contracts with Customers requires the transaction price to be
allocated to the performance obligations in the contract.
Where each performance obligation is satisfied at a point in time, how should
the allocation of the transaction price be made?

A. The transaction price should be spread equally over the period from when the
contract is first agreed to when it is completed

B. The transaction price should be allocated relative to the stand-alone selling price
of the component parts at the date of the contract inception

C. An agreed percentage of the transaction price should be allocated to the stand-

alone selling price of any goods sold with the balance spread equally over the
term of the contract

D. The transaction price should be allocated based on the cost of the component
parts at the date on which the contract is first agreed

What is the correct answer?

The correct answer was:

B – The transaction price should be allocated relative to the stand-alone selling

price of the component parts at the date of the contract inception.

In accordance with IFRS 15, an entity must allocate the transaction price of a contract
to each performance obligation identified on a relative stand-alone selling price basis.
To do this, the entity must determine the stand-alone selling price of the distinct good
or service underlying each performance obligation in the contract and allocate the
transaction price in proportion to those stand-alone selling prices.

Where did candidates go wrong?

Most candidates selected either B or C with this question. Candidates needed to
recognise that it is the stand-alone selling price which is relevant to allocating the
transaction price and that this question was specifically asking about performance
obligations which are satisfied at a point in time, rather than those which might be
satisfied over time.

Statement C simply describes an ‘agreed percentage’, whereas statement B correctly

indicates that it is the ‘stand-alone selling price’ which is the relevant factor.
Furthermore, statement C indicates that there should be some aspect of the
transaction price which is spread equally over the term of the contract but this does
not agree to the specific scenario in question where the performance obligations are
satisfied at a point in time.

Examiner’s report – FR March/June 2022 11

Question 3

In relation to the sale made on 1 October 20X6, what is the amount that will be
reported as the contract liability for the service plan at 31 December 20X6 (to the
nearest $'000)?

$ ____________ ,000

What is the correct answer?

The correct answer was $142,000 and candidates would have been required to simply
type 142.

A contract liability represents the entity’s obligation to transfer goods or services to a

customer for which the entity has received consideration (or the amount is due) from
the customer.

In this case, Bargi Co has received $1.8m on 1 October 20X6, but part of that
consideration relates to a three-year (i.e. 36 month) service plan. Therefore, by the
year end of 31 December 20X6, there will still be 33 months (36 months - 3 months),
over which Bargi Co will need to perform its obligation to the customer relating to the
service plan.

As the total stand-alone selling price of each performance obligation is greater than
the total contract price of $1.8m, then the discount needs to be allocated to each
performance obligation:

$'000
Technical equipment – stand-alone selling price 1,750
Service plan – stand-alone selling price 165
Total of stand-alone selling prices 1,915
Total contract price 1,800
Discount on contract 115

Revenue to be recognised for the service plan:

Total revenue ($1,800,000 x ($165,000/$1,915,000)) 155
Deferred revenue ($155,000 x 33/36 months) 142
Revenue recognised in the year ended 31 December 20X6 13

Where did candidates go wrong?

$142,000 was the single most common answer, but there were a wide range of
incorrect responses which meant that, overall, performance on this question was quite
poor.

Some of the most common incorrect answers can be found as part of the above
workings, including:

• $115,000 – this was the total discount on the contract

Examiner’s report – FR March/June 2022 12
 • $155,000 – this was the total revenue to be recognised for the service plan over
three years

• $13,000 – this was the amount of revenue that would have been recognised in
the year

These responses indicate that, although they did not get the question right, many
candidates did know what calculations were required. This emphasises the importance
of carefully reading the requirement and ensuring that you answer exactly what is
required.

Question 4

Which of the following statements is correct in relation to the warranty work

undertaken on 18 November 20X6?

A. Revenue should include $80,000 to reflect the selling value of the goods
provided in repairing the machine to avoid affecting the gross profit margin of
Bargi Co

B. Cost of sales will include $60,000 for the cost of the goods used, assuming no
provision has previously been made by Bargi Co for a warranty liability

C. Revenue should include $60,000 to match the actual costs incurred by Bargi
Co and net off to give nil effect on profit

D. Cost of sales will be reduced by $60,000 for the cost of the goods used,
assuming no provision has previously been made by Bargi Co for a warranty
liability

What is the correct answer?

The correct answer was:

B – Cost of sales will include $60,000 for the cost of the goods
used, assuming no provision has previously been made by Bargi Co for a
warranty liability.

Where did candidates go wrong?

Most candidates answered this question correctly, with the most common incorrect
response being D.

Two out of the four options (A and C) include references to revenue, but no additional
revenue should be recognised in these circumstances. Those candidates who realised
that repairs made under warranty would not result in additional revenue could then
work out that neither of these options could be the correct answer.

Examiner’s report – FR March/June 2022 13

When comparing options B and D, candidates needed to determine whether the
$60,000 cost of replacement parts should be an additional cost to be recognised in the
statement of profit or loss or whether it would reduce cost of sales. Using replacement
parts would result in a reduction in Bargi Co’s inventory and so would reduce
inventories and increase cost of sales.

Question 5

Match the relevant amounts to show how Bargi Co should account for the
contract on 1 December 20X6 in its financial statements for the year ended 31
December 20X6.

What is the correct answer?

The correct responses were:

• Revenue - $0
• Interest Expense - $10,000
• Cash - $200,000
• Liability - $210,000

The transaction on 1 December 20X6 represents a repurchase agreement where Bargi

Co has the right to repurchase the goods sold in four months’ time. This is referred to
as a ‘call option’.

Where an entity has the right (or obligation) to repurchase an asset, the customer does
not obtain control of that asset. This is because the customer is limited in its ability to
direct the use of, and obtain substantially all of the remaining benefits from, the asset
even though the customer may have physical possession of that asset. Depending on
Examiner’s report – FR March/June 2022 14
the circumstances, this can result in various different outcomes. For Bargi Co, as they
can repurchase the goods for an amount that is equal to or more than the original selling
price of the asset, this should be treated as a financing arrangement and no revenue
should be recognised.

Instead, Bargi Co would recognise the cash received as a financial liability in

accordance with IFRS 9 Financial Instruments. Between 1 December 20X6 and 1 April
20X7, Bargi Co would also recognise $40,000 of interest expense for the difference
between the exercise price ($240,000) and the cash received ($200,000). Since the
transaction took place on 1 December 20X6, this means that there should be $10,000
($40,000 x 1/4 months) of interest expense recognised in the year ended 31 December
20X6.

Where did candidates go wrong?

The most common error was for candidates to get everything correct except the liability,
which was incorrectly included at $30,000. Those candidates realised that no revenue
should have been recorded and that a liability was required, but perhaps thought that
only three months of the interest element would be required.

The next most common error was to include $30,000 as a liability but to also include
revenue of $210,000. These candidates may have been confusing this situation with a
transaction with a significant financing component and attempting to unwind a discount
– although in the case of a significant financing component, the discount should be
credited to finance income rather than revenue.

Examiner’s report – FR March/June 2022 15

Section C

We have selected two constructed response questions, Venus Co and Print Co,
that are available on the ACCA Practice Platform. Venus Co is a financial
statements analysis and interpretation question for a group of companies, while
Print Co is a single entity financial statements preparation question. When using the
following detailed commentary, it would be helpful to consult the questions and
answers available to you here.

Venus Co

Venus Co required candidates to demonstrate and apply their knowledge from the
analysing and interpreting financial statements area of the syllabus (syllabus section
C). The question had both numerical information and additional information relating to
a company that had acquired a subsidiary during the year. Candidates were asked to
complete several tasks using this information.

The analysis and interpretation of a group is an important area of the syllabus and will
continue to be examined. As in previous examination sessions, most candidates failed
to score high marks on this question. The reason for this seemed to be poor exam
technique by not addressing the requirement or not adequately using the information
in the scenario. The focus for this detailed commentary will be on getting the most out
of the question, rather than simply recreating the suggested solution and will highlight
the importance of using the scenario when constructing an answer to an interpretation
question.

Requirement (a) – 3 marks

Based on the extracts provided, use the pre-formatted table to calculate the
following ratios for Venus Co and the Venus Group for the years ended 30 June
20X8 and 30 June 20X7 respectively: Gross profit %, Net profit %, and Return on
equity (equity should include NCI where applicable).

This requirement was generally well received by candidates, with many earning full
marks. This demonstrated that the ratio calculations had been well revised. The
candidates who did not score well on this part of the question typically produced
Examiner’s report – FR March/June 2022 16
incorrect ratios without providing any workings, or there were some candidates who
attempted to adjust the draft financial statement extracts before calculating the ratios.
This was not asked for and candidates are reminded to read the requirements carefully
before answering the question.

Requirement (b)(i) – 5 marks

Complete the table provided to adjust Venus Co's consolidated profit for the
year ended 30 June 20X8 in order to calculate the profit of Venus Co for that
year as if the acquisition of Luto Co had not taken place. Your answer should
take account of the information provided in the notes. Your answer should also
recalculate the net profit %.

This requirement is one that candidates found challenging. In order to assess the true
performance of the parent company, candidates were asked to remove the impact of
the acquisition from the consolidated draft financial statement extracts. This is another
way of testing if candidates know how the acquisition of a subsidiary will affect the
figures in a consolidated statement of profit or loss.

To perform well on this section, candidates needed to demonstrate that they were
comfortable with some core accounting entries relating to consolidations including
depreciation on assets following a fair value adjustment at acquisition and the
unwinding of a discount on deferred consideration. This part of the question should
have been straightforward as these adjustments are common in a group scenario.
However, outside the context of actually preparing consolidated financial statements,
many candidates struggled.

It is important to note that Venus Co acquired its controlling interest in Luto Co six
months ago and therefore the fair value depreciation and the unwinding of the discount
needed to be time apportioned. This was often overlooked by candidates in their
calculations.

This part of the question also required the net profit margin to be recalculated using the
candidate’s own adjusted profit. Most candidates who attempted this net profit margin
calculation were awarded the appropriate marks for net profit based on the ‘own figure
rule’ which does not penalise candidates for earlier mistakes. However, the
denominator needed to be adjusted for the intra-group sale which the majority of
candidates did not do.

The marking team noted that many candidates completely ignored this requirement.
Understanding what figures are included in consolidated financial statements is crucial
to success in the FR exam.

Requirement (b)(ii) – 3 marks

Explain why consolidated financial statements, for example those of the Venus
Group, are not comparable to those of a single entity, for example Venus Co.
This requirement was looking for candidates to demonstrate a good understanding of
the topic matter. Responses were mixed but many candidates were at least able to
suggest one or two plausible reasons.

The requirement specifically asks for an explanation as to why consolidated financial

statements are not comparable to single entity financial statements, so it was
Examiner’s report – FR March/June 2022 17
surprising to see many answers stating generic limitations of ratio analysis that were
not group related. These comments did not attract any marks.

Requirement (c) – 9 marks

Based on your answers to parts (a) and (b), comment on the comparative
performance of Venus Co for the years ended 30 June 20X7 and 20X8,
specifically addressing the managing director’s comments.
The performance on this part of the question remained broadly consistent with
previous years. The best candidates attempted to use the scenario and assess how
the points given could have affected the numbers in the financial statements.

Weaker candidates appear to have grasped the message about the importance of
using the scenario but now copy out sections of the requirement into the answer. This
repetition of the scenario will not gain marks as the examination team are looking for
individuals to use that information to explain the impact on the entity.

The lowest performing candidates continue to make the same mistakes, either
ignoring the scenario completely and giving ‘textbook’ answers about what the
movements in the ratios could mean or simply putting extremely brief answers.

Examiner’s report – FR March/June 2022 18

Print Co

Print Co is a typical example of a single entity accounts preparation question from

section C of the exam. In this type of question, candidates are provided with a trial
balance (or an extract from a trial balance) and some additional information that will
require adjustments to be made in accordance with relevant IFRS Standards and
accounting principles.

Question requirements will vary with this question type, but you can expect to be asked
to prepare a mixture of a statement of profit or loss and other comprehensive income,
a schedule of adjustments to profit, a statement of changes in equity, a statement of
financial position, or a specific extract from the financial statements such as, ‘financing
activities’ from the statement of cash flow.

Print Co had two requirements:

Requirement (a) – 8 marks

Prepare the statement of profit or loss for Print Co for the year ended 30 June
20X2.

Requirement (b) – 12 marks

Prepare the statement of financial position for Print Co as at 30 June 20X2.

From an exam technique perspective, it is advised that you set up the answer/layout
for the requirements first. For example, for Print Co, lay out the working for the
statement of profit or loss and the statement of financial position within the response
area. Leave a space between each statement so that it is easy for the marker to
distinguish between where one statement ends and another begins.

As a general comment, you must ensure that all trial balance items are included either
in the relevant working or within the financial statements themselves. It is often noted
by the marking team that some balances are not transferred from the trial balance into
the answer and therefore, what are considered to be easy marks, are lost.

Examiner’s report – FR March/June 2022 19

It is important to note that you do not have to deal with the adjustments in the order
presented in the question, although this is a logical approach and will ensure you do
not miss out any required adjustments. For example, in this question you may be most
confident in adjusting for depreciation in note (v) and be less confident with the bank
loan/share issue in note (i). Dealing with the adjustments that you are most familiar
with first could help to ease you into the question and stop panic setting in.

The following discussion will look at each of the adjustments in more detail and may
help when you work through the question for practice.

(i) Bank loan/Share issue

This note contains information about an error that was made when recording
the $30m cash raised from financing in the year. The entire $30m was
incorrectly recorded as a bank loan but $14m was raised following a share
issue.

Most candidates were able to recognise that the bank loan in the trial balance
was overstated and needed to be reduced by $14m. The correcting entry for
the share issue was sometimes confused and many candidates simply added
$14m on to share capital. Whilst this did attract some credit, the correct
adjustment needed to be split between share capital and share premium.

The correcting journal should have been recorded as follows:

$’000 $’000
Dr Bank loan 14,000
Cr Share capital (7m shares x $1) 7,000
Cr Share premium (balancing amount) 7,000

Having corrected the original error, candidates then needed to recognise that
an error had also been made when recording the loan interest accrual as this
had incorrectly been based on the full $30m. To correct this, it would have been
useful for candidates to identify how much interest had been recorded
incorrectly, calculate the amount that should have been recorded and then
reverse the excess as follows:

$’000

Interest recorded incorrectly ($30m x 5% x 6/12) 750

Interest based on correct loan amount (($30m - $14m) x 5% x 400

6/12)

Interest accrual overstated 350

Examiner’s report – FR March/June 2022 20

 The correcting journal entry should have been recorded as follows:

$’000 $’000
Dr Trade and other payables (SOFP) 350
Cr Finance costs (SOPL) 350

(ii) Inventories

In this question, closing inventory has not yet been recorded. Candidates can
confirm this as the trial balance currently includes inventory at 30 June 20X1
(the previous year). Therefore, candidates simply needed to apply their
knowledge of IAS 2 Inventories and calculate the amount to be included in the
financial statements (at the lower of cost or net realisable value (NRV)).

Many candidates incorrectly recorded closing inventory at $5.7m. This note

states that included within this amount are 700 units recorded at a cost of
$1,400 per unit. However, before the goods can be sold, an additional $400 per
unit will be incurred. Candidates are advised to calculate cost and compare to
the NRV before recording closing inventory.

Cost $1,400

NRV ($1,600 - $400) $1,200

NRV is lower and therefore the original estimate of $5.7m included 700 units
that are overstated by $200 per unit ($1,400 - $1,200) and therefore an
inventories write-down of $140,000 is required (700 units x $200). Candidates
can then adjust the cost of sales and closing inventory to record $5.56m of
closing inventories ($5.7m - $140,000).

(iii) Contract to purchase electrical components

Many candidates were not able to deal with the adjustment to the onerous
contract correctly. In this question there is a contract to purchase electrical
components for the next three years and, although these components are no
longer required for their initial purpose, they do have an alternative use. To use
these components, an additional cost would be incurred of $600 per
component. Alternatively, the contract could be cancelled by paying a penalty
of $4m.

Examiner’s report – FR March/June 2022 21

 This is an example of an onerous contract, where the unavoidable costs of
fulfilling the contract exceed any revenues expected to be received from the
sale of the goods. Per IAS 37 Provisions, Contingent Liabilities and Contingent
Assets, if an entity has a contract that is onerous, the present obligation under
the contract should be recognised as a provision.

Many candidates incorrectly recognised a provision for the penalty costs of

$4m. Whilst some credit was awarded for this, the provision should be recorded
at the lower of the costs of fulfilling the contract or penalties from failure to fulfil
the contract.

Candidates should first calculate the cost per component and compare it to the
NRV. The cost per component becomes $1,050 ($450 + $600, but the net
realisable value per component is $900. As cost is greater than NRV, there is
an expected loss on the contract of $150 per component ($1,050 - $900).
Therefore, the total cost to fulfil the contract is calculated as $3.375m (22,500
components x $150) which is lower than the penalty cost and a provision of
$3.375m should be recorded as:

$’000 $’000
Dr Administrative expenses (SOPL) 3,375
Cr Provisions (SOFP) 3,375

As a final point, the provision created relates to the next three years and should
therefore be split between its non-current and current liability.

(iv) Held for sale machinery

At the start of the year, a machine met the criteria to be classified as held for
sale but no adjustments had been made and therefore the machine is
incorrectly included within plant and machinery in the trial balance. In
accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, the machine should be removed from property, plant and
equipment and recorded as a separate class of assets at the lower of carrying
amount or fair value.

In this question, there was an added complication that candidates were told the
fair value of the machine on 1 July 20X1 (the date that the held for sale criteria
were met) and the actual selling price on 1 July 20X2. Some candidates
incorrectly used the fair value at 1 July 20X1, but own figure marks were
awarded thereafter.

To correctly adjust for the held for sale machinery, candidates should remove
the carrying amount from property, plant and equipment and then compare

Examiner’s report – FR March/June 2022 22

 carrying amount and fair value to determine the appropriate amount to
recognise as a held for sale asset:

Carrying amount $1.5m

Fair value $1.1m

$0.4m

$’000 $’000
Dr Held for sale asset 1,100
Dr Cost of sales 400
Cr Property, plant and equipment 1,500

(v) Depreciation

The depreciation calculation was relatively straightforward and was correctly

calculated by many candidates. However, to correctly calculate the
depreciation expense for the year, candidates needed to remove the held for
sale asset from the plant and machinery cost in the trial balance. Some
candidates overlooked this part of the calculation but were able to correctly
adjust the financial statements thereafter using their own figure.

A number of candidates incorrectly calculated depreciation on a reducing

balance basis. In this instance, candidates would not have been awarded any
related marks within cost of sales but own figure marks applied within the
statement of financial position.

(vi) Income tax refund

The question specifically stated that income tax for the year was estimated at
$2.53m and that this is a tax refund. Despite this, many candidates incorrectly
treated this as an expense in the statement of profit or loss and a liability in the
statement of financial position. Unfortunately, these candidates were not
awarded the marks for a relatively straight forward adjustment. Candidates are
once again reminded to read the question carefully.

Overall, the preparation of financial statements is an integral part of the FR syllabus

and is something that should be practised. Please ensure that you attempt to use the
relevant practice workspace available on the ACCA website so that you get used to
competing your answer in the CBE environment. It is vital that you show all workings.
Examiner’s report – FR March/June 2022 23
Where you are provided with a spreadsheet response option, if you use the
functionality of the spreadsheet, markers will be able to view your workings within the
cell. If you do not use the spreadsheet to calculate your figures, you must ensure that
you set out all workings and calculations so that the marker is able to follow through
what you have done and award marks accordingly.

On a final note, when practicing Print Co, do not forget to make sure that all trial
balance items have been used or transferred into the relevant statements/workings,
and when completing the statement of financial position, transfer your own profit for
the year from the statement of profit or loss into retained earnings within equity.

Examiner’s report – FR March/June 2022 24

Financial Reporting
(FR)
Sept/Dec 2021
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Section A ............................................................................. 3
Question 1 ....................................................................... 3
Question 2 ....................................................................... 5
Question 3 ....................................................................... 6
Question 4 ....................................................................... 8
Section B ........................................................................... 10
Question 1 ..................................................................... 11
Question 2 ..................................................................... 12
Question 3 ..................................................................... 14
Question 5 ..................................................................... 17
Section C ........................................................................... 18
Pinardi Co ...................................................................... 18
Requirement (a) – 2 marks ........................................ 18
Requirement (b) – 3 marks ........................................ 19
Examiner’s report – FR September/December 2021 1
Requirement (c) – 4 marks ........................................ 20
Requirement (d) – 11 marks ...................................... 20
Mims Co ........................................................................ 23
General comments

This examiner’s report should be used in conjunction with the published September/December 2021
sample exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer the questions
whilst sharing their observations from the marking process, highlighting the strengths and
weaknesses of candidates who attempted these questions. Future candidates can use this
examiner’s report as part of their exam preparation, attempting question practice on the ACCA
Practice Platform, reviewing the published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The model
of delivery for the CBE means that candidates do not all receive the same set of questions.
This report includes the following:
• Section A objective test questions – we focus on four specific questions that caused
difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at one specific question that
was challenging for candidates.
• Section C constructed response questions – here we provide detailed commentary
around two constructed response questions and identify some of the main issues that
have affected candidates’ performance in this section of the exam, identifying common
knowledge gaps and offering guidance on where exam technique could be improved,
including in the use of the CBE functionality.

Examiner’s report – FR September/December 2021 2

Section A

Here we look at FOUR Section A questions which proved to be challenging for candidates.

Question 1

The information below relates to the financial statements of a company as at 30

September 20X7:

$
Carrying amount:
Plant (cost less depreciation) 110,000
Land (original cost $200,000) 280,000

Tax base:
Plant 90,000
Land 200,000

Tax rate 20%

Deferred tax liability 20,000
Revaluation surplus 64,000

Indicate, by clicking on the relevant boxes in the table, whether the balances
on the deferred tax liability and revaluation surplus (after accounting for any
deferred tax consequence) at 30 September 20X7 are correct or incorrect.

What does this test?

This question tests learning outcome B8(c) where candidates must be able to compute and record
deferred tax amounts in the financial statements.

What is the correct answer?

The correct responses were:

The amount of the deferred tax liability is: CORRECT

The amount of the revaluation surplus is: CORRECT

Examiner’s report – FR September/December 2021 3

Candidates may have approached this question as follows:

Deferred tax liability:

Taxable
Carrying
Tax base temporary Deferred tax at 20%
amount
difference
$ $ $ $
Plant 110,000 90,000 (20,000) (4,000)
Land 280,000 200,000 (80,000) (16,000)
Total
deferred tax (20,000)
liability

Revaluation surplus:
$
Revaluation gain ($280,000 - $200,000) 80,000
Less associated deferred tax (per above) (16,000)
Total revaluation surplus 64,000

Therefore, both the deferred tax liability and the revaluation surplus are correct as they are
presented in the question.

Where did candidates go wrong?

The most common error was for candidates to select that the revaluation surplus was incorrect. This
is most likely due to candidates forgetting that where transactions and events are recognised
outside profit or loss (either in other comprehensive income or directly in equity), any related tax
effects are also recognised outside profit or loss (either in other comprehensive income or directly in
equity).

The revaluation gain of $80,000, which must have been recognised in other comprehensive income,
will have an associated deferred tax liability of $16,000 which would also have been recognised in
other comprehensive income. Consequently, the revaluation surplus for that asset will be presented
net of the associated deferred tax liability.

Examiner’s report – FR September/December 2021 4

Question 2

On 1 July 20X7, a company purchased a five-year loan note investment with a par value of
$7m. The investment was purchased at a 12% discount. The loan note has a coupon rate
of 5% and an effective interest rate of 7%. Interest is receivable annually in arrears. The
company has the intention of holding the loan note to receive the contractual cash flows.

How much finance income should be reported in the statement of profit or loss of the
company for the year ended 30 June 20X9 (to the nearest $'000)?

$ ____________,000

What does this test?

This question tests learning outcome B5(f)(ii) which relates to redeemable preference shares and
debt instruments with no conversion rights (principle of amortised cost).

What is the correct answer?

The correct answer is $437,000 (note that the question required candidates to enter a figure to the
nearest $’000, so the number 437 needed to be entered). Candidates were required to establish
that, based on the entity’s business model and the contractual cash flow characteristics of this
investment, the investment in debt would have been classified as being measured at amortised
cost.

On this basis, the investment would initially be recorded at its fair value plus any transaction costs.
As the $7m loan note was purchased at a 12% discount and no transaction costs are included in the
question, this means that the investment would be recorded on 1 July 20X7 at its fair value of
$6,160,000 ($7m x 88%).

The effective interest rate of 7% would be applied to the opening balance each year and would be
added to the carrying amount of the asset. Similarly, the nominal interest received of $350k ($7m x
5%) would be deducted from the carrying amount.

The table below demonstrates how this might have been calculated in the exam:

Opening Effective Nominal interest Closing

Year ended
balance interest (7%) (5%) balance
$’000 $’000 $’000 $’000
30 June 20X8 6,160 431 (350) 6,241
30 June 20X9 6,241 437 (350) 6,328

Note that the nominal interest and closing balance at 30 June 20X9 have been included for
illustrative purposes only and were not required to reach the final answer of $437k.

Examiner’s report – FR September/December 2021 5

Where did candidates go wrong?
A wide range of incorrect answers were entered by candidates. The most common incorrect answer
was $490k which indicates that candidates were calculating the effective interest rate as 7% of the
$7m par value rather than using the fair value of the loan note. Another common mistake was to
answer $350k which was simply the coupon rate of interest.

It is important that candidates practice questions on financial instruments and become comfortable
with how to approach the calculations required.

Question 3

Alpha Co acquired 80% of the ordinary share capital of Bravo Co on 1 September 20X4 and
40% of the ordinary share capital of Charlie Co a number of years ago.

On 30 November 20X4, Alpha Co sold goods to Bravo Co making a profit of $2,000. Half of
these items remained in inventory at the year end.

The profit for the year ended 31 December 20X4 for each company is:

Alpha Co Bravo Co Charlie Co

($) ($) ($)
Profit for the year 80,200 51,900 86,800

What is the amount of profit attributable to the equity shareholders of Alpha Co in the
consolidated statement of profit or loss for the year ended 31 December 20X4?

$ ____________

What does this test?

This question tests learning outcome D2(b) and includes the mid-year acquisition of a subsidiary
and the inclusion of an associate.

This also demonstrates how it is possible for elements of candidate’s consolidation knowledge to be
tested in other sections of the exam apart from section C.

What is the correct answer?

The correct answer is $127,760.

The profit attributable to the equity shareholders of Alpha Co will include:

100% of Alpha Co’s profit for the year of $80,200, less the provision for unrealised profit of $1,000
($2,000 x 50%) which would be adjusted for the intra group sale.
80% of Bravo Co’s post acquisition profits for the year, which is $13,840 ($51,900 x 4/12 months x
80%).
40% of Charlie Co’s profit for the year, being Alpha Co’s share of the associate’s profit, which is
$34,720 ($86,800 x 40%)

Examiner’s report – FR September/December 2021 6

Note that only 80% of Bravo Co’s post acquisition profits are included because 20% will be
attributable to the non-controlling interests in Bravo Co. The question is specifically asking for the
amounts attributable to the equity shareholders of Alpha Co, not the consolidated profit for the year
of the Alpha Group.

Profit attributable to
equity shareholders of
Alpha Co
$
Alpha Co ($80,200 - $1,000) 79,200
Bravo Co ($51,900 x 4/12 months x 80%) 13,840
Charlie Co ($86,800 x 40%) 34,720
Total 127,760

Where did candidates go wrong?

The most common incorrect answers were $155,440 and $131,220, both of which appear to relate
to mistakes with the treatment of Bravo Co.

Candidates who calculated $155,440 used a profit figure for Bravo Co of $41,520, which is $51,900
x 80% (i.e. it correctly includes only 80% of the profit, but incorrectly uses the full year’s profit rather
than just the post-acquisition period).

Candidates who calculated $131,220 used a profit figure for Bravo Co of $17,300, which is $51,900
x 4/12 months (i.e. it correctly includes only the post-acquisition period, but also includes the
amounts attributable to non-controlling interests).

Overall, there were a wide variety of incorrect answers presented in this question and it is important
that candidates know how to apply their knowledge of consolidation and equity accounting to
objective test style questions as well as the constructed response questions presented in section C
of the exam.

Examiner’s report – FR September/December 2021 7

Question 4

Bouani Co manufactures cycling equipment. It has a number of specialised frames in

inventory which cost $20,000 to manufacture. These frames were manufactured following
an order from a customer at an agreed selling price of $30,000. Due to recent
technological advances, the current cost of manufacturing such frames is estimated to be
$15,000.
Bouani Co also has inventory of 3,000 pedals with a cost of $20 each. These have
become damaged. If the company spends $5,000 to repair all of them, these could be
sold for $21 each.

Which TWO of the following statements regarding Bouani Co's inventory are true?

Options:

A. The frames should be valued at $15,000

B. The frames should be valued at $20,000
C. The frames should be valued at $30,000
D. The pedals should be valued at $60,000
E. The pedals should be valued at $58,000
F. The pedals should be valued at $65,000

What does this test?

This question tests learning outcome B4(a) where candidates must be able to apply the principles of
inventory valuation in accordance with IAS 2 Inventories.

In this question, there are two separate types of inventory – frames and pedals. Candidates needed to
have confidence in their knowledge of IAS 2 requirements and know to ignore information that was not
relevant.

What is the correct answer?

The correct responses were:

B – The frames should be valued at $20,000

E – The pedals should be valued at $58,000

One of the basic principles from IAS 2 is that inventory should be measured at the lower of cost and
net realisable value (NRV).

The frames had cost Bouani $20,000 to manufacture and these were included in inventory at this
amount. The question does not indicate any selling costs which will be incurred so NRV must be the
$30,000 agreed selling price. This means that the frames should continue to be carried at $20,000,
being the lower of cost and NRV. The fact that the frames could now be manufactured for $15,000
is not relevant.

The cost of the pedals is $60,000 (3,000 pedals x $20). The NRV would be $58,000 ([3,000 pedals
x $21] less $5,000 costs to repair). As the pedals are currently being held at a cost of $60,000, the
carrying amount should now be reduced to the lower NRV amount.

Examiner’s report – FR September/December 2021 8

Where did candidates go wrong?
The single biggest mistake by candidates was related to the frames, with candidates indicating that
they should be valued at $15,000 – i.e. the cost to manufacture the frames if they were made now.
However, the frames had already been manufactured for a cost of $20,000 and since this cost will
be recovered through sale (because the NRV is higher than the cost), then no write down of the
inventories would be required.

A common error related to the pedals was to select $65,000 which meant that candidates added the
$5,000 repair costs to the initial cost of the pedals. This was wrong because the pedals have
already been manufactured at a cost of $60,000. NRV is the estimated selling price in the ordinary
course of business less estimated costs of completion and the estimated costs necessary to make
the sale. The pedals need to be repaired before they can be sold for $21 per pedal, which means
that this is a cost necessary to make the sale and should be included in the calculation of NRV.

Examiner’s report – FR September/December 2021 9

Section B

Section B tests candidates’ knowledge on a number of IFRS Standards in more depth than section
A, with three case questions containing five two-mark objective test questions.

We have selected one of the cases that primarily examined IAS 36 Impairment of Assets and IAS
20 Accounting for Government Grants and Disclosure of Government Assistance. You should note
that a case will be a mixture of narrative and calculation questions and can also include different
styles of OT questions similar to those used in section A. Candidates should also read the case
scenario and its requirements carefully. As these questions score either two marks or zero marks, it
is important that candidates do not misread or miss any information in the scenario. Close reading
of the requirements is also important to identify any specific instructions such as rounding.

Section B – Scenario
The following issues relating to Chestnut Co's non-current assets are outstanding for the
year ended 31 December 20X7:

(1) Factory
At 1 January 20X7, Chestnut Co's factory had a carrying amount of $5m. It has a
remaining useful life of ten years at that date. On 31 December 20X7, there was an
impairment review of the factory and the recoverable amount was deemed to be $2.5m.
Chestnut Co's factory had previously been revalued upwards and the revaluation surplus
has a credit balance of $1m relating to this factory.

(2) Head Office

Chestnut Co's head office cost $12m on 1 January 20X1 and is being depreciated over a
40-year life. On 31 December 20X4, there was an impairment review of the head office
and the recoverable amount was deemed to be $9m. A more recent valuation, at 31
December 20X7, has estimated that the recoverable amount of the head office is $11m.

(3) Machinery
On 1 April 20X7, Chestnut Co received a grant of $2.6m towards new production
machinery. The machinery cost $4m and is expected to have a useful life of five years.
Depreciation is charged on a straight-line proportionate basis.

Chestnut Co uses the cost model when accounting for its head office, and the deferred
income method in relation to government grants.

Examiner’s report – FR September/December 2021

10
Question 1

Which of the following assets belonging to Chestnut Co require an annual

impairment review?

Options:

A. The head office only

B. The machinery only
C. Both the head office and the machinery
D. Neither the head office nor the machinery

What is the correct answer?

The correct answer is D – Neither the head office nor the machinery

The head office and machinery only need an impairment review where there are any
indications that these assets might be impaired. The fact that they have been
impaired before does not mean that an annual impairment review is required
regardless of whether there are any indicators of impairment.

Where did candidates go wrong?

The top choice by candidates for this question was the correct answer, but a
significant number of candidates selected A or C.

Candidates may have been confusing the concept of an impairment review with the
requirement to assess whether there are any indications of impairment. It is
important that candidates have a good understanding of the specific requirements for
impairment testing under IAS 36 and must also take care to understand exactly what
is being asked in the requirement.

Examiner’s report – FR September/December 2021 11

Question 2
In accordance with IAS 36 Impairment of Assets, what is the correct journal entry
to reflect the depreciation and the impairment of Chestnut Co's factory for the
year ended 31 December 20X7?

Options:

A. Dr Statement of profit or loss $1.5m

Dr Revaluation surplus $1m
Cr Non-current assets $2.5m

B. Dr Statement of profit or loss $2.5m

Cr Non-current Assets $2.5m

C. Dr Non-current assets $2.5m

Cr Statement of profit or loss $1.5m
Cr Non-current Assets $1m

D. Dr Non-current assets $2.5m

Cr Statement of profit or loss $2.5m

What is the correct answer?

The correct answer is A:

Dr Statement of profit or loss $1.5m

Dr Revaluation surplus $1m
Cr Non-current assets $2.5m

At 1 January 20X7, Chestnut Co’s factory had a carrying amount of $5m and a
useful life of ten years. Therefore, the annual depreciation charge required would be
$0.5m ($5m / 10 years) and the carrying amount at 31 December 20X7 would be
$4.5m ($5m - $0.5m).

The recoverable amount of the factory was deemed to be $2.5m which means that
an impairment loss of $2m is required ($4.5m - $2.5m).

As there is an existing revaluation surplus of $1m relating to this factory, the

impairment loss is treated as a revaluation decrease and the impairment loss should
first be debited to the revaluation surplus before any remaining loss is debited to the
statement of profit or loss.

Therefore, the carrying amount of the factory within non-current assets will reduce by
$2.5m in total and the split of the impairment loss will be $1m to the revaluation
surplus and $1.5m to the statement of profit or loss.

Examiner’s report – FR September/December 2021 12

Where did candidates go wrong?
Candidates generally performed well in this question. In particular, most candidates
realised that the revaluation surplus needed to be adjusted, which eliminated options
B and D as realistic choices.

Option C includes the correct figures and nominal ledger accounts but the debits and
credits were reversed. Unsurprisingly, this was the most common incorrect option
which candidates selected. Although some candidates may not have known whether
the accounts should be debited or credited, it is also likely that many candidates
simply misread the information in their haste to complete the question. It is important
to take care in these situations to ensure that marks are not lost by selecting the
incorrect option simply by not taking the time to read the options carefully.

Examiner’s report – FR September/December 2021 13

Question 3

What is the carrying amount of Chestnut Co’s head office in the statement of
financial position as at 31 December 20X7?

Options:

A. $8.25m

B. $9.9m

C. $10.8m

D. $11m

What is the correct answer?

The correct answer is B – $9.9m.

On 31 December 20X4, the carrying amount of the head office would have been
$10.8m ($12m x 36/40 years) before the impairment review on that date. Following
the impairment review, the head office would have been impaired to its recoverable
amount of $9m with an impairment loss of $1.8m ($10.8m - $9m) being charged to
the statement of profit or loss.

The valuation of $11m on 31 December 20X7 means that there is a reversal of this
original impairment loss. In accordance with IAS 36, an increase to the carrying
amount of the head office attributable to the reversal of an impairment loss must not
exceed the carrying amount that would have been determined had no impairment
loss been recognised for the asset in prior years.

As the head office is accounted for under the cost model (rather than the revaluation
model), the impairment loss can only be reversed to the extent that the asset is
carried at the amount that it would have been had no impairment taken place.

This would be $9.9m, being $12m less seven years’ depreciation (1 January 20X1 to
31 December 20X7) at $0.3m per year ($12m / 40 years).

Where did candidates go wrong?

Candidates who selected $8.25m took the carrying amount at 31 December 20X7
without applying any impairment reversal. This would have been calculated by using
the $9m recoverable amount at 31 December 20X4 and continuing to depreciate the
asset over the remaining useful life of 36 years ($9m x 33/36 years).

Candidates who selected $11m included the asset at its fair value, effectively
performing a revaluation despite the asset being accounted for under the cost model
per the scenario.

Examiner’s report – FR September/December 2021 14

Candidates who selected $10.8m took the asset back to its pre-impairment carrying
amount, so did not factor in any subsequent depreciation which would have taken
place.

Examiner’s report – FR September/December 2021 15

Question 4

Which of the following statements relating to government grants is correct?

Options:

A. The deferred income method should always be used for grants related to
assets

B. Grants related to income must be disclosed separately in the statement of

profit or loss as other income

C. The deferred income method should only be used if the grant is repayable

D. Grants related to assets can be accounted for using either the deferred income
method or by deducting from the asset’s carrying amount

What is the correct answer?

The correct answer is D – Grants related to assets can be accounted for using
either the deferred income method or by deducting from the asset’s carrying
amount

Where did candidates go wrong?

Most candidates answered this question correctly, which requires a good
understanding of the requirements of IAS 20.

IAS 20 states that government grants related to assets, including non-monetary

grants at fair value, shall be presented in the statement of financial position either by
setting up the grant as deferred income or by deducting the grant in arriving at the
carrying amount of the asset, making option D correct.

Consequently, option A cannot be correct as it states that the deferred income

method must always be used. Similarly, the standard does not stipulate that only the
deferred income method can only used if the grant is repayable, so option C cannot
be correct.

Option B makes reference to grants related to income and candidates should

recognise from IAS 20 that grants related to income are presented as part of profit or
loss, but can be presented separately, under a general heading such as ‘other
income’, or can be deducted in reporting the related expense. Therefore, the
statement in option B is much narrower than the standard allows and is not correct.

Examiner’s report – FR September/December 2021 16

Question 5

What is the carrying amount of the non-current liability in respect of the

government grant in Chestnut Co’s statement of financial position as at 31
December 20X7?

Options:

A. $2.08m

B. $1.69m

C. $2.21m

D. $1.56m

What is the correct answer?

The correct answer is B – $1.69m.

The $2.6m grant should be released over the five-year useful life of the asset,
beginning on 1 April 20X7. Therefore, nine months should be released in 20X7, giving
$0.39m ($2.6m / 5 years x 9/12 months). This leaves $2.21m ($2.6m - $0.39m) total
deferred income at 31 December 20X7.

As $0.52m ($2.6m / 5 years) will be released to the statement of profit or loss over the
next 12 months, this means that $0.52m of deferred income will be a current liability
and $1.69m ($2.21m - $0.52m) will be a non-current liability.

Where did candidates go wrong?

Candidates who selected $2.08m released a full year of deferred income in the year
ended 31 December 20X7 rather than just nine months ($2.6m - $0.52m) and did not
split the liability between its current and non-current components.

Candidates who selected $1.56m released a full year of deferred income as above,
although did split the liability correctly based on their own figures ($0.52m current
liability and $1.56m non-current liability).

Candidates who selected $2.21m correctly released nine months of deferred income
but did not split the liability between current and non-current. This was the most
common answer and demonstrates how important it is that candidates read the
requirements of a question carefully as it is common to be asked for the current or
non-current portion of a liability rather than the total liability.

Examiner’s report – FR September/December 2021 17

Section C

We have selected two constructed response questions, Pinardi Co and Mims Co,
that are available on the ACCA Practice Platform. Pinardi Co is a financial
statements analysis and interpretation question for a group of companies, while
Mims Co is a single entity financial statements preparation question. When using
the following detailed commentary, it would be helpful to consult the questions and
answers available to you here.

Pinardi Co

Pinardi Co shares similarities with recent questions examined on the syllabus area of
analysis and interpretation of the financial statements (syllabus section C). The
question had both numerical information and additional narrative information relating
to a subsidiary that was sold at the beginning of the financial year. Candidates were
asked to complete a variety of tasks using this information.

The analysis and interpretation of a group is an important area of the syllabus and will
continue to be examined. As in previous examination sessions, most candidates failed
to score high marks on this question. The reason for this seemed to be poor exam
technique such as not addressing the requirements or not adequately using the
information in the scenario. The focus for this detailed commentary will be on getting
the most out of the question, rather than simply recreating the suggested solution, and
will highlight the importance of using the scenario when constructing an answer to an
interpretation question.

Requirement (a) – 2 marks

Calculate the gain on disposal of Silva Co that would need to be included in the
consolidated statement of profit or loss for the Pinardi group for the year ended
31 December 20X7.

Calculating a gain or loss on the disposal of a subsidiary has been part of the FR
syllabus for many years now. The information on the disposal of Silva Co, a 100%
owned subsidiary, was mostly straightforward. Many candidates were able to score
Examiner’s report – FR September/December 2021 18
full marks on this requirement. However, there were some candidates who omitted this
part of the answer entirely and others who demonstrated a lack of knowledge of this
syllabus area.

To calculate a gain on the disposal of a subsidiary, the disposal proceeds should be

compared to the carrying amount of the subsidiary at the date of disposal (subsidiary
net assets and carrying amount of goodwill at disposal). Many candidates were able
to identify the disposal proceeds as part of the calculation, even where the remainder
of the calculation was confused.

Candidates did not need to calculate net assets at disposal in this question as these
were provided in note (2). The goodwill at disposal however did need to be determined.
The goodwill at acquisition was already calculated and provided in the question,
however, note (2) advised that goodwill had been impaired by 30% in 20X5 and this
needed to be applied.

Presentation varied, but typically the following two layouts were provided by those
candidates that achieved full marks:

Layout 1:
$’000
Proceeds 42,000
Net assets at disposal (35,000)
Goodwill at disposal (4,200)
($6m x 70%)
Gain on disposal 2,800

Layout 2:
$’000 $’000
Proceeds 42,000
Net assets at disposal (35,000)
Goodwill at disposal:
Goodwill at acquisition 6,000
Impairment ($6m x 30%) (1,800)
(4,200)
Gain on disposal 2,800

Requirement (b) – 3 marks

Explain whether or not the disposal of Silva Co is likely to constitute a

discontinued operation, and the correct accounting treatment for this.

This part of the question required candidates to apply their knowledge of IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations. Numerous candidates
ignored this part of the question altogether which was both surprising and
disappointing.

Note (1) of the question informed candidates that “the accounting assistant has not
accounted for Silva Co as a discontinued operation because the disposal occurred on
1 January 20X7”. The marking team noted that many candidates simply agreed with

Examiner’s report – FR September/December 2021 19

this statement before moving on to answer part (c). This was not correct, and as such,
did not attract any marks.
A large number of answers simply stated that the current treatment was not correct,
and that the disposal of Silva Co was a discontinued operation. Whilst this did attract
some credit, without further explanation, candidates were not able to score well.

It was pleasing to see that there were some candidates who were able to not only
identify that the disposal was a discontinued operation, but to support this with the
definition of a discontinued operation from the IFRS Standard.

A good answer identified that the activities of Silva Co manufacturing jewellery

represented a separate major line of operations to the Pinardi Group that operates in
the fragrance and cosmetics industry.

Only a small number of candidates fully addressed the requirement by explaining the
accounting treatment of a discontinued operation. This is an important area of the
syllabus and candidates are advised to ensure they are familiar with the accounting
treatment for a discontinued operation.

Requirement (c) – 4 marks

Calculate the following ratios, using the pre-formatted table, for the Pinardi
group for 20X7 and 20X6:
• Gross profit margin;
• Operating profit margin;
• Interest cover; and
• Inventory turnover days.

It was pleasing to see that many candidates were able to score full marks on this part
of the question. The examining team continue to recommend that candidates show
not only the relevant formula for the ratios, but also fully show their workings. An
incorrect answer without workings will not be awarded any marks, but where workings
are provided markers are able to award marks despite any ‘calculation errors’ where
relevant.

It was clear that for those candidates who did not score well on this part of the question,
their knowledge of ratio formulae was limited. This is an integral part of the syllabus
and features at every examination sitting and as such candidates should have a
working knowledge of financial ratios.

Requirement (d) – 11 marks

Analyse the performance and position for the Pinardi group for the year ended
31 December 20X7 compared to the year ended 31 December 20X6.

Time management is crucial in all ACCA examinations. In a three-hour exam there are
1.8 minutes per mark available (180 minutes / 100 marks). Candidates therefore
should have allocated just under twenty minutes to this part of the question. This time
should be used to provide plausible explanations for changes in performance and
position using the scenario.

Examiner’s report – FR September/December 2021 20

The examinations team noted that many scripts continue to provide superficial,
‘textbook’ answers that do not draw on any of the information from the scenario.
Candidates should note that these types of answers will attract little, if any, marks.

To earn marks in this type of question it is essential that candidates use the scenario
to provide a rationale for the changes in the performance and position. This scenario
was not short of clues, one of the biggest being the disposal of Silva Co, so it was
surprising that many answers failed to consider this at all.

The disposal of the subsidiary took place at the start of the year and candidates should
consider what the impact of this would be when comparing this year’s ratios to the
previous year. At a basic level, the group results in 20X7 exclude Silva Co’s revenue
and expenses in the statement of profit or loss, and its assets and liabilities would be
excluded in the statement of financial position. This would therefore account for some
of the variations in the ratios. Some candidates did identify this but failed to develop
their analysis further.

Besides the direct link to the disposal of Silva Co, there was additional information in
the scenario that was vital to the analysis of the Pinardi Group:

• Pinardi Co will now receive $2m per year for use of the Silva Co brand
• Silva Co’s key financial information
• One-off payment of $3 million to exit the leave vs. previous lease cost of
$2.5 million per year
• Raw materials sourced from overseas resulting in exchange gains and
losses

The above information should be used to add depth to candidates’ analysis. Any
answer that does not incorporate the impact of the disposal and this additional
information would not score highly.

A good answer would discuss the immediate impact of the disposal such as the
reduction in both revenue and costs, but then would aim to develop this further. For
example, despite the reduction in revenue following the disposal of Silva Co, gross
profit and operating margins improved. If candidates calculated the gross profit and
operating profit margins for Silva Co using the information provided in note (4),
candidates could go on to explain that Silva Co has good results on a standalone
basis, but these were below group results, suggesting that better margins are earned
in the fragrance and cosmetics industry compared to jewellery manufacturing.
Reasons for this could have been explored, such as higher costs of raw materials,
production etc.

The highest-level candidates would then develop their answers further by drawing on
the information that has been included in the scenario. For example, operating
expenses include a one-off payment as a result of exiting the lease, which distorts the
current year profit. By excluding this one-off cost, operating profit margin would
improve, and this would continue to be expected in 20X8.

Some candidates recalculated the 20X6 results for the Pinardi Group excluding the
results of Silva Co and went on to explain that these results would assist with a more
accurate comparison, and this was well received by the marking team.

Examiner’s report – FR September/December 2021 21

Overall, the analysis on these questions continues to be disappointing with only a
minority of candidates using the scenario to form their answer. Answers were either
far too brief or too generic. The golden rules for candidates to think about for producing
a good answer are:

• Use the scenario – any answer not based on this will not score well
• One mark per well explained point
• Talk about all areas provided in the scenario
• Always say WHY things have moved, not just that they have

If a candidate follows these rules, they will be able to score well in this question. Sadly,
far too many seem content with learning ratio definitions and trying to repeat these in
the exam.

Examiner’s report – FR September/December 2021 22

Mims Co

Mims Co is a typical example of a single entity accounts preparation question from

section C of the exam. In this type of question, you will be provided with a trial balance
(or an extract from a trial balance) and some additional information that will require
adjustments in accordance with relevant IFRS Standards and accounting principles.

Question requirements will vary, but you can expect to be asked to prepare a mixture
of a statement of profit or loss and other comprehensive income, a schedule of
adjustments to profit, a statement of changes in equity, a statement of financial
position, or a specific extract from the financial statements such as, ‘financing
activities’ from the statement of cash flows.

Before you attempt this question, make sure you are clear on what the requirement is
asking for. There is no point in, for example, preparing a statement of financial position
when the requirement has not asked for this. Providing additional statements that are
not required wastes valuable time and will not attract any marks.

Mims Co had the following requirements:

• Requirement (a) – 12 marks
Prepare the statement of profit or loss for Mims Co for the year
ended 31 December 20X5.
• Requirement (b) – 5 marks
Prepare the statement of changes in equity for Mims Co for the year
ended 31 December 20X5.
• Requirement (c) – 4 marks
Prepare the following extracts from the statement of cash flows for
Mims Co for the year ended 31 December 20X5:
(i) Cash flows from investing activities; and
(ii) Cash flows from financing activities.
Overall, this question is worth 20 marks. For 20 marks you would allocate 36 minutes
of your exam time to answering this question (180 minutes / 100 marks = 1.8 minutes
per mark x 20 marks).

For many questions, it will be advised that you further sub-divide this time between the
separate tasks (as noted in requirement (d) of Pinardi Co above). For Mims Co, part
Examiner’s report – FR September/December 2021 23
(a) is worth 12 marks and therefore 21.6 minutes could be spent on this (and similarly
nine minutes could be spent on part (b) and so on). This approach, however, is not
advised for this type of question because some of the adjustments required to the trial
balance will impact both the adjustment to retained earnings and the statement of
financial position. Therefore, it makes more sense to deal with these separate tasks
together. This approach will be further explained below.

From an exam technique perspective, it is advised that you set up the answer/layout
for the requirements first. For example, for Mims Co, lay out the working for the
statement of profit or loss, the statement of changes in equity and the statement of
cash flow extracts within the spreadsheet. Leave a couple of rows between each
statement so that it is easy for the marker to distinguish between where one statement
ends, and another begins.

As a general comment, you must ensure that all trial balance items are included either
in the relevant working or within the financial statements themselves. It is often noted
by the marking team that some balances are not transferred from the trial balance into
the answer and therefore, what are considered to be easy marks, are lost. In this
question, revenue, distribution costs and finance costs did not require adjustment as
a result of the additional information and could be transferred directly to the statement
of profit or loss. Including these balances in this statement attracted marks from the
marking scheme. Similarly, the share capital and retained earnings in the trial balance
at 1 January 20X5 could have been included in the opening balances on the statement
of changes in equity.

It is important to note that you do not have to deal with the adjustments in the order
presented in the question, although this is a logical approach and will ensure you do
not miss out any required adjustments. However, in this question you may, for
example, be most confident in adjusting for income tax and deferred tax at note (3)
and be less confident with intangible assets in note (6). Dealing with the adjustments
that you are most familiar with first may ease you into the question and help to stop
panic setting in.

We will now consider each of the adjustments in more detail, which may help when
you work through the question for practice.

(1) Inventory
This note contains information about an error that was made in the inventory
count resulting in inventory being overstated by $0.7m at 31 December 20X4.
Most candidates identified that an adjustment needed to be made, but there was
often confusion about how to deal with this prior period error.

When preparing the statement of profit or loss, cost of sales is generally

comprised of opening inventory plus purchases less closing inventory. The
closing inventory at 31 December 20X4 (i.e. the opening inventory for the year
ended 31 December 20X5) is overstated by $0.7m and, therefore, cost of sales
needed to be reduced by this amount. Many candidates recognised that an
adjustment was required to cost of sales, but some added the adjustment on in
error. This was generally due to candidates misreading the scenario and thinking
that the error related to the 20X5 closing balances, as most candidates that did
this failed to go on and adjust opening retained earnings in the statement of
changes in equity.
Examiner’s report – FR September/December 2021 24
 Candidates are encouraged to think about the impact that the overstated
inventory would have on last year’s profit. If closing inventory was overstated in
20X4, then too much was deducted in the calculation of cost of sales for that
year, leading to lower cost of sales and therefore greater profit. As a result of last
year’s inventory being overstated, last year’s profit was too high. In accordance
with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
Mims Co must correct the prior period error retrospectively, and therefore
opening retained earnings for the year ended 31 December 20X5 are misstated
and should be reduced by $0.7m in the statement of changes in equity.

(2) Court case

This is a simple bookkeeping adjustment rather than the application of the
recognition criteria for a provision per IAS 37 Provisions, Contingent Liabilities
and Contingent Assets. Candidates were simply told that a provision that had
already been accounted for in 20X4 had been settled at 31 December for $6m.
Mims Co had correctly accounted for the cash payment of $6m but has
incorrectly recorded the debit entry to the suspense account.

This incorrect entry means that the provision continues to be recognised in the
trial balance at $4.6m. Now that the case has been settled, this obligation no
longer exists and therefore should be reduced to zero. As Mims Co settled the
case for more than the original estimate, this additional cost is to be recognised
as an expense in the current year. It may be helpful to consider the correcting
journal entry which would be required:

$’000 $’000
Dr Provision 4,600
Dr Administrative expenses 1,400
Cr Suspense account 6,000

As you are not asked to prepare a statement of financial position, the adjustment
required here exists only in the statement of profit or loss and candidates were
required to increase administrative expenses by $1.4m.

(3) Income tax

In order to complete the statement of profit or loss, candidates needed to
calculate the tax expense/income in the current year. Whilst this was well
attempted by many candidates, there were often errors made. This was largely
due to the estimated tax refund that had been calculated in the current year.

Many candidates overlooked the year end estimate being a refund and recorded
it as an expense in their workings. Other errors included the incorrect treatment
of the under provision for the prior year income tax and the deferred tax liability
of $8.2m was often incorrectly added into the tax expense in full.

Examiner’s report – FR September/December 2021 25

 The income tax for the statement of profit or loss should have been calculated
as follows:
$’000
Year end estimate (refund) (1,200)
Under provision from 20X4 140
Increase in deferred tax liability 500
($8.2m – $7.7m)
(560) To be shown as income in
profit or loss

(4) Share issue

The adjustment in respect of the share issue is considered to be relatively
straightforward in this question and many candidates dealt with this correctly.
The trial balance indicates that there are 60 million shares in issue at the start of
the year (as these have a nominal value of $1). On 30 September 20X5, Mims
Co made a 1 for 4 rights issue at an exercise price of $3.50 and has only recorded
the cash correctly. Candidates did not need to prepare the debit/credit
adjustment specifically, as no statement of financial position was required in this
question, however candidates needed to know how much cash was received
from the issue so as to include it in the statement of cash flow in part (c) and the
share capital/share premium needs to be disclosed in the statement of changes
in equity for part (b).

The number of shares issued on 30 September 20X5 were 15 million (60 million
x 1/4) and so the cash received was $52.5m (60 million x $3.50). Candidates
should recognise this as an inflow from financing activities in part (c).

The credit side of the share issue should have been split between share capital
and share premium and not recorded in the suspense account. The nominal
amount of the shares should be recorded in share capital with the balance being
recognised in share premium.

Therefore, $15m should be recorded in share capital (15 million x $1) and
$37.5m should be recorded in share premium (($52.5m - $15m) or (15 million x
($3.50 - $1)). Many candidates recorded this correctly in the statement of
changes in equity, although there were some variations such as only recording
share capital.

(5) Investment property

Again, this adjustment was considered to be relatively straightforward, but many
candidates did not account for this entirely correctly. Candidates needed to apply
their knowledge of IAS 40 Investment Properties. In accordance with IAS 40,
when adopting the fair value model, investment property is not depreciated, and
should be recorded on the statement of financial position at fair value with any
resultant gain or loss recorded within profit or loss. Mims Co should not have
depreciated the property, and this will need to be reversed. $1 million will need
to be removed from administrative expenses ($20m / 20 years).

The property at the end of the year has a fair value of $22m. When compared
with the property value at the start of the year of $20m there is a $2m gain that
Examiner’s report – FR September/December 2021 26
 should be recorded in investment income. Some candidates recorded the gain
in administrative expenses or cost of sales and marks were awarded accordingly
where the signage was correct.

Many candidates failed to reverse the incorrect depreciation and simply recorded
a gain of $3m, being the difference between the fair value of $22m and the
incorrect carrying amount on the trial balance of $19m.

It is important to note that gains (or losses) on investment property must be

recorded in profit or loss and not in other comprehensive income. Many
candidates did this and were not able to score full marks as a result.

To complete the picture for investment property, candidates also needed to

consider the impact on the statement of cash flow in part (c). This is an
acquisition of an asset and therefore the cash spent of $20m to purchase the
investment property should also be recorded as a cash outflow within investing
activities.

(6) Brand names

Mims spent $1.3m promoting one of its major brands and has capitalised this
within its intangible assets. This treatment is not in accordance with IAS 38
Intangible Assets and should be removed from intangible assets and recognised
as an expense. It is important to note that as Mims Co considered this to be an
intangible asset with an indefinite life, no amortisation will have been charged,
so the reversal of $1.3m completes this part of the adjustment

A new brand name was purchased in the year for $2m. In accordance with IAS
38, purchased intangibles must be capitalised. If the intangible has a finite life,
then the intangible asset should be amortised, irrespective of any expected
increases in value. Therefore, Mims Co needed to depreciate this brand over its
useful life of five years. An added complication is that the brand itself was
purchased on 1 October 20X5 and therefore the brand should only be amortised
for three months (October to December). Many candidates who recognised the
need for amortisation often calculated a full year. Some merit was awarded for
this, but for full marks the expense had to be time apportioned.

The purchase of the brand name from the competitor, also represents a cash out
flow to be recorded within investing activities on the statement of cash flows in
part (c).

(7) Dividend
The final note relates to the dividend paid. Dividends paid are not business
expenses, but appropriations of profit to the owners of the business. As such,
Mims Co should not have recorded the dividend paid as an expense. Candidates
need to be careful and look at the date the dividend is paid. The dividend paid
was at 31 December 20X5 which is after the share issue in note (4). This means
that the $0.04 per share is on the closing number of shares, not the opening
share capital. Many candidates unfortunately calculated the dividend based on

Examiner’s report – FR September/December 2021 27

 the opening share capital, which was incorrect. Some merit was awarded where
the correct adjustment took place.

To correctly deal with this note, the dividend paid should first be calculated. At
31 December 20X5 there were 75 million shares in issue (60 million opening
share capital + 15 million issued in note (4)). All shares in issue were subject to
the dividend and therefore $3m was paid (75 million x $0.04). The $3m should
be removed from administrative expenses and recorded as a reduction against
retained earnings in the statement of changes in equity (part (b)).

The dividend paid would also be recognised as a cash outflow within financing
activities in the statement of cash flow in part (c). Where candidates had
incorrectly calculated the dividend paid but recorded it as an outflow in the
statement of cash flows, own figure marks were awarded.

Overall, the preparation of financial statements is an integral part of the FR syllabus

and is something that should be practiced. Please ensure that you attempt to use the
relevant practice workspace available on the ACCA website so that you get used to
competing your answer on a spreadsheet. It is vital that you show all workings. If you
use the functionality of the spreadsheet, markers will be able to view your workings
within the cell. If you do not use the spreadsheet to calculate your figures, you must
ensure that you set out all workings and calculations so that the marker is able to follow
through what you have done and award marks accordingly.

On a final note, when completing this question, don’t forget to make sure that all trial
balance items have been used or transferred into the relevant statements, and when
asked to prepare a statement of changes in equity, ensure that you transfer the profit
for the year into retained earnings.

Examiner’s report – FR September/December 2021 28

Financial Reporting
(FR)
March / June 2021
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Section A ............................................................................. 3
Question 1 ........................................................................ 3
Question 2 ........................................................................ 4
Question 3 ........................................................................ 5
Question 4 ........................................................................ 7
Section B ............................................................................. 9
Question 1 ...................................................................... 10
Question 2 ...................................................................... 11
Question 3 ...................................................................... 12
Question 4 ...................................................................... 13
Question 5 ...................................................................... 14
Section C ........................................................................... 16
Pastry Co ....................................................................... 16
Requirement (a) – 6 marks ......................................... 16
Requirement (b) – 14
Examiner’s report – FR
marks .......................................
March/June 2021 17 1
Gold Co .......................................................................... 19
Requirement (a) – 6 marks ......................................... 20
Requirement (b) – 14 marks....................................... 21
General comments

This examiner’s report should be used in conjunction with the published March/June
2021 sample exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The
model of delivery for the CBE exam means that candidates do not all receive the same
set of questions.

• Section A objective test questions – we focus on four specific questions that

caused difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at one specific question
that was challenging for candidates.
• Section C constructed response questions – here we provide detailed
commentary around two constructed response questions and identify some of
the main issue that have affected candidates’ performance in this section of the
exam, identifying common knowledge gaps and offering guidance on where
exam technique could be improved, including in the use of the CBE functionality
in answering this question.

Examiner’s report – FR March/June 2021 2

Section A

Here we look at FOUR Section A questions which proved to be challenging for

candidates.

Question 1

Which of the following is NOT included in the International Accounting

Standards Board’s (IASB) definition of an asset in the Conceptual Framework
for Financial Reporting?

Options:

A. The asset is controlled by the entity

B. The asset is a present economic resource
C. The economic resource can be reliably measured
D. The asset exists as a result of past events

What does this test?

This question tests learning outcome A2(b) where candidates must be able
to define the various elements of the financial statements and apply the
recognition criteria in accordance with the Conceptual Framework for
Financial Reporting (the Conceptual Framework).

Candidates must appreciate that all areas of the syllabus can be tested in
the exam. Highly narrative parts of the FR syllabus are often ignored by
candidates in favour of focussing on other areas, but candidates must ensure
they have a breadth of knowledge covering all syllabus areas.

What is the correct answer?

The correct answer is C – The economic resource can be reliably measured.
The Conceptual Framework defines an asset as follows:
‘An asset is a present economic resource controlled by the entity as a result
of past events.’
Therefore, the only statement that is NOT included in the definition of an
asset is C.

Where did candidates go wrong?

The most common options selected were either B or D. This implies that many
candidates are not familiar with the terminology from the Conceptual Framework
regarding the definitions of the elements of financial statements.

Although individual IFRS Standards may require an entity to be able to reliably

measure an asset before recognising it, this is not part of the definition of an asset.

Examiner’s report – FR March/June 2021 3

Question 2

Platinum Co acquired 80% of the ordinary share capital of Palladium Co on 1

April 20X0 by means of cash and contingent consideration. At this date,
Platinum Co assessed the fair value of contingent consideration at $250,000.
Platinum Co calculates non-controlling interest, using the fair value at the
date of acquisition, which was estimated to be $100,000 and the goodwill
arising on acquisition was $300,000.
The following figures for Palladium Co are relevant:
$'000
Ordinary shares of $1 each at
acquisition 500
Retained earnings at 1 January 20X0 (300)
Profit for the year ended 31
December 20X0 120

The profits for Palladium Co have accrued evenly throughout the year.
What was the cash consideration paid by Platinum Co for the
investment in Palladium Co?

$ ____________
What does this test?
This question tests learning outcome D2(a) which is related to preparing
consolidated financial statements. Although accounts preparation will be tested in
some form as part of the constructed response questions in Section C of the exam,
both section A questions and the questions in section B can cover any area of the
syllabus, including accounts preparation.

In this particular question, candidates must use their knowledge of how to calculate
goodwill in order to identify the missing cash figure.

What is the correct answer?

The correct answer is $180,000. Some workings have been provided below which
could have been adopted in the exam. They take the form of preparing a goodwill
calculation using the figures provided in the question and then establishing the cash
consideration as a balancing figure:

Examiner’s report – FR March/June 2021 4

 $'000 $'000
Fair value of consideration transferred:
Cash consideration ?
Contingent consideration 250
Plus fair value of NCI at acquisition 100

Less fair value of net assets acquired:

Shares 500
Retained earnings/(losses) at acquisition (W1) (270) (230)
Goodwill at acquisition 300

Therefore $180,000 is the balancing figure related to the cash consideration

W1 – Retained earnings at acquisition $'000

Retained earnings/(losses) at 1 January 20X0 (300)
Profit to the date of acquisition (120 x 3/12 months) 30
Retained earnings/(losses) at acquisition (270)

Where did candidates go wrong?

Many candidates answered with $150,000 instead of $180,000. This comes from
only including the $500,000 shares in the list of net assets acquired and ignoring the
retained losses brought forward and profit to the date of acquisition.

Although candidates may be more used to seeing a positive value for retained
earnings, they would be expected to recognise that retained losses should be
included as part of the net assets acquired and to calculate this appropriately.

Question 3

Indicate, by clicking on the relevant boxes in the table, whether the

following statements are true or false in relation to accounting for the
acquisition of a subsidiary.

Examiner’s report – FR March/June 2021 5

What does this test?
As with the previous question, this question also tests candidates’ accounts
preparation knowledge, this time through learning outcome D2(g). The focus here is
on accounting for goodwill and bargain purchases.

What is the correct answer?

Statement 1 – True
Statement 2 – True

A gain on bargain purchase will be credited to the consolidated statement of profit or

loss immediately. It is not recognised in the consolidated statement of financial
position.

If liabilities are overstated, then the net assets would be understated. This would
cause any goodwill recognised to be overstated.

For example, the calculations below illustrate the impact of preparing a goodwill
calculation for acquiring 100% of the share capital of a subsidiary for $100,000 cash.
For the purposes of this illustration, we will assume that the correct fair value of the
net assets acquired were $75,000. In one calculation, the liabilities have been
overstated by $30,000, causing the net assets to be incorrectly included in the
calculation at $45,000 ($75,000 - $30,000). In the second calculation, the liabilities
are not overstated, and the net assets are included at their correct fair value of
$75,000:

Liabilities
Liabilities NOT
overstated overstated
$'000 $'000
Fair value of consideration transferred 100 100
Less net assets acquired (45) (75)
Goodwill at acquisition 55 25

As you can see, overstating the liabilities causes the goodwill to be overstated.

Where did candidates go wrong?

Many candidates knew that statement 1 was true but thought that statement 2 was
false. Although not necessary, approaching this question by using some invented
numbers in a basic goodwill calculation may have helped candidates to visualise the
fact that overstating liabilities reduces net assets and consequently will overstate
goodwill.

Examiner’s report – FR March/June 2021 6

Question 4

What does this test?

This question tests learning outcome B11(a) where candidates should be able to
apply the provisions of relevant IFRS Standards in relation to accounting for
government grants.

In this question, Pootle Co has recognised the full government grant as income in the
statement of profit or loss for the year ended 31 December 20X4. Candidates must
realise that some of the grant should have been recorded as deferred income and an
appropriate correcting journal entry is required.

What is the correct answer?

$60,000 / (5 years x 12 months) = $1,000 per month

So, Pootle Co should have only recognised $4,000 ($1,000 x 4 months) of income
in the statement of profit or loss for the year ended 31 December 20X4, with the
remaining $56,000 recognised as deferred income in the statement of financial
position.

The correcting journal entry required is therefore:

Dr Other Income $56,000

Cr Total deferred income $56,000
Examiner’s report – FR March/June 2021 7
Where did candidates go wrong?
Although the most common answer selected was the correct one, there were a
variety of other choices made by candidates which indicate some difficulty with the
concept and approach required.

There are effectively three elements that candidates must do correctly here:
1. Select the correct accounts to adjust;
2. Identify which account should be debited and which should be credited; and
3. Calculate the amount required for the correcting journal

Other income must be adjusted as too much income has been recognised in the
statement of profit or loss. To reduce a credit account such as other income, it must
be debited.

Candidates should realise that no adjustment is required to bank as this has

already been accounted for correctly on receipt of the cash. Therefore, they must
establish that it is deferred income (liability) that should be adjusted by crediting
total deferred income rather than adjusting total accrued income (asset).

The value to be included in the journal will be the same for both debit and credit.

The values available to be selected were:

1. $4,000 – this is the amount of income that should have been recognised,
rather than the $56,000 adjustment required to correct the error
2. $48,000 – this figure meant that a full year’s worth of income was recognised,
rather than just four months
3. $56,000 – this is the correct response and means that only four months of
income are recognised
4. $57,000 – this figure recognised three months of income rather than four
months

Examiner’s report – FR March/June 2021 8

Section B

Section B tests candidates’ knowledge on a number of IFRS Standards in more depth

than section A, with three case questions containing five two-mark objective test
questions.
We have selected one of the cases that examined IAS 38 Intangible Assets. You
should note a case will be a mixture of narrative and calculation questions and can
also include different styles of OT questions similar to those used in section A.
Candidates should also read the case scenario and its requirements carefully. As
these questions score either 2 marks or zero marks, it is important that candidates do
not misread or miss any information in the scenario. Close reading of the
requirements is also important to identify any specific instructions such as rounding.
Section B – Scenario
Wilrob Co has the following research projects at 31 March 20X7:

Project 324 – The project commenced on 1 April 20X6 and incurred total costs
of $15m during the period to 31 December 20X6 on a pro-rata basis. On 30 June
20X6, the directors were confident that the project met the capitalisation criteria
of IAS 38 Intangible Assets. The project was completed and began to generate
revenue from 1 January 20X7. It is estimated that the project will generate
revenue for five years.

Project 325 – The project commenced on 1 September 20X6. Costs of $20,000

per month were incurred until 31 January 20X7 when the project was
abandoned. The specialist equipment that had been purchased for Project 325
was transferred for use in another of Wilrob Co's research projects.

Project 326 – The project commenced on 1 January 20X7. Costs of $40,000 per
month were incurred until 31 August 20X7 when the directors increased the
spend to $60,000 to complete the project quickly as a potential buyer had been
identified on 20 July 20X7. The directors had not been confident of the success
of the project until this point.

Examiner’s report – FR March/June 2021 9

Question 1

Which TWO of the following are required by IAS 38 Intangible Assets in

relation to the amortisation of intangible assets (excluding goodwill)?
Options:
A. Intangible assets should be amortised over the expected useful life or not
at all if the useful life is deemed to be indefinite
B. Intangible assets should not be amortised but instead reviewed for
impairment losses only
C. Intangible assets should be amortised on the basis of the expected
pattern of consumption of the expected future economic benefits
D. Intangible assets should not be amortised or impaired and instead simply
carried forward at their original cost until sold or scrapped
What is the correct answer?
The correct responses are:

A – Intangible assets should be amortised over the expected useful life or not
at all if the useful life is deemed to be indefinite
C – Intangible assets should be amortised on the basis of the expected
pattern of consumption of the expected future economic benefits

Amortisation is the systematic allocation of the depreciable amount of an intangible

asset over its useful life. It serves the same function as depreciation for a tangible
non-current asset.

Where the intangible asset has a finite useful life, it should be amortised. A variety of
amortisation methods can be used (e.g. straight-line or reducing balance method).
The method used should be selected on the basis of the expected pattern of
consumption of the future economic benefits.

Some intangible assets may have an indefinite useful life (i.e. there is no foreseeable
limit to the period over which the asset is expected to generate net cash inflows for
the entity) – this includes goodwill. In such cases, these intangible assets are not
amortised but are instead tested for impairment annually and whenever there is an
indication that the intangible asset may be impaired.

Option B is not correct as this would only apply to intangible assets with an indefinite
useful life (such as goodwill). It does not apply to intangible assets as a whole and
the question specifically excluded goodwill.

Option D is not correct and would lead to intangible assets being overstated in the
accounts.

Where did candidates go wrong?

Most candidates got this question right and, in particular, candidates tended to know
that option A was correct, even if they did not also select option C.

The second most common answer was to select options A and B together. This
implies that some candidates were rushing or did not read the question carefully
enough, perhaps not examining each option available or whether their selections
Examiner’s report – FR March/June 2021 10
make sense together. It is important to read each question carefully and to realise
that option B could not be the correct response as IAS 38 does not apply this rule to
all intangible assets and option A already identifies that intangible assets with an
indefinite useful life should not be amortised.

Question 2

Which TWO of the following statements are true in relation to IAS 38

Intangible Assets?
Options:

A. IAS 38 requires the revaluation of intangible assets where a company has

chosen to revalue its tangible non-current assets
B. IAS 38 does not permit the revaluation of any intangible assets in any
circumstances
C. IAS 38 permits the revaluation of intangible assets only if there is an active
market for such assets
D. IAS 38 requires that the initial recognition of intangibles must be at cost

What is the correct answer?

The correct responses are:

C – IAS 38 permits the revaluation of intangible assets only if there is an

active market for such assets

D – IAS 38 requires that the initial recognition of intangibles must be at cost

An entity’s accounting policy for intangible assets is separate to its accounting policy
for tangible non-current assets. Intangible assets must be measured initially at cost,
but subsequently it is possible to measure certain intangible assets under the
revaluation model where, after initial recognition, intangible assets will be carried at a
revalued amount. However, it is only possible to hold intangible assets under the
revaluation model where an active market exists for such assets.

In practice, this means that most intangible assets will not be measured under the
revaluation model. IAS 38 states that it is uncommon for an active market to exist for
an intangible asset, although it may happen (e.g. for freely transferable intangible
assets such as taxi licences, fishing licenses or production quotas). An active market
cannot exist for intangible assets such as brands, patents or trademarks because
each asset is unique and the price paid for one asset may not provide sufficient
evidence of the fair value of another. Such prices are also often not available to the
public.

Where did candidates go wrong?

Selecting option A was a common mistake. Candidates should take care to realise
that tangible non-current assets and intangible assets are entirely different. Different
IFRS Standards apply to each and revaluing intangible assets is actually quite

Examiner’s report – FR March/June 2021 11

uncommon. There is certainly no requirement to revalue intangible assets simply
because tangible non-current assets are revalued.

Question 3

In accordance with IAS 38 Intangible Assets, what is charged to the

statement of profit or loss for the year ended 31 March 20X7 in respect of
project 324?
Options:

A. $5.5m
B. $6.5m
C. $7m
D. $10m

What is the correct answer?

The correct answer is A – $5.5m.

The $15m of project costs incurred between 1 April 20X6 and 31 December 20X6
cover a nine-month period.

As the project did not meet the capitalisation criteria of IAS 38 until 30 June 20X6,
this means that any costs related to the first three months of the year (1 April 20X6 –
30 June 20X6) were research expenditure which should be charged to the statement
of profit or loss:

$15m x 3/9 months = $5m

Therefore, the remaining $10m ($15m x 6/9 months) would be capitalised as

development expenditure. As the project was completed and began to generate
revenue from 1 January 20X7, the capitalised development expenditure should then
be amortised from that date over its useful life of five years. This requires an
amortisation expense for three months (1 January 20X7 – 31 March 20X7) which
should be charged to the statement of profit or loss:

$10m / 5 years x 3/12 months = $0.5m

Therefore, the total charge to the statement of profit or loss in respect of project 324
for the year ended 31 March 20X7 consists of:

Research expense $5m

Amortisation expense $0.5m
Total charge to statement of profit or loss $5.5m

Where did candidates go wrong?

Candidates who selected $6.5m charged nine months of amortisation to the
statement of profit or loss rather than three months (i.e. charged $1.5m of
Examiner’s report – FR March/June 2021 12
amortisation from the date that the development expenditure criteria was met rather
than from when the asset was available for use on 1 January 20X7).

Candidates who selected $7m charged a full year of amortisation with no pro-rating
at all.

Candidates who selected $10m ignored the initial research expense which should
have been charged to the statement of profit or loss and wrote off the entire $10m of
development expenditure.

Question 4

In accordance with IAS 38 Intangible Assets, which of the following is/are true
or false in respect of the accounting treatment of projects 325 and 326?

accounting treatment of projects 325 and 326?

What is the correct answer?

Statement 1 – True
Statement 2 – False
Statement 3 – False

Examiner’s report – FR March/June 2021 13

 Where did candidates go wrong?
Candidates needed to select the correct option for all three statements to be
awarded credit.

Most candidates knew that statement 1 was true – if the cost were not expensed to
the statement of profit or loss it would be capitalised on the statement of financial
position as an asset, which would not be appropriate for an abandoned research
project.

Although most candidates selected the correct response for each of the three
statements, the second most common response was to select statement 2 as being
true which is incorrect. IAS 16 Property, Plant and Equipment would apply to the
specialist equipment used in project 325. In accordance with IAS 16, depreciation of
the asset would begin when it was available for use. As it was being used for this
project, then it should be depreciated and it makes no difference that the project was
abandoned.

Statement 3 tested how well candidates know the requirements for the development
phase of an internally generated intangible asset (i.e. when it meets the criteria to be
capitalised as an asset on the statement of financial position). The requirements for
this are quite strict and prescriptive, including being able to demonstrate how the
intangible asset will generate probable future economic benefits. Since the directors
were not confident of the success of the project at the year end, it would not have
been possible to recognise this project as an intangible asset and any costs incurred
should instead be expensed to the statement of profit or loss.

Question 5

During the year ended 31 March 20X8, Wilrob Co incurred the following costs:
(1) $400,000 in staff costs incurred in updating a computerised record of potential
customers
(2) $800,000 for the purchase of a domain name for the website of a company
making substantial online sales
(3) $4m for a patent purchased to improve the production process, with an
expected useful life of three years

Which of the above costs would be capitalised as intangible assets in

accordance with IAS 38 Intangible Assets?

Options:
A. 1 only
B. 3 only
C. 2 and 3 only
D. 1, 2 and 3

Examiner’s report – FR March/June 2021 14

What is the correct answer?
The correct answer is B – 2 and 3 only.

An intangible asset can be recognised when it meets:

1. the definition of an intangible asset; and
2. the recognition criteria.

An intangible asset is an identifiable non-monetary asset without physical substance.

An intangible asset can only be recognised if it is probable that the expected future
economic benefits that are attributable to the asset will flow to the entity and the cost
of the asset can be measured reliably.

Both the domain name and the patent meet the definition of being intangible assets
and the cost of each can clearly be measured reliably. Based on the information
available, it appears that economic benefits will flow to the entity through revenue
from online sales (domain name) and production cost savings (patent).

Internally generated customer lists are specifically excluded by IAS 38 from being
recognised as intangible assets (along with other items such as internally generated
brands). This is because any expenditure incurred on such items cannot be
distinguished from the cost of developing the business as a whole.

Where did candidates go wrong?

The most common error was to select that only the patent should be capitalised.
Therefore, while most candidates recognised that the costs relating to the customer
list should not be capitalised, many also thought that the website domain name
should also not be capitalised.

The costs incurred on developing this website would be subject to the requirements
of IAS 38, which would include the $800,000 spent to purchase the domain name.
Although certain costs relating to web design may be expensed to the statement of
profit or loss in accordance with IAS 38, any costs incurred in purchasing a domain
name should be capitalised as an intangible asset.

Examiner’s report – FR March/June 2021 15

Section C

We have selected two constructed response questions, Pastry Co and Gold Co,
that are available on the ACCA Practice Platform. Pastry Co is a financial
statements analysis and interpretation question for a single entity, while Gold Co is
a consolidated financial statements preparation question. When using the following
detailed commentary, it would be helpful to consult the questions and answers
available to you here.

Pastry Co
Pastry Co shares similarities with recent questions examined on the syllabus area
of analysis and interpretation of the financial statements (syllabus section C). The
question contained both numerical information and additional information relating
to two companies, Cook Co and Dough Co, that are potential acquisition targets for
Pastry Co.

Analysis and interpretation is an important area of the syllabus and will continue to
be examined. As in previous examination sessions, most candidates failed to score
high marks on this question. The reason for this seemed to be poor exam technique
by not addressing the requirements or not adequately using the information in the
scenario. The focus for this detailed commentary will be on getting the most out of
the question, rather than simply recreating the suggested solution and will highlight
the importance of using the scenario when constructing an answer to an interpretation
question.

Requirement (a) – 6 marks

Requirement (a) involved some restating of financial statements to make them

comparable. In a single entity interpretation question, it is not uncommon for
candidates to be asked to make some adjustments to figures before calculating ratios.
These adjustments could be to alter financial statements for an accounting policy (e.g.
to remove a revaluation, as in this question) or to correct errors in order to make
Examiner’s report – FR March/June 2021 16
financial statements more comparable. This is done to test a candidate’s knowledge of
double-entry and IFRS Standards, in addition to providing the analysis required.
The adjustments in (a) had mixed results. Some candidates applied another
revaluation, rather than removing the revaluation to prepare the results as if Dough Co
had used the cost model. Other candidates omitted the adjustments completely,
scoring no marks on the section.

A trickier area that candidates struggled with was to adjust for the extra depreciation
that would no longer be incurred if the cost model had been used. Also, only a minority
of candidates remembered that any adjustment they made to the statement of profit or
loss would also be reflected within the retained earnings.

Candidates were then required to recalculate ratios based on their adjustments in (a).
As always, the ‘own figure’ rule was applied here. This means that if candidates had
made errors on the earlier adjustments of their financial statements they were given
the marks for using their own adjusted figures, even if they were incorrect.

As an example, a candidate may have added $30 million to the revaluation surplus,
rather than deducting it as they should have done. As long as they showed their
working in their return on capital employed (ROCE) calculation, they would get the full
follow through marks, even though their capital employed figure was $60m higher than
it should have been.

The use of the ‘own figure’ rule means that the only candidates who would not score
full marks on the ratio calculations were those who either did not know the formulae for
those ratios or those who did not provide workings. If a candidate made an error in
adjusting their figures and then did not provide a working for their adjusted ratio, it was
difficult to see how they had arrived at the calculations. Markers will not try to guess or
assume what the candidate has done, so it is essential that detailed workings are
shown.

Requirement (b) – 14 marks

The FR examinations team have mentioned this in most of the examiners’ reports
which have been written, but it is absolutely essential that candidates use the
information in the scenario in answering the question. Far too many candidates are still
trying to answer analysis questions with explanations rote learned from a textbook.
This means that answers are often generic and bear no relevance to the scenario in
front of them. It is important that candidates understand possible reasons for the
movements in ratios but then use the scenario to fully explain the performance of the
entities.

Candidates can approach this in any way they see fit, although candidates working
their way from top to bottom generally seem to score higher. These candidates discuss
movements in revenue, gross profit margin, operating profit margin and then go on to
ROCE.

Examiner’s report – FR March/June 2021 17

Weaker candidates start with ROCE, explaining how ROCE is made up. This is not
needed in the exam, as we are looking for candidates to explain the reasons for
movements rather than explaining the definitions of ratios.

From the Pastry Co scenario, the following facts can be established from information
provided in the narrative:

• Both companies are in the catering industry

• Dough Co sells to the public, whereas Cook Co is a wholesaler selling to coffee
shops
• Dough Co has expensive city-centre premises, whereas Cook Co has a low-
cost production facility
• Dough Co revalues its property, whereas Cook Co uses the cost model
• Dough Co charges amortisation of research and development (R&D) to
operating expenses, whereas Cook Co charges it to cost of sales.
• Dough Co had $2.5m R&D expense, whereas Cook Co had $1.2m.
• Dough Co pays its directors a salary of $560,000, whereas Cook Co pays its
directors $110,000.
The above information is all we know about the two businesses. All of the comments
or suggestions made by candidates should be based around that information. Any
answer that does not incorporate the above information will not score highly as the
reasons given for differences would be based on guesswork rather than the given
scenario.

A good answer discussed the differing customers that the two companies sold to,
comparing the margins made as a retailer to that as a wholesaler in assessing the
gross profit margin. This could then be developed further by talking about the differing
levels of R&D expense in the two companies, which affects the margins but also
highlights the potential future benefits that may arise.

It would then be hoped that candidates would go on to explain the impact of the
property costs and salary costs on the ratios, discussing how that may fit into the
strategy of each company. Only the very best candidates considered that Cook Co’s
directors may be taking a smaller salary to ensure profits remain high to possibly sell
the company on.

When discussing ROCE, the candidates should have been comparing the vastly
different retained earnings figure, coupled with the difference in loan notes balances.
Some candidates were able to do that and to attempt to explain why this may be, but
other candidates simply stated which company was the most efficient based on which
had the highest ratio.

Candidates who tended to score the highest marks were able to discuss how the
results looked dramatically different when Dough Co’s accounting policies were
brought in line with Cook Co, showing how the choice of accounting policy from a
company can significantly affect its results.

Overall, the standard of narrative was disappointing in responses to this question.

Answers were either too brief or too generic. The golden rules for candidates to think
about to produce a good answer are:

Examiner’s report – FR March/June 2021 18

• Use the scenario – any answer not based on this will not score well
• One mark per well explained point
• Talk about all key areas (revenue in particular), even if it’s not in a ratio
calculation
• Always say WHY ratios or figures have changed or are different
If a candidate follows these rules, they will be able to score well in this type of question.
Unfortunately, far too many candidates seem to be content with learning ratio
definitions and trying to repeat these in the exam.

Gold Co
Gold Co is a fairly straightforward consolidated financial statements question from
syllabus area D2. In this type of question, you may be asked to prepare a consolidated
statement of profit or loss or a consolidated statement of financial position for a simple
group (parent and subsidiary). This type of question may also require you to account
for an associate company.

Overall, this question is worth 20 marks, giving you 36 minutes of your exam time to
answer the entire question (180 minutes/100 marks = 1.8 minutes per mark x 20
marks). It is suggested that you break this down further into the component
requirements of the question. For example, requirement (a) is worth 6 marks overall
and therefore you should allocate 11 minutes of your exam time to this (10.8 minutes
to be precise) and the remaining 25.2 minutes would be allocated to requirement (b).
Please note, you are not expected to answer the requirements in chronological order
so if you wish to complete (b) first that is acceptable. However, this may not be possible
for some questions, depending on the nature of the requirements.

In this type of question, it is absolutely vital that you present your workings clearly for
the marking team. These can either be shown separately or can be included within a
cell in the spreadsheet. If you calculate an amount on the calculator tool incorrectly
and do not show the working, the marking team will not be able to award any own
figure marks.

Examiner’s report – FR March/June 2021 19

Requirement (a) – 6 marks

The calculation of goodwill is a standard adjustment in consolidated financial

statements. When candidates are asked to prepare a consolidated statement of
financial position, the calculation of goodwill is generally dealt with very well. When it
is part of a standalone requirement, some candidates appear to struggle with its
preparation. It is important to note that you could be asked to prepare any of the
adjustments typically associated with a consolidated statement of financial position as
a standalone requirement (e.g. goodwill, non-controlling interest (NCI), consolidated
retained earnings and the investment in associate). It is therefore important that you
understand the make-up of these workings rather than rote-learning an approach to a
consolidated statement of financial position.

Goodwill on acquisition is typically calculated as follows:

$’000
Cost of investment X
NCI at acquisition X
Fair value of net assets at acquisition (X)
Goodwill on acquisition X

The cost of investment in this question is comprised of two elements – a share

exchange and a deferred cash payment, due one year after acquisition.

While many candidates calculated the share exchange correctly, there were common
errors made by some. These errors typically arose where candidates used the incorrect
number of shares in their calculation or, more commonly, the incorrect share price. You
are told in the question that Gold Co acquired 90% of Silver Co’s 16 million $1 equity
shares, therefore they have purchased 14.4 million equity shares. It is this number of
shares that should be used in the share exchange calculation. Some candidates
incorrectly used the full 16 million equity shares in the exchange calculation.

Gold Co issued 8.64 million shares in the exchange (14.4 million shares x 3/5) and
these must be measured at fair value. Many candidates incorrectly used the share
price of $3.50 relating to the value of Silver Co’s shares at acquisition. As Gold Co
issues the shares as part of the acquisition, these shares must be valued using Gold
Co’s share price at acquisition of $8.00.

The deferred cash payment was generally dealt with very well. There were some
surprising calculations though that made use of both the discount factor of 0.9091 that
was given in the question followed by a further application of the discounting formula.
This part of the calculation should have been straightforward and candidates simply
needed to multiply $34.848 million (14.4 million shares x $2.42) by 0.9091 to get the
fair value of the deferred consideration at the acquisition date of $31.680 million. Some
candidates used the discounting formula instead which was also acceptable ($34.848
million x 1/1.11) and marks were awarded accordingly by the marking team.

The NCI at acquisition is to be measured at fair value in the Gold group. Often
candidates will be given this fair value, however in this question, NCI needed to be
Examiner’s report – FR March/June 2021 20
calculated. There were numerous mistakes made by candidates when arriving at this
amount. Remember, the fair value of NCI at acquisition is found by taking the number
of shares the NCI still own, multiplied by the subsidiary share price at acquisition. In
this question this was found as 1.6 million shares (16 million shares x 10%) x $3.50.

Finally, the fair value of net assets at acquisition can be prepared. These should initially
comprise the share capital of Silver Co and its retained earnings at 1 January 20X2.
The retained earnings at acquisition are often incorrectly calculated. In note (1) you
are told the retained earnings of Silver Co at 1 October 20X1 only. So the retained
earnings at acquisition should be $56 million + (3/12 x Silver Co’s profit for the year
($9.920 million)) this would reflect the opening retained earnings, plus the profit made
before Gold Co took control of Silver Co.
There were two net asset fair value adjustments in this question, and details for these
were outlined in note (2). The adjustment to plant was generally dealt with well,
although some candidates incorrectly tried to adjust fair value depreciation within the
calculation of goodwill. Again, this would not be necessary as you are using the fair
values that exist at the date Gold Co takes control. Surprisingly, despite being tested
before, many candidates omitted the fair value adjustment in respect of the contingent
liability entirely. In accordance with IFRS 3 Business Combinations, the contingent
liability was part of net assets acquired and should be included at fair value in the
consolidated financial statements.

Requirement (b) – 14 marks

This requirement is fairly lengthy and would take up the majority of the time for this
question. Candidate performance on a consolidated statement of profit or loss is
usually weaker than when a consolidated statement of financial position is examined,
and this question was no exception.

From an exam technique point of view, you may find it useful to layout the consolidated
statement of profit or loss (and other comprehensive income if there is any)
immediately. In doing this, it is highly recommended that you also head up the split
between the profit that is attributable to the parent and that of the NCI (you will also
need a split for total comprehensive income (TCI) if there is any other comprehensive
income in the question) at the bottom of the consolidation.

Examiner’s report – FR March/June 2021 21

For example:
$’000

Profit for the period X

Other comprehensive income

Revaluation gain etc. X

Total comprehensive income X

Profit for the period attributable to:

Shareholders of P X

NCI X

TCI for the period attributable to:

Shareholders of P X

NCI X

The split of profit and total comprehensive income between the parent company and
NCI should be calculated in a separate working. You should spend time practicing and
revising this.

In Gold Co, many candidates failed to complete the split of profit for the period, with
many omitting it altogether. By not completing the split, candidates immediately lost
marks. If you spend a small amount of time laying out the split in the early part of your
answer, this will act as a reminder to attempt to complete this later on and in doing so
score valuable marks.

When completing the consolidated statement of profit or loss, ensure you get the ‘easy’
marks out of the question early on. These marks are earned in the initial consolidation
process. You should add together all income and expenses (and other comprehensive
income if there is any) for the parent and subsidiary. Be careful though, if control of the
subsidiary was acquired mid-way through the period it will be necessary to time
apportion the subsidiary’s income and expenses. This will almost always be the case
in the FR exam and in Gold Co the post-acquisition period is nine months. This is vital
in a consolidated profit or loss question and is an area that many candidates often
forget.

It is disappointing to note that despite guidance in previous reports from the examining
team, many candidates attempted to take 90% of the subsidiary results in their
answers. This is fundamentally incorrect and the basic consolidation marks will be lost
so please DO NOT proportionately consolidate the results of the subsidiary.

Examiner’s report – FR March/June 2021 22

Having completed the initial consolidation process, candidates should turn their
attention to the consolidation adjustments that may be required. In this question there
is an intra-group sale and purchase that needs to be eliminated, with a further
adjustment for unrealised profit on the goods that remain in inventory at the reporting
date. There is also an additional group expense in respect of fair value depreciation
and an associate company. These are standard consolidation adjustments for the FR
exam and on the whole were well attempted, although there were some common errors
or omissions noted by the marking team.

Note (4) of the question informs candidates that sales made between Gold Co and
Silver Co in the post-acquisition period had consistently been $600,000 per month.
These are internal sales and purchases within the group and will need to be removed
from both revenue and cost of sales (purchases). Often candidates removed $5.4
million ($600,000 x 9 months) from revenue but a different amount from cost of sales.
This is an error. The adjustment to cost of sales should be the same as the adjustment
to revenue, in this case, $5.4 million. Once you have eliminated this internal
transaction, you will then need to consider any unrealised profit that remains on the
transaction. Where unrealised profit in inventory exists, the adjustment should be made
to cost of sales.

The fair value adjustment for plant will require an additional consolidation expense in
respect of fair value depreciation. This was generally done well by the majority of
candidates. However, some candidates omitted this adjustment all together, while
others failed to time apportion the depreciation charge for the post acquisition period
(9 months).

Gold Co’s investment income currently includes a dividend from an investment in a

40% owned associate company. This dividend should be removed and replaced with
a 40% share of the associates profit for the year of $1.2 million ($3 million x 40%). This
is in accordance with IAS 28 Investments in Associates and Joint Ventures. Many
candidates successfully adjusted for the share of profit but failed to remove the
dividend income. In this instance, only partial marks were available.

The unwinding of the discount on the deferred consideration was an adjustment often
overlooked by candidates. In part (a) the deferred consideration was discounted to a
present value of $31.680 million using a cost of capital of 10%. This is another example
of where ‘own figure’ marks will be awarded. Most candidates who attempted to unwind
the discount correctly applied 10% to the deferred consideration calculated in part (a)
and added this on to finance costs. To score full marks however, candidates need to
time apportion this adjustment (nine months) and many candidates did not do this.

Finally, note (6) contained an accounting adjustment in respect of a convertible loan

note that was issued by Gold Co on 1 October 20X1. The marking team noted that this
adjustment caused confusion for some candidates. This appeared to be because this
was an individual company adjustment rather than a traditional group accounting
adjustment. You must be prepared for adjustments such as this to be contained within
a group accounting question. In this situation, think about the appropriate accounting
treatment, show your workings accordingly and most importantly make the adjustment
in the parent company’s accounts. Those candidates who attempted to deal with this
adjustment generally earned some marks but relatively few got the full marks available
for this transaction. The most common error when the liability was calculated correctly
was where the full finance costs for the year at 8% were added onto the consolidated
finance costs. Candidates needed to adjust finance costs for the difference between
Examiner’s report – FR March/June 2021 23
interest at the effective rate and the nominal rate of interest that had already been
included in Gold Co’s accounts.

Overall, consolidations are an integral part of the FR syllabus. Candidates spend most
of their time, it would appear, preparing for a consolidated statement of financial
position. There is an equal likelihood that a consolidated statement of profit or loss and
other comprehensive income may be tested and therefore it is vital that you prepare
for all aspects of the syllabus.

Examiner’s report – FR March/June 2021 24

Financial Reporting
(FR)
Sept / Dec 2020
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Section A ............................................................................. 3
Question 1 ........................................................................ 3
Question 2 ........................................................................ 4
Question 3 ........................................................................ 5
Question 4 ........................................................................ 6
Section B ............................................................................. 8
Question 1 ........................................................................ 9
Question 2 ........................................................................ 9
Question 3 ...................................................................... 10
Question 4 ...................................................................... 11
Question 5 ...................................................................... 12
Section C ........................................................................... 13
Karl Co ........................................................................... 13
Requirement (a) – 4 marks ......................................... 14
Part (b) – 13 marks ..................................................... 15
Examiner’s
Part report
(c) – 3 marks – FR September/December 2020
....................................................... 16 1

Loudon Co ...................................................................... 17
General comments

This examiner’s report should be used in conjunction with the published

September/December 2020 sample exam which can be found on the ACCA Practice
Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The
model of delivery for the CBE exam means that candidates do not all receive the same
set of questions.

• Section A objective test questions – we focus on four specific questions that

caused difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at one specific question
that was challenging for candidates.
• Section C constructed response questions – here we provide detailed
commentary around two constructed response questions and identify some of
the main issue that have affected candidates’ performance in this section of the
exam, identifying common knowledge gaps and offering guidance on where
exam technique could be improved, including in the use of the CBE functionality
in answering this question.

Examiner’s report – FR September/December 2020 2

Section A

Here we look at FOUR Section A questions which proved to be particularly challenging

for candidates.

Question 1

Pater Co acquired 80% of the issued equity share capital of Sono Co on 1 May 20X1,
when the balance on Sono Co's retained earnings was $520,000.

On 15 November 20X8, Sono Co made $240,000 sales of goods to Pater Co, on which
Sono Co made a mark-up (on cost) of 20%. Pater Co subsequently sold one-quarter
of these goods to external parties prior to 31 December 20X8.

At 31 December 20X8, the retained earnings of Pater Co and Sono Co were $4m and
$3.4m respectively.

What retained earnings should be reported in Pater Co's consolidated statement

of financial position as at 31 December 20X8 (to the nearest $'000)?

$ ____________ ,000

What does this test?

This question tests learning outcome D2(a) where candidates should be able to
prepare a consolidated statement of financial position for a simple group. It is important
to note this area of the syllabus can be tested anywhere in the Financial Reporting
exam and is not restricted to section C. As this is a fill in the blank, candidates should
take care to read all the information given to ensure their calculation is accurate and
has taken account of all the details provided. Unfortunately, most candidates made
one error by not reading the question scenario carefully enough. The three most
common errors were:

(i) calculating the PUP adjustment using margin rather than mark-up;
(ii) not reflecting the 80% ownership; or
(iii) not taking into account the retained earnings figure in Sono Co at the date of
acquisition.

It is worth pointing out that most candidates who did not arrive at the correct figure
only made one of these errors which suggests they are not methodically working
through the information given.

What is the correct answer?

The correct answer is $6,280,000 calculated as follows:

PUP on sales made by Sono Co to Pater Co $240,000 x 20/120 x ¾ unsold = $30,000

Consolidated retained earnings at 31 December 20X8 are:

For Pater Co $4,000,000

Examiner’s report – FR September/December 2020 3

For Sono Co (3,400,000 – 520,000 pre-acquisition (given in question) – 30,000 PUP)
x 80% share = $2,280,000

This gives a total of $4,000,000 + $2,280,000 = $6,280,000

Where did candidates go wrong?

As indicated above the common errors were:
(i) Using margin – so calculating PUP as $240,000 x 20% x ¾ unsold = $36,000
so arrived at $4,000,000 + (3,400,000 – 520,000 – 36,000 PUP) x 80% share
= $6,275,200
Or
(ii) Not adjusting for 80% so $4,000,000 + (3,400,000 – 520,000 – 30,000 PUP) =
$6,850,000
Or
(iii) Not adjusting for pre-acquisition retained earnings so $4,000,000 + (3,400,000
– 30,000 PUP) x 80% = $6,696,000

Question 2

At 31 December 20X4, Litch Co had, in inventory, 100 items of work in progress which had cost
$14,900 to produce. It estimated that the work in progress would cost $13 per unit to complete, and
that each unit would then sell for $166.

Direct selling costs are estimated at 2% of revenue.

In accordance with IAS 2 Inventories, what is the correct value of Litch Co’s inventory as at 31
December 20X4?

Options:

A. $14,900

B. $16,268

C. $16,200

D. $14,968

What does this test?

This question tests learning outcome B4(a) where candidates should be able to
account for inventories applying the requirement that inventory be measured at the
lower of cost and net realisable value (NRV).

What is the correct answer?

The correct answer is calculated as follows:

Cost (given in question) $14,900

Examiner’s report – FR September/December 2020 4

NRV = Realisable value (selling price) less costs of completion less costs to make the
sale
100 units x ($166 - $13 - ($166 x 2% = $3.32)) = $14,968

Therefore, cost is lower and the correct answer is A. $14,900

Where did candidates go wrong?

The most common error was to add the costs to complete (100 x $13) to the cost to
produce and therefore chose C, $16,200. This demonstrated a lack of understanding
of the basic principles of valuing inventories and suggests that candidates might focus
practice and learning on more complex areas of the syllabus but they should not ignore
the more straightforward learning outcomes, especially if they build on prior learning
and knowledge.

Question 3

Which of the following ratios are likely to DECREASE due to a significant

revaluation gain on a depreciating asset at the start of the year?

(1) Return on capital employed (ROCE)

(2) Gearing (debt/equity)
(3) Operating profit margin
(4) Net asset turnover

Options:

A. 1, 2, 3 and 4

B. 1, 2 and 3 only

C. 2, 3 and 4 only

D. 1 and 4 only

What does this test?

This question tests learning outcome C2(a) where candidates should be able to
calculate accounting ratios and know what and how an accounting adjustment might
impact these ratios. This tests more deeply whether the candidate understands the
components of a ratio calculation. It is important to note this area of the syllabus can
be tested anywhere in the Financial Reporting exam and is not restricted to section C.

What is the correct answer?

The correct answer is A. as the revaluation of a significant asset will cause all 4 ratios
to decrease. The revaluation is at the beginning of the year and will affect the
depreciation for the year and therefore operating profit:

ROCE – increased depreciation will reduce profit and capital employed will increase
due to the revaluation surplus but the denominator (including the revaluation surplus)
will increase more.

Examiner’s report – FR September/December 2020 5

Gearing – increase in equity due to the revaluation surplus will decrease the ratio as
debt will not be affected

Operating profit margin – reduction in profit due to increased depreciation

Asset turnover – increase in assets (PPE) due to revaluation even if the asset has one
year’s worth of depreciation.

Where did candidates go wrong?

A significant number of candidates focussed on the impact of the revaluation surplus
without considering the impact of increased depreciation on the operating profit and
therefore chose D. It is important that candidates have a deep understanding of how
ratios are calculated and how adjustments to the financial statements can impact the
numerator and/or the denominator. Rote learning ratios is not useful for section C
where they need to interpret these ratios.

Question 4

Identify TWO associate companies of Zuckal Co (one from each group of three)

What does this test?

This question tests learning outcome A4(j) where candidates should be able to define
an associate and explain the principles and reasoning for the use of equity accounting.

Examiner’s report – FR September/December 2020 6

It is important to note that associate companies and equity accounting can be tested
anywhere in the Financial Reporting exam and is not restricted to section C where the
computational approach to equity accounting may be examined. Candidates need to
carefully read all the information as the details are very important for them to
differentiate. It is also important to read the instructions – they must select one from
each group of three to gain the 2 marks as partial marks are not awarded.

What is the correct answer?

Group 1
The 50% owned in Castur Co will give significant influence as Zuckai Co will not have
the power to direct operating decisions but will be able to have significant influence
over Castur Co through being able to participate in the financial and operating
decisions.

Group 2
The 15% owned in Fumitt Co will also give significant influence as no individual party
will have control or the ability to appoint 2 board members. It is important that
candidates understand the 20% holding is a rebuttable presumption and candidates
need to read all of the information provided and not merely concentrate on the %
holdings given.

Where did candidates go wrong?

Artles Co should be treated as a trade investment as there is neither significant
influence nor control – most candidates correctly identified this was not an associate

Bandoka Co should be accounted for as a subsidiary as Zuckai Co controls the

majority of the voting rights in the company – this was a common error as the
candidates were only considering the shares owned (40%)

Dunnatonn Co should be treated as a trade investment as despite owning 21%, the

other 79% is owned by Yentee Co which gives them control. Again, candidates often
got this incorrect as they were focussing on the 21% rather than considering the wider
information.

Eahnn Co will be accounted for as a subsidiary and most candidates identified this
correctly.

Examiner’s report – FR September/December 2020 7

Section B

Section B tests candidates’ knowledge on a number of IFRS standards in more depth

than section A, with three case questions containing five two-mark objective test
questions. The range of topics tested in the September and December 2020
examination included:

• Tangibles and Intangibles, impairment, held for sale and government grants
• Earnings per share and discontinued operations
• Foreign currency transactions
• IFRS 16 leases
• Revenue recognition (contracts for goods and service, contracts over time)

We have selected one of the cases that examined IFRS 15 Revenue from Contracts
with Customers as these continue to challenge candidates. You should note a case
will be a mixture of narrative and calculation questions and can also include different
styles of OT questions similar to those used in section A. Candidates should also read
the case scenario and its requirements carefully. As these questions score either 2
marks or zero marks, it is important that they do not misread or miss any information
in the scenario. Close reading of the requirements is also important to identify specific
instructions such as rounding.

Section B – Case question

The following details relate to three of Campbell Co's contracts:

Contract 1 has a total price of $9m and commenced in 20X7. Total costs are expected
to be $7m. The progress towards completion is assessed at 90% at 31 December 20X8.
Progress was measured at 20% for the year ended 31 December 20X7.

Contract 2 commenced in December 20X8 and is expected to generate a profit of $3m.

It is too early in the contract to assess progress towards completion. Campbell Co has
spent $0.2m so far, all of which is expected to be recoverable from the customer when
Campbell Co sends its first invoice in 20X9.

Contract 3 relates to the sale of equipment to a customer for $2.36m on 1 July 20X8.
The sale included $0.4m for installation of the equipment and $0.2m relating to 12
months after-sales support. The equipment was installed on 1 July 20X8.

Examiner’s report – FR September/December 2020 8

Question 1

Which of the following correctly reflects how revenue should be recognised in

accordance with IFRS 15 Revenue from Contracts with Customers?

Options:

(1) Revenue should be

recognised as an
entity satisfies a Correct Not correct
performance
obligation
(2) Progress towards
completion on a
contract should be
Correct Not correct
measured solely on
an input basis

What is the correct answer?

Statement (1) is correct but statement (2) is not correct as progress can be measured
using input or output methods

Where did candidates go wrong?

Most candidates got the correct answer but many thought statement (2) was also
correct. We suspect they saw the term ‘input method’ and recognised it as relating to
IFRS 15 without reading carefully the whole statement. The crucial point was ‘solely’
– they should have known there were alternative acceptable methods.

Question 2

What revenue should be recognised in respect of Contract 1 in Campbell Co's

statement of profit or loss for the year ended 31 December 20X8?

$________________m

What is the correct answer?

$6.3m

As the contract is 90% complete (given in question), cumulative revenue of $8.1m

(90% x $9m) should be recognised by 31 December 20X8. However, $1.8m (20% x
$9m) will have been recognised in 20X7 so only $6.3m can be recognised in the
current year ($8.1 – 1.8m)

Where did candidates go wrong?

Although the majority of candidates got this correct, a significant number made
common errors. The most common errors were to calculate:

Examiner’s report – FR September/December 2020 9

 (i) $1.4m – these candidates had taken 70% of the contract profit ($9m - $7m).
These candidates had not read the question carefully to identify it was
revenue that was required
(ii) $8.1m – these candidates had not taken account of the fact that this contract
was in its second year and that they needed to deduct the revenue already
recognised in the prior year

Question 3

Which of the following items would NOT be recorded in the financial statements
for 20X8 of Campbell Co in respect of Contract 2?

Options:
A.
Revenue $0.2m

B.
Cost of sales $0.2m

C.
Contract asset $0.2m

D.
Contract liability $0.2m

What is the correct answer?

D – the candidates were asked what will NOT be recorded. Revenue will be recognised
to the level of recoverable costs where the progress cannot be measured (IFRS 15
para 45). Therefore $0.2m should be recognised as Revenue and cost of sales. As no
invoice has yet been issues a contract asset will be recognised for $0.2m.

Where did candidates go wrong?

This was the question within the case that candidates found most challenging with a
range of options although the most common option chosen was A – which would be
not to recognise revenue. This suggests candidates again were not reading the
requirement and instead calculated the revenue to be recognised, saw the option and
chose it rather than reflecting on what they should actually have been selecting.

Examiner’s report – FR September/December 2020 10

Question 4

What revenue should be recognised in respect of Contract 3 in Campbell Co’s

statement of profit or loss for the year ended 31 December 20X8?

Options:
A.
$2.06m

B.
$2.16m

C.
$2.26m

D.
$2.36m

What is the correct answer?

C – The after sales support will be recognised over the 12-month period. As Campbell
Co has already provided 6 months of support, $0.1m can be recognised meaning that
$2.26m can be recognised overall ($2.36m - $0.1m).

Where did candidates go wrong?

We felt that two fill in the blanks on the calculation questions within this case would
have potentially made it too challenging and in fact the candidates performed very well
in this question, perhaps because MCQ styles tend to perform better. The most
common errors were either to remove all the after sales support or not adjusting for it
(perhaps not reading the dates carefully).

Examiner’s report – FR September/December 2020 11

Question 5

Campbell Co offers its customers an accessory for the equipment that it sells in
contract 3. Campbell Co does not manufacture the accessory itself, but has an
agreement with the manufacturer to sell the accessory on the manufacturer's behalf.
Campbell Co places the order with the manufacturer and the manufacturer delivers
the accessory direct to the customer. The customer pays Campbell Co for the
accessory and Campbell Co then deducts 3% commission before paying the
manufacturer.

An accessory is delivered to one of Campbell Co's customers on 10 December 20X8,

which the customer has accepted and will pay $50,000.

Which of the following correctly describes how Campbell Co should recognise

this transaction?

Options:
A.
$50,000 should be recognised as revenue by Campbell Co when the accessory has
been delivered and accepted by the customer

B.
$1,500 should be recognised as revenue by Campbell Co when the accessory has
been paid for by the customer

C.
$1,500 should be recognised as revenue by Campbell Co when the accessory has
been delivered and accepted by the customer

D.
$50,000 should be recognised as revenue by Campbell Co when the accessory has
been paid for by the customer

What is the correct answer?

C – Campbell Co is acting as an agent as the equipment accessory is delivered directly
to the customer from the manufacturer. Only the 3% commission should be recognised
as revenue (3% x $50,000 = $1,500). As the customer has taken delivery and
accepted the price of $50,000, the revenue can be recognised at that point.

Where did candidates go wrong?

We were pleased that candidates understood how IFRS 15 applies to principal/agent
relationships and the majority got this correct. The most common error was delaying
recognition of the revenue until payment would have taken place (B).

Examiner’s report – FR September/December 2020 12

Section C

We have selected two constructed response questions, Karl Co and Loudon Co, that
are available on the ACCA Practice Platform. Karl Co is a financial statements
analysis and interpretation question for a group entity, while Louden Co is a financial
statements preparation question for a single entity. When using the following detailed
commentary it would be helpful to consult the questions and answers available to
you here.
Karl Co

Karl Co shares similarities with recent questions examined on the syllabus area of
analysis and interpretation of the financial statements (syllabus section C). The
question had both numerical information and additional information relating to a
subsidiary that was sold at the end of the financial year and candidates were asked to
complete a variety of tasks using this information.

The analysis and interpretation of a group is an important area of the syllabus and will
continue to be examined. As in previous examination sessions, most candidates failed
to score high marks on this question. The reason for this seemed to be poor exam
technique by not addressing the requirement or adequately using the information in
the scenario. The focus for this detailed commentary will be on getting the most out of
the question, rather than simply recreating the suggested solution and will highlight
the importance of using the scenario when constructing an answer to an interpretation
question.
From an exam technique point of view, time management is crucial in performing well
in any exam. Typically, in a 3 hour exam, you would allocate 1.8 minutes per mark
(180 minutes/100 marks = 1.8 minutes per mark). The maximum amount of your exam
time that you should spend on Karl Co is 36 minutes.
There is a lot of information contained within the question itself that you will need to
become familiar with. It is important that you take the time to read through the
information in the question and use the onscreen tools available to highlight important

Examiner’s report – FR September/December 2020 13

information, use your scratch pad to make any key notes etc. On this basis, it may be
better to allocate 1.5 minutes per mark in each of the three requirements which will
allow you six minutes to read (and make sense of) the scenario and allow some time
at the end for checking your answer.
Requirement (a) – 4 marks

The calculation is only worth four marks and based on the discussion above, you would
have approximately six minutes to answer this requirement (1.5 minutes per mark x 4
marks). It is vital that you do not overrun on the allocated time on this task as this will
be detrimental to the analysis that you are able to provide in the next requirement. In
the time taken to read the scenario, you will have noted that all the information required
to answer this part of the question is included in the opening paragraphs, before the
extracts of the financial statements.
You should take the time here to consider how a gain or loss on disposal to be included
in the consolidated accounts should be calculated. A common error noted by the
marking teams on this question was candidates providing a calculation that would be
included in the single entity financial statements of Karl Co.
You are advised to lay out the working for the disposal in the workspace first, for
example:
£
Proceeds X
Less: net assets (X)
Less: carrying amount of (X)
goodwill
Gain/loss on disposal X

You should have already noted that the subsidiary that was sold was wholly owned,
so you did not need to consider non-controlling interests. Once you have the structure
for the working in place, you can include information from the question requirement.
For example, the disposal proceeds and the net assets at disposal are given and can
be transferred directly into your working. The goodwill at the disposal date will need to
be calculated and you can either show this working separately and reference it to your
disposal calculation or you can include it directly within the cell area of the
spreadsheet. From a marker’s perspective, showing the calculation of goodwill
separately is preferable because it will be easier for the marker to determine how
figures have been arrived at and therefore potentially award marks under the own
figure rule, even if there are mistakes in some of the calculations.

Examiner’s report – FR September/December 2020 14

Part (b) – 13 marks

The guidance given in the following commentary is not intended to reproduce the
suggested solution, but should give a candidate an idea on how to approach this part
of the answer.
When calculating the ratios, you must ensure that you show your workings, it is also
advised that you note the formula that you are using e.g. current ratio = current
assets/current liabilities. Accounting ratios are a key part of the financial reporting
syllabus and it is essential that you are familiar with these. The question requirement
informs you that there will be a maximum of five marks available for the calculation of
ratios and therefore you should spend approximately 7.5 minutes on these
calculations.
You may be provided with a pre-formatted table in these types of questions, but not
always. However, it would be helpful if you constructed a table that will allow you to
demonstrate your workings and make the analysis more ordered. For example:
Working 20X8 Working 20X7
Gross profit
margin

If there is a ratio that you cannot remember how to calculate, it is a good idea to have
a go anyway as you may be partially correct. This not only means that you may be
able to earn part of the marks that would be available for the calculation, but also you
will have some results that will allow discussion in the commentary part of your answer.
The remaining eight marks available are allocated to the discussion of the
performance and position of the Karl group year on year. Many candidate
commentaries provided to these analysis style questions remain vague and generic.
This limits the number of marks that can be awarded. We do not need you to describe
what a ratio means or what an ‘acceptable’ ratio might be as they are not comments
that directly address the specific scenario you have been given.
You should ensure that you use the scenario in order to make the most of the question
and score as many marks as possible when analysing a company.
This question had many clues that could help to form your discussion. A disposal of a
subsidiary took place on the very last day of the accounting year. What is the impact
of this? Well, the consolidated profit or loss would contain a full year’s results for Sinker

Examiner’s report – FR September/December 2020 15

Co, whereas, the statement of financial position, which is a snapshot at a point in time,
would not include any assets or liabilities of Sinker Co as control was lost at the
reporting date. This would lead to a massive distortion in comparing ratios such as
ROCE and gearing year on year. Many candidates failed to address this point at all.
The one-off redundancy costs would distort current year profitability and is a cost that
will not be repeated in subsequent years. This point could be supported further by
recalculating operating profit margin without this one-off cost to determine the impact
on this year’s profitability.
Even without the redundancy costs it can be noted that Sinker Co was already in a
loss making position ($17 million operating loss in total minus the $15 million
redundancy costs reflects a $2 million operating loss). This was likely due to the fact
that Sinker Co had lost a significant contract three months into the financial year.
Again, this needed to be referred to in the analysis as it would have had a detrimental
impact on the group revenue during the last nine months.
A point many candidates did not refer to was the loss on disposal that had been
calculated in part (a). Again, this is a one-off transaction within the consolidated
financial statements and will not be part of the results in the following years.
Candidates needed to refer to the fact that this was causing group profitability to fall in
the current year, but would not impact the performance in the future.
By referring to this information in your analysis and using it as potential justification for
the changes in the ratios year on year, you should be able to provide the marking team
with a commentary that attracts marks available in the marking scheme.
A final point to note is that a conclusion to your analysis should always be provided.
This conclusion does not need to be overly comprehensive, but should state your final
opinion on the performance and position of the Karl group year on year. It is always
worth re-reading the scenario before you write your conclusion, and make sure you
have used each separate point of information provided.
Part (c) – 3 marks

This part of the question was often overlooked by candidates which demonstrated a
lack of time management. This was a standalone requirement for three marks
(approximately 4.5 minutes) which could have been attempted first to ensure that it
was covered.
The main factors affecting the comparability of the financial statements are points that
will be addressed in part (b) such as the one-off costs and the disposal resulting in a
full year’s results in the consolidated statement of profit or loss but only the assets and
liabilities of Karl and its other subsidiary in the consolidated statement of financial
position.

Examiner’s report – FR September/December 2020 16

It is important to note that you are not expected to recreate the analysis from part (b)
and use these points to explain the performance, rather provide them as justification
as to why comparability has been impaired. The rule of thumb you should use, is that
one well explained point will be worth 1 mark so you were expected to make 3
reasonable points.

Loudon Co

Loudon Co is a typical example of a published financial statements preparation

question from section C of the exam, covering syllabus areas D and B. In this type of
question, you will be provided with a trial balance (or an extract from a trial balance)
and some additional information that will require adjustment in accordance with
relevant IFRS Standards and accounting principles.

Question requirements will vary, but you can expect to be asked to prepare a mixture
of a statement of profit or loss and other comprehensive income, a schedule of
adjustments to profit, a statement of changes in equity, a statement of financial
position, or a specific extract from the financial statements such as, ‘financing
activities’ from the statement of cash flow.
Before you attempt this question, make sure you are clear on what the requirement is
asking for. There is no point in, for example, preparing a statement of changes in equity
when the requirement has asked for a schedule of adjustments to retained earnings
and a statement of financial position. Providing additional statements that are not
required wastes valuable time and will not attract any marks.

Examiner’s report – FR September/December 2020 17

Overall, this question is worth 20 marks. For 20 marks you would allocate 36 minutes
of your exam time to answering this question (180 minutes/100 marks = 1.8 minutes
per mark x 20 marks). For many questions, it will be advised that you further sub-divide
this time between the separate tasks e.g. part (a) is worth 8 marks and therefore 14.4
minutes could be spent on this (and similarly 21.6 minutes could be spent on part (b)).
However this approach is not advised for this type of question. Why? Well some of the
adjustments required to the trial balance will impact both the adjustment to retained
earnings and the statement of financial position and so it makes more sense to deal
with these separate tasks together. This approach will be further explained below.
From an exam technique perspective, it is advised that you set up the proforma for the
requirements first. For example, for Loudon Co, layout the working for the adjusted
profit calculation and the statement of financial position within the workspace. Perhaps
leave an extra row between each heading in case you need to insert a new heading
on the statement. This will give you focus when dealing with the additional information
and will enable you to update the required statements accordingly.
As a general comment, you must ensure that all trial balance items are included either
in the relevant working or within the financial statements themselves. It is often noted
by the marking team that some balances are not transferred from the trial balance into
the answer and therefore, what are considered to be easy marks, are lost. In this
question, equity shares, current assets and current liabilities did not require adjustment
as a result of the additional information and needed to be transferred directly to the
statement of financial position. Including these balances in this statement attracted
marks from the marking scheme.
It is important to note that you do not have to deal with the adjustments in the order
presented in the question, although this is a logical approach and will ensure you do
not miss out any required adjustments. However, for example, in this question you
may be most confident with adjusting the environmental provision in note (3) and less
confident with the loan note in note (1). Dealing with the adjustments that you are most
familiar with first will ease you into the question and stop panic setting in.
The following discussion will look at each of the adjustments in more detail and may
help when you work through the question as a practice question.
(1) Loan note
In this question, Loudon Co had incorrectly expensed the direct issue costs. Per IFRS
9 Financial Instruments, such costs should be deducted from the proceeds of the loan
and not expensed. This adjustment was often incorrectly treated in the exam, with

Examiner’s report – FR September/December 2020 18

many candidates only adjusting one side of the transaction, or omitting the adjustment
all together. To fix this error, the issue costs need to be added back to profit in part (a)
and deducted from the loan note proceeds of $5 million.
The adjusted loan amount (net proceeds of $4,875,000) then needed to be accounted
for using the amortised cost method. This was often done well and attracted own figure
marks even where the issue costs had not been dealt with correctly but the effective
interest rate was used correctly. There was some confusion with the finance cost
though as the trial balance has recorded the interest paid separately to retained
earnings and therefore, once calculated, the effective rate of interest needed to be
deducted from retained earnings in full as it had not been adjusted yet. A common
error was where candidates took the difference between the effective rate of interest
and the cash paid as an expense in part (a).
This adjustment demonstrates the benefit of already preparing proformas for both part
(a) and (b) before starting your detailed workings. You can use your working to
immediately adjust the TB profit figure (part (a)) by the effective interest rate finance
cost you have just calculated (deduct $390,000) and include the closing balance for
the loan note under non-current liabilities in the statement of financial position
($5,015,000).
(2) Non-current assets
This note contains information for both the office building and factories and requires
knowledge of both IAS 16 Property, Plant and Equipment and IAS 36 Impairment. It is
advisable to deal with each asset category separately. Again, you can choose which
adjustment you wish to deal with first.
You need to be very clear on the dates in this part of the question to deal with the
adjustment to the office building correctly. Not taking the time to look at the dates and
determine what they mean may lead to incorrect workings taking place. You may find
it useful to consider a timeline of events as part of your workings. For example, the
financial year for Loudon Co begins on 1 October 20X7 and ends on 30 September
20X8. Mid-way (six months) through this year (1 April 20X8) the office was deemed to
be impaired. These dates should now form the structure for this part of the working.
Initially a six-month depreciation charge for the building (based on the original life of
25 years) is required between 1 October 20X7 and the date of impairment. On 1 April
20X8, the building should be reviewed for impairment by comparing the carrying
amount of the building at that date (cost b/f minus accumulated depreciation b/f minus
six months depreciation calculated to 1 April 20X8) to the fair value. Once the
impairment expense is identified and accounted for as both a reduction in the retained
earnings and the carrying amount of the asset, the final six months depreciation can
be calculated. Following the impairment, depreciation will be calculated by spreading
the impaired carrying amount over the remaining life of the asset (estimated at the
date of impairment). Don’t forget to only take six months of this final depreciation
calculation. At this point, include the impairments and the depreciation to your adjusted
retained earnings (part (a))

Examiner’s report – FR September/December 2020 19

The factory that was sold at the beginning of the financial year has not yet been
accounted for correctly. This disposal will need to be dealt with first before the annual
depreciation charge is calculated. When there is a disposal of a non-current asset, the
carrying amount of the asset should be removed from the statement of financial
position and compared with the proceeds to determine if there is a gain or loss that
should be recorded in the statement of profit or loss. Many candidates correctly
calculated the gain on the disposal, but failed to remove the asset on the statement of
financial position. Another common error noted was the deduction of the gain on
disposal from the adjustment to retained earnings in part (a).
The depreciation charge for the remaining nine factories can be calculated once the
disposal has been adjusted for. Depreciation for this category of asset uses the
reducing balance method. The 15% depreciation rate will be applied to the carrying
amount of the factories left after the disposal. The depreciation charge is an expense
and once again should be treated as a deduction against retained earnings.
The main issue with the adjustments required by this note was not providing adequate
workings. Again, another useful rule of thumb is that if you are using your calculator to
find a figure, you should be replicating that in a working for the marker to see.
(3) Environmental provision
This should have been a relatively straightforward adjustment requiring knowledge of
IAS 37 Provisions, Contingent Assets & Contingent Liabilities. The information given
in the question informs us that the environmental provision has already been correctly
accounted for in the previous accounting period and that it relates to a liability at the
end of the factory’s useful life. The time value of money would have been taken into
account and the provision would have been discounted to present value in the
previous accounting period. Therefore, the only adjustment required here is to unwind
the discount for the year using the cost of capital of 5%. This will then need to be
treated as both a finance cost in part (a) and an increase in the provision in part (b).
Another rule of thumb is that if you are given a cost of capital or discount rate you are
expected to use it.
There was a tendency to overcomplicate this adjustment, by further discounting the
trial balance amount and then unwinding. This may have been due to a lack of
understanding of the required treatment or, most likely, was due to not taking the time
to read the information in the question thoroughly. It is important that you review the
information you are given carefully and consider what accounting has already been
done (sometimes nothing) and what is left to do.
(4) Deferred tax
This adjustment was not done well by the majority of candidates. It was considered
that this was as a result of not reading the information in the question properly, rather
than there being a lack of working knowledge of the calculation for deferred tax. The
information in this note provided you with a tax written down value. Most candidates
mistook this for a temporary difference and incorrectly multiplied the $25 million by the
tax rate of 20%.

Examiner’s report – FR September/December 2020 20

The question actually required you to calculate a temporary difference by comparing
the tax written down value to the total carrying amount of non-current assets
(calculated following the adjustments made from note (2)). Candidates were given
credit for calculating the temporary difference under the own figure rule so even if the
property, plant and equipment figure was not correct, credit was given for
demonstrating understanding of the deferred tax calculation. This temporary
difference should then be multiplied by the tax rate to arrive at the closing deferred tax
liability for the statement of financial position. Finally, the opening and closing amounts
should be compared and the increase in deferred tax reported as a reduction in
retained earnings. This adjustment is something that candidates are encouraged to
have an awareness of for future examination sessions.
Once you have worked through all the notes, check that you have transferred all the
figures from the trial balance.
One last observation is that it is disappointing that candidates do not appear to be
practising these type of questions using a spreadsheet. It is worthwhile doing so and
then standing back and considering whether you could follow the workings and see
clearly how all the figures have been arrived at if you were the marker? Familiarity with
the CBE environment and the available functionality is vital to success in the exam
and we would always recommend looking at the CBE specimen exam and using the
practice platform when using past exam questions.

Examiner’s report – FR September/December 2020 21

Financial Reporting
(FR)
March/July 2020
Detailed
commentary
The aim of this commentary is to provide constructive
guidance for future candidates and their tutors by
giving insight into what markers are looking for and
identifying issues encountered by candidates who sat
these questions.

Contents
General comments ............................................................... 2
FIT ........................................................................................ 2
PLANK ................................................................................. 3

Examiner’s report – FR March/July 2020 1

General comments

This detailed commentary should be used in conjunction with the published

March/July 2020 sample exam which can be found on the ACCA website.

FIT

This was considered to be a relatively straightforward performance appraisal question

that required candidates to calculate some financial ratios and provide a commentary
on the performance and position of two companies operating in the same sector.
Part (a) required the calculation of five standard financial ratios for both companies. It
was pleasing to note that many candidates were able to score full marks on this part
of the question. There were some common errors made in the calculation of some
these ratios such as profit before tax being incorrectly used in both operating margin
and return on capital employed. Also, many candidates used the wrong capital
employed figure to arrive at the return on capital employed (this should be debt +
equity).

It was surprising that despite previous guidance from the examining team there
continues to be a number of candidates that calculate gearing using the formula of
debt to debt + equity despite the question specifically asking for debt to equity. While
the former is acceptable in some questions, if you are given specific guidance in the
question requirement ensure you calculate the ratio as instructed to achieve the mark
available.

The quality of the commentary provided to part (b) of this question was particularly
disappointing. The trend continues where many candidates provide either little or no
analysis or the analysis provided is superficial and does not attempt to use the
information in the scenario to guide the commentary. Those candidates that link their
commentary to the scenario tend to score very well.

There was plenty of information in the scenario of this question that could act as a
prompt for a more detailed commentary. For example, both companies operate in the
same sector. However, one company is a manufacturer and retailer of premium
branded sportswear, while the other sources mid-market sportswear from its suppliers
and retails them separately. Based on this information it is likely that both sales prices,
costs etc. will be significantly different for each company and could be used to explain
the differences in performance.

Both companies sell online, but one sells through its own branded stores and one sells
through department stores. Again, this would give rise to differences not only in the
costs incurred by each business but the structure of the statement of financial position
is likely to be different (Fit would be expected to have more assets due to its
manufacturing facilities and premises for its stores) and this in turn would impact return
on capital employed.

These are not the only prompts given in the question! Candidates are encouraged to
look at the information provided in the scenario and to use it to add depth and meaning
to their analysis. The marking guide to this and other published FR questions can be
used to give you further ideas of the commentary required to score well on a

Examiner’s report – FR March/July 2020 2

performance appraisal question and a useful article on performance appraisal can be
found here.

The marking team continues to encourage candidates to provide a conclusion to their

analysis/commentary. Whilst some candidates did attempt to provide a conclusion on
this question, there were many that did not. In this particular question for example,
candidates could summarise their findings to determine which company is considered
to be the best performing based on the limited information available.

PLANK

The first part of this question required candidates to prepare a consolidated statement
of profit or loss and other comprehensive income (SPLOCI). Many were able to score
well on this question but the marking team noted common areas where problems
occurred and these will be discussed below.

Almost all candidates that attempted this question were able to complete the basic
consolidation by adding the income and expenses of the parent and subsidiary
together to show control. However, some candidates failed to time apportion the
results of the subsidiary to represent the nine month post acquisition period. This
continues to be a problem when this type of question is examined. A minority of
candidates’ time apportioned the subsidiary results by an incorrect number of months,
for example eight months instead of nine. In this situation, the marking team were
able to provide own figure marks providing workings were clearly shown.

Surprisingly, there continue to be a minority of candidates that proportionately

consolidate the results of subsidiary (e.g. including 85% of Strip Co’s income and
expenses). As previously noted, this is a fundamental error and the basic
consolidation marks will not be awarded when using this method.

This question required candidates to make adjustments for common consolidation

transactions, including an adjustment for fair value depreciation and intra-group
adjustments for sales and purchases, unrealised profit and internal dividends. On the
whole these were generally dealt with well. The nine month post acquisition period
continued to be a problem here, with some candidates forgetting to time apportion the
fair value depreciation while others incorrectly time apportioned unrealised profit or the
dividend.

It was pleasing to see that many candidates recognised that the dividend received
from Strip Co was to be removed from investment income. However, there were a
considerable number of candidates that removed the entire $18 million. As Plank Co
only owns 85% of the shares in Strip Co it was necessary to adjust the dividend by
this percentage before removing.

Note (iii) not only required candidates to adjust for the internal dividend discussed
above, but it also required an adjustment in respect of intra-group loan interest. There
were some candidates that seemingly missed this from the question and failed to deal
with it at all. For those that did, a variety of answers were produced. To correctly
adjust for this transaction, candidates needed to recognise that the loan interest was
both payable by Strip Co and receivable by Plank Co. This interest therefore needed
to be eliminated from both finance costs and investment income. The interest of $5

Examiner’s report – FR March/July 2020 3

million did not need to be time apportioned as the loan to Strip Co was made on 1 April
20X8 (the same as the acquisition date).

It was noted in the opening paragraph that Plank Co had previously acquired 35% of
Arch Co. Further detail in note (v) confirmed that Arch Co is an associate of Plank Co
and is therefore equity accounted for in accordance with IAS 28 Investments in
Associates and Joint Ventures. Only a minority of candidates correctly included the
share of Arch Co in the consolidated statement of profit or loss.

The marking team noted that this area of the consolidation had the largest variation in
responses. Firstly, the dividend received from Arch Co needed to be eliminated from
Plank Co’s investment income (e.g. 35% x $35 million) and then the ‘income from
associate’ was to be included as a separate entry within the consolidated profit or loss.
Using the equity accounting method, candidates were required to include 35% of Arch
Co’s profit for the year and then adjust for the unrealised profit. Many candidates were
able to calculate the unrealised profit as they would for a subsidiary ($26 million x
30/130), but the majority then failed to multiply this amount by the 35% influence that
Plank Co had over Arch Co.

It was disappointing to note that a number of candidates attempted to incorrectly

consolidate the results of Arch Co on a line-by-line basis. Again, this treatment is
considered to be a fundamental error that does not follow the equity accounting
method and should be discouraged.

When preparing a SPLOCI candidates must remember to split both the profit for the
year and total comprehensive income between the amount attributable to the parent’s
shareholders and the amount attributable to the non-controlling interest. This
continues to be the most commonly omitted part of the statement and often represents
a significant portion of the total marks.

Part (b) to the question was well done with many of the candidates that attempted this
part of the question able to score well. Markers were able to apply the own figure rule
for the dividend and unrealised profit adjustment if previously adjusted for incorrectly
in part (a).

Examiner’s report – FR March/July 2020 4

Examiner’s report
Financial Reporting (FR)
July 2020

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.
This report should be used in conjunction with the published March/June 2020 sample exam. Due
to the COVID-19 pandemic, the June 2020 exam was postponed and sat in July 2020. This report
labelled July 2020 refers to this exam.

General comments

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The model of
delivery for the CBE exam means that candidates do not all receive the same set of questions. In
this report, the examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance, and to offer constructive advice for future
candidates.

• Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
• Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here we take a look at TWO Section A questions which proved to be particularly challenging for
candidates.

Example 1

Millhouse Co received a government grant on 1 October 20X8. The grant was to help fund
rental costs of a factory in an urban regeneration area. The conditions of the grant were
that the factory must be rented and used for at least one year. Millhouse Co rented a
factory from 1 July 20X9 and was confident that the conditions of the grant would be met.
Millhouse Co owns other factories in different areas.

Which TWO of the following correctly reflect the accounting treatment for the
government grant that could be adopted by Millhouse Co in its financial statements
for the year to 30 September 20X9?

A. Recognise the grant in full as other income in the statement of profit or loss

Examiner’s report – FR July 2020

 B. Deduct the full amount of the grant from the cost of factories in the statement of
financial position
C. Recognise three months of grant income as other income in the statement of profit
or loss
D. Deduct three months of grant income from the factory rental expense in the
statement of profit or loss
E. Deduct the full amount of the grant from the factory rental expense in the statement
of profit or loss

What does this test?

This question tests learning outcome B11(a) where candidates should be able to understand
the accounting for a government grant. It is important to note that two options must be correct
to get 2 marks. Unfortunately, most candidates got one answer correct but not the two
required. It is therefore vital that candidates read all of the options carefully and that each
option is given equal consideration before you move to the next question.

What is the correct answer?

The correct answer is C and D as IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance allows for two alternative presentations of grants related to income -
either separately or under a heading such as ‘Other income’ (option C) or they can be
deducted from the related expense (option D).

Why the other options are not correct?

Option A and E recognise the full amount of the grant however the question sets out the
requirements of the grant and that includes the requirement that the factory must be rented – this
only occurred on 1 July 20X9 and therefore the students should have time apportioned and only
recognised in profit or loss 3 months of the 12 month grant.
Option B would have been correct if it was a capital grant however Millhouse Co were renting not
purchasing a factory. This was a common error.

Example 2

Green Co acquired 70% of Blue Co on 1 January 20X4. At 31 December 20X4 the equity
of both companies was as follows:

Green Co Blue Co
$m $m
Share capital 20 20
Retained earnings 116 30

Examiner’s report – FR July 2020 2

 136 50

At the date of acquisition, the fair value of Blue Co's net assets is $40m and goodwill is
calculated to be $25m. At 31 December 20X4, 20% of this goodwill is to be written off due
to impairment. Non-controlling interests are measured at fair value.

What amount should be shown for consolidated retained earnings in the statement
of financial position as at 31 December 20X4 (to one decimal place)?

$ ____________ m

What does this test?

This question tests learning outcome D2(a) where candidates should be able to calculate the
figures for a consolidated statement of financial position. It is important to note this area of the
syllabus can be tested anywhere in the Financial Reporting exam and is not restricted to
section C. As this is a fill in the blank, candidates should take care to read all the information
given to ensure their calculation is accurate and has taken all details provided into account.

What is the correct answer?

The correct answer is calculated as follows:

The consolidated retained earnings includes 100% of the parents + groups share (70%) of the
subsidiaries post acquisition earnings less groups share of goodwill impairment.

$116m + (70% x [$50m - $40m)) – (£25m x 20% x 70%) = $119.5m

Where did students go wrong?

The most common error was to include the groups share of the subsidiary’s net assets at 31
December 20X4 rather than only consolidating the post-acquisition share of the subsidiary’s
increase in net assets. The candidates were provided with the fair value of the subsidiary’s net
assets at acquisition and therefore should ask why they have been given this information. Almost
all candidates adjusted for the groups share of the goodwill impairment.

Examiner’s report – FR July 2020 3

Section B
Section B tests candidates’ knowledge on a number of IFRS standards in more depth than section
A, with three case questions containing five two-mark objective test questions. The range of topics
tested in the July 2020 examination was:
• Intangibles, impairment, borrowing costs and government grants
• Earnings per share and a rights issue
• Deferred tax and the impact of asset revaluations
• Revenue recognition in a combined contract for goods and services

In one of the cases, there was a question that tested the reversal of an impairment of a tangible
asset. However, many candidates were not aware that the carrying amount of the asset after the
reversal should be restricted to its carrying amount had the asset been measured using historical
cost accounting. IAS 16 Property, plant and equipment is an accounting standard that is regularly
tested and so candidates need to ensure that they are comfortable with its content, regardless of
whether it is tested in Section A, B and/or C. Other topics that candidates struggled with were the
calculation of deferred tax and the journal entries required to account for its movement in the
statement of financial position and the amount of revenue to be recognised on a contract for the
sale of goods and services.

Candidates should also read the case scenario and its requirements carefully. As these questions
score either 2 marks or zero marks, it is important that you do not misread or miss any information
in the scenario. Close reading of the requirements is also important to identify specific instructions
such as rounding.

The FR exam aims to test your ability to apply your knowledge – this is a very important skill which
you will continue to develop in Strategic Business Reporting. Consequently, you need to
understand why you are producing accounting adjustments and try not to rote learn them.

Examiner’s report – FR July 2020 4

Section C

Preparation of individual company financial statements

Some candidates were required to present an adjusted profit calculation and a statement of
financial position (SFP) using the TB supplied and a list of relevant notes, from which they could
work out what adjustments to make to the TB figures. Traditionally questions which require a
statement of adjusted profit are ones which candidates struggle more with than producing a whole
statement of profit or loss. It was pleasing to see less evidence of this, with candidates generally
producing good attempts at this. Haverford Co from the March/June 2018 hybrid paper is a good
example of this for students to practice.

It was pleasing to see a good level of performance in relation to convertible loan notes. This has
been tested numerous times, but is a complex accounting area so it was good to note that many
students were able to produce calculations around this item.

Some candidates were required to provide entries largely involving a statement of profit or loss and
statement of changes in equity, outlining the impact on assets and liabilities of the entries. Answers
to this were quite pleasing, although the adjustments to the statement of financial position figures
were weaker than expected. The aim of this question was to test the candidate’s knowledge of
double entry, and a number of candidates produced single entry adjustments.

Candidates were also generally able to produce entries relating to tax and provision adjustments,
which were relatively simple but answered well.

The adjustments relating to non-current assets proved the most challenging. These were technical
adjustments, but performance still tended to disappoint a little. The most common mistake related
to a change in use relating to property, moving from PPE to investment property. This needed to
be revalued under IAS 16 before being then held under the fair value model per IAS 40 for
investment properties. Very few knew the steps for dealing with this, which was disappointing as
this is the kind of topic which provides a bridge towards Strategic Business Reporting. It was also
extremely surprising to see students struggle with simple depreciation calculations, often failing to
apply straight line or reducing balance accordingly, which was more of a problem than it should
have been for students.

In addition to the uncertainty over investment properties, candidates also appeared to struggle with
the disposal of a revalued asset, and how that is shown in the statement of changes in equity.
Many were able to produce a reserve transfer for the additional depreciation on a revalued asset,
but relatively few knew to release a revaluation surplus upon the disposal of a revalued asset.

Overall, there was slight improvement in the use of the software and layout from previous sittings,
where many candidates provided workings which could be followed. Those who continue to work
answers out on a calculator and simply type the answer into a spreadsheet continue to receive ‘all-
or-nothing’ marks, as it is impossible for markers to give credit if workings are not shown. This has
continued to diminish, and the majority of candidates are showing workings, either in the cell or
across different cells in the spreadsheet. Both of these are fine, and good technique is important to
pick up as many marks as possible in the exam.

Examiner’s report – FR July 2020 5

There are multiple past exam questions looking at the preparation of single company financial
statements, as this has been a large part of the Financial Reporting exam for many years. In
addition to the suggestion above, Vernon Co from the March/June 2019 hybrid paper and Duggan
Co from the September/December 2018 hybrid paper are good examples of this type of question
which students must practice.

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remain an area that
candidates perform well on. Candidates with clear workings often scored highly on this area. As
noted within the discussion of the preparation of single company financial statements above, there
was an improvement in the number of candidates showing their workings, either within the cell or
shown separately in different lines of the spreadsheet. Both are acceptable methods, and both will
be marked by the marking team.

The preparation of a consolidated statement of profit or loss was done reasonably well, with
candidates able to process adjustments relating to intra-group sales, unrealised profits and fair
value depreciation. These are all core areas for consolidated financial statements so it was
pleasing to see students performing well.

A big disappointment was the number of students who neglected to split the profit between the
parent’s shareholders and the non-controlling interest (NCI). This is a fundamental part of a
consolidated statement of profit or loss and too many students lost substantial marks by not
attempting this. This was also identified in the Examiners Report in December 2019, and
candidates are losing far too many marks by omitting the parent/NCI allocation of profit. The split of
profit is an essential element of this type of question and will continue to be tested. There is no
reason for students to not attempt this, and we will be seeking improvement in relation to this in
future questions.

Another area of weakness among candidates is failing to time-apportion the figures of a subsidiary
with a mid-year acquisition. This is regularly tested and one which we would expect students to
apply. Failure to do so is a fundamental error by not recognising the principle of only consolidating
the results from the date of acquisition. A smaller, but still relatively common, issue is that of
proportionate consolidation. This displays a poor knowledge of the consolidation principles and
should not be happening in the exam.

The preparation of a consolidated statement of financial position was another area where
candidates performed less well than they usually do. Many of this stemmed from a basic lack of
technique, and too many simple fundamental errors were made.
Students who did well were able to apply discounting to a calculation of deferred consideration. A
number did this in the goodwill, but the strongest candidates also included the deferred
consideration as a liability in the statement of financial position.

Sadly, a number of students neglected the narrative discussion marks, meaning they lost up to
three marks immediately. The FR exam is essential preparation for the SBR exam, where students

Examiner’s report – FR July 2020 6

are expected to be able to discuss and explain items. Candidates should be adding that skill into
their portfolio at this stage of their studies so that they are able to perform well at the higher level.

Nevertheless, preparation of a consolidated statement of financial position continues to be an area

that students perform well on, with some ‘core’ adjustments on fair value adjustments and
impairment done well. It was surprising to see a number of students struggle with goodwill
calculations and share-for-share exchanges, as these have been examined consistently in the FR
syllabus. It was also disappointing to see basic errors such as using proportionate consolidation
and time apportioning for a mid-year acquisition. Candidates doing either of these had clearly not
practiced enough questions and tended to score very low marks.

There are multiple past exam questions looking at the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co
from the September/December 2017 hybrid paper, Dargent Co from the March/June 2017 hybrid
paper and Bycomb Co from the June 2015 paper are good examples of this type of question which
students must practice.

Analysis of individual company financial statements

The calculation of basic ratios continues to be an area where many students score full marks,
which is good to see, but candidates absolutely must show workings when asked to redraft some
figures and prepare recalculated ratios.

As always, performance in the analysis section of the question was mixed. This question showed a
great divide in the capabilities (and marks) of the students.

The first group of students relates to a good number of individuals who attempted to use the
information in the scenario to provide explanations for movements, and these students tended to
score very well. The only weakness is that sometimes answers were too brief, and if the students
had expanded their initial comments they would have been able to score more marks. It was
pleasing to see these candidates identify the key points well, but then sad to see them simply
move on or feel they had made enough points, when they clearly had the ability to score more.
Candidates should be working on the basis of scoring one mark for each well explained point, so if
11 marks are available for the analysis they should try to make 11 separate points.

The second group of students are those who continue to ignore all information given in the
question scenario. These students continue to use ‘textbook’ answers to explain what a ratio
means, or to suggest generic reasons for movements. Students who simply commented that an
increase in inventory showed a lack of ability to sell goods completely neglected the fact that there
had been a significant increase in revenue. This kind of answer simply serves to show markers that
students think they can simply learn what an increase or decrease in a ratio must mean and repeat
that in an exam.

The aim of these questions is to display that students are able to deal with the information given
and provide a good analysis of realistic scenarios. These answers cannot simply be rote learned
and copied from notes. Students must understand what the ratios are and potential reasons for

Examiner’s report – FR July 2020 7

changes, but ultimately need to be able to apply these to a specific situation to provide a good level
of analysis.

Candidates were asked to explain the simple accounting treatment for the repayment of a
government grant. Many simply wrote double entries which gained marks, but does not constitute
an explanation. This further highlighted the reluctance of candidates to produce comprehensive
narrative answers. This is essential in the bridge to SBR and we will continue to ask questions of
this nature, so that candidates develop this skill.

The word processing software does appear to mean that students are thinking about how they lay
out their answer, and the higher performing students often used short paragraphs and headings so
they are carefully identifying the specific points made.

Some weaker candidates type everything in one block of text. This often reads poorly as it feels
like students are just throwing anything they can think of into the answer. It is far better to make
one or two points per paragraph. This would also help students to know how many points they
have made and will give a good guide to how much more they should be writing.

There are multiple past exam questions looking at the analysis of single entity financial statements,
as this has been a large part of the Financial Reporting exam for many years. Bun Co from the
September/December 2019 hybrid paper, Mowair Co from the September/December 2017 hybrid
paper and Funject Co from the March/June 2017 hybrid paper are good examples of this type of
question which students must practice.

Analysis of consolidated financial statements

This question involved the calculation of the gain/loss on disposal of a subsidiary. In general
candidates made a reasonable attempt at this, displaying that they were aware of the processes
and workings behind such a calculation. Candidates produced accurate calculations of goodwill as
part of the disposal calculation, but really struggled with how to work out the non-controlling
interest at the date of disposal. A few applied the proportionate method when the fair value was
required. The most common situation was students either omitting it or simply using the non-
controlling interest at the date of acquisition.

Following the calculation of the gain/loss on disposal, candidates were then required to remove the
subsidiary from the consolidated results in order to produce the results of the group without the
subsidiary. Candidates were generally able to do this well and calculate ratios on this basis. The
most common error was failing to recognise that the subsidiary had been disposed of after 6
months of the year, meaning only 6 months of results needed to be removed. Candidates who
failed to notice this lost a mark here but picked up follow through marks in the ratio calculations,
providing they showed adequate workings.

Of the ratio calculations, the most common error was failing to know how interest cover and return
on equity are calculated. This is something we have seen in previous sittings and candidates need
to ensure they know the key ratios in the learning materials. The number of ratios examined is not
unrealistic for students, and these really need to be learned.

Examiner’s report – FR July 2020 8

The discussion element was sadly very disappointing. Stronger candidates were able to separately
discuss the performance of the disposed subsidiary and the rest of the group, in addition to
commenting on other areas highlighted in the scenario. These included new contracts, a newly
received loan, new marketing costs and the costs of a new product launch. The students who
discussed these were able to score very well.

Sadly many answers were extremely brief, and in fact much briefer than in the analysis of
individual financial statements. Candidates seemed to simply calculate numbers and hope that was
sufficient. The analytical discussion will always be the majority of the marks available, and is
included to build a bridge between FR and SBR. Candidates who refuse to engage with such
analysis will struggle at SBR, so this is a crucial skill to develop.

Candidates must look at Pirlo Co from the March/June 2019 hybrid paper, Duke Co from the
September/December 2018 hybrid paper, Perkins from the March/June 2018 hybrid paper and the
September 2016 question Gregory Co as examples of how to incorporate knowledge of
consolidations into an answer. This type of question is one which can often divide candidates.
Those who are well prepared can often score good marks, but sadly far too many individuals are
picking up either very limited marks or no marks at all for their discussion.

Exam technique

Good exam technique is vital for success in FR. Strong candidates continue to use good workings
for both the preparation of financial statements and calculation of ratios, enabling them to
maximise the marks gained here. As stated earlier, candidates who failed to provide workings often
scored much lower marks on all aspects of calculation.

The analytical discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should also ensure they include a
conclusion. A sensible conclusion summarising the main points of the analysis is important, and
marks will be given here.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. The most commonly omitted sections tended to be areas where candidates
were asked to explain issues. The exam will involve elements of discussion, so candidates cannot
afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates were asked to use the word processing tool for the analysis question
and were less likely to show their workings, which needs to be improved so marks are not lost.
Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements and workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both are perfectly acceptable as markers will follow both methods. As stated earlier, the

Examiner’s report – FR July 2020 9

candidates who do workings on a calculator and simply type in the final answer often lose marks
and should be careful using this ‘all or nothing’ approach.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across exam sittings. Previous examiner’s reports can be found here and will
give good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to performing well in the FR exam is question practice and reviewing the answer to
see any areas you may have missed. This is particularly relevant on the analysis questions. Often
on this question candidates feel comfortable, but carefullyreviewing the answers can show the
depth of discussion that is being sought here. We strongly recommend that you use an up to date
question and answer bank from one of our Approved Content Providers but if this is not possible
then work through the most recent past exams on our website. However, please note if you are
using the past exams that these are not updated for syllabus changes or changes to the exam
format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

As always, exam technique is an important aspect of success in any exam. Throughout this report
the importance of reading and interpreting requirements very carefully has been reiterated many
times; failure to do this is often the cause of poor scores. The tendency for some candidates is to
answer the question that they want to get rather than answering the question which they have
been given.

Candidates should ensure that they have read all the requirements and noted the mark allocation
for each requirement; this is especially important in CBE as the requirements might be split over
more than one screen. Each requirement should be properly broken down so that it can be
established what is being asked. A recommended approach to this would be that at the start of an
answer, candidates should do a small plan in which they have broken down a requirement and
asked themselves how many things they are being asked to do, making sure that they consider all
aspects of the requirement.

Finally, please remember to use the spreadsheet functionality available. Totals should be
calculated by inserting formulae rather than typing in the number.

Examiner’s report – FR July 2020 10

Examiner’s report
Financial Reporting (FR)
March 2020

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

General comments

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The model of
delivery for the CBE exam means that candidates do not all receive the same set of questions. In
this report, the examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance, and to offer constructive advice for future
candidates.

• Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
• Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here we take a look at TWO Section A questions which proved to be particularly difficult for
candidates.

Example 1:
New Designs Co is considering the following potential assets for inclusion in its statement of
financial position.

Indicate which of the options below should be recognised as intangible assets by dragging
and dropping the appropriate options into the grey target boxes.

OPTIONS Intangible Assets

Brand name developed by New Designs $2m spent on an advertising campaign
Co worth $10m expected to increase revenue by $20m
$2.5m spent on new equipment to $3m paid to acquire the brand name Fast
develop a new successful product Designs
$3m spent on a licence to operate a $1m spent on the construction of a
production facility for six years product prototype before its launch
$1.5m spent on training customer service $2m paid as goodwill when acquiring
staff expected to increase revenue by Unique Co
$5m

Examiner’s report – FR March 2020

What does this test?
This question tests learning outcome B2(c) where candidates should be able to understand the
criteria for the recognition of intangible assets. It is important to note that all four options must be
correct to get 2 marks. Unfortunately, many candidates got three answers correct but not all four. It
is therefore vital that candidates read all of the options carefully and that each option is given equal
consideration before you move to the next question.

What is the correct answer?

The correct answers are identified below for the following reasons:
• $3m to acquire brand name Fast Designs – meets the definition of an intangible asset (note
that this contrasts with the internal development of a brand)
• $3m licence - meets the definition of an intangible asset
• $1m prototype expenditure – meets the definition of development expenditure
• $2m goodwill - meets the definition of an intangible asset

Why the correct answer is none of the other options?

The incorrect answers are identified below for the following reasons:
• $10m brand developed by New Designs Co – internally developed and therefore
capitalisation is prohibited
• $2m advertising campaign – this expenditure cannot be controlled therefore it does not
meet the definition of an asset
• $2.5m spent on equipment – this may be a tangible asset but it is definitely not an
intangible asset
• $1.5m staff training - this expenditure cannot be controlled therefore it does not meet the
definition of an asset

Example 2:
Root Co acquired 30% of the 100,000 equity shares in Branch Co for $7.50 per share on 1 January
20X7, when Branch Co had retained earnings of $460,000 and a balance on the revaluation
surplus of $50,000.

At the year end date of 31 December 20X7, Branch Co had retained earnings of $370,000 and a
balance of $70,000 on the revaluation surplus. Root Co considered that its investment in Branch
Co had suffered an impairment loss of $40,000

Calculate the carrying amount of the investment in Branch Co in the consolidated statement
of financial position of Root Co as at 31 December 20X7

What does this test?

This question tests a candidate’s understanding of how to account for a company’s investment in
an associate company (learning outcome D2). Using equity accounting, the carrying amount is:

COST +/- MOVEMENT IN POST-ACQUISITION RESERVES – DIVIDENDS RECEIVED - IMPAIRMENT

Examiner’s report – FR March 2020 2

What is the correct answer?
$
Cost of investment (30,000 x $7.50) 225,000
Post-acquisition loss in retained earnings (($370,000-$460,000) x 30%) (27,000)
Post-acquisition increase in revaluation surplus (($70,000-$50,000) x 30%) 6,000
Impairment (40,000)
164,000

Why the correct answer is none of the other options?

This was a fill in the blank question (so there were no other options) but many candidates ignored
the post-acquisition increase in the revaluation surplus and some also ignored the post-acquisition
loss in retained earnings. Some treated the post-acquisition loss in retained earnings as a gain and
adjusted for it the wrong way and others only wrote off 30% of the impairment. This suggests that
candidates are either not comfortable with equity accounting or were careless in their workings.
Candidates should take great care with fill in the blank questions and review their answer
thoroughly before moving on the next question.

Section B

Section B tests candidates’ knowledge on a number of topics in more detail than section A, with
three case questions containing five two-mark objective test questions. The range of topics
covered in the March 2020 examination was:

• Accounting policies
• Financial instruments
• Plant, property and equipment; borrowing costs; and government grants
• Leases
• Foreign exchange
• Revenue

Candidates found the following accounting adjustments difficult: the revaluation of a property;
government grants; costs associated with the construction of PPE (in particular borrowing costs);
and the calculation of the carrying amount of a right-of-use leased assets. Admittedly, some of
these topics are technically challenging but this does not mean that the FR examining team will not
examine them. Candidates should be prepared for a balanced FR exam which will contain
challenging questions in addition to questions that are less challenging.

A few key points that came out of section B were:

• Read the case scenario and requirements very carefully. This goes for the whole exam, but
any objective test question is ‘all or nothing’ – if you misread the requirement or miss a vital
piece of information from the scenario and get the answer incorrect you score zero for that
question. Close reading is also important for identifying the instructions in the question on
how to round your answers.
• Cover the whole syllabus. The list above should highlight this – FR has a large syllabus
which can seem daunting, but it is essential to have a broad knowledge. If, for example, a

Examiner’s report – FR March 2020 3

 section B OT case testing leases comes up, and you haven’t covered this in your revision,
the 10 marks available are left to chance.
• Be able to apply your knowledge of theories/techniques to the scenario provided, as in the
OT case questions these areas will often be examined in the context of the case. It is
important that you are able to apply the logic of a concept or theory to a problem and so
you need to understand the method and why you are doing the calculations and not just
focus on how to do the calculations.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Single entity accounts preparation

- Analysis of single entity financial statements
- Preparation of consolidated financial statements
- Analysis of consolidated financial statements

These will be discussed in turn. Although the specifics of individual questions will not be discussed,
common areas candidates either performed well on or struggled with will be highlighted. Advice will
be provided to improve exam performance.

Single entity accounts preparation

Some candidates were required to prepare a statement of profit or loss (SOPL) and other
comprehensive income (OCI), a statement of changes in equity (SOCIE) and extracts from the
statement of cash flow (SCF) using a trial balance (TB)and notes that required adjustments. On
the whole, performances in this area were not as good as in previous diets, however, there were
still many well-prepared candidates that were able to score highly.

A common mistake in the SOPL for some candidates related to the investment in shares. The
question stated that the investment was to be recognised as fair value through other
comprehensive income in accordance with IFRS 9 Financial Instruments. Many candidates
ignored the instruction to record changes in fair value in OCI and instead recognised the gain in
SOPL. There was also a significant number of candidates that viewed this investment as a share
issue in error and recognised it in the SOCIE. It was disappointing that such a large number of
candidates failed to recognise the investment correctly as this is a topic area where the basics
need to be grasped at the FR level to underpin the knowledge required for Strategic Business
Reporting (SBR).

The marking team commented that the SOCIE was often not attempted at all or was largely
incomplete. A surprising number of candidates did not show the opening balances or adjusted
them for a (non-existent) share issue in some questions. In questions where candidates were
presented with a rights issue that had already been recorded, this was often calculated incorrectly
using the opening share capital balances. A common omission throughout the preparation of the
SOCIE was the prior period adjustment that was rarely included. It was pleasing that the majority
of candidates were able to get “own figure” marks for including the profit after tax and OCI (where
relevant) in the SOCIE.

Examiner’s report – FR March 2020 4

Many candidates were able to correctly deal with the adjustment for revaluations and the
subsequent excess depreciation in respect of the annual transfer from the revaluation surplus.
This is an area of the syllabus that is regularly tested, so it was pleasing to see a stronger level of
performance here.

The requirement to prepare extracts from the SCF (investing and financing activities) was omitted
by a significantly large number of candidates. For those that did attempt this part of the question,
the dividend paid was often correctly included as a deduction from financing activities. It is worth
noting that when buying new assets such as investments or a brand, this will result in cash outflow
that should be recognised in investing activities. The requirement to prepare extracts from the
SCF is common in this style of question and is something that candidates need to work on and
improve.

The marking team noted that many candidates produced well-presented financial statements and
for those that provided clear workings, markers were able to apply the ‘own figure rule’. For
example, if a calculation error was made (such as on a rights share issue) candidates still gained
credit for following the incorrect figure through and accounting for it correctly in the SOCIE.

Despite previous guidance in the examiner’s reports, markers have reported that there are still
candidates that continue to type their answer into the spreadsheet rather than showing workings to
explain how they were calculated. In the absence of a working it is impossible for markers to give
credit and the ‘own figure rule’ cannot be applied.

There are multiple past exam questions that demonstrate how single company financial statements
are tested. The examining team recommend that you attempt Vernon Co from the March/June
2019 hybrid paper, Duggan Co from the September/December 2018 hybrid paper and Haverford
Co from the March/June 2018 hybrid paper. These are good examples of this type of question
which students must practice. The FR exam will remain technically challenging and it is essential
that students have a thorough working knowledge of IFRS standards. This knowledge is
necessary to pass this exam and progress to SBR.

Analysis of individual company financial statements

It was pleasing to see that many candidates were able to score maximum marks on the calculation
of basic financial ratios in these questions, with only a minority not attempting the calculations at
all. Some common mistakes included not using profit before interest & tax or using the wrong
capital employed in a return on capital employed calculation. Some candidates also calculated
gearing using debt to debt plus equity, despite the question asking for debt to equity. It is
important to read the question carefully and provide the calculations being asked for. Financial
analysis is something that is tested in every exam diet and therefore candidates must ensure they
are familiar with the various ratio formula. A final point to note for the ratio calculations is perhaps
one of the most important! Candidates must ensure that they show their workings for the ratio
calculations so that credit can be given accordingly.

Responses to the appraisal part of the question were often disappointing. There were many
answers that included very limited analysis, with numerous solutions simply citing the change in

Examiner’s report – FR March 2020 5

the various ratios. Generic comments that are not related to the scenario or performance of the
entity will not score marks. For example, stating that a reduction in gross profit margin could be
due to a fall in sales price or lack of cost control will not score marks when there are clear
indicators for the movement contained within the scenario and these are not addressed.

The marking team also noted that there was an increase in the number of candidates not providing
a conclusion to their analysis. Candidates are advised to provide a conclusion (with a suitable
heading) based on the objective of the question. For example, if you are comparing company
performance year on year, your answer should conclude whether performance has improved or
deteriorated based on your analysis?

It continues to be the case that candidates who score well in these types of questions are those
that attempt to use the scenario to provide a rationale for the differences in ratios (e.g. year on year
or compared to a competitor). These questions are designed to allow candidates to demonstrate
that they can deal with the information provided and prepare a good in-depth analysis of realistic
business scenarios. Candidates must demonstrate that they not only understand what ratios are
and potential reasons for their movement but they must be able to apply this knowledge using the
scenario to provide a robust analysis of company performance.

In recent diets, it has been noted that candidates are now using the CBE software to their
advantage in these question types. High scoring candidates often make use of tables to present
their ratio results and workings and use headings and short paragraphs for their analysis. This
approach makes it easier for the marker to identify the relevant points that the candidate is making.
Poorer performing candidates often do not use headings and provide continuous text where it is
difficult for markers to identify the points that the candidate is trying to make.

By using headings and small paragraphs, candidates will provide better structure to their answer
and enable them to identify how many points have been made. For example, if there are nine
marks for analysis, ideally you would provide nine points using the scenario. These points can be
clearly identified by the marker if you have included them separately in small paragraphs.

The examining team recommend that candidates practice past questions in this area. There are
multiple past exam questions that test the analysis of single entity financial statements, as this has
been a large part of the FR exam for many years. Bun Co from September/December 2019,
Mowair Co from September/December 2017 and Funject Co from March/June 2017 are good
examples of this.

Preparation of consolidated financial statements

General consolidation principles continue to be familiar to candidates with many being able to
score highly. Where workings are clearly shown, markers are able to award marks for relevant
calculations and apply the ‘own figure rule’. The marking team noted that, in line with previous
sittings, a greater proportion of candidates are showing their workings in this type of question,
either within the cell or shown separately elsewhere within the spreadsheet. Both are acceptable
methods and both will be marked by the marking team.

Examiner’s report – FR March 2020 6

This diet required some candidates to prepare a consolidated statement of profit of loss (CSOPL)
and for some to include OCI. The preparation of such statements was done reasonably well with
many candidates able to successfully deal with fair value depreciation, intra-group sales and
unrealised profits.

It was disappointing to note that a surprisingly large number of candidates did not recognise the
mid-year acquisition of a subsidiary which is common place in a CSOPL. In such a situation, the
results of the subsidiary should be time apportioned (for the period of time that the parent has had
control over the subsidiary) when including in the consolidated profit or loss.

Another area of weakness that was highlighted by the marking team was the failure to split the
consolidated profit for the year between the amount attributable to the shareholders of the parent
and the amount attributable to the non-controlling interests. This also extended to the total
comprehensive income (TCI) that also needed to be apportioned by some candidates. The
profit/TCI split is an area that is often overlooked by candidates in the exam and should be
addressed by candidates as part of their revision of this syllabus area.

It continues to be the case that elements of these questions related to ‘non-group’ accounting
adjustments, such as the correct inclusion of a loan per relevant IFRS standards are often not
correctly accounted for. In this diet an adjustment required candidates to reverse out an incorrect
treatment of issue costs and to calculate and correctly account for the correct finance cost. Many
candidates were unable to deal with such an adjustment in the context of consolidated financial
statements, whereas a similar adjustment required to the financial statements of a single entity is
usually well received. Candidates need to be prepared to make adjustments to either the parent or
subsidiary financial statements prior to consolidation.

Some candidates were required to account for an associate in the CSOPL and to calculate the
investment in the associate that would be recognised in the CSFP. On the whole these
requirements were generally well attempted. One of the main errors related to the share of
associate profit. The CSOPL should record the share of associate profit for the current accounting
period only whereas the investment in associate in the CSFP should include the share of all post-
acquisition profit to date. Many candidates calculated the unrealised profit for the associate in the
same way as they would for a subsidiary. Whilst this approach was partially correct, to complete
the calculation candidates needed to adjust only for the share of the associate’s unrealised profit,
for example, 30%.

There are multiple past exam questions that test the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Runner
Co from the September/December 2019 hybrid paper, Party Co from the September/December
2017 hybrid paper, Dargent Co from the March/June 2017 hybrid paper and Bycomb Co from the
June 2015 paper are good examples of this type of question which students must practice.

Analysis of consolidated financial statements

This question type may require candidates to complete a small calculation for part (a) before
calculating a number of ratios and analysing the performance or position of a company. In the
March 2020 diet, candidates were either required to calculate goodwill or a group gain following the

Examiner’s report – FR March 2020 7

disposal of a subsidiary. Both the acquisition and the disposal took place mid-way through the
accounting period and the impact of this should have been noted in the analysis part of the
question.

A surprising number of candidates were unable to deal with the calculation of goodwill correctly.
Common errors included not discounting the deferred consideration to present value and using the
incorrect share price when calculating the share exchange and the non-controlling interest.

Group disposals have been part of the syllabus for several years now, so it was very disappointing
to note that many candidates were unable to correctly calculate the gain on the disposal of the
subsidiary. A number of candidates included non-controlling interest at disposal in the calculation,
despite it being a disposal of a 100% owned subsidiary. Candidates were told in the scenario that
the goodwill of the disposed company had been impaired by 50%. Candidates often misread the
information and simply took 50% of the consolidated goodwill from the consolidated statement of
financial position (which included the goodwill of other group companies) in error. Marks were
available for calculating the goodwill on the acquisition of the disposal company and subsequently
reducing this by the impairment amount of 50%. Many candidates did not attempt this and so
missed out on these marks.

It was pleasing to see that a large proportion of candidates were able to score full marks on the
ratio calculations in these questions. For the candidates that did not score full marks on the ratios
there were often errors in the formula used or no workings were provided for the marker. As
already noted in this report, candidates need to record all workings when calculating ratios.

The analysis section of the question produced answers that varied in quality. There was a notable
decline in the performance of candidates in this question type. Some candidates used information
from the scenario and incorporated it into their answer. Candidates that used this information and
recognised the impact that an acquisition or disposal of a subsidiary part-way through the year, or
one-off transactions (such as a gain on disposal or acquisition costs relating to a new subsidiary)
may have, scored very well.

Unfortunately, far too many candidates ignored the scenario provided in the question and the
acquisition/disposal of the subsidiary and produced vague, generic answers. When analysing
consolidated financial statements, it is essential that candidates recognise the impact that the
acquisition/disposal of a subsidiary will have on the financial statements to support their analysis
and use the additional information in the scenario to provide a rationale for the change.

The examining team recommends that previous questions containing group analysis issues are
considered such as Pirlo from the March/June 2019 hybrid paper, Duke Co from the
September/December 2018 hybrid paper, Perkins from the March/June 2018 hybrid paper and the
September 2016 question Gregory Co as examples of how to incorporate knowledge of
consolidations into an answer. To score well on this question type candidates MUST ensure that
they use and apply the information provided in the question scenario.

Examiner’s report – FR March 2020 8

Exam technique

Good exam technique is vital for success in the Financial Reporting exam. Strong candidates
continue to use clearly presented workings for both the preparation of financial statements and
calculation of ratios, enabling them to maximise the marks gained here. As stated earlier,
candidates who failed to provide workings often scored much lower marks on all aspects of
calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should make clear statements and
avoid repetition. Numerous candidates continue to repeat the same point two or three times when
explaining the movement in a ratio which will waste time and not provide any further marks. It is
much better to make comments on a wider range of figures than to repeat similar points over one
specific balance.

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be awarded for
a decent attempt to do this.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. In this diet, it was pleasing to see that the majority of candidates attempted all
sections of the exams. The most commonly omitted questions in section C tended to be areas
where candidates were asked to explain issues. The exam will involve elements of discussion, so
candidates cannot afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost.
Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements and workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both approaches are perfectly acceptable as markers can allocate marks to both methods. As
stated earlier, the candidates who do workings on a calculator and simply type in the final answer
often lose marks.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Examiner’s report – FR March 2020 9

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Examiner’s report – FR March 2020 10

Examiner’s report
Financial Reporting (FR)
December 2019
The examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance, and to offer constructive advice for
future candidates.

General comments

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The model of
delivery for the CBE exam means that candidates do not all receive the same set of questions. In
this report, the examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance, and to offer constructive advice for future
candidates.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here we take a look at TWO Section A questions which proved to be particularly difficult for
candidates.

Example 1:
A company’s statement of financial position at 31 December 20X4 included land at a cost of
$200,000 and a deferred tax liability of $60,000.

On 1 March 20X5, the land was professionally valued at $250,000. This valuation was incorporated
into the financial statements for the year to 31 December 20X5. No other non-current assets have
been revalued. Other taxable temporary differences increased during the year to 31 December
20X5 by $40,000. The relevant rate of tax is 20%.

What are the balances at 31 December 20X5 on the revaluation surplus and the deferred tax
liability?

A Revaluation surplus of $50,000 and deferred tax liability of $68,000

B Revaluation surplus of $50,000 and deferred tax liability of $78,000
C Revaluation surplus of $40,000 and deferred tax liability of $78,000
D Revaluation surplus of $40,000 and deferred tax liability of $62,000

Examiner’s report – FR December 2019

What does this test?
This question tests candidates’ knowledge of the provision of deferred tax on the revaluation of a
non-current asset (in this case land). IAS 12 states that if an adjustment giving rise to deferred tax
is recognised in the statement of profit or loss (SOPL) then so too should its related deferred tax be
recognised there. Likewise, if the adjustment is recognised outside the SOPL (for example in Other
Comprehensive Income (OCI) or equity), then its related deferred tax should also be recognised
there. In this case, the gain on the land is recognised in OCI and the revaluation surplus. This
means that the associated deferred tax should also be recognised in the same place (in this case,
OCI and revaluation surplus).

What is the correct answer?

The correct answer is C

The gain on the land revaluation is $50,000 and the associated deferred tax is $10,000 (20%). The
journal entries for the land revaluation and its associated deferred tax are:

Dr Land $50,000 Dr Revaluation Surplus $10,000

Cr Revaluation Surplus $50,000 Cr Deferred tax $10,000

The closing balance on the revaluation surplus should then be $40,000

The opening balance on deferred tax is $60,000 which will be increased by the adjustment of
$10,000 (above) for the land revaluation and $8,000 for the increase in taxable temporary
differences ($40,000 x 20% per question). The closing balance on deferred tax should then be
$78,000.

Why the correct answer is none of the other options

Neither option A nor B take account of the deferred tax on the land revaluation. Option D deducts
the deferred tax on the taxable temporary differences instead of adding it on.
It was clear that many candidates were not aware of the fact that a deferred tax provision was
required on the revaluation of land. Also, candidates should take time to produce the accounting
entries and ensure that they work through all aspects of these entries to get a final answer.

Example 2:

Which of the following should be accounted for as subsidiaries in the consolidated financial
statements of Preece Co?

(1) Gilber Co Preece Co currently owns 40% of the share capital of Gilber Co and holds
options to purchase another 20% which it can exercise immediately
(2) Grovez Co Preece Co owns 60% of Grovez Co and has appointed the majority of the
board of directors
(3) Roge Co Preece Co owns 80% of Roge Co. Roge Co is loss-making and Preece Co is
considering selling it in the near future.

A 1 and 2 only
B 2 and 3 only

Examiner’s report – FR December 2019 2

C 1 and 3 only
D 1, 2 and 3

What does this test?

This question tests that candidates understand the concept of control and can recognise when a
subsidiary does not meet the definition of held-for-sale.

What is the correct answer?

The correct answer is D and all three companies should be consolidated as subsidiaries. Gilber Co
should be consolidated because the options are currently exercisable and so Preece Co could take
immediate control if it chose to. Preece Co has control of Grovez Co because it is already
appointing directors to the board. Roge Co appears to be a subsidiary by virtue of the fact that
Preece Co owns 80%. It is not a held-for-sale asset because it has not met the criteria of
International Financial Reporting Standard (IFRS®) 5 Non-current assets held for sale and
discontinued operations. Roge Co should therefore continue to be consolidated.

Why the correct answer is none of the other options

The other three options only identify two subsidiaries instead of all three.

Many candidates did not believe that Gilber Co was a subsidiary because Preece Co only holds
40% of the share capital. Candidates need to appreciate that the definition of control is not limited
to just the number of shares held.

Section B

Section B tests candidates’ knowledge on a number of IFRS standards in more depth than section
A, with three case questions containing five two-mark objective test questions. The range of topics
tested in the December 2019 examination was:
 Intangibles, impairment and government grants
 Provisions
 Leases
 Events after the reporting period
 Financial instruments
 Deferred tax

Candidates appeared to struggle with Leases, Events after the reporting period and deferred tax.
Candidates should make sure that they are studying with up-to-date materials (i.e. those published
by approved content providers). For example, they should ensure that they are using the latest
leasing standard (IFRS 16 Leases). They should also ensure that the whole of the syllabus is
revised including IAS 10 Events after the reporting period. They should also ensure that they have
revised and understand some of the more technical IFRS standards such as IAS 12 Deferred Tax.

Read the case scenario and its requirements carefully. As these questions score either 2 marks or
zero marks, it is important that you do not misread or miss any information in the scenario. Close
reading of the requirements is also important to identify specific instructions such as rounding.

Examiner’s report – FR December 2019 3

The FR exam aims to test your ability to apply your knowledge – this is a very important skill which
you will continue to develop in Strategic Business Reporting. Consequently you need to
understand why you are producing accounting adjustments and try not to rote learn them.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Preparation of individual company financial statements

- Preparation of consolidated financial statements
- Analysis of individual financial statements
- Analysis of consolidated financial statements

Preparation of individual company financial statements

Some candidates were required to present a Statement Of Profit or Loss (SOPL) and Other
Comprehensive Income (OCI) using the trial balance (TB) supplied and a list of relevant notes,
from which they could work out what adjustments to make to the TB figures. Presentation, on the
whole, was fairly good, with line items in the correct order.

The most common mistake related to a change in use concerning property, moving from PPE to
investment property. This needed to be revalued in accordance with IAS 16 Property, Plant and
Equipment before being measured in accordance with the fair value model in IAS 40 Investment
Properties. Unfortunately, very few candidates knew how to account for this, which was
disappointing as this is topic tests good technical knowledge which can be used to support
Strategic Business Reporting (SBR). It was also surprising to see some candidates struggle with
simple depreciation calculations.

A number of candidates were confused with revenue adjustments relating to deferring income or
contracts which are satisfied over time. Specifically, candidates were very poor at providing an
explanation of their accounting adjustments. This is a specific skill which FR uses to prepare
candidates for SBR. If candidates did not calculate the correct accounting numbers some marks
might be lost, however, marks might still be awarded if markers can use the candidate’s
explanation to understand their thought processes behind their accounting numbers. However, if
no explanation, or a poor explanation is provided then this process is not possible and so more
marks are lost.

Students were more able to cope with adjustments relating to convertible loan notes and tax
workings, highlighting that good question practice has occurred prior to the exam. These are both
areas which have been tested regularly, so it was good to see a stronger level of performance
here.

Candidates that were asked to produce a statement of adjusted profit appeared to struggle with
what was required. This has been examined on numerous occasions in the FR exam, so

Examiner’s report – FR December 2019 4

candidates should practice this requirement. Haverford Co from the March/June 2018 hybrid paper
is a good example of this examining approach.

There are multiple past exam questions looking at the preparation of single company financial
statements, as this has been a large part of the FR syllabus for many years. In addition to the
suggestion above, Vernon Co from the March/June 2019 hybrid paper and Duggan Co from the
September/December 2018 hybrid paper are good examples of this type of question which
students must practice.

Overall, there was slight improvement in the use of the CBE software and layout from previous
sittings, and many candidates provided workings which could be easily followed by markers. Those
who continue to use a calculator and simply type the answer into a spreadsheet continue to
receive ‘all-or-nothing’ marks, as it is impossible for markers to give credit if workings are not
shown.

Whilst there was a slight improvement in layout, there was a noticeable decline in the knowledge of
some students. There were too many students scoring very low marks, and struggling on areas
that should not be challenging students at this level. For example, Earnings per Share. The FR
exam will remain technically challenging, and it is essential that students have a thorough working
knowledge of IFRS standards. This knowledge is necessary to pass this exam and progress to
further studies.

Examiner’s report – FR December 2019 5

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remains an area that
candidates perform well on. Candidates with clear workings often scored highly on this area. As
noted within the discussion of the preparation of single company financial statements above, there
was an improvement in the number of candidates showing their workings, either within the cell or
shown separately in different lines of the spreadsheet. Both are acceptable methods, and both will
be marked by the marking team.

The preparation of a consolidated statement of profit or loss was done reasonably well, with
candidates able to process adjustments relating to intra-group sales, unrealised profits, mid-year
acquisitions and fair value depreciation. These are all core areas for consolidated financial
statements so it was pleasing to see students performing well here.

However, many candidates neglected to split the profit between the parent’s shareholders and the
non-controlling interest. This is a fundamental part of a consolidated statement of profit or loss and
too many students lost three marks by not attempting this.

The weakest element in these questions related to ‘non-group’ accounting adjustments, such as
foreign currency adjustments in the parent financial statements or lease accounting. Both of these
would be elements we would expect to see students perform strongly in when producing financial
statements for individual companies, but candidates struggled to translate that to consolidated
financial statements. It is important that candidates understand a wide variety of accounting issues,
rather than simply rote learning the common group-related adjustments.

The preparation of a consolidated statement of financial position continues to be an area that

candidates perform well on, with some ‘core’ adjustments on fair value adjustments and
impairment done well. It was surprising to see a number of students struggle with goodwill
calculations and share-for-share exchanges, as these have been examined regularly in the FR
exam. It was also disappointing to see basic errors such as the time-apportionment of the
assets/liabilities of the subsidiary in a mid-year acquisition and using proportionate consolidation.
Candidates who adopt either of these approaches have clearly not practiced enough questions and
tended to score very low marks.

As always, many candidates neglected the narrative/discussion marks, meaning that they lost up
to three marks immediately. The FR exam is essential preparation for the SBR paper, where
candidates are expected to be able to discuss and explain accounting principles. Candidates
should learn that skill at this stage so that they are able to perform well at the higher level.

There are multiple past exam questions looking at the preparation of consolidated financial
statements, as this has been a large part of the FR exam for many years. Party Co from the
September/December 2017 hybrid paper, Dargent Co from the March/June 2017 hybrid paper and
Bycomb Co from the June 2015 paper are good examples of this type of question which students
must practice.

Examiner’s report – FR December 2019 6

Analysis of individual company financial statements

The calculation of basic ratios continues to be an area where many students score full marks,
which is good to see, but candidates must show workings when asked to redraft some figures and
prepare recalculated ratios. This is not an uncommon situation in FR, and many candidates
continue to show no workings for their thought processes. If students continue to do this, they are
likely to lose marks through the inability of a marker to apply the own figure rule.

Candidates often perform either really well or rather poorly in these types of questions.

Those who perform well attempted to use the information provided in the scenario to explain the
movement in ratios, and these candidates tend to score very well. The only weakness is that
sometimes answers were too brief, and if candidates had continued to develop their thoughts they
would have been able to score more marks. Candidates should be working on the basis of scoring
one mark for each well explained point.

Those who perform less well tend to ignore all information provided in the scenario. These
candidates often use ‘textbook’ answers to explain what a ratio means, or to suggest generic
reasons for movements. Candidates who simply state that an increase in gross profit margin could
be due to an increase in the price charged or a better management of costs will not score marks
when there are clear reasons for the movement provided in the scenario. The aim of these
questions is to provide evidence that candidates are able to deal with the information provided and
provide a good in-depth analysis of realistic scenarios. These questions cannot simply be rote
learned and copied from notes. Candidates must understand what the ratios are and potential
reasons for their movement, but ultimately they need to be able to apply these to the scenario to
provide a substantial and robust level of analysis.

The use of the CBE software is providing evidence that candidates are thinking about how they lay
out their solutions, and the higher performing candidate often used short paragraphs and headings
– this shows that they are carefully identifying the specific points that they want to make. Some
weaker candidates type everything in one huge block of text. This often reads poorly as it feels like
students are just throwing anything they can think of into the answer. It is far better to make one or
two points per paragraphs. This would also help candidates to know how many points they have
made and will give a good guide to how much more they should be writing.

The largest weakness in these question types related to the calculation of Earnings Per Share. The
brevity of some answers evidenced that some candidates may have attempted to ‘question spot’
and simply had not revised this topic. A disappointing number of students also scored zero on this
part of the question.

There are multiple past exam questions that test the analysis of single entity financial statements,
as this has been a large part of the FR exam for many years. Mowair Co from the
September/December 2017 hybrid paper and Funject Co from the March/June 2017 hybrid paper
are good examples of this type of question which students must practice.

Examiner’s report – FR December 2019 7

Analysis of consolidated financial statements

Candidates continue to find this question difficult and often neglect the consolidated element of this
question. In this case, candidates were specifically asked to discuss why a set of consolidated
financial statements would differ from those of a single entity, and surprisingly struggled with it.
They would have been expected to discuss the inclusion of a subsidiary in the consolidated
financial statements, the inclusion of a non-controlling interest, intra-group transactions versus
none of these being accounted for in a single entity’s financial statements etc. This should be an
area that candidates score highly in but surprisingly that this was not the case.

Problem areas for candidates in these types of question are similar to those noted in the analysis
of individual financial statements above; i.e candidates do not use the scenario in their analysis or
do not show workings when required to perform redrafted accounting numbers. For instance, many
candidates lost marks by failing to produce workings in the following example:

Draft extracts of group financial statements before adjustments:

$000
Revenue 34,000
Cost of sales (18,000)
Gross profit 16,000

Giving a gross profit margin of 47% (16,000/34,000).

Let’s say part (a) of the question required the removal an intra-group sale of $5,000 and make an
adjustment for unrealised profit of $1,000. Accounting for these group adjustments would provide
the following result:

$000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000 + 1,000) (14,000)
Gross profit 15,000

Giving a revised gross profit margin of 51.7%

The marks for the adjustments would be given in part (a) of the question, and these would be
marked as either right or wrong. If part (b) asked the candidates to calculate ratios based on the
draft and recalculated figures, these would be marked according to the own figure rule. Ideally, this
is how the FR examining team would like to see candidates show these workings:

Draft Restated
Gross profit margin 47% 51.7%
(16,000/34,000) (15,000/29,000)

Examiner’s report – FR December 2019 8

This clearly shows the ratio and the workings, and would obtain full marks. Let’s say a candidate
forgot to adjust the unrealised profit in cost of sales. This would make cost of sales $13m. This
would give the following results:

$000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000) (13,000)
Gross profit 16,000

Draft Restated
Gross profit margin 47% 55.1%
(16,000/34,000) (16,000/29,000)

This would lose a mark in part (a), as the candidate has made an error. However, they would score
full marks in part (b) for the ratios under the own figure rule, as it is clear which figures a candidate
has used in the restated calculation.

If a candidate simply shows the ratio calculations as (i.e. with no workings):

Draft Restated
Gross profit margin 47% 55.1%

then a marker would mark these figures as right or wrong. As there are no workings to show what
the candidate has done, the marker cannot assume the mistake that the candidate has made, as
this is not clear. Therefore this candidate would score 0.5 for the draft calculation, as this is correct,
but nothing for the restated, as this is incorrect.

The omission of workings like this can cost candidates up to 2 marks. It is imperative that workings
such as these are shown to maximise the marks to be gained.

The discussion related to the analysis of consolidated financial statements will always have group
elements associated with it, something which the weaker candidates continue to neglect. Items
such as intra-group trade, rental agreements, shared property arrangements, preferable terms are
all included to provide information to analyse the underlying performance and position. If these are
ignored, candidates are missing the point of the question and will score a poor mark.

Candidates must look at Pirlo Co from the March/June 2019 hybrid paper, Duke Co from the
September/December 2018 hybrid paper, Perkins from the March/June 2018 hybrid paper and the
September 2016 question Gregory Co as examples of how to incorporate knowledge of
consolidations into an answer. This type of question is one which can often divide candidates.
Those who are well prepared can often score good marks, but sadly far too many individuals are
picking up either very limited marks or no marks at all for their discussion.

Exam technique

Examiner’s report – FR December 2019 9

Good exam technique is vital for success in FR. Strong candidates continue to use good workings
for both the preparation of financial statements and calculation of ratios, enabling them to
maximise the marks gained here. As stated earlier, candidates who failed to provide workings often
scored much lower marks on all aspects of calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should also ensure they include a
conclusion on the analysis discussion. A sensible conclusion summarising the main points of the
analysis is important, and marks will be given here.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. The most commonly omitted sections tended to be areas where candidates
were asked to explain issues. The exam will involve elements of discussion, so candidates cannot
afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates were asked to use the word processing tool for the analysis question
and were less likely to show their workings, which needs to be improved so marks are not lost.
Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements and workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both are perfectly acceptable as markers will follow both methods. As stated earlier, the
candidates who perform workings on a calculator and simply type in the final answer often lose
marks and so should be careful with this.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in FR can
be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to FR is question practice, attempting questions and reviewing the answer to see
any areas you may have missed. This is particularly relevant on the analysis questions. Often on
this question candidates feel comfortable, but reviewing the answers can show the depth of
discussion that is being sought here. We strongly recommend that you use an up to date question

Examiner’s report – FR December 2019 10

and answer bank from one of our Approved Content Providers but if this is not possible then work
through the most recent past exams on our website. However, please note if you are using the
past exams that these are not updated for syllabus changes or changes to the exam format and so
should be used with caution – so check the latest syllabus and study guide for changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

As always, exam technique is an important aspect of success in any exam. Throughout this report
the importance of reading and interpreting requirements very carefully has been reiterated many
times; failure to do this is often the cause of poor scores. The tendency for some candidates is to
answer the question that they want to get rather than answering the question which they have
been given.

Candidates should ensure that they have read all the requirements and note the mark allocation for
each requirement; this is especially important in CBE as the requirements might be split over
several screens. Each requirement should be properly broken down so that it can be established
what is being asked. A recommended approach to this would be that at the start of an answer,
candidates should do a small plan in which they have broken down a requirement and asked
themselves how many things they are being asked to do, making sure that they consider all
aspects of the requirement.

Finally, please remember to use the spreadsheet functionality available. Totals should be
calculated by inserting formulae rather than typing in the number.

Examiner’s report – FR December 2019 11

Examiner’s report
Financial Reporting (FR)
September 2019
The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

General comments

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The model of
delivery for the CBE exam means that candidates do not all receive the same set of questions. In
this report, the examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance, and to offer constructive advice for future
candidates.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here we take a look at TWO Section A questions which proved to be particularly difficult for
candidates.

Example 1

According to the Conceptual Framework for Financial Reporting of the International Accounting
Standards Board (IASB), verifiability means that “…different knowledgeable and independent
observers could reach a consensus of faithful representation…”

Which of the following procedures directly verifies that the relevant balances are faithfully
represented?

A Confirming the cash balance by conducting a physical count of cash

B Confirming the inventory by reviewing the year end list of inventory

C Confirming a revaluation of land by agreeing the revaluation surplus to a minute of the board
meeting where the directors agreed its estimate

D Confirming the carrying amount of receivables by reviewing the year end statements issued to
customers at that date

What does this test?

Examiner’s report – FR September 2019

This question tests Learning Outcome A1(e) “Discuss what is meant by understandability and
verifiability in relation to the provision of financial information”

What is the correct answer?

The correct answer is A. The question provides candidates with the definition of verifiability which
refers specifically to independence. Option A is the only option that objectively verifies the
existence of cash.

Why the correct answer is none of the other options?

All other options verify the asset against an internal document; i.e. a “list of inventory”, a “board
minute” and a “receivable statement”. Often, as in this case, the question stem contains some
guidance for candidates. It is important therefore that candidates read the question stem and try to
make the best use of any guidance provided.

Example 2

During the year ended 31 December 20X4, Bloop Co incurred expenditure on two projects

Project 1 costs relate to the evaluation of alternatives for improved production systems to be
implemented during 20X5 and 20X6. The company spent $1m on related salaries and materials
and $2m on design equipment (which had an expected life of four years).

Project 2 involves the testing of a new product which will be introduced to the market in 20X5 and
is expected to generate profits over a four-year period. The company spent $4m on salaries and
materials.

The policy is to charge a full year’s depreciation on assets.

What is the TOTAL charge to profit or loss for the year ended 31 December 20X4?

A $5.5m

B $3.0m

C $1.5m

D $1.0m

What does this test?

This tests Learning Outcome B2(f) “Describe and apply the requirements of relevant accounting
standards to research and development expenditure”

What is the correct answer?

The correct answer is C. Project 1 expenditure on the “evaluation of alternatives” could never be
classified as an asset. Therefore the full $1m relating to salaries and materials should be charged
to profit or loss. Also, the depreciation for the design equipment should be expensed ($2m/4);
$1.5m in total. The project 2 costs associated with the “testing of a new product which will be
introduced to the market in 20X5” should be capitalised in 20X4 and written off from 20X5 for the

Examiner’s report – FR September 2019 2

next four years. Consequently, there will be no project 2 costs charged to profit or loss during
20X4.

Why the correct answer is none of the other options?

A Charges $1.5m for project 1 and $4m for project 2
B Writes off all costs associated with project 1 (including the design equipment)
D Charges the $1m for project 1 salaries and materials only

Section B

Section B tests candidates’ knowledge on a number of International Financial Reporting Standards

(IFRS®) in more depth than in section A, with three case questions containing five two-mark
objective test questions. The range of topics tested in the September 2019 examination was:

 Deferred tax and revaluations of non-current assets

 Accounting policies
 Non-current assets and cash generating units
 Revaluation of non-current assets and government grants
 Leases
 Revenue

A few key points that came out of section B were:

 Read the case scenario and requirements very carefully. This goes for the whole exam, but
any objective test question is ‘all or nothing’ – if you misread the requirement or miss a vital
piece of information from the scenario and get the answer incorrect you score zero for that
question. Close reading is also important for identifying the instructions in the question on
how to round your answers.
 Cover the whole syllabus. The list above should highlight this – FR has a large syllabus
which can seem daunting, but it is essential to have a broad knowledge. If, for example, a
section B OT case covering variances comes up and you haven’t covered this in your
studies, the 10 marks available are left to chance.
 Be able to apply your knowledge of theories/techniques to the scenario given, as in the OT
case questions these areas will often be examined in the context of the case. It is important
that you are able to apply the logic of a concept or theory to a problem and so you need to
understand the method and why you are doing the calculations and not just focus on how to
do the calculations.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Single entity accounts preparation

- Analysis of single entity financial statements
- Preparation of consolidated financial statements
- Analysis of consolidated financial statements

Examiner’s report – FR September 2019 3

These will be discussed in turn. Although the specifics of individual questions will not be discussed,
common areas candidates either performed well on or struggled with will be highlighted. Advice will
be provided to improve exam performance.

Single entity accounts preparation

This area of the syllabus required candidates to prepare single entity financial statements which is
an essential skill for an accountant and has been a large part of the financial reporting syllabus for
many years. Performances in this area were generally good with many well prepared candidates
able to score high marks.

As in previous questions on single entity accounts preparation, candidates were required to

prepare financial statements from a trial balance and a set of adjustments. Many candidates
produced well-presented financial statements and for those that provided clear workings, markers
were able to apply the ‘own figure rule’. For example, if a calculation error was made (such as an
inventory adjustment) candidates still gained credit for following the incorrect figure through and
accounting for it correctly in either the statement of profit or loss or the statement of financial
position or both.

However, despite previous guidance in the examiners reports, markers have reported that there
are still many candidates who continue to type their answer into the spreadsheet rather than show
workings or use formula in the cell to explain how their answer is calculated. Where a candidate
presents an incorrect figure and in the absence of a working, or cell formula, markers are unable to
award relevant marks.

For example, let’s say finance costs of $9,000 in the statement of profit or loss were worth 2.5
marks and are made up of $7,500 - $3,500 + $5,000.

A candidate may calculate the finance costs as $2,150 by deducting $350 (instead of $3,500) and
deducting $5,000 in error.

If a candidate does this and shows the full working they will lose possibly 0.5 or 1 marks.
However, a candidate that simply writes $2,150 and does not provide supporting workings or cell
formula, they will score zero for finance costs.

It is therefore crucial that candidates provide workings to show how an answer is arrived at for
appropriate credit to be given.

Candidates were generally able to prepare well-presented, basic financial statements using the
trial balance figures. The requirements relating to earnings per share and convertible loans were
dealt with particularly well. Common adjustments such as tax and depreciation were also generally
dealt with well by the majority of candidates.

The areas that candidates found more challenging included the recognition of a provision from an
onerous contract (with many mistaking the adjustment as a revenue issue per IFRS 15) and
disappointingly, the accounting treatment of a held-for-sale asset. Many candidates failed to
recognise an impairment loss on the reclassification of the manufacturing equipment as a held-for-

Examiner’s report – FR September 2019 4

sale asset in cost of sales and depreciation on the remaining plant and machinery was often
calculated incorrectly with candidates calculating depreciation using the reducing balance method
rather than the straight line method indicated in the question. This should act as a reminder to
ensure you read the question carefully. It was pleasing however to see the majority of candidates
attempting to record the held-for-sale asset within current assets on the statement of financial
position.

There are multiple past exam questions that demonstrate how single company financial statements
are tested. The examining team recommend that you attempt Vernon Co from the March/June
2019 hybrid paper, Duggan Co from the September/December 2018 hybrid paper and Haverford
Co from the March/June 2018 hybrid paper. These are good examples of this type of question
which students must practice. As this type of question has possibly the widest areas of syllabus
coverage, candidates should attempt the preparation of the financial statements of a single entity
multiple times before sitting this exam.

Analysis of single entity financial statements

Performance in this area was disappointing compared to previous diets however the ratio
calculations were often done well, with many candidates scoring maximum marks for these. The
calculation of asset turnover produced the widest variation of incorrect responses with errors made
to both the numerator and denominator. Candidates should ensure they are familiar with the ratio
formulas commonly used within the financial reporting questions.

Some ratio calculations required the use of balances from part (a) following on from adjustments to
profit, retained earnings and inventory. Unfortunately, many candidates did not use these balances
in their ratio calculations and were unable to achieve full marks. For those that did use the
information from part (a) the ‘own figure rule’ was applied accordingly.

There are still many candidates that continue to provide results from ratio calculations without
providing the underlying working. This leads to the loss of marks where the answer provided does
not agree with the marking scheme. If you have calculated gross profit margin as 30%, you must
show the marker how you have arrived at this result. For example, gross profit margin = gross
profit / revenue x 100 = $30 / $100 x 100 = 30%. Or use cell formula. There are numerous ways
that the working may be presented in your workspace, such as in a list format, in a table etc. the
most important thing is to ensure that the working is clear and visible for the marker.

The responses to the appraisal part of the question were often disappointing. The marking team
reported an increase in the number of candidates providing no answer or very brief answers (often
only one or two paragraphs).Candidates should be aware that markers are unable to award full
marks if they have written very little.

It continues to be the case that the candidates that make use of the scenario to provide a rationale
for ratio results (year on year or compared to a sector average etc.) are the ones that score highly
on these question types. Generic comments that are not related to the scenario or performance of
the entity will continue to earn relatively few marks.

Examiner’s report – FR September 2019 5

The examining team recommend that candidates practice past questions in this area. There are
multiple past exam questions that test the analysis of single entity financial statements, as this has
been a large part of the Financial Reporting exam for many years. Mowair Co from
September/December 2017 and Funject Co from March/June 2017 are good examples of this.

Preparation of consolidated financial statements

Candidates were required to prepare a consolidated statement of financial position in the

September 2019 session which accounted for a proportion of the marks available. This was then
followed by an explanation of a consolidation issue such as equity accounting for an associate or
the elimination of intra-group balances.

The preparation of a consolidated statement of financial position continues to be completed to a

high standard with many candidates able to score high marks. The marking team noted that the
majority of candidates continue to show the core workings for the consolidation (such as goodwill,
non-controlling interests and group retained earnings) as noted in previous diets. This approach
enables markers to apply the ‘own figure rule’ and as a result candidates perform well.
An area of difficulty experienced by many candidates was the issue of a share exchange on the
acquisition of an associate company. The share exchange had not been recorded by the parent
company and therefore candidates were required to include the cost of this investment within the
investment in associate working and to record the issue of the shares within share capital and
share premium. This type of adjustment is common (albeit usually in a parent-subsidiary scenario)
and candidates should familiarise themselves with the various ways that a parent may acquire
shares in an associate.

Some consolidated accounts preparation questions will require candidates to make adjustments for
transactions in the parent’s financial statements, the subsidiary financial statements or both. In this
diet both the parent and the subsidiary held investments that needed to be accounted for in
accordance with IFRS 9 Financial Instruments. The most common mistake relating to this
transaction occurred where candidates recorded the entire gain on the subsidiary investment within
group retained earnings. The gain should be recognised as an increase in subsidiary net assets
and therefore a proportion of the gain should be allocated to group retained earnings and non-
controlling interests respectively.

There are multiple past exam questions that test the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co
from the September/December 2017 hybrid paper, Dargent Co from the March/June 2017 hybrid
paper and Bycomb Co from the June 2015 paper are good examples of this type of question which
students must practice.

Analysis of consolidated financial statements

This question type will often require candidates to produce minor calculations in the early part of
the question before calculating a series of ratios and then to provide an analysis of the
performance or position of a group or a group in comparison to a single entity. In the September
2019 diet, candidates were either required to calculate the group gain or loss following the disposal
of a subsidiary or to calculate non-controlling interests.

Examiner’s report – FR September 2019 6

It was disappointing that many candidates are unable to correctly identify the gain or loss on the
disposal of a subsidiary despite this being part of the syllabus for many years now. The most
common error noted by the marking team occurred within the calculation of non-controlling
interests at the disposal date, with many candidates not including the non-controlling interests in
the disposal calculation at all.

A large proportion of candidates were able to score full marks on the ratio calculations in these
questions. For the candidates that did not score full marks on the ratios there were often errors in
the formula used or no workings were provided for the marker. As already noted in this report,
candidates need to record all workings when calculating ratios.

The analysis section of the question produced answers that varied in quality. Disappointingly, the
answers of many candidates were scant or had little substance. The best performing candidates
were those that used information from the scenario and incorporated it into their reasons for
changes in performance and position. It was pleasing to see that there is slight increase in
candidates recognising that an acquisition or a disposal of a subsidiary part-way through the year,
or one-off transactions (such as a gain on disposal or acquisition costs relating to a new
subsidiary) will distort the results when comparing to previous years.

Far too many candidates however continue to ignore the scenario given in the question and
produce vague, general answers. It is essential that candidates use the scenario to support their
analysis. It is disappointing that this trend continues.

The examining team recommends that previous questions containing group analysis issues are
considered such as Pirlo from the March/June 2019 hybrid paper, Duke Co from the
September/December 2018 hybrid paper, Perkins from the March/June 2018 hybrid paper and the
September 2016 question Gregory Co as examples of how to incorporate knowledge of
consolidations into an answer. To score well on this question type, candidates MUST ensure that
they use and apply the information provided in the question scenario.

Exam technique

Good exam technique is vital for success in the Financial Reporting exam. Strong candidates
continue to use clearly presented workings for both the preparation of financial statements and
calculation of ratios, enabling them to maximise the marks gained here. As stated earlier,
candidates who failed to provide workings often scored much lower marks on all aspects of
calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should make clear statements, and
avoid repetition. Numerous candidates continue to repeat the same point two or three times when
explaining the movement in a ratio which will waste time and not provide any further marks. It is
much better to make comments on a wider range of figures than to repeat similar points over one
specific balance.

Examiner’s report – FR September 2019 7

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be awarded for
a decent attempt to do this.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. In this diet, it was pleasing to see that the majority of candidates attempted all
sections of the exams. The most commonly omitted questions in section C tended to be areas
where candidates were asked to explain issues. The exam will involve elements of discussion, so
candidates cannot afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost.
Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements and workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both approaches are perfectly acceptable as markers can allocate marks to both methods. As
stated earlier, the candidates who do workings on a calculator and simply type in the final answer
often lose marks.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Examiner’s report – FR September 2019 8

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Examiner’s report – FR September 2019 9

Examiner’s report
Financial Reporting (FR)
June 2019

The examining team share their observations from the marking process to
highlight strengths and weaknesses in candidates’ performance, and to offer
constructive advice for future candidates.
General comments

The Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that
candidates do not all receive the same set of questions. In this report, the examining team share
their observations from the marking process to highlight strengths and weaknesses in candidates’
performance, and to offer constructive advice for future candidates.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

There were three sections to the examination and all the questions were compulsory. Section A
consisted of fifteen OT questions for a total of 30 marks, which covered a broad range of syllabus
topics. In Section B candidates were presented with three case studies of 5 OT questions worth 30
marks and two constructive response questions worth 20 marks each; testing the candidates’
understanding and application of financial reporting in more depth.

In order to pass this examination, candidates should ensure they devote adequate time to obtain
the required level of knowledge and application. Candidates who do not spend sufficient time
practicing questions are unlikely to be successful as the constructed response questions in
particular aim to test candidate’s application skills

Section A

Section A questions test a broad range of the syllabus and candidates should be prepared for this.
They should avoid question spotting as there are no “core” learning outcomes – all learning
outcomes are equally important. Candidates should resist looking at answer options until they have
fully worked the question. As can be seen in the following two examples, some of the distractors
can appear genuine but may miss a stage of the calculation, thereby offering an incomplete
answer. The following two questions are reviewed with an aim of giving future candidates an
indication of the types of questions that can be asked, guidance on how much work is involved in
answering 2 mark questions and to provide a technical debrief on the learning outcomes tested.

Examiner’s report – FR June 2019

Sample questions for discussion

Here we take a look at two Section A questions that proved to be particularly difficult for
candidates.

Example 1

Flute Co undertakes drilling activities and has a widely publicised environmental policy stating that
it will incur costs to restore land to its original condition once drilling activities have been
completed.

Drilling commenced on a particular piece of land on 1 July 20X8. At this time, Flute Co estimated
that it would cost $3m to restore the land when drilling was completed in five years’ time. Flute
Co’s cost of capital is 7% and the appropriate present value factor is 0.713.

At what amount will the provision for restoration costs be measured in Flute Co’s statement of
financial position as at 31 December 20X8?

A $2.14m

B $3m

C $2.29m

D $2.21m

What does this test?

This tests learning outcome B7(f) environmental provisions. In this case, the calculation of an
environmental provision is required.

What is the correct answer?

D is correct: Provision at 1 July 20X8 = ($3m x 0.713) = $2,139,000

Interest to 31 Dec 20X8 = 7% x $2.139m x 6/12 = $74,865
Provision at 31 Dec 20X8 = $2,139,000 + $74865 = $2,213,865 rounded to $2.21m

Why the correct answer is none of the other options?

$2.14m is the initial carrying amount at 1 July 20X8

$2.29m is based on unwinding the discount for 12 months instead of 6
$3m is the undiscounted amount

Example 2

An investor company assesses control to determine whether or not it is the parent of an investee
company.

Examiner’s report – FR June 2019 2

According to IFRS 10 Consolidated Financial Statements, which three of the following are required
to determine whether an investor has control of an investee?
(1) The ability to use its power over the investee to affect the amount of the investor’s returns
(2) Exposure, or rights, to variable returns from its involvement with the investee
(3) Acquisition of 50% or more of the share capital
(4) Power over the investee

A 1, 2 and 3

B 2, 3 and 4

C 1, 3 and 4

D 1, 2 and 4

What does this test?

This question tests an understanding of the concept of “control” in accordance with IFRS 10 which
then requires a group to prepare consolidated financial statements.

What is the correct answer?

D is correct in accordance with IFRS 10 paragraph 7

Why the correct answer is none of the other options?

IFRS 10 makes no reference to a holding of more than 50% of the equity shares of an investee
company

Section B
This section of the exam presents three scenarios around which five (two mark) objective test
questions were based. This approach allows the examining team to test a particular learning
outcome in some depth. These scenarios can be based on any of the FR learning outcomes which
means that future candidates need to have knowledge of the syllabus that is both wide and deep.
They also need to be able to apply that knowledge to the context of a specific scenario. In June
2019, candidates’ knowledge of the following was weak:
i. intangible assets and fair value measurement
ii. non-current assets held for sale (particularly the application of the definition)
iii. diluted earnings per share
iv. contracts that are for goods and services (combined contracts) and the allocation of
revenue
These are areas of the syllabus that are technically challenging but candidates need to be aware
that they will meet their fair share of these difficult questions and they should be prepared for that
challenge.

Section C

Candidates were presented with questions drawn mainly from the areas of:

Examiner’s report – FR June 2019 3

 - Single entity accounts preparation
- Analysis of consolidated financial statements
- Preparation of consolidated financial statements
- Analysis of single entity financial statement

Single entity accounts preparation

This area of the syllabus requires candidates to prepare a set of financial statements for a single
entity. This is a fundamental skill for an accountant, and has been a large part of the financial
reporting syllabus for many years. Performances in this area were generally quite good, with
candidates able to make a decent attempt at many areas of the question.

As in previous questions on single entity financial statements, candidates were required to produce
financial statements from a trial balance and set of adjustments. Also common to previous sittings,
candidates were not necessarily asked for full sets of financial statements, such as being asked to
produce a statement of profit or loss or statement of adjusted profit, alongside items such as a
statement of changes in equity and calculation of earnings per share.

Candidates were generally able to prepare well-presented financial statements, thereby producing
good answers. The requirements surrounding foreign currency transactions and provisions were
dealt with particularly well, with a good number of candidates able to make a strong attempt at tax
and deferred tax calculations.

Calculations around depreciation were slightly disappointing, with a sizeable minority unable to
deal with a disposal alongside the calculation of depreciation. Calculations of impairment were split
between the candidates who knew the rule and scored full marks and candidates who completely
omitted it from their answer, scoring zero.

The big issue for markers was that many candidates simply typed their answer into the
spreadsheet rather than showing workings to explain how items were calculated. This is very
dangerous, particularly in relation to items such cost of sales, which are often made up of many
marks. Without showing a working, candidates only need to make one mistake to be awarded zero
marks (from a potential 3 marks), due to the marker not being able to see how the number was
calculated.

For example, let’s say cost of sales and administrative expenses were made up of the following:

Cost of sales: $4,000 + $400 depreciation + $950 impairment + $140 inventory write off = $5,490
Administrative expenses: $1,600 + $460 depreciation + $60 foreign exchange loss = $2,120

A candidate may calculate cost of sales at $5,810 due to missing the inventory write off and
including depreciation of $460 in cost of sales rather than admin.

If a candidate does this and shows the full workings, they would lose maybe 1 or 1.5 marks for the
two errors. They will have shown that they have taken the $4,000, added the depreciation and

Examiner’s report – FR June 2019 4

impairment correctly, and taken the correct $460 depreciation but to the wrong category of cost.
This may mean that they still score 4 or 5 marks.

A candidate who simply writes $5,810 with no workings will score zero. They may have done the
same thing, but the marker is unable to fully assess as different errors may have been made.
Unfortunately, markers cannot interpret what the candidate may have done. Therefore, two
candidates making the same mistakes could end up with vastly differing marks due to the
differences in their exam technique.

Some candidates simply copied figures from the trial balance with no adjustments, and those who
do this will score no more than a small number of marks. This displays that these candidates are
probably not ready for the exam as they are probably not comfortable with the adjustments
required in this question. This highlights a lack of preparation over a fundamental area of the exam,
and candidates must not attempt the FR exam without having good exam technique and practise in
this style of question.

There are multiple past exam questions that demonstrate how single company financial statements
are tested. For example, Vernon Co from the March/June 2019 hybrid paper, Duggan Co from the
September/December 2018 hybrid paper and Haverford Co from the March/June 2018 hybrid
paper are good examples of this type of question which candidates must practice. As this type of
question has possibly the widest areas of syllabus coverage, candidates should be attempting
numerous single entity accounts preparation questions before sitting this exam.

Analysis of consolidated financial statements

Performance on these questions continues to be mixed, and is particularly poor where discussion
is required. In this diet, it was surprising that weak candidate performance was apparent when they
were required to adjust accounting numbers for consolidated items (such as intra-group sales or
goodwill) and then recalculate ratios. It is surprising because, if this requirement were included as
part of a full consolidated financial statements question, these would be areas that candidates
perform well on. This suggests that candidates are rote learning a set technique, often based on a
standard layout of traditional workings. Candidates must avoid rote learning and attempt to develop
a real understanding of consolidation adjustments in preparation for Strategic Business Reporting
rather than being simply able to mechanically produce a set of consolidated financial statements.

Despite this, candidates continue to be able to score well on the calculation of ratios. Many
candidates were able to score full marks on this, showing that they had learned the ratio
calculations well. However, some candidates failed to produce the ratios requested, and instead
produced different ratios, which will always score zero marks.

Candidates also continue to produce ratios without workings, particularly in CBE, with many
candidates failing to score marks through the ‘own figure rule (OFR)’. If workings were provided, a
marker would be able to apply the OFR and a candidate would only be penalised for their first
error, but not for any knock-on effect of that error on other calculations. This was particularly
evident where candidates were asked to redraft figures and then recalculate ratios.

Examiner’s report – FR June 2019 5

The following example was used in the June 2018 and December 2018 examiner’s reports, but
continues to be relevant in the light of the lack of workings produced for ratios. This example
shows draft figures of a group, before adjustments:

$000
Revenue 34,000
Cost of sales (18,000)
Gross profit 16,000

Giving a gross profit margin of 47% (16,000/34,000)

Let’s say the question required the candidate to remove an intra-group sale of $5,000 and make an
adjustment for unrealised profit of $1,000. Correcting for these would give the following result:

$000
Revenue (34,000 – 5,000) 29,000

Cost of sales (18,000 – 5,000 + (14,000)

1,000)
Gross profit 15,000

Giving a revised gross profit margin of 51.7%

The marks for the adjustments would be given in part (a) of the question, and these would be
marked as right or wrong.

If part (b) asked the candidates to calculate ratios based on the draft and recalculated figures,
these would be given as an own figure rule. Ideally, this is how we would like to see candidates
show these workings:

Draft Restated
Gross profit margin 47% 51.7%
(16,000/34,000) (15,000/29,000)

This clearly shows the ratio and the workings, and would obtain full marks. Let’s say a candidate
forgot to adjust the unrealised profit in cost of sales. This would make cost of sales $13m. This
would give the following results:

$000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000) (13,000)
Gross profit 16,000

Examiner’s report – FR June 2019 6

 Draft Restated
Gross profit margin 47% 55.1%
(16,000/34,000) (16,000/29,000)

This would lose a mark in part (a), as the candidate has made an error. However, they would score
full marks in part (b) for the ratios under the own figure rule, as it is clear which figures a candidate
has used in the restated calculation.

If a candidate simply shows the ratio calculations as:

Draft Restated
Gross profit margin 47% 55.1%

A marker would mark these figures as right or wrong, as there are no workings to show what the
candidate has done. The marker cannot assume the mistake that the candidate has made, as this
is not clear. Therefore this candidate would score 0.5 for the draft calculation, as this is correct, but
nothing for the restated, as this is incorrect.

Not showing workings like this cost candidates up to 2 marks if they had made errors redrafting
their financial statements. It is imperative that workings such as these are shown to maximise the
marks to be gained.

The quality of analysis surrounding consolidated financial statements continues to be

disappointing. Standard things such as knowing that an acquired subsidiary would have different
margins should be things that candidates are able to discuss and explain. Far too many candidates
continue to answer this question by simply looking at numbers and completely disregarding the
scenario provided. It is essential that candidates use the scenario provided to produce their
discussion, rather than learning what ratios may mean and repeating that in the exam. This is a
common complaint in these reports and it is disappointing to see this continue.

Candidates must look at Pirlo Co from the March/June 2019 hybrid paper, Duke Co from the
September/December 2018 hybrid paper, Perkins from the March/June 2018 hybrid paper and the
September 2016 question Gregory Co. In particular, analyse the solutions to see how the scenario
is used and how to incorporate knowledge of consolidations into an answer. This type of question
is one which can often divide candidates. Those who are well prepared can often score good
marks, but sadly far too many individuals are picking up either very limited marks or no marks at all
for their discussion.

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remain an area where
candidates perform well. Candidates with clear workings will score highly on this area. Happily,
there was an improvement in the number of candidates showing their workings, either within the
cell or shown separately in different lines of the spreadsheet. Both are acceptable methods, as
both will be seen and therefore marked by the marking team.

Examiner’s report – FR June 2019 7

The preparation of a consolidated statement of profit or loss was well done, with candidates
displaying a good knowledge. Commonly seen items such as intra-group sales, unrealised profits
and fair value depreciation were dealt with well. The areas candidates struggled more with were
generally the more technical areas, such as interest on financial instruments and unwinding
discounts.

Most candidates were able to split the profit between the parent and the non-controlling interest,
however, only a small number were also able to split the total comprehensive income including the
OCI.

The discursive elements of this type of question continued to be challenging for candidates.
However, candidates should be prepared to discuss areas of accounting within an accounts
preparation question, much as they should be prepared to provide calculations within an analysis
question.

The principles underpinning consolidated financial statements are a key part of the Financial
Reporting syllabus, directly linking to similar topics within Strategic Business Reporting, and
candidates are expected to be able to discuss these. Candidates should be able to explain the
different methods of valuing the non-controlling interest or the principles behind accounting for an
associate.

There are multiple past exam questions looking at the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co
from the September/December 2017 hybrid paper, Dargent Co from the March/June 2017 hybrid
paper and Bycomb Co from the June 2015 paper are good examples of this type of question which
candidates must practice.

Analysis of single entity financial statements

The ratio calculations were often done well, with many candidates scoring maximum marks for the
calculation of ratios. However, a surprising number of candidates were unable to produce revenue
per employee, which suggests rote learning of ratios rather than really stepping back and thinking
about what the ratios are attempting to show.

The issue of CBE candidates being less likely to show their workings for the calculation of ratios
remains, and this is a situation which needs to be addressed as it can lead to the loss of OFR
marks. This problem was discussed in more detail above in the ‘analysis of consolidated financial
statements’ section.

Candidates dealt reasonably well with the issue of a convertible loan note, but possibly less well
than if this had been asked as part of a published financial statements question. This is a similar
problem as noted in the calculation element required in the analysis of consolidated financial
statements question. Candidates should not be surprised to see some accounting standards tested
within an analysis question. FR requires a rounded set of knowledge and it is important that
candidates understand the range of topics in the syllabus rather than applying set approaches and
techniques to certain questions.

Examiner’s report – FR June 2019 8

There is evidence in the questions that use word processing software that candidates are thinking
about how they lay out the points made, and the better performing candidates often used short
paragraphs to carefully structure their specific points. Some weaker candidates type everything in
one huge block of text. Unfortunately, this reads poorly as it feels like candidates are just throwing
anything they can think of into the answer. It is far better to make one or two points per
paragraphs. This would also help candidates to know how many points they have made and will
give a good guide to how much more they should be writing.

Often answers were just too brief. Candidates should be working on the basis of scoring one mark
for each well explained point. Too many candidates wrote one or two paragraphs, which is always
going to be some way short of the required standard for scoring between 11 and 15 marks.

There are multiple past exam questions that demonstrate how the analysis of single entity financial
statements are tested, as this has been a large part of the Financial Reporting exam for many
years. Mowair Co from the September/December 2017 hybrid paper and Funject Co from the
March/June 2017 hybrid paper are good examples of this type of question which candidates must
practice.

Exam technique

Good exam technique is vital for success in Financial Reporting. Strong candidates continue to use
good workings for both the preparation of financial statements and calculation of ratios, enabling
them to maximise the marks gained here. As stated earlier, candidates who failed to provide
workings often scored much lower marks on all aspects of calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should make clear statements, and
avoid repetition. Numerous candidates continue to repeat the same point two or three times when
explaining the movement on a ratio. It is much better to make comments on a wider range of
figures than to repeat similar points over one specific balance.

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be given here.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage their time well. The majority of candidates attempted all sections. The most commonly
omitted sections tended to be areas where candidates were asked to explain issues. The exam will
involve elements of discussion, so candidates cannot afford to neglect these sections as they
practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost.

Conversely, the narrative answers were often well presented, with headings and spacing used
well.

Examiner’s report – FR June 2019 9

For the preparation of financial statements question, candidates often laid out the financial
statement workings well. Some candidates tended to put figures in individual cells and add the
cells across for the answer, whereas others did the entire working in one cell using a formula. Both
are perfectly acceptable as markers can allocate marks to both methods. As stated earlier, the
candidates who do workings on a calculator and simply type in the final answer often lose marks.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to identify any areas missed. This is particularly relevant on the analysis questions. Often
on this question candidates feel comfortable, but reviewing the answers can show the depth of
discussion that is being sought here. We strongly recommend that you use an up to date question
and answer bank from one of the ACCA Approved Content Providers but if this is not possible then
work through the most recent past exams on the ACCA website. However, please note if you are
using the past exams that these are not updated for syllabus changes or changes to the exam
format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit candidates.

Examiner’s report – FR June 2019 10

Examiner’s report
Financial Reporting (FR)
March 2019

The examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance, and to offer constructive advice for
future candidates.

General comments

The Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that
candidates do not all receive the same set of questions.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

There were three sections to the examination and all the questions were compulsory. Section A
consisted of fifteen OT questions for a total of 30 marks, which covered a broad range of syllabus
topics. In Section B candidates were presented with three case studies of 5 OT questions worth 30
marks and two constructive response questions worth 20 marks each; testing the candidates’
understanding and application of financial reporting in more depth.

In order to pass this examination, candidates should ensure they devote adequate time to obtain
the required level of knowledge and application. Candidates who do not spend sufficient time
practicing questions are unlikely to be successful as the constructed response questions in
particular aim to test candidate’s application skills.

Section A

Section A questions test a broad range of the syllabus and candidates should be prepared for this.
They should avoid question spotting as there are no “core” learning outcomes – all learning
outcomes are equally important. Where answer options are available, candidates should resist
looking at these until they have fully worked the question. Some of the distractors can appear
genuine but may miss a stage of a calculation, thereby offering an incomplete answer. The
following two questions are reviewed with the aim of giving future candidates an indication of the
types of questions that can be asked, guidance on how much work is involved in answering 2 mark
questions and to provide a technical debrief on the learning outcomes tested.

Examiner’s report – FR March 2019 1

Sample Questions for Discussion

Here we take a look at TWO Section A questions which proved to be particularly difficult for
candidates.

Example 1

Zayn Co spent $500,000 on 1 January 20X6 sending its key staff on a one-day training course
which took place at the beginning of the current financial year. Zayn Co is expected to benefit from
this training for the next two years.

This training course was partly funded by a government scheme and Zayn Co received $50,000
from the government before the training commenced. The remaining balance of $50,000 is due to
be received on 31 December 20X7. Current circumstances indicate that the receipt of the second
instalment is virtually certain.

What amount should be charged to Zayn Co’s statement of profit or loss for the year ended
31 December 20X6 to reflect the above transactions?

A $150,000
B $200,000
C $450,000
D $400,000

What does this test?

This tests a candidates understanding of the nature of an intangible asset and their knowledge of
how to treat a government grant that is awarded to off-set revenue expenditure.

What is the correct answer?

The correct answer is D.
An asset is defined as “a present economic resource controlled by the entity as a result of past
events”. The staff training does not meet the definition of an asset because the employer does not
control its employees; the employer cannot control whether or not an employee chooses to leave
employment. If an employee leaves, the employer will not receive the full benefit of the staff
training. If the staff training is not an asset, then $500,000 should be charged to profit or loss. As
the second instalment of the government grant, is virtually certain then the full $100,000 can be
offset against the $500,000 staff training costs.

Why the correct answer is none of the other options?

A staff training costs (treated as an intangible asset an amortised over 2 years) $500,000/2 years =
$250,000 less $100,000 (revenue grant received and receivable)

B staff training costs (treated as an intangible asset an amortised over 2 years) $500,000/2 years =
$250,000 less $50,000 (revenue grant received)

C total staff training costs $500,000 less $50,000 (revenue grant received)

Examiner’s report – FR March 2019 2

Example 2

Tonton Co acquired 9,000 shares in Pogo Co on 1 August 20X3 at a cost of $6.40 per share.
Tonton Co incurred transaction costs of $9,000 for this transaction. Tonton Co elected to hold
these shares at fair value through other comprehensive income.

At 31 December 20X3, the fair value of the Pogo Co shares was $7.25 per share and selling costs
were expected to be 4%.

What is the value of the Pogo Co shares in Tonton Co’s individual financial statements at 31
December 20X3?

A $65,250
B $74,250
C $62,640
D $66,600

What does this test?

Although it might look like this question is testing IFRS 9: Financial Instruments, it is actually
testing an understanding of IFRS 13: Fair Value measurement. This is because it tests whether
candidates know how to measure the investments at 31 December 20X3 and whether or not to
include the original transaction costs. IFRS 13 states that “…the fair value of an asset shall not be
adjusted for transaction costs”

What is the correct answer?

The correct answer is A
9,000 shares x $7.25 = $65,250

Why the correct answer is none of the other options?

B $65,250 + $9,000 = $74,250
C 9,000 shares x (96% x $7.25) = $62,640
D (9,000 shares x $6.40) + $9,000 = $66,600

Section B

Section B tests candidates’ knowledge on a number of topics in more detail than section A, with
three case questions containing five two-mark objective test questions. This approach allows the
examining team to test a particular learning outcome in some depth. These scenarios can be
based on any of the FR learning outcomes which mean that future candidates need to have a
knowledge of the syllabus which is both wide and deep. They also need to be able to apply that
knowledge in the context of a specific scenario.

In March 2019, candidates’ demonstrated some knowledge that was weak in the following syllabus
areas:
(i) leases – IFRS 16 is a relatively new standard and so candidates should ensure that they are
using an up-to-date text. Also, pay particular attention to dates as not all leases will be started on

Examiner’s report – FR March 2019 3

the first day of the financial year which means that this will restrict the expenses charged to profit
or loss.
(ii) Research and development – these questions usually involve detailed information being
provided about the amount of expenditure on specific dates and then it being written off to profit or
loss. Therefore, candidates need to pay attention to the detail of the scenario and use timelines
where possible to organise that information.
(iii) Revenue recognition – by their nature, these types of questions will be detailed and make use
of dates. Candidates should ensure that they understand the question scenario and learn how to
un-pack the detail and organise it effectively. This topic area is also widely spread and may include
questions that test more complex areas such construction contracts.

A few key points to emerge from an analysis of the section B responses are:

 Read the case scenario and requirements very carefully. Although this advice is relevant
for the whole exam, candidates need to appreciate that any objective test question is ‘all or
nothing’ – if you misread the requirement or miss a vital piece of information from the
scenario and get the answer incorrect you score zero for that question. This applies also to
instructions on how to round your answers.
 Ensure that your revision covers the whole syllabus. The list above should highlight this –
FR has a large syllabus which can be daunting, but it is essential to have a broad
knowledge. If, for example, a section B case tests IFRS 16 Leases and you haven’t
covered this in your studies, the 10 marks available in this case are left to chance.
 Be able to apply your knowledge of theories/techniques to the scenario provided. It is
important that you understand why you are applying a concept or theory rather than
performing the calculations by rote.

Section C

Candidates were presented with the following question types:

- Preparation of single entity financial statements

- Analysis of single entity financial statements
- Preparation of consolidated financial statements
- Analysis of consolidated financial statements

Although the specifics of individual questions will not be discussed, the common areas in which
candidates either performed either well, or not so well, will be highlighted. Advice is provided to
improve exam performance.

Preparation of single entity financial statements

This area of the syllabus requires candidates to prepare single entity financial statements which is
an essential skill for an accountant that will continue to be examined. In the March 2019 exam,
candidates were asked to prepare some combination of (i) a statement of profit or loss and other
comprehensive income; (ii) a schedule of adjusted profit, (iii) a statement of changes in equity and,
(iv) a statement of financial position. As in previous sittings, these financial statements are
prepared from a trial balance and a list of adjustments. Many candidates produced well-presented
financial statements and for those that provided clear workings, markers were able to apply the

Examiner’s report – FR March 2019 4

own figure rule. For those candidates that did not provide relevant workings to support their
financial statements markers were unable to apply the own figure rule and marks could not be
awarded.

Candidates who performed well tended to do so in depreciation, interest accruals and tax
calculations. The areas that candidates found more challenging related to share issue costs,
foreign currency transactions and the deferred tax relating to a revaluation. These are the more
technical areas so it is unsurprising that candidates found these the most difficult.

It was pleasing to see that many candidates were able to demonstrate their knowledge of IFRS 15
where revenue should be recognised in full in the statement of profit or loss when the five steps
have been met. However, candidates should note that marks will not be awarded for the
replication of an IFRS standard (for example the five steps of IFRS 15) without that knowledge
being applied to the scenario provided. In this type of question, many candidates failed to
recognise the financing element associated within a contract where revenue will be received in
more than one year. For those candidates who were able to correctly deal with the financing
element, many treated the unwinding of the discount incorrectly as a finance cost rather than as
finance income.

A slightly disappointing feature of the single entity accounts preparation question was that a
significant minority put the bank overdraft as a negative asset within current assets. At this stage,
we would expect candidates to know that this should be a current liability and this was
disappointing to see.

A minority of candidates seemed to struggle with the concept of adjusting a draft profit figure,
despite this style of question being examined numerous times in the past. These candidates often
showed haphazard workings, making it difficult for markers to award credit.

There are multiple past exam questions looking at the preparation of single company financial
statements, as this has been a large part of the Financial Reporting exam for many years. The
examining team recommend that you attempt Duggan Co from the September/December 2018
hybrid paper and Haverford Co from the March/June 2018 hybrid paper. These are good
examples of this type of question which students must practice. As this type of question has
possibly the widest areas of syllabus coverage, candidates should attempt the preparation of the
financial statements of a single entity multiple times before sitting this exam.

Analysis of single entity financial statements

Performance in this area was not as good as in previous diets. Candidates were required to make
some minor adjustments to a set of financial statements before calculating relevant financial ratios
for two potential acquisition targets. Candidates were then required to compare and contrast the
performance of the two entities before concluding on the most appropriate investment.

Part (a) to the question required candidates to apply their knowledge of IAS 16 to adjust one of the
entity’s financial statements. Many candidates added the revaluation to the existing figures rather

Examiner’s report – FR March 2019 5

than removing it. Others ignored the question requirement - which was to show the adjustments -
and simply calculated the revised year-end figures. These were often incorrect as candidates had
not appreciated that there were other non-current assets that had not been revalued.

Frequently the adjustments/year-end figures were incorrect and often with no clear workings being
shown so that markers were unable to give credit for candidates adopting the right approach.
Occasionally more basic errors were made – e.g. land was depreciated, the wrong number of
years and incorrect dates were used. Candidates also failed to deduct the extra depreciation that
had been charged to operating expenses as a result of the revaluation. Similarly, the extra
depreciation (for two years) was not added back to equity – nor was the correct revaluation amount
deducted from equity.

The requirement to calculate some financial ratios for both entities was generally well answered.
Remember to always show workings for your ratio calculations as an incorrect ratio result cannot
be given own figure marks if the marking team does not know how the answer has been arrived at.
This advice is especially true where the answer space is a word document – when the answer is in
a spreadsheet, markers can see the cell formulae.

A common error that was made was where candidates did not use their amended figures from part
(a) when calculating the operating profit margin and gearing. A worrying number of candidates
made more basic errors. Some were unable to calculate the inventory and receivable day’s ratios
which are considered to be basic ratios and have been present in many previous exam questions.
Others calculated gearing as debt/(debt+equity) rather than debt/equity as clearly indicated in the
question.

There was mixed performance in the analysis part of the question. Many candidates picked up on
the bigger picture that, whilst one company was more profitable, it also had serious liquidity and
working capital issues. However candidates were often unable to elaborate on these points and
perform a more in depth analysis. Basic errors were also observable here. For example, one entity
had a much lower operating profit margin. However this was entirely due to the lower gross profit
margin. Many candidates then commented that this entity therefore had poorer control over its
operating expenses, when the figures showed the opposite – where their ratio of operating
expenses to sales was much better than the other acquisition target.

It was pleasing to see that an increasing number of candidates did refer to the information provided
in this question such as a new app being launched, just in time developments and the different
business models - but again were often unable to analyse the impact of these factors on the
reported results.

The examining team recommend that candidates practice past questions in this area. There are
multiple past exam questions that test the analysis of single entity financial statements, as this has
been a large part of the Financial Reporting exam for many years. Mowair Co from
September/December 2017 and Funject Co from March/June 2017 are good examples of this.

Examiner’s report – FR March 2019 6

Preparation of consolidated financial statements

In the March 2018 exam, candidates may have been asked to prepare a statement of financial
position or a calculation of goodwill followed by a consolidated statement of profit or loss.

The preparation of a consolidated statement of financial position continues to be completed to a

high standard with many candidates able to score high marks, consistent with performance in
previous sittings. Students were able to produce good calculations in relation to fair value
adjustments, goodwill and unrealised profits, highlighting that this is an area that has been well
practised.

Students generally struggled with the consideration of a contingent liability, applying rules per IAS
37 rather than applying the fair value consolidation rules per IFRS 3. Other common mistakes
arose around the acquisition of the subsidiary in a share-for-share exchange, and an adjustment
relating to cash-in-transit, which many students treated as goods-in-transit.

It was disappointing to see that some candidates continue to use proportionate consolidation within
their answer by adding only 80% of the subsidiary assets and liabilities within the consolidation.
This continues to be a fundamental error and other wise ‘easy’ consolidation marks end up not
being earned.

Overall candidates did not perform as well when preparing a consolidated statement of profit or
loss, although there were many that were able to achieve high marks. Most candidates were
happy with the initial consolidation process, although a number failed to time apportion the results
of the subsidiary company for the nine month post-acquisition period.

Common consolidated profit or loss adjustments such as the elimination of intra-group sales and
purchases, fair value depreciation and unrealised profits were generally dealt with well by most
candidates.

Some candidates appeared to struggle with the elimination of the dividend that the parent received
from the subsidiary, with many eliminating the full dividend paid rather than the 80% that was
received by the parent. The unwinding of the discount on the deferred consideration was often
omitted altogether or, when included, many failed to time apportion for the nine months. Only the
highest scoring candidates were able to deal with the inventory fair value adjustment correctly.

The most disappointing area of this question was the failure to complete the split between the profit
attributable to the parent company shareholders and the non-controlling interests’ share. This part
of the consolidation was largely based on own figures. The consolidated profit or loss has been
tested on numerous occasions and the profit split is considered to be a critical aspect of the
preparation of these statements. Future candidates must ensure that this profit split is addressed
to give themselves a better chance of scoring well on these questions.

There are multiple past exam questions that test the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co
from the September/December 2017 hybrid paper, Dargent Co from the March/June 2017 hybrid

Examiner’s report – FR March 2019 7

paper and Bycomb Co from the June 2015 paper are good examples of this type of question which
students must practice.

Analysis of consolidated financial statements

When candidates are required to appraise the performance and position of a group of companies
they are often required to produce minor calculations. In March 2019, candidates were asked to
calculate the gain or loss on the disposal of a subsidiary company. For the candidates that
attempted this part of the question this was generally dealt with well. The most common error was
the inclusion in the disposal calculation of an increase in goodwill. Increases in goodwill are never
accounted for and therefore it is only unimpaired goodwill that should be included.

Many candidates were able to score full marks on the calculation of the ratios which was
particularly pleasing to see, although many candidates did not provide workings so were lucky that
their ultimate answers were correct. For those that didn’t earn all of the available marks this was
often due to the wrong formula/numbers were being used. For example, if you are asked to
produce an operating profit margin, you must use profit before interest and tax, any other profit
used will mean the marks for that ratio cannot be awarded. It continues to be disappointing that
many candidates still fail to show their workings for their ratio calculations and the marking team
are unable to apply the own figure rule.

The analysis section often produced vague, general answers and in many cases no commentary
was provided at all. Needless to say, marks earned for these answer types are limited. The
candidates that scored well on this section showed that they were well prepared and made use of
the information contained within the scenario to discuss and provide reasons for obvious changes
in performance and position. For example, disposing of a subsidiary mid-way through the year
would impact both the current and the following year results, meaning that comparison of
performance year-on-year is distorted or that inclusion of a gain or loss on disposal is a one-off
event that will not be present in future or prior year financial statements.

The examining team recommends that previous questions containing group analysis issues are
considered such as Duke Co from the September/December 2018 hybrid paper, Perkins from the
March/June 2018 hybrid paper and the September 2016 question Gregory Co as examples of how
to incorporate knowledge of consolidations into an answer. To score well on this question type
candidates MUST ensure that they use and apply the information provided in the question scenario

Exam technique on FR exams

Good exam technique is vital for success in the Financial Reporting exam. Strong candidates
continue to use clearly presented workings for both the preparation of financial statements and
calculation of ratios, enabling them to maximise the marks gained here. As stated earlier,
candidates who failed to provide workings often scored much lower marks on all aspects of
calculation.

In analysis-type questions, discussion points should be laid out clearly, using headings for each
area requested, such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should make clear

Examiner’s report – FR March 2019 8

statements, and avoid repetition. Numerous candidates continue to repeat the same point two or
three times when explaining the movement in a ratio which will waste time and not provide any
further marks. It is much better to make comments on a wider range of figures than to repeat
similar points over one specific balance.

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be awarded for
a decent attempt to do this.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. In this diet, it was pleasing to see that the majority of candidates attempted all
sections of the exams. The most commonly omitted questions in section C tended to be areas
where candidates were asked to explain issues. The exam will involve elements of discussion, so
candidates cannot afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost. Conversely, the narrative answers were often well
presented, with headings and spacing used well.

In questions that tested the preparation of financial statements, candidates often laid out the
financial statements and workings well. Some candidates tended to put figures in individual cells
and add the cells across for the answer, whereas others did the entire working in one cell using a
formula. Both approaches are perfectly acceptable as markers will follow both methods. There are
resources on ACCA’s website giving more guidance on how to use the spreadsheet software. A
video introducing the main functionality and how to make best use of these in Financial Reporting
can be accessed

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for

Examiner’s report – FR March 2019 9

changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Guidance and Learning Support resources to help you succeed in your exam

Preparing for the PM exam may appear daunting but there are many resources available to help
you. There are many technical articles available on the topics in this report. In addition all the past
exams referred to are available for your use. You should refer to these throughout your studies.
Please make sure that you visit the ACCA’s website and look at everything available to you. There
are also plenty of support materials to help you feel confident about taking your exams on CBE.

http://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5.html

Examiner’s report – FR March 2019 10

Examiner’s report
Financial Reporting (FR)
December 2018

The examining team share their observations from the marking process to
highlight strengths and weaknesses in candidates’ performance, and to offer
constructive advice for future candidates.
General comments

The Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that
candidates do not all receive the same set of questions.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

There were three sections to the examination and all the questions were compulsory. Section A
consisted of fifteen OT questions for a total of 30 marks, which covered a broad range of syllabus
topics. In Section B candidates were presented with three case studies of 5 OT questions worth 30
marks and two constructive response questions worth 20 marks each; testing the candidates’
understanding and application of financial reporting in more depth.

In order to pass this examination, candidates should ensure they devote adequate time to obtain
the required level of knowledge and application. Candidates who do not spend sufficient time
practicing questions are unlikely to be successful as the constructed response questions in
particular aim to test candidate’s application skills

Section A
Section A questions test a broad range of the syllabus and candidates should be prepared for this.
They should avoid question spotting as there are no “core” learning outcomes – all learning
outcomes are equally important. Where answer options are available, candidates should resist
looking at these until they have fully worked the question. As can be seen in the following two
examples, some of the distractors can appear genuine but may miss a stage of a calculation,
thereby offering an incomplete answer. The following two questions are reviewed with the aim of
giving future candidates an indication of the types of questions that can be asked, guidance on
how much work is involved in answering 2 mark questions and to provide a technical debrief on the
learning outcomes tested.

Examiner’s report – FR December 2018

Sample questions for discussion

Here we take a look at two Section A questions that proved to be particularly difficult for
candidates.

Example 1

On 1 September 20X8, Paper Co acquired 75% of Stone Co's ordinary share capital. The fair
values of the net assets of Stone Co at the date of acquisition were equal to their carrying
amounts, with the exception of a liability, which had a carrying amount of $20,000 below the fair
value. Stone Co had not accounted for this fair value adjustment in its individual financial
statements.

It is the group policy to measure non-controlling interests at acquisition at fair value.

As a result of the above consolidation adjustment, what would be the impact on the
goodwill amount at the date of acquisition?

A. Increase by $15,000
B. Decrease by $15,000
C. Increase by $20,000
D. Decrease by $20,000

What does this test?

This question tests that candidates understand the fair value consolidation adjustments required
and it tests both the amount of the adjustment and its direction.

What is the correct answer?

Candidates should know that any fair value adjustments made in the Statement of Financial
Position are made at 100%; i.e. it is not the group share of individual asset or liabilities that are
adjusted for their fair value but the full amount. In this case, this is the full $20,000. Where the
carrying amount of a liability is below its fair value, this means that the liability needs to be
increased to reflect its fair value; i.e. the liability needs to be credited by the full amount of
$20,000. The impact of this is to reduce net assets and therefore increase goodwill by a
corresponding amount. The correct answer is C.

Tip: if candidates are unsure of the direction of the adjustment, then use fake figures to calculate
a fake goodwill figure and then account for the fair value adjustment to see what happens to
goodwill.

Why the correct answer is none of the other options?

Both options A and B are incorrect because they use the group share of the fair value adjustment.
Option D is incorrect because the adjustment is in the wrong direction.

Examiner’s report – FR December 2018 2

Example 2
Cornet Co entered into an eight year lease agreement on 1 July 20X4. The lease requires annual
payments of $750,000 in arrears. The present value of the lease payments at 1 July 20X4,
discounted at a rate of 6% is $4,657,500. Additionally Cornet Co paid directly attributable costs of
$37,500 on 1 July 20X4.

What is the total charge to the statement of profit or loss for the year ended 30 June 20X5 in
respect of the right-to-use asset?

A. $586,875
B. $866,325
C. $279,450
D. $1,029,450

What does this test?

This question tested that candidates knew to (a) capitalise the directly attributable costs of the
lease, (b) charge depreciation on the right-of-use asset to the statement of profit or loss and (c)
charge the lease interest to the statement of profit or loss.

What is the correct answer?

Right-of-use
asset

Cost 1 July 20X4 ($4,657,500+$37,500) 4,695,000

Depn to 30 June 20X5 ($4,695,000/8) 586,875

Lease liability

1 July 20X4 6% interest

4,657,500 279,450

Total charge to SOPL = 586875 + 270,450 = 866,325

Why the correct answer is none of the other options?

Examiner’s report – FR December 2018 3

Option A is the depreciation only

Option C is the lease interest only

Option D is the lease interest plus the lease repayment (treated as rental)

Section B
This section of the exam presents three scenarios around which five (two mark) objective test
questions are based. This approach allows the examining team to test a particular learning
outcome in some depth. These scenarios can be based on any of the FR learning outcomes which
mean that future candidates need to have a knowledge of the syllabus which is both wide and
deep. They also need to be able to apply that knowledge in the context of a specific scenario. In
December 2018, candidates’ knowledge of the following was weak:
(i) leases – IFRS 16 is a relatively new standard and so candidates should ensure that
they are using an up-to-date text. Also, pay particular attention to dates as not all
leases will be started on the first day of the financial year which means that this will
restrict the expenses charged to profit or loss.
(ii) Research and development – these questions usually involve detailed information
being provided about the amount of expenditure on specific dates and then it being
written off to profit or loss. Therefore, candidates need to pay attention to the detail
of the scenario and use timelines where possible to organise that information.
(iii) Financial instruments – Candidates need to avoid a superficial understanding of this
subject area. If this topic makes you nervous then you need to practice more
questions.
(iv) Revenue recognition – by their nature, these types of questions will be detailed and
make use of dates. Candidates should ensure that they understand the question
scenario and learn how to un-pack the detail and organise it effectively. This topic
area is also widely spread and may include questions that test more complex areas
such as sale and leaseback.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Preparation of single entity financial statements

- Analysis of consolidated financial statements
- Preparation of consolidated financial statements
- Analysis of single entity financial statement

Single entity accounts preparation

This area of the syllabus requires candidates to prepare a set of financial statements for a single
entity. This is a fundamental skill for an accountant and has been a large part of the financial
reporting syllabus for many years. Performances in this area were generally good, although
possibly not as good as in previous sittings.

Examiner’s report – FR December 2018 4

As in previous questions on single entity financial statements, candidates were required to produce
financial statements from a trial balance and a list of adjustments. Candidates were able to
produce well-presented financial statements, maximising the marks available due to the ‘own figure
rule’. This means that candidates who make a calculation error (such as depreciation) still gained
credit for following that incorrect figure through and accounting for it correctly in either the
statement of financial position or the statement of profit or loss or both. Candidates who show clear
workings and produce neatly presented financial statements are often able to pick up these marks.
Candidates who do not show how they have arrived at a final answer for an item containing
numerous calculations continue to miss out on these marks. The use of workings is a good exam
technique and is fundamental to producing a set of financial statements in the exam. Workings
must be clearly shown to allow markers to award marks accordingly.

Candidates generally coped well with adjustments relating to depreciation and tax. However,
candidates found entries relating to a long-term contract challenging, with a large numbers omitting
the contract asset from the statement of financial position.

There were some weak attempts in respect of leases, which was sadly consistent with recent
sittings. As IFRS 16 is a relatively new standard, it was expected that candidates would be better
prepared to deal with this. All of the approved content provider texts have relevant examples, so it
would appear that some candidates need further question practice on this area. A minority of
candidates simply used the figures from the trial balance, making no attempt to adjust for the
information provided in the question. This highlights a lack of preparation in a fundamental area of
the syllabus.

There are multiple past exam questions looking at the preparation of single company financial
statements, as this has been a large part of the Financial Reporting exam for many years. Duggan
Co from the September/December 2018 hybrid paper and Haverford Co from the March/June 2018
hybrid paper are good examples of this type of question which students must practice. As this type
of question has possibly the widest areas of syllabus coverage, candidates should attempt the
preparation of the financial statements of a single entity multiple times before sitting this exam.

Analysis of consolidated financial statements

Candidates tend not to perform well in interpretation questions but especially so when they are
based on the financial statements of a group. Frustratingly, many candidates do not attempt all
question parts which suggests that some candidates are question spotting. This behaviour is
dangerous and should not be something that candidates attempt in the FR paper.

In questions where the analysis is based on group issues, candidates may be asked for minor
calculations, such as goodwill, gain/loss on disposal, or group-related adjustments to the financial
statements. These are core items that candidates are expected to be able to produce. Candidates
tended to score reasonably well on the adjustments and goodwill calculation, with many who
attempted scoring high marks on this. The performance on the disposal tended to be less good,
with many candidates not really displaying a clear answer or set of workings.

Candidates continue to be able to score well on the calculation of ratios with many able to score
full marks. This demonstrates that they had learned the ratio calculations well. However, some

Examiner’s report – FR December 2018 5

candidates failed to produce the ratios requested, and instead produced different ratios, which will
always score zero marks.

The worrying trend of producing ratios without workings has continued, particularly in CBE, with
many candidates failing to score marks through the ‘own figure rule’. This was particularly evident
in a question where the candidate was asked to redraft figures from the financial statements and
then to recalculate certain ratios.

The following example was used in the June 2018 examiner’s report, but continues to be relevant
in the light of the lack of workings produced for ratios. This example below shows draft figures of a
group, before adjustments:

$000
Revenue 34,000
Cost of sales (18,000)
Gross profit 16,000

Giving a gross profit margin of 47% (16,000/34,000)

Let’s say the question required the candidate to remove an intra-group sale of $5,000 and make an
adjustment for unrealised profit of $1,000. Correcting for these would give the following result:

$000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000 + (14,000)
1,000)
Gross profit 15,000

Giving a revised gross profit margin of 51.7%

The marks for the adjustments would be given in part (a) of the question, and these would be
marked as right or wrong.

If part (b) asked the candidates to calculate ratios based on the draft and recalculated figures,
these would be given as an own figure rule. Ideally, this is how we would like to see candidates
show these workings:

Draft Restated
Gross profit margin 47% 51.7%
(16,000/34,000) (15,000/29,000)

This clearly shows the ratio and the workings, and would obtain full marks. Let’s say a candidate
forgot to adjust the unrealised profit in cost of sales. This would make cost of sales $13m. This
would give the following results:

Examiner’s report – FR December 2018 6

 $000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000) (13,000)
Gross profit 16,000

Draft Restated
Gross profit margin 47% 55.1%
(16,000/34,000) (16,000/29,000)

This would lose a mark in part (a), as the candidate has made an error. However, they would score
full marks in part (b) for the ratios under the own figure rule, as it is clear which figures a candidate
has used in the restated calculation.

If a candidate simply shows the ratio calculations as:

Draft Restated
Gross profit margin 47% 55.1%

A marker would mark these figures as right or wrong, as there are no workings to show what the
candidate has done. The marker cannot assume the mistake that the candidate has made, as this
is not clear. Therefore this candidate would score 0.5 for the draft calculation, as this is correct, but
nothing for the restated, as this is incorrect.

Not showing workings like this cost candidates up to 2 marks if they had made errors redrafting
their financial statements. It is imperative that workings such as these are shown to maximise the
marks to be gained.

The analysis surrounding consolidated financial statements must involve comments on group-
related issues. A significant minority of candidates continue to answer these questions without
reference to group-related issues. A disappointing number of candidates produced very limited or
zero commentary. Generic statements will continue to score very few marks, as the question is
looking for the candidate to bring in the information provided in the scenario, particularly focusing
their answers on group-related topics.

Candidates must look at Duke Co from the September/December 2018 hybrid paper, Perkins from
the March/June 2018 hybrid paper and the September 2016 question Gregory Co as examples of
how to incorporate knowledge of consolidations into an answer. This type of question is one which
can often divide candidates. Those who are well prepared can often score good marks, but sadly
far too many individuals are picking up either very limited marks or no marks at all for their
discussion because they are not applying the information provided in the question scenario.

Examiner’s report – FR December 2018 7

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remain an area that
candidates perform well on. Candidates with clear workings often scored highly on this area. There
was an improvement in the number of candidates showing their workings, either within the cell or
shown separately in different lines of the spreadsheet. Both are acceptable methods, and both will
be marked by the marking team.

The preparation of a consolidated statement of financial position was done particularly well, with a
number of candidates able to score very highly.

Only the very highest scoring candidates were able to correctly deal with the fair value adjustment
of a contingent liability, which was the most technically challenging aspect of the question. Another
common error was candidates forgetting to unwind the discount in relation to deferred
consideration payable for a subsidiary. Some candidates calculated the initial present value
correctly, but then did no subsequent adjustments for the unwinding. Calculations relating to
contingent consideration, where the consideration should be included at fair value, proved
challenging to many students, as did the calculation of unrealised profit on goods in transit at the
year-end.

The largest error, and possibly the most surprising omission, arose from candidates failing to deal
with a government grant correctly. This may be because students have attempted to learn a
mechanical process in preparing consolidated financial statements and were therefore unprepared
for an accounting adjustment that they may have expected in a question that tested the preparation
of the financial statements of a single entity. This is an essential skill to develop for Strategic
Business Reporting, as candidates will be expected to apply IFRS requirements in a group context.

A surprising number of candidates used proportionate consolidation in relation to the subsidiary.

Proportionate consolidation is where the group share of the subsidiary’s individual assets and
liabilities (say 70%) are added to those of the parent which is fundamentally incorrect. This has
been a problem which has been in decline in recent years, but the last couple of sittings have now
displayed a rise in candidates doing this, which is disappointing to see. It is likely that candidates
who do this have not practiced enough consolidation questions and/or are failing to fully compare
their answer to the correct answer provided.

There are multiple past exam questions that test the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co
from the September/December 2017 hybrid paper, Dargent Co from the March/June 2017 hybrid
paper and Bycomb Co from the June 2015 paper are good examples of this type of question which
students must practice.

Analysis of single entity financial statements

Performance in this area was often good, with many candidates showing an improvement in
technique.

Examiner’s report – FR December 2018 8

The ratio calculations were often done well, with many candidates scoring maximum marks for
these. CBE candidates are often less likely to show their workings, and this is a situation which
needs to be addressed as it can lead to the loss of follow-through marks from the application of the
own figure rule.

It was very pleasing to see candidate attempts to analyse cash flow information, something which
has not been examined frequently in recent sittings. There has been a key article released on the
ACCA website, and there was good evidence that candidates have read this, with the analysis
often being the strongest part of some answers.

However, the discussion around profitability and interest cover was often of a lower quality, with
candidates using more generic discussion points such as profit improving being a good thing, with
no attempt to explain why. The question scenario provides candidates with the key information
about the business and it is essential that candidates use this produce their answers.

Often answers were too brief. Candidates should be working on the basis of scoring one mark for
each well explained point. Too many candidates wrote one or two paragraphs, which is always
going to be some way short of the required standard for scoring up to 15 marks.

Consistent with previous feedback, the highest scoring candidates did demonstrate that they are
bringing the scenario into the answer more and more. After providing similar comments for
numerous sittings, it was disappointing that more candidates did not do this, reversing a recent
positive trend.

There are multiple past exam questions looking at the analysis of single entity financial statements,
as this has been a large part of the Financial Reporting exam for many years. Mowair Co from the
September/December 2017 hybrid paper and Funject Co from the March/June 2017 hybrid paper
are good examples of this type of question which students must practice.

Exam technique

Good exam technique is vital for success in the Financial Reporting exam. Strong candidates
continue to use clearly presented workings for both the preparation of financial statements and
calculation of ratios, enabling them to maximise the marks gained here. As stated earlier,
candidates who failed to provide workings often scored much lower marks on all aspects of
calculation.

In analysis-type questions, discussion points should be laid out clearly, using headings for each
area requested, such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should make clear
statements, and avoid repetition. Numerous candidates continue to repeat the same point two or
three times when explaining the movement in a ratio which will waste time and not provide any
further marks. It is much better to make comments on a wider range of figures than to repeat
similar points over one specific balance.

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be awarded for
a decent attempt to do this.

Examiner’s report – FR December 2018 9

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. In this diet, it was pleasing to see that the majority of candidates attempted all
sections of the exams. The most commonly omitted questions in section C tended to be areas
where candidates were asked to explain issues. The exam will involve elements of discussion, so
candidates cannot afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost.

Conversely, the narrative answers were often well presented, with headings and spacing used
well.

In questions that tested the preparation of financial statements, candidates often laid out the
financial statements and workings well. Some candidates tended to put figures in individual cells
and add the cells across for the answer, whereas others did the entire working in one cell using a
formula. Both approaches are perfectly acceptable as markers will follow both methods.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Examiner’s report – FR December 2018 10

Examiner’s report
Financial Reporting (FR)
September 2018
General comments

The Financial Reporting (FR) exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that candidates do
not all receive the same set of questions. In this report, the examining team share their observations from the
marking process to highlight strengths and weaknesses in candidates’ performance, and to offer constructive
advice for future candidates.

 Section A objective test questions – we focus on two specific questions that caused difficulty in this
sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this section in
the exam
 Section C constructed response questions - here we provide commentary around some of the main
themes that have affected candidates’ performance in this section of the exam, identifying common
knowledge gaps and offering guidance on where exam technique could be improved, including in the
use of the CBE functionality in answering these questions.

Section A
Section A questions test a broad range of the syllabus and candidates should be prepared for this. They
should avoid question spotting as there are no “core” learning outcomes – all learning outcomes are equally
important. Where answer options are available, candidates should resist looking at these until they have fully
worked the question. As can be seen in the following two examples, some of the distractors can appear
genuine but may miss a stage of a calculation, thereby offering an incomplete answer. The following two
questions are reviewed with the aim of giving future candidates an indication of the types of questions that
can be asked, guidance on how much work is involved in answering 2 mark questions and to provide a
technical debrief on the learning outcomes tested.

Sample questions for discussion

Here we take a look at two Scetion A questions that proved to be particularly difficult for candidates.

Example 1
A 60% owned subsidiary sold goods to its parent for $150,000 at a mark-up of 25% on cost during the year
ended 30 June 20X5. One fifth of these goods remained unsold as at 30 June 20X5.

What is the debit adjustment to be made to group retained earnings to reflect the unrealised profit in
inventory at 30 June 20X5?

A $6,000
B $3,600
C $2,400
D $4,500

What does this test?

This tests whether candidates can account for the effects in the financial statements of intra-group trading.
This question specifically tests unrealised profit in inventory.

What is the correct answer?

B $150,000 x 25/125 x 1/5 x 60% = $3,600

Examiner’s report – FR September 2018 1

Why the correct answer is none of the other options?
Option A calculates the adjustment as if the sale was made by the parent
$150,000 x 25/125 x 1/5 = $6,000
Option C calculates using the NCI% as opposed to the group share
$150,000 x 25/125 x 1/5 x 40% = $2,400
Option D calculates using a margin as opposed to a mark-up
$150,000 x 25% x 1/5 x 60% = $4,500

Example 2

Which of the following meet(s) the recognition criteria for an asset and/or a liability?
(1) Green Co spent $100,000 providing health and safety training to its staff
(2) Green Co has been told by a brand consultancy that the value of its internally created brands is
$2,000,000
(3) Green Co is suing a supplier for $450,000 for losses that it suffered due to faulty goods. Greene Co is
likely, though not certain, to win the court case
(4) Green Co has sold goods subject to a five-year warranty on which it expects some claims will be made

Option A is not an asset because Greene Co does not control staff and there is not sufficient certainty of
economic benefits they may leave their job

A 1 and 2
B 3 and 4
C 2 only
D 4 only

What does this test?

This tests whether candidates can apply the recognition criteria for assets and liabilities to four specific
scenarios.

What is the correct answer?

The correct answer is Option D: 4 only. This is because a legal obligation (the warranty) has been created as
a result of the sales contract.

What is the correct answer?

All other scenarios are not correct for the following reasons:
(1) the $100,000 expenditure on the health and safety training does not meet the definition of an asset
because Greene Co does not control their staff (i.e. they could leave their jobs at any time) and it is not
certain that the health and safety training will produce economic benefits
(2) as the brand has been internally generated, it cannot be reliably measured and so it does not meet the
definition of an asset
(3) the court case against the supplier cannot be recognised as an asset because the economic benefits are
not sufficiently certain. It may however be a contingent asset and disclosed in the notes to the financial
statements.

Section B

This section of the exam presents three scenarios around which five (two mark) objective test questions are
based. This approach allows the examining team to test a particular learning outcome in some depth. These
scenarios can be based on any of the FR learning outcomes which means that future candidates need to
have a knowledge of the syllabus which is both wide and deep. They also need to be able to apply that
knowledge in the context of a specific scenario. In September 2018, candidates’ knowledge of the following

Examiner’s report – FR September 2018 2

was weak: the reversal of the impairment of an asset, earnings per share and financial instruments. Whilst
the reversal of the impairment of an asset is a relatively new addition to the syllabus, earnings per share and
financial instruments have been tested for many years. Candidates should therefore practice as many cases
as possible to ensure a wide exposure of the syllabus using these question types.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Preparation of single entity financial statements

- Analysis of single entity financial statements
- Preparation of consolidated financial statements
- Analysis of consolidated financial statements

Preparation of single entity financial statements

This area of the syllabus requires candidates to prepare a set of financial statements for a single entity, from
either a trial balance or an extract thereof. Candidate performance in this area was very mixed, but it was
pleasing to see some very good answers being produced.

Candidates were required to produce financial statements from a trial balance incorporating a series of
adjustments. In Sep 2018, they were not asked to prepare a complete set of financial statements, instead
the requirements asked for a statement of profit or loss and a statement of changes in equity but not the
statement of financial position. Another question required a schedule of adjustments to profit and a
statement of financial position. The requirements tested the candidates’ presentation of financial statements
and their ability to identify the correct adjustments required.

Candidates were confident in the presentation of the financial statements with many providing the marking
team with well presented workings. This enables the team to apply the ‘own figure rule’. If an error is made
in an earlier part of the answer, but that same balance is subsequently used correctly elsewhere then
candidates will be awarded marks an ‘own figure’. The marking teams work very hard to ensure the own
figure rule is applied. Unfortunately, for those candidates who do not show workings or present them in a
logical, legible manner, these marks are often lost. Full presentation of all workings is essential as markers
are not able to mark what was ‘in your head’.

Candidates coped well with adjustments for non-current assets and basic tax adjustments as expected. In
addition to this, candidates generally performed very well with technical adjustments to revenue relating to a
performance obligation met over time and a convertible loan.

The most technical areas of the questions continue to be challenging for some students. These include
recording provisions correctly and deferred tax where the temporary difference must be calculated. In many
past questions the temporary difference may be given to students but in instances where this is not provided
candidates will need to calculate this themselves. This can be done by comparing the difference between
the tax written down value of property, plant and equipment to the carrying amount that the candidate has
calculated and included in the statement of financial position. This of course will be given the benefit of the
‘own figure rule’ if mistakes were made in calculating the carrying amount of property, plant and equipment.

Examiner’s report – FR September 2018 3

Many candidates did not cope well with the calculation of earnings per share (EPS). When there is a full
market share issue during the accounting year, candidates must ‘weight’ the average of the shares when
calculating EPS. This is a fundamental requirement of IAS 33 and was rarely applied by candidates. All
ACCA approved learning materials have examples of this. Finally, it was disappointing to see candidates
were not presenting EPS correctly, often showing the result as a percentage. EPS shows the earnings per
share and must be recorded as a monetary value. For example, if you calculate 0.42 this should be
recorded as either $0.42 or 42 cents.

There are numerous past exam questions that test the preparation of single entity financial statements. It is
essential that candidates practice as many of these questions as possible as it will expose them to a wide
areas of the syllabus. Haveford Co from the March/June 2018 hybrid paper and Triage Co from the
September 2016 exam are good examples of this type of question.

Analysis of single entity financial statements

Performance in this area was generally quite good and had improved since the previous sitting which was
pleasing to see. The ratio calculations continued to be well done, with many candidates scoring full marks.
For those candidates that had calculated the ratio incorrectly and not provided workings, then marks could
not be awarded. This continues to be frustrating for the marking teams.

There are often 0.5 marks available for both the numerator and the denominator of the ratio, if workings were
clearly shown then candidates may earn more marks for the part of the ratio that has been completed
correctly. The absence of workings will then potentially have a knock-on effect to later ratios. For example,
if a candidate calculated return on capital employed incorrectly by using the correct profit from operations of
$30 million divided by an incorrect capital employed of $110 million then 0.5 could be awarded to profit from
operations when the working is shown. But simply recording return on capital employed as 27% with no
working will not be allocated any marks. If the candidate were then asked to calculate net asset turnover -
using the correct revenue of $200 million divided by the candidates own capital employed figure of $110
million would achieve 1 mark with the working shown. In the absence of any workings however, a candidate
recording a net asset turnover of 1.8 times would again achieve zero marks for this calculation.

The narrative part of the question continued to be very mixed with some candidates simply writing one or two
sentences/paragraphs. This approach is unlikely to score many marks in the exam. It is essential that
candidates do not simply rely on calculating ratios to pass this question as the discussion marks continue to
be awarded the majority of the marks. This question tests candidates’ ability to appraise the performance
and position of an entity over time or compared to another company. This is a key skill required by
accountants. The examining team are keen for candidate’s performance in this area to be improved.

It was noted by marking teams that candidates continue to provide vague, ‘textbook’ answers for the ratios
calculated. Simply stating that gross margin is bigger, and this may be because sales have increased, or
costs have reduced does not constitute analysis and will score no marks. A good answer will always use the
scenario to help explain why increases or decreases have occurred. Those candidates that used the
scenario in their analysis generally scored very well on this part of the question as they were able to make
valid suggestions for the changes that existed in the ratios. For future candidates, greater consideration of
the comparison between potential ‘one-off’ items versus longer-term changes in profits is required.

Examiner’s report – FR September 2018 4

The analysis of company performance was far superior to that of financial position with many candidates
neglecting to provide an analysis on financial position discussion at all. It continues to be important that all
parts of the requirement are addressed.

Many candidates are still not summarising their thoughts in a well explained conclusion. This continues to be
highlighted in the exam reports and is disappointing that candidates fail to do this. A conclusion based on
the analysis the candidate has done will always attract marks and candidates are strongly advised to provide
this in future.

The examining team recommend that candidates practice past questions in this area. There are multiple
past exam questions that test the analysis of single entity financial statements, as this has been a large part
of the Financial Reporting exam for many years. Mowair Co from September/December 2017 and Funject
Co from March/June 2017 are good examples of this.

Preparation of consolidated financial statements

In September 2018, candidates were asked to calculate goodwill and prepare a consolidated statement of
profit or loss. It was pleasing to see that many candidates were able to achieve full marks on the goodwill
calculation. For those candidates not achieving full marks for goodwill, there were common errors including
the failure to discount the deferred consideration to present value when calculating the cost of investment,
and when calculating net assets, the contingent liability was often omitted or was added in as an adjustment
to net assets rather than being deducted. Many candidates continued to struggle to identify retained
earnings at the acquisition date correctly often missing the current year profit up to the date of acquisition.
This is an area that has been tested many times previously, so it was surprising to see these mistakes
continue to be made.

The preparation of a consolidated statement of profit or loss was generally well attempted by many
candidates with relatively few however achieving full marks. Many candidates demonstrated a sound
knowledge of the consolidation process in this area dealing with intra-group sales, fair value depreciation and
unrealised profit well. The most common error relating to the preparation of the consolidation continued to
be the split of profit between the parent and the non-controlling interests, with a surprisingly large number of
candidates failing to attempt this part of the consolidation at all. These candidates immediately missed out
on 2 marks which are largely based on ‘own figures’ from earlier parts of the consolidation. Another common
mistake was the failure to unwind the discount on the deferred consideration from part (a) but, for those that
did attempt this, many forgot to time apportion the expense for the post-acquisition period.

The technical area of convertible loans was examined within the consolidated statement of profit or loss with
the parent company issuing the convertible loan at the start of the accounting year. Candidates were
required to include interest on the convertible loan within finance costs at the equivalent rate of 8% on a non-
convertible loan. Many candidates failed to do this and, for those that did, they failed to deduct the interest
that had already been included within finance costs at the coupon rate of 6%. Another common mistake was
where candidates applied 8% to the par value of the liability when the loan should have been split between
its debt and equity components.

There are multiple past exam questions that test the various preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co from

Examiner’s report – FR September 2018 5

September/December 2017, Dargent Co from March/June 2017 and Bycomb Co from the June 2015 paper
are good examples of this type of question which candidates must practice.

Examiner’s report – FR September 2018 6

Analysis of consolidated financial statements

In questions where the analysis was based on group issues, candidates were asked to perform minor
calculations for group companies, such as non-controlling interests, group retained earnings and
gains/losses on the disposal of a subsidiary company. Candidates should expect to be tested on these
routine group-related adjustments. Candidates generally performed well when preparing the non-controlling
interest and group retained earnings calculations. An adjustment that many candidates omitted, related to
the professional fees on the acquisition of the subsidiary company. These fees never form part of the cost of
investment of a subsidiary when calculating goodwill on acquisition but are instead an expense that relates to
the parent company only. These fees should therefore be deducted from group retained earnings and are
not to be split between the parent and non-controlling interests. Where candidates were asked to calculate
the gain or loss on the disposal of a company this was generally well attempted, although very few
candidates achieved full marks. The disposal of the company was mid-year and therefore the most common
mistake was where candidates omitted the current year profit up to the disposal date when determining net
assets.

The requirement to calculate ratios was generally well received by candidates with many scoring full marks.
However, as noted in previous examiner reports (and above in this report) candidates continue to produce
ratios without supporting workings. The lack of workings means that the marking team are unable to apply
the ‘own figure rule’. This was particularly evident in the question where candidates were asked to calculate
non-controlling interests and retained earnings to be included in consolidated financial statements.

An example of how this would be marked is shown below:

Part (a) asked candidates to calculate the non-controlling interests and retained earnings to be included in
the consolidated financial statements.

Let’s assume the correct balances for these per the marking scheme were:

$’000
Non-controlling interests 3,600
Retained earnings 14,000

Now let’s assume the candidate has calculated the balances as:

$’000
Non-controlling interests 2,900
Retained earnings 13,100

The marks for these workings would then be awarded in line with the making scheme and, where candidates
did not perform all parts of the calculation correctly, the marks would not have been awarded.

If Part (b) then asked candidates to calculate ratios based on the financial statements and their answers to
part (a) these would be given own figure rule. For example, if asked to calculate return on capital employed
(using a profit before interest and tax of $15 million) the candidate would need to take the capital employed
for the group which includes:

Examiner’s report – FR September 2018 7

 Per scheme Per candidate
£’000 £’000
Share capital (given in question) 10,000 10,000
Retained earnings (from part (a)) 14,000 13,100
Non-controlling interests (from part (a)) 3,600 2,900
27,600 26,000
Long-term loans (given in question) 11,000 11,000

The return on capital employed per the scheme would be 38.9% using balances per the suggested solution
(15,000/(27,600+11,000)). The candidate however would calculate return on capital employed as:

Return on capital employed 40.5% (15,000/(26,000+11,000))

The result of 40.5% in this instance would score full marks in part (b) as the workings have been clearly
shown and the marker is able to apply ‘own figure rule’.

If the candidate did not show any workings however and simply shows return on capital employed as 40.5%,
then the marking team is forced to mark this as incorrect and the mark for return on capital employed would
be lost.

In the analysis parts of the question it was surprising to see that many candidates wrote very little. Many
also repeated the ratios and explained that numbers had gone up or down with no further discussion. Some
misinterpreted their ratios even when they had calculated them correctly. The analysis surrounding
consolidated financial statements must also include comments on group related issues however some
candidates continue to avoid reference to these issues at all. Few candidates made good use of the
information they had been provided with in the question for their discussion and as such scored very few
marks. It is worrying to see that there continues to be a significant minority of candidates who continue to
calculate ratios with no attempt at discussion, which highlights that further work and practice is required in
this area of the syllabus.

Candidates should ideally look at past questions on this area such as the Perkins Group from the
March/June 2018 Hybrid paper and the September 2016 question Gregory Co to provide examples of how to
incorporate knowledge of consolidations into an answer.

Exam technique

Good exam technique is vital for success in Financial Reporting. Strong candidates continue to produce
good workings for both the preparation of financial statements and calculation of ratios, enabling them to
maximise the marks to be gained here. As stated earlier, candidates who failed to provide workings often
scored much lower marks on all aspects of calculation.
The analysis discussion points should be laid out clearly, using headings for each area requested, such as
‘performance’ and ‘position’. Candidates should make clear statements, and avoid repetition. Numerous
candidates continue to repeat the same point two or three times when explaining the movement on a ratio. It
is much better to make comments on a wider range of figures than to repeat similar points over one specific
balance.

Examiner’s report – FR September 2018 8

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible conclusion
summarising the main points of the analysis is important, and marks will be given here. The completion rate
of questions continues to be high, suggesting that many candidates are able to manage time well. The
majority of candidates attempted all sections. The most commonly omitted sections tended to be areas
where candidates were asked to explain issues. The exam will involve elements of discussion, so candidates
cannot afford to neglect these sections as they practise questions.

Word processing and spread sheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less likely to show
their workings for calculating ratios than those sitting the paper-based exam, which needs to be improved so
that marks are not lost. Conversely, the narrative answers were often well presented, with headings and
spacing used well.

For the preparation of financial statements question, candidates often laid out the financial statements and
workings well. Some candidates tended to put figures in individual cells and add the cells across for the
answer, whereas others did the entire working in one cell using a formula. Both are perfectly acceptable as
markers can follow both methods.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet software. A
video introducing the main functionality and how to make best use of these in Financial Reporting can be
accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common themes
discussed in this report regarding exam technique and ways to improve are comments that are commonly
made across sittings. Previous examiner’s reports can be found here and will give good, consistent guidance
in what the examining team is looking for from well prepared candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the answer
to see any areas you may have missed. This is particularly relevant on the analysis questions. Candidates
may feel comfortable with this type of question, but reviewing the answers can also show the depth of
discussion that is being sought here. We strongly recommend that you use an up to date question and
answer bank from one of our Approved Content Providers but if this is not possible then work through the
most recent past exams on our website. However, please note if you are using the past exams that these are
not updated for syllabus changes or changes to the exam format and so should be used with caution – so
check the latest syllabus and study guide for
changes.
Some of the more challenging areas of the syllabus have specific articles describing them in more depth in
the technical articles section and these should provide greater understanding. The exam section also
provides guidance for approaching the analysis question, and further guidance for resit students.

Examiner’s report – FR September 2018 9

Financial Reporting
F7 Examiner’s report
June 2018
General comments

The Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that
candidates do not all receive the same set of questions. In this report, the examining team share
their observations from the marking process to highlight strengths and weaknesses in candidates’
performance, and to offer constructive advice for future candidates.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here we take a look at two Section A questions that proved to be particularly difficult for
candidates.

Example 1
A company purchased an item of plant for $40,000 on 1 September 20X1. The plant had an
estimated life of five years and an estimated residual value of $5,000. The plant is depreciated on
a straight-line basis. Local tax law does not allow depreciation as an expense, but a tax allowance
of 60% of the cost of the asset can be claimed in the year of purchase and 20% per annum on a
reducing balance basis in the following years. The rate of income tax is 30%.

REQUIRED:
What charge or credit for deferred taxation should be recorded in the company’s profit or
loss for the year to 31 August 20X2?

A $17,000 charge

B $5,100 charge

C $5,100 credit

D $17,000 credit

What does this test?

This question tests that a candidate knows how to calculate both the amount of the deferred tax
provision and how it should be adjusted in the statement of profit or loss.

What is the correct answer?

Examiner’s report – Financial Reporting June 2018 1

The correct answer is B
To answer this question, candidates need to calculate the amount of deferred tax required by
taking the difference between the carrying amount and the tax base of the asset at 31 August 20X2
and multiplying it by the appropriate tax rate. They then need to establish the direction of the
adjustment required. The calculations required are as follows:

Carrying amount($) Tax Base($)

Cost at 1 Sep 20X1 40,000 Cost at 1 Sep 20X1 40,000
Depreciation year 1 (7,000) Tax allowance year 1 (26,000)
(40,000-5,000)/5 40,000 x 60%
Carrying amount at 33,000 Tax Base at 16,000
31 Aug 20X2 31 Aug 20X2
Temporary difference (33,000-16,000) = 17,000 x 30% = 5,100

As the tax allowances are in advance of the depreciation, a deferred tax provision is required.
Therefore, a charge of $5,100 will be required to the statement of profit or loss.
Candidates need to understand both how to calculate the deferred tax amount and how to adjust
for it.

Why the correct answer is none of the other options?

A This option does not take account of the rate of tax but the direction of the adjustment is correct
C This option is the correct amount of deferred tax but it has been adjusted for the wrong way in
the SOPL(i.e. the direction of the adjustment is incorrect)
D This option does not take account of the rate of tax and the direction of the adjustment is
incorrect

Example 2
On 1 July 20X5, Pull Co acquired 80% of the equity of Sat Co. At the date of acquisition, goodwill
was valued at $10,000 and the non-controlling interest was measured at fair value. In conducting
the fair value exercise on Sat Co’s net assets at acquisition, Pull Co concluded that property, plant
and equipment with a remaining life of ten years had a fair value of $300,000 in excess of its
carrying amount. Sat Co had not incorporated this fair value adjustment into its individual financial
statements. At the reporting date of 31 December 20X5, the goodwill was fully impaired. For the
year ended 31 December 20X5, Sat Co reported a profit for the year of $200,000.

REQUIRED:
What is the Pull Group profit for the year ended 31 December 20X5 that is attributable to
non-controlling interests?

A $16.000

B $12,000

C $35,000

D $15,000

Examiner’s report – Financial Reporting June 2018 2

What does this test?
This question tests that candidates understand the impact on non-controlling interests (NCI) of a
mid-year acquisition, the write-off of goodwill and the additional depreciation required by
accounting for the net assets of the subsidiary at fair value.

What is the correct answer?

The correct answer is D.

$
Subsidiary profits ($200,000 x 6/12) 100,000
Write-off of goodwill (10,000)
Additional depreciation (300,000/10 x 6/12) (15,000)
75,000
NCI @ 20% 15,000

Why the correct answer is none of the other options?

A The write-off of goodwill is time apportioned in error (100-5-15) x 0.2 = 16

B The depreciation is not time apportioned in error (100-10-30) x 0.2 = 12
C The profits are not time apportioned in error (200-10-15) x 0.2 = 35

Section B
This section of the exam presents three scenarios around which 5 (two mark) objective questions
are based. This approach allows the examining team to test a particular learning outcome in some
depth. These scenarios can be based on any of the F7 learning outcomes which means that future
candidates need to have a knowledge of the syllabus which is both wide and deep. They also need
to be able to apply that knowledge in the context of a specific scenario. In June 2018, candidates’
knowledge of the following learning outcomes was weak: provisions and contingencies, change in
accounting policies and construction contracts.

 Here are some tips when practicing case questions: Read the case through in its entirety
without looking at the questions associated with it. Then read it through again…these cases
are not lengthy and so do not take long to read.
 Read the requirement of each question carefully to ensure that you understand what is
being asked of you. Some questions in the case may test similar issues but from a different
perspective.
 Some questions in the case will be quicker to answer than others; for example, there will be
some questions where you are required to input the answer as a number (i.e. the question
will not be a multiple choice). You will need to take more care with these questions. Ensure
that you work the answer through either in the scratchpad or on a piece of paper (with
workings if necessary).
 Ensure that you understand the numerical denominations required in the case; for example,
you may be required to input all of your answers in $millions or in $000s.
 Double check your answer against both the scenario and the requirement before you
input/select your answer.

Examiner’s report – Financial Reporting June 2018 3

The cases are used to test a syllabus area in-depth which means that they cannot be rushed. Each
case is designed to take about 18 minutes to work through. If you are working through them
quicker than that, then it is likely that you are not thinking about the subject matter in sufficient
depth. A candidate that reviews their answer and double checks their workings is more likely to
score higher marks on a case than a candidate who does neither.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Preparation single entity financial statements

- Analysis of consolidated financial statements
- Preparation of consolidated financial statements
- Analysis of single entity financial statement

Preparation of single entity financial statements

This area of the syllabus requires candidates to prepare a set of financial statements for a single
entity. This is a fundamental skill for an accountant, and has been a large part of the financial
reporting syllabus for many years. Performances in this area were generally good, although
possibly not as good as in previous sittings.

As in previous questions on single entity financial statements, candidates were required to produce
financial statements from a trial balance incorporating a set of adjustments. Also common to
previous sittings, candidates were not necessarily asked for full sets of financial statements, with
requirements such as producing a statement of adjusted profit, or being asked to produce a
statement of profit or loss, statement of changes in equity but not a statement of financial position.
This tests the candidates’ knowledge of the presentation of financial statements, their ability to
identify the correct elements accordingly and also tests knowledge of a variety of accounting
standards.

Candidates were generally able to prepare well-presented sets of financial statements, maximising
the marks available due to the ‘own figure rule’ where candidates were asked to produce a
statement of adjusted profit and a statement of financial position. This means that students who
made a calculation error over an item such as depreciation gained credit for following that figure
through in the statement of financial position. Students who show good workings and neatly
presented financial statements are often able to pick up these marks. Candidates who do not show
how they have arrived at a final answer for an item containing numerous calculations continue to
miss out on these marks. This is a fundamental approach that should be adopted to produce a set
of financial statements in the exam, and workings must be clearly shown.

Candidates generally coped well with adjustments relating to revaluations, inventory and
depreciation, as expected. In addition to this, candidates performed reasonably well with technical
adjustments to revenue, and made a noticeably improved attempt at calculations of non-current

Examiner’s report – Financial Reporting June 2018 4

assets held for sale. This had been an area previously noted as poorly performing, so this was
reassuring to see.

The most technical areas of the questions proved challenging for some students. These included
professional fees incurred on a financial instrument, and deferred tax relating to a revaluation. Both
have featured regularly in previous exams, but can be challenging due to their technical nature.

By some distance, candidates did not cope well with entries in respect of leases. As International
Financial Reporting Standard (IFRS®) 16 is the newest standard released in relation to the
Financial Reporting exam, it was expected that candidates would be better prepared to deal with
this. A surprising number of candidates were unable to deal with a lease with payments made in
advance. Even fewer candidates were able to deal with the low value lease. All of the approved
texts have examples of these in, so it would appear that some candidates need further question
practice on this area.

There are multiple past exam questions that test the preparation of single company financial
statements, as this has been a large part of the Financial Reporting exam for many years. Triage
Co from the September 2016 exam and Moston Co from the September/December 2015 are good
examples of this type of question which students must practice. As this type of question has
possibly the widest areas of syllabus coverage, candidates should be attempting the preparation of
numerous single entity financial statements before sitting this exam.

Analysis of consolidated financial statements

In questions where the analysis is based on group issues, candidates may be asked for minor
calculations, such as goodwill or group-related adjustments to the financial statements. These are
core items that candidates are expected to be able to produce. Candidates scored well on the
calculation of goodwill, as expected, with many candidates scoring full marks on this. The
questions that required candidates to make adjustments were less well received. This was
surprising, given that the adjustments involved were standard such as intra-group sales, unrealised
profits and goodwill impairment.

Candidates continue to be able to score well on the calculation of ratios. Many candidates were
able to score full marks on this, showing that they had learned the ratio calculations well.

The worrying trend of producing ratios without workings has continued, particularly in CBE, with
many candidates failing to score marks through the ‘own figure rule’ because it is impossible for
markers to establish how ratios have been calculated. This was particularly evident in the question
where the candidate was asked to redraft figures and then recalculate ratios.

An example of how this would be marked is shown below. The table below shows draft figures of a
group, before adjustments:

$000
Revenue 34,000
Cost of sales (18,000)

Examiner’s report – Financial Reporting June 2018 5

Gross profit 16,000

Giving a gross profit margin of 47%

Let’s say the question required the candidate to remove an intra-group sale of $5,000 and make an
adjustment for unrealised profit of $1,000. Correcting for these would give the following result:

$000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000 + (14,000)
1,000)
Gross profit 15,000

Giving a revised gross profit margin of 51.7%

The marks for the adjustments would be given in part (a) of the question, and these would be
marked as either right or wrong.

If part (b) asked the candidates to calculate ratios based on the draft and recalculated figures,
these would be given as an own figure rule. Ideally, this is how we would like to see candidates
show these workings:

Draft Restated
Gross profit margin 47% 51.7%
(16,000/34,000) (15,000/29,000)

This clearly shows the ratio and the workings, and would obtain full marks. Let’s say a candidate
forgot to adjust the unrealised profit in cost of sales. This would make cost of sales $13m. This
would give the following results:

$000
Revenue (34,000 – 5,000) 29,000
Cost of sales (18,000 – 5,000) (13,000)
Gross profit 16,000

Draft Restated
Gross profit margin 47% 55.1%
(16,000/34,000) (16,000/29,000)

This would lose a mark in part (a), as the candidate has made an error there. However, they would
score full marks in part (b) for the ratios under the own figure rule, as it is clear which figures a
candidate has used in the restated calculation.
However, candidates often show their answer as:

Examiner’s report – Financial Reporting June 2018 6

 Draft Restated
Gross profit margin 47% 55.1%

in such a case, a marker is forced to mark these figures as either right or wrong because there are
no workings to show what the candidate has done. The marker cannot assume the mistake that
the candidate has made, as this is not clear. Therefore this candidate would score 0.5 for the draft
calculation (47%), as this is correct, but nothing for the restated (55.1%), as this is incorrect.

By not showing workings as in the example above, candidates can lose up to 2.5 marks. It is
imperative that workings such as these are shown to inform markers and maximise the marks to be
gained.

The analysis surrounding consolidated financial statements must involve comments on group-
related issues. A significant minority of students continue to answer these questions without
reference to group-related issues. A disappointing number of students produced very limited or
zero commentary. Generic statements will continue to score very few marks, as the question is
looking for the candidate to bring in the information provided in the scenario, particularly focusing
their answers on group-related topics.

Candidates must look at Perkins from the March/June 2018 hybrid paper and the September 2016
question Gregory Co as an example of how to incorporate knowledge of consolidations into an
answer. This type of question is one which can often divide candidates. Those who are well
prepared can often score good marks, but sadly far too many individuals are picking up either very
limited marks or no marks at all for their discussion. A significant minority continue to attempt ratios
with no attempt at discussion, which highlights that further work and practice is required over this
area by some.

Preparation of consolidated financial statements

The preparation of consolidated financial statements remains an area that candidates perform well
on. Candidates with clear workings often scored highly on this area. There was an improvement in
the number of candidates showing their workings, either within the cell or shown separately in
different lines of the spreadsheet. Both are acceptable methods, and both will be marked by the
marking team.

The preparation of a consolidated statement of financial position was performed particularly well,
with a number of candidates able to score very highly. Only the very highest scoring candidates
were able to correctly deal with the fair value adjustment of a contingent liability, which was the
most technically challenging aspect of the question. A common error occurred when candidates
forgot to unwind the discount in relation to any deferred consideration that was payable for a
subsidiary. Many candidates calculated the initial present value correctly, but then did not process
any subsequent adjustments for the unwinding.

A surprising number of students are still using proportionate consolidation in relation to the
subsidiary, which is a fundamental error at this stage and should not be happening. This has been
a problem which has been in decline, but the last couple of sittings have now displayed a rise in

Examiner’s report – Financial Reporting June 2018 7

candidates doing this, which is disappointing to see. This might be overcome if candidates
attempted multiple consolidation questions in practise and compared their answer to the suggested
solution where it would be clear that a subsidiary should be consolidated 100% and not
proportionately.

The preparation of a consolidated statement of profit or loss was generally well answered.
Candidates displayed good knowledge of intra-group sales, fair value depreciation and unrealised
profits.
The most common error by far was the omission of the profit split between the parent’s
shareholders and the non-controlling interest. This is a key part of a consolidated statement of
profit or loss, but continues to be missed by too many candidates. Individuals who did not attempt
to split the profit or other comprehensive income between the parent and the non-controlling
interest missed out on a potential 3 marks. This has been also been highlighted in previous
examiner reports, so it would be nice to see progress on this.

In one particular question, candidates were asked to produce the consolidated statement of profit
or loss and a total of consolidated assets. This tests the knowledge of double entry, ensuring the
candidate is thinking fully of the dual effect that adjustments will have had on the financial
statements. This was the worst answered part of the question, and it is perhaps because many
candidates were over-thinking it. Total assets is simply non-current assets and current assets
added together and these numbers are subject to the normal adjustments which would be
required during the preparation of a consolidated statement of financial position.

There are multiple past exam questions that test the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Party Co
from September/December 2017, Dargent Co from March/June 2017 and Bycomb Co from the
June 2015 paper are good examples of this type of question which candidates must practice.

Analysis of single entity financial statements

Performance in this area was not as good as it has been in previous sittings, which was
disheartening - it is a key part of the syllabus and has been for many years.

The ratio calculations were often done well, with many candidates scoring maximum marks for the
calculation of ratios. However, it has become noticeable in recent sittings that some candidates do
not know the formulas for calculating net asset turnover and interest cover. This was again in
evidence here, as the most likely ratios to be calculated incorrectly. The other most common errors
included a failure to include lease liabilities as part of debt, despite specific instruction from the
question to do so.

Again, the most common problem here is candidates simply showing a percentage or figure with
no workings. If candidates do this, it is often impossible to see how they have arrived at the figure,
meaning that credit cannot be given for follow through marks. For example, a student may have
calculated return on capital employed incorrectly in year 1 by applying the incorrect figure for
capital employed. Applying the own figure rule, a candidate who repeated this mistake in year 2 but
showed their workings would only lose a half mark in year 1. Similarly, candidates who then
repeated the same mistake on capital employed into net asset turnover would obtain full marks

Examiner’s report – Financial Reporting June 2018 8

because they have already lost a half mark for the initial error. However, if no workings are
provided, unless the answer is absolutely correct, no marks can be awarded because the marker is
unable to tell how candidates have calculated the ratios.

Markers are not able to recalculate ratios in an attempt to work out what candidates have done.
The candidate must show the marker how the figure has been obtained. This is advice which has
been repeated many times in previous reports, and it is frustrating to see that candidates are still
not following this advice.

It also appears that the improvement in candidates narrative answers on analysis noted in previous
sittings was less evident here. Fewer candidates were using the narrative information from the
scenario, with many simply stating that decreased profit margins meant worse performance – there
was no attempt to analyse why a company may have recorded this change in margins. Similarly
there were far too many ‘textbook’ answers relating to gearing, explaining that high gearing is bad
for the business rather than considering the reasons for the high gearing.

Far too many answers were too brief. Candidates should be working on the basis of scoring one
mark for each well explained point. Too many candidates wrote one or two paragraphs, which is
always going to be some way short of the required standard for scoring 14 marks.

Consistent with previous feedback, the highest scoring candidates used the scenario in their
answer. After providing similar comments for numerous sittings, it was disappointing that more
candidates did not do this, reversing a recent positive trend.

An area of continuing weakness is that candidates too often fail to summarise their thoughts in a
well explained conclusion. A sensible summary of the analysis that the candidate has already
written will always score marks, and candidates must ensure that they include this in their answer.

There are multiple past exam questions that test the analysis of single entity financial statements,
as this has been a large part of the Financial Reporting exam for many years. Mowair Co from
September/December 2017 and Funject Co from March/June 2017 are good examples of this type
of question which students must practice.

Exam technique

Good exam technique is vital for success in Financial Reporting. Strong candidates continue to
produce good workings for both the preparation of financial statements and calculation of ratios,
enabling them to maximise the marks to be gained here. As stated earlier, candidates who failed to
provide workings often scored much lower marks on all aspects of calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’ and ‘position’. Candidates should make clear statements, and avoid
repetition. Numerous candidates continue to repeat the same point two or three times when
explaining the movement on a ratio. It is much better to make comments on a wider range of
figures than to repeat similar points over one specific balance.

Examiner’s report – Financial Reporting June 2018 9

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be given here.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. The majority of candidates attempted all sections. The most commonly
omitted sections tended to be areas where candidates were asked to explain issues. The exam will
involve elements of discussion, so candidates cannot afford to neglect these sections as they
practise questions.

Word processing and spread sheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost.

Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements and workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both are perfectly acceptable as markers will follow both methods.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam

Examiner’s report – Financial Reporting June 2018 10

technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Examiner’s report – Financial Reporting June 2018 11

Examiner’s report
F7 Financial Reporting
March 2018
General comments

The F7 Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that
candidates do not all receive the same set of questions. In this report, the examining team share
their observations from the marking process to highlight strengths and weaknesses in candidates’
performance, and to offer constructive advice for future candidates.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A
Section A questions test a broad range of the syllabus and candidates should be prepared for this.
They should avoid question spotting as there are no “core” learning outcomes and all learning
outcomes carry the same degree of importance. Where answer options are available, candidates
should resist looking at these until they have fully worked the question. As can be seen in the
following two examples, some of the distractors can appear genuine but may miss a stage of the
calculation, thereby offering an incomplete answer. The following two questions are reviewed with
the aim of giving future candidates an indication of the types of questions asked, guidance on how
much work is involved in answering 2 mark questions and to provide a technical debrief on the
learning outcomes tested by the specific questions asked.

Sample questions for discussion

Here we take a look at two Section A questions that proved to be particularly difficult for
candidates.

Example 1
Platt Co has owned 60% of the issued equity share capital of Serpi Co for many years. At 31
October 20X7, the individual statements of financial position included the following:
Platt Co ($) Serpi Co ($)
Current Assets 700,000 500,000
Current 300,000 200,000
Liabilities

Neither company had a bank overdraft at 31 October 20X7.

Examiner’s report – F7 March 2018 1

During the year ended 31 October 20X7, Platt Co made $100,000 sales on credit to Serpi Co.
Serpi Co had one-quarter of these goods in inventory at 31 October 20X7. Platt Co makes a 20%
gross profit margin on all sales.

On 31 October 20X7, Serpi Co sent a cheque for $50,000 to pay all of the outstanding balance due
to Platt Co. Platt Co did not receive this cheque until 2 November 20X7.

Platt Co’s policy for in-transit items is to adjust for them in the parent company.

In respect of current assets and current liabilities, what amounts will be reported in Platt
Co’s consolidated statement of financial position at 31 October 20X7?

A Current Assets $1.197m and current liabilities $0.5m

B Current Assets $1.145m and current liabilities $0.45m

C Current Assets $1.195m and current liabilities $0.45m

D Current Assets $1.195m and current liabilities $0,5m

What does this test?

An understanding of how group unrealised profit included in inventory held at the year-end and
cash-in-transit between group companies are eliminated on consolidation.

What is the correct answer?

The correct answer is D

The unrealised profit in inventory held at the year-end is: ($100,000 x ¼) x 20% = $5,000. Both
inventory and retained earnings are reduced by the same amount – no impact on NCI as sale is
from parent to subsidiary.
As the cash-in-transit is adjusted in the parent, one asset (receivables) is merely exchanged for
another (cash) which means that the net effect on current assets is zero.

Current Assets = $700,000 + $500,000 - $5,000 = $1,145,000

Current Liabilities = $300,000 = $200,000 = $$500,000

Why the correct answer is none of the other options?

Option A adjusts the inventory by $3,000 ($5,000 x 60%)

Option B adjusts the correct unrealised profit in inventory but also deducts the $50,000 cash-in-
transit from both current assets and liabilities
Option C adjusts the correct unrealised profit in inventory but also deducts the $50,000 cash-in-
transit from current liabilities only

Example 2
Boat Co acquired 60% of Anchor Co on 1 January 20X4. At the date of acquisition, the carrying
amount of Anchor Co’s net assets were the same as their fair values, with the exception of an item

Examiner’s report – F7 March 2018 2

of machinery which had a carrying amount of $90,000 a fair value of $160,000 and a remaining
useful life of five years. Non-controlling interests are valued at fair value.

What is the journal entry required to reflect this fair value adjustment in the consolidated
statement of financial position of Boat Co as at 31 December 20X6?

A Dr Retained earnings $25,200

Dr Non-controlling interest $16,800
Dr Property, plant and equipment $28,000
Cr Goodwill $70,000

B Dr Retained earnings $8,400

Dr Non-controlling interest $5,600
Dr Property, plant and equipment $56,000
Cr Goodwill $70,000

C Dr Retained earnings $57,600

Dr Non-controlling interest $38,400
Dr Property, plant and equipment $64,000
Cr Goodwill $160,000

D Dr Retained earnings $42,000

Dr Property, plant and equipment $28,000
Cr Goodwill $70,000

What does this test?

An understanding of how, on acquisition, the valuation of a subsidiary’s assets at their fair value
impacts on the consolidated statement of financial position.

What is the correct answer?

The correct answer is A

The increase due to the use of fair value is $70,000 ($160,000-$90,000) which should be adjusted
in (credited to) goodwill in its entirety.
An additional depreciation charge is required for 3 years (31 Dec 20X4, 20X5 and 20X6) -
$70,000/5 x 3 = $42,000. Therefore, Property, plant and equipment is increased by $28,000
(70,000 – 42,000)
As NCI are valued at fair value, the additional depreciation should be split between group retained
earnings (60%) and NCI (40%).
Retained earnings ($42,000 x 60%) = $25,200
Non-controlling interest ($42,000 x 40%) = $16,800

Why the correct answer is none of the other options?

Option B charges only one year’s depreciation instead of three

Examiner’s report – F7 March 2018 3

Option C allocates the full fair value of $160,000 instead of the difference between fair value and
carrying amount
Option D ignores the fact that NCI are valued at fair value and allocates 100% of the additional
depreciation to retained earnings

Section B
This section of the exam presents three scenarios around which 5 (two mark) objective questions
are based. This approach allows the examining team to test a particular learning outcome in some
depth. These scenarios can be based on any of the F7 learning outcomes which means that future
candidates need to have a knowledge of the syllabus which is both wide and deep. They also need
to be able to apply that knowledge in the context of a specific scenario. In March 2018, candidates’
knowledge of the following learning outcomes was weak: events after the reporting period, leases
and different types of revenue, specifically revenue from construction contracts and revenue from
contracts that offer both the supply of goods at a specific point in time and services that are
provided over period of time. This is surprising given that these are topics which have been
highlighted in recent examiner’s reports. As IFRS 16 Leases and IFRS 15 Revenue from Contracts
with Customers are standards that have been issued by the IASB relatively recently, it also
demonstrates how important it is for candidates to use up-to-date texts and technical articles to
ensure that their knowledge is contemporary.

Section C

Candidates were presented with questions drawn from the areas of:

- Preparation of single entity financial statements

- Analysis of single entity financial statements
- Preparation of consolidated financial statements
- Analysis of consolidated financial statements

Preparation of single entity financial statements

This area of the syllabus requires candidates to be able to prepare financial statements for a single
entity, generally from a trial balance. These questions were well attempted by the majority of
candidates.

One of these questions required candidates to prepare a schedule of adjustments to profit/retained

earnings, a statement of financial position and statement of changes in equity. As is typical in this
question type, there were several adjustments that required candidates to apply their knowledge of
relevant accounting standards and principles.

Many candidates made a very good attempt at the statement of financial position but did not
provide a schedule of adjustments to profit/retained earnings. This meant that, unless candidate
workings demonstrated that an adjustment to profit/retained earnings was required, they were not
awarded the marks they might have been had a schedule of adjustments been provided.

Examiner’s report – F7 March 2018 4

In both the paper based and the CBE exams, workings were often muddled or non-existent. The
marking team are unable to award any marks for incorrect balances where no workings exist.
Showing your workings, in an organised manner is crucial to enable the marking team to award the
maximum marks available. The own figure rule remains a key factor in the constructed response
questions. For example, candidates who failed to deduct the issue costs from the nominal value of
a loan note issued in the year would still gain credit for both the statement of profit or loss effective
interest and the completion of the amortised cost method using their own figures. If no working
was shown then these marks would be lost.

The clear and logical presentation of workings is crucial to the success of these questions in both
formats of the exam. The ACCA website contains a video debrief of a published accounts
question, Triage from the Sep 2016 exam. This video completes a published accounts question in
the CBE workspace and demonstrates how to construct your workings in a clear and organised
manner. This video is still applicable to candidates taking the paper based exam and is available
here.

On the whole the marking team was pleased to see that candidates were able to deal with
adjustments to non-current assets, environmental provisions and convertible loans well. A deferred
tax adjustment proved to be the most challenging calculation for many candidates resulting in
numerous incorrect answers. Unlike previous diets, candidates were not provided with a
temporary difference to calculate deferred tax. Instead candidates were required to use their own
property, plant and equipment balance to compare to the tax base provided and calculate a
temporary difference to include in the deferred tax calculation.

A surprising number of candidates were unable to complete the statement of changes in equity and
so missed what are perhaps considered to be the easier marks, such as the transfer of profit from
part (a) to retained earnings or the deduction of a dividend from retained earnings that had already
been provided in the trial balance. The treatment of a revaluation loss was generally dealt with
well, however, a number of candidates deducted the full revaluation loss, resulting in a negative
revaluation reserve. Only a small number of candidates were able to deal with accounting for a
bonus issue of shares.

Candidates can significantly improve their performance in these questions by continuing to attempt
past questions. There are numerous past practice questions available on both the ACCA website
and from approved content providers. Kandy from the F7 specimen exam and Moston from the
September/December 2015 hybrid paper are good examples of this type of question. Good exam
technique is crucial to scoring well on a published accounts question. However, workings must be
well presented, there must be an attempt to deal with all adjustments and ensure that no balances
remain in the trial balance. Each trial balance figure should be used within the financial statements
or within the relevant workings.

Analysis of single entity financial statements

The calculation of ratios were often well attempted and many candidates were able to score
maximum marks for these. Candidates performed less well where the question required an
adjustment to the financial statements and then to produce revised ratios in line with the adjusted
financial statements. It should be remembered that the own figure rule will apply to both the ratio

Examiner’s report – F7 March 2018 5

calculations and the analysis that is produced as a result of the adjustments made. Therefore it is
important to complete the remaining parts of the question, even if you feel that you were not
successful in the restatement of the financial statements.

As in previous diets, candidates continue to show a percentage or a figure with no workings. If the
figures are in line with the marking scheme then the marks will be awarded per the scheme, but
where no workings are shown and the figure is wrong, it is impossible for the marking team to
award marks. Consequently it is crucial that workings for the restatement of financial statements
and for the ratio calculations are shown so that credit can be given.
Pleasingly, there was an increasing number of candidates using the written scenarios provided in
the question. This enabled these candidates to score well on the analysis part of the question.
Candidates who continue to ignore the narrative in the scenario and make statements such as
profit margin is lower because cost of sales increased will unfortunately score relatively few marks.

It was also pleasing to see that many candidates were attempting to summarise and draw a
conclusion based on their findings. This summing up process will always score marks and is
necessary to complete the analysis question.

Candidates who have completed plenty of past practice questions on this area tend to score well.
Completing numerous practice questions gives you exposure to the language that is useful to use
in an analysis question. Practice questions that candidates must attempt include Funject and
Mowair from the March/June 2017 and the September/December 2017 hybrid papers.

Preparation of consolidated financial statements

It was good to see candidates score good marks on this question by doing the basics of
consolidated statements of financial position well. Many candidates were able to complete much
of the initial consolidation, goodwill, NCI and group retained earnings to a good standard. One of
the more complex fair value adjustments included a contingent liability in the subsidiary at the
acquisition date. This was often ignored completely or was adjusted for incorrectly.

It is worth noting again that clearly showing all workings is crucial to success in these questions.
The workings were often not provided or clearly shown in the CBE constructed response
workspace. A minority of candidates continue to include consolidated totals with no evidence of
how the total was derived. Again incorrect totals without supporting workings cannot score any
marks.

Many candidates were able to apply the equity accounting method well to the associate and the
related adjustments.

It was disappointing to see that a small minority of candidates continue to proportionately

consolidate the subsidiary. As previously stated this technique is considered to be a fundamental
error and should not be applied in any situation. Using past practice questions such as Dargent Co
and Party Co from the March/June 2017 and the September/December 2017 hybrid papers and
questions provided by approved content providers will further illustrate that proportionate
consolidation is not appropriate. There were also a number of candidates that attempted to
incorrectly consolidate or proportionately consolidate the associate.

Examiner’s report – F7 March 2018 6

Analysis of consolidated financial statements

Questions that require candidates to analyse consolidated financial statements will often require
minor calculations such as the goodwill on the acquisition of a new subsidiary or gain/loss on the
disposal of a subsidiary. Following the calculations in the first part of the question candidates may
then be asked to make adjustments to the financial statements before calculating the required
ratios. In this diet candidates were required to calculate a gain or loss following the disposal of a
subsidiary company. It was pleasing to see that the majority of candidates are now calculating this
correctly.

Where the question required an adjustment to the statement of profit or loss for the parent
company following the disposal of the subsidiary mid-way through the year, many candidates
incorrectly eliminated a full year’s revenue and expenses to find the parent only balances. It is
important to remember that a statement of profit or loss is a summary of the performance of a
business for an accounting period and therefore the candidates should time apportion as
appropriate.

Many candidates calculated the loss on disposal correctly, and also scored highly on the
calculation of ratios, but the analysis was often very poor. Many candidates did not actually
mention comparability issues despite this being a clear requirement and in the analysis of the
performance and position weaker candidates explained that one ratio was higher/lower than
another which was good/bad without any more detailed discussion. Weaker discussions also often
omitted any mention of the disposal of the subsidiary and the impact this might have had on the
ratios and performance of the company.

As previously mentioned there were many candidates that did not show any workings at all for their
ratios. If the ratios were correct, then full marks were given but candidates many lost marks which
could have been awarded for partially correct calculations or own figures.

Candidates are advised to practice Tangier Co from the F7 specimen exam and Gregory Co from
the September 2016 paper to see how to appraise a set of financial statements that contain group
issues. In addition to this candidates are required to review the technical article entitled Financial
Reporting: Learning Outcomes from the study support resources section of the ACCA website.

Exam technique

Good exam technique is vital for success in the F7 exam. Candidates who score well in section C
of the exam are those that provide the marking team with clear and well-presented workings. As
discussed throughout this report, candidates that do not provide workings will generally not perform
as well on the calculations.

For the discursive element of the analysis questions, it was especially pleasing to see candidates
that were using headings such as performance, position and conclusion/recommendation to
structure their answers. This approach not only makes it easier for the marking team to identify the
points that are being made, but it will also assist the candidate in reviewing their answer to ensure
they have covered all of the relevant areas.

Examiner’s report – F7 March 2018 7

Candidates should make logical, clear points when analysing the financial statements of a
company and avoid making the same points repeatedly. A strong answer will draw on the
information contained within the question scenario. Once the analysis is complete, candidates
should ensure that a conclusion/recommendation is provided based on the analysis completed.
It was pleasing to note that most candidates attempted all exam questions. For candidates that
appeared to mismanage the time available in the exam it was often the discussion part of the
analysis question that was omitted.

Word processing and spreadsheet technique

When the candidate uses the word processing tool, it is often the case that workings for
calculations such as the ratios are not shown. For any CBE candidate, please ensure that all
workings are shown accordingly in both the word processing and spreadsheet response areas.
The discussion elements of the analysis questions were presented well with many candidates
using headings and paragraphs in a clear manner. It is hoped that this approach will continue to
be used.

Depending on the number of marks allocated to calculation, candidates may be presented with a
spreadsheet in which to perform some analysis. This was the case in this diet and candidates were
required to use the spreadsheet functionality to appraise the financial statements of either a single
entity or consolidated financial statements. Whilst the spreadsheet function aids candidates with
the calculation part of the question, it also requires them to type the discursive elements into the
spreadsheet. When doing this, candidates should think about how their answer will present to
markers. For example, some candidates included their entire analysis in a single cell in the
spreadsheet which either stretched across a single row and required the marker to either hold and
scroll to view required the marker to ‘unhide’ the information. If using a spreadsheet to analyse the
performance of a company, continue to use headings as already discussed and break your
sentences up so that it is visible in that part of the spreadsheet area that you are able to view on
screen.

When using the spreadsheet for the preparation of financial statements, candidates continue to lay
out the financial statements and workings well. As in previous diets, candidates either put figures
in individual cells and add the cells across for the answer or include the entire working in one cell
using a formula. Both are perfectly acceptable as markers will follow both methods.

The resources available on ACCA’s website to provide more guidance on how to use the
spreadsheet software for CBE candidates can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the F7 exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared candidates
on F7.

Examiner’s report – F7 March 2018 8

You should make sure you have made use of all of the resources found under Technical Articles
for F7 – these include technical articles, study support videos and exam technique resources – all
developed with you in mind.

The key to being successful in F7 is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the F7 syllabus have specific articles describing them in
more depth in the Technical Articles section and these should provide greater understanding. The
exam technique section also provides guidance for approaching the analysis question, and further
guidance for resit students

Examiner’s report – F7 March 2018 9

Examiner’s report
F7 Financial Reporting
December 2017
General comments

The F7 Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The
structure is the same in both formats but our model of delivery for the CBE exam means that
candidates do not all receive the same set of questions. In this report, the examining team share
their observations from the marking process to highlight strengths and weaknesses in candidates’
performance, and to offer constructive advice for future candidates.

 Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this
section in the exam
 Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

In this section, two Section A questions that proved to be difficult for candidates are reviewed:

Example 1
On 1 January 20X5, Pratt Co acquired 80% of the equity shares of Sam Co. Pratt Co values non-
controlling interests at fair value and, at the date of acquisition, goodwill was valued at $20,000. At
31 December 20X5, the goodwill was fully impaired.

In conducting the fair value exercise of Sam Co’s net assets at acquisition, Pratt Co concluded that
property, plant and equipment, with a remaining life of five years, had a fair value of $5,000 in
excess of its carrying amount.

Sam Co has not incorporated any of these adjustments into its individual financial statements.

What is the total charged to group retained earnings at 31 December 20X5 as a result of
these consolidation adjustments?

A $16,800
B $21,000
C $17,000
D $20,800

What does this test?

This tests that candidates know how to write off the group share of any goodwill impaired and the
group share of the additional depreciation relating to any fair value adjustments on consolidation.

Examiner’s report – F7 December 2017 1

Unfortunately, the majority of candidates failed to restrict the write-offs to the group share (80%)
and most wanted to charge 100% of both adjustments against retained earnings.

What is the correct answer?

The additional depreciation charged as a result of fair value adjustment is:
$5,000/5 = $1,000
$1,000 (depreciation)+ $20,000 (impairment of goodwill) = $21,000 x 0.8 = $16,800

Why is the correct answer none of the other options?

$21,000 – no adjustment to either adjustment for group share

$17,000 – 80% of the goodwill impairment + 100% of the additional depreciation

$20,800 – 100% of the goodwill impairment + 80% of the additional depreciation

Example 2
In accordance with the Conceptual Framework for Financial Reporting of the International
Accounting Standards Board, which of the following is/are true in relation to the enhancing
characteristic of comparability?

(1) Permitting alternative accounting treatments for the same economic phenomenon enhances
comparability
(2) Comparability requires uniformity

A Both 1 and 2
B Neither 1 nor 2
C 1 only
D 2 only

What does this test?

This question tests whether candidates understand the meaning of comparability.

What is the correct answer?

Paragraph QC25 of the conceptual framework of Financial Reporting states that permitting
alternative accounting treatments for the same economic phenomenon diminishes comparability.
Paragraph QC23 of the conceptual framework of Financial Reporting state that comparability is not
uniformity and does not require it.

Why is the correct answer none of the other options?

Unfortunately, most candidates recognised that the first statement was incorrect but thought that
comparability required uniformity. Candidates should read the question carefully and rationalise
each of the options individually.

Examiner’s report – F7 December 2017 2

Section B
Section B consisted of three scenario-based questions, each of which had five (two mark) objective
test questions. In December 2017, the cases included in the paper-based exam tested the
impairment of non-current assets (IAS 36), government grants (IAS 20), discontinued operations
(IFRS 5), earnings per share (IAS 33), foreign currency (IAS 21) and financial instruments (IFRS
9). The case questions in section B require candidates to demonstrate a wide knowledge of the
syllabus and that they are able to apply that knowledge to a given set of circumstances.
Unfortunately, candidates did not perform well in the questions that addressed IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations and IAS 33 Earnings per Share. Candidates
should be prepared to answer questions that test all areas of the syllabus and be aware that the
case questions allow the examiner to test a wide variety of topics in-depth.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Single entity accounts preparation

- Analysis of consolidated financial statements
- Preparation of consolidated financial statements
- Analysis of single entity financial statement

Single entity accounts preparation

This area of the syllabus requires candidates to prepare a set of financial statements for a single
entity. This is a fundamental skill for an accountant, and has been a large part of the F7 syllabus
for many years. Performances in this area were generally good, although possibly not as good as
in previous sittings.

As in previous questions on single entity financial statements, candidates were required to produce
financial statements from a trial balance and set of adjustments. This tests the candidates’
knowledge of the presentation of financial statements, their ability to identify the correct elements
accordingly and also tests knowledge of a variety of accounting standards.

Candidates were generally able to prepare a well presented set of financial statements, maximising
the marks available due to the ‘own figure rule’. For example, candidates who made a depreciation
calculation error still gained credit for following that incorrect figure through into the financial
statements. Candidates who show good workings and neatly presented financial statements are
often able to pick up these marks. Candidates who do not show how they have arrived at a final
answer for an item containing numerous calculation errors continue to miss out on these marks.
The presentation of logical and clear workings is a fundamental approach to producing a set of
financial statements in this exam, whether in CBE or paper format.

Candidates generally coped well with adjustments relating to inventory, depreciation and the issue
of loan notes. A surprising number of candidates seemed unable to deal with a non-current asset
held for sale, with a significant minority ignoring it completely. An onerous contract proved the most
challenging aspect for many students, producing the most incorrect answers. Again, candidates

Examiner’s report – F7 December 2017 3

who attempted the calculation and indicated the impact of the double entry picked up more marks
than the candidates who attempted to record the expense with no consideration for the impact on
the statement of financial position.

There continues to be a wide variety of layouts used by CBE candidates. CBE candidates should
ensure that all of their workings are logical and easily linked. They should also be aware that
formula within a cell is entirely acceptable. A small minority of candidates completed workings
many rows beneath or to the right of their answers. This should be avoided, and workings should
be presented either next to or directly below the main answer.

There are multiple past exam questions looking at the preparation of single company financial
statements, as this has been a large part of the F7 exam for many years. Triage Co from the
September 2016 paper and Moston Co from the September/December 2015 hybrid paper are
good examples of this type of question which students must practice, preferably within the CR
workspace for CBE candidates. As this type of question has possibly the widest areas of syllabus
coverage, candidates are advised to attempt numerous single entity accounts preparation
questions before sitting this exam.

Analysis of consolidated financial statements

In questions where the analysis is based on group issues, candidates may be asked for minor
calculations, such as goodwill or the gain/loss on disposal of a subsidiary. Candidates scored well
on the calculation of goodwill, but often performed poorly on the calculation of the gain/loss on
disposal of a subsidiary. Although this has is a relatively new addition to the syllabus, it has been
tested on a number of occasions now and candidates should be prepared for it.

Candidates continue to be able to score well on the calculation of ratios, with the exception of the
calculation of return on capital employed and net asset turnover. It is crucial to show workings for
the calculation of these ratios so that markers are able to see the figures used by the candidate. In
recent sittings it has been noted that CBE candidates are significantly more likely to present the
ratios without workings, possibly due to the answer being in a word processing format rather than a
spreadsheet. It is good practice for candidates to show their workings which support each ratio,
and the candidates that showed these, whether in a table or just over several lines, scored much
higher than those who simply wrote the percentage figure calculated.

The analysis surrounding consolidated financial statements must involve comments on group-
related issues; for example, the comparability of consolidated financial statements year-on-year
especially where there has been a disposal or acquisition of a subsidiary or the elimination of intra-
group transactions. However, a minority of candidates answered the question without any
reference to these group-related issues. A disappointing number of candidates produced very
limited or zero commentary. Generic statements will continue to score very few marks, as the
question is looking for the candidate to bring in the information provided in the scenario, particularly
focusing their answers on group-related topics.

Candidates should look at the September 2016 question Gregory Co as an example of how to
incorporate their knowledge of consolidations into a question that requires the analysis of
consolidated financial statements. Also, Tangier Co, one of the additional constructed response

Examiner’s report – F7 December 2017 4

questions available here will show how this can be examined. This type of question is one which
can often divide candidates. Those who are well prepared can often score good marks, but sadly
far too many individuals are picking up either very limited marks or no marks at all for their
discussion. A significant minority continue to attempt ratios with no attempt at discussion, which
highlights that further work and practice in this area of the syllabus i required.

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remain an area that
candidates perform well on. Candidates with clear workings often scored highly on this area.
Again, it was noted that some CBE students had less workings displayed, instead showing the total
consolidated figure with no guidance as to how that figure had been calculated.

The preparation of a consolidated statement of profit or loss was generally well answered, with the
better prepared candidates often scoring near to full marks, highlighting the importance of good
practice. A surprising number of candidates used proportionate consolidation in relation to the
subsidiary, which is a fundamental error at this stage. Although this has been a problem in
previous years, it is an approach which has been in decline. However, this sitting displayed a rise
in candidates who used this incorrect approach. If future candidates analyse the solutions provided
in past papers and Approved Content Providers revision kits properly (ie alongside the question),
then they should be able to avoid the adoption of fundamentally incorrect techniques.

Calculations of goodwill continue to be well presented. Also, the adjustments required to the
consolidation were often an area that candidates scored highly on, which is encouraging to see.
Students displayed good knowledge of intra-group sales, fair value depreciation and unrealised
profits. It was also heartening to note that many candidates attempted to unwind the discount
which is one of the most technical aspects of the syllabus.

The most common error by far was the omission of the profit split between the parent’s
shareholders and the non-controlling interest in the Statement of Profit or Loss (SOPL). This is a
key part of the preparation of a consolidated SOPL, but continues to be missed by too many
candidates. Individuals who did not attempt to split the profit or other comprehensive income
between the parent and the non-controlling interest missed out on a potential 4.5 marks out of 17.

As expected, answers to the narrative section of this question were mixed. When revising
consolidated financial statements, candidates cannot simply rote learn a technique. The F7 exam
is looking for an understanding of the principles behind the preparation of consolidated financial
statements, rather than simply providing a set of calculations. Candidates who omitted this
discussion missed out on a further 3 marks.

It was not uncommon to see candidates who clearly had a decent knowledge of the topic fail this
question by omitting the profit split and the discussion, therefore forfeiting 7.5 marks out of 20.
Candidates must not target their revision simply at calculations, as this can prove costly. The
December 2015 exam contains a good example of a consolidated statement of profit or loss for
students to attempt.

Examiner’s report – F7 December 2017 5

Analysis of single entity financial statements

Again, the ratio calculations were often well attempted, with many candidates scoring maximum
marks for the calculation of some relatively straightforward ratios. Candidates found it more difficult
when asked to adjust figures first and then produced revised ratios. The most common problem
here is when candidates simply show a percentage or a figure with no workings. If candidates do
this, it is difficult to see how they have arrived at the figure, meaning credit cannot be given if they
have done some elements of the adjustments correctly.

Candidates did demonstrate an improvement in using the narrative information from the scenario
here, which was pleasing to see. Unfortunately however, a significant minority continue to ignore
all narrative information from the scenario, simply stating that a lower profit margin meant worse
performance, with no attempt to analyse why a company may have recorded lower margins.

Pleasingly, in many scripts, candidates did demonstrate that they could use the scenario to help
them answer the question. After highlighting this issue in numerous previous sittings, this was an
encouraging sign and one which we hope continues.

An area of continuing weakness is that candidates too often fail to summarise their thoughts in a
well explained conclusion. A sensible summary of the analysis that candidate has already written
will always score marks, and candidates must ensure that they include this in their answer – it is a
professional skill which is required in the workplace.

Exam technique

Good exam technique is vital for success in the F7 exam. Strong candidates continue to use good
workings for both the preparation of financial statements and calculation of ratios, enabling them to
maximise the marks gained here. As stated earlier, candidates who failed to provide workings often
scored much lower marks on all aspects of calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’ and ‘position’. Candidates should make clear statements, and avoid
repetition. Numerous candidates continue to repeat the same point two or three times when
explaining the movement on a ratio. It is much better to make comments on a wider range of
figures than to repeat similar points over one specific issue.

Candidates should also ensure they include a conclusion which is based on their
analysis/discussion; if so, marks will be awarded accordingly.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. The majority of candidates attempted all sections. The most commonly
omitted sections tended to be areas where candidates were asked to explain issues. The F7 exam
will involve elements of discussion as this is a skill that is required in P2, so candidates cannot
afford to neglect these sections as they practise questions.

Examiner’s report – F7 December 2017 6

Word processing and spreadsheet technique

As stated earlier, it would appear that when the word processing tool is used for the analysis
question candidates are less likely to show their workings for calculating ratios than those sitting
the paper-based exam. CBE candidates need to improve their answers here so that marks are not
lost.

Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements are workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both are perfectly acceptable as markers will follow both methods.

There are resources on ACCA’s website that provide more guidance on how to use the
spreadsheet software for CBE candidates. A video introducing the main functionality and how to
make best use of these in F7 can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the F7 exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared candidates
on F7.

One of the keys to F7 is question practice, attempting questions and reviewing the answer to see
any areas you may have missed. This is particularly relevant on the analysis questions. Often on
this question candidates feel comfortable, but reviewing the answers can show the depth of
discussion that is being sought here. We strongly recommend that you use an up to date question
and answer bank from one of our Approved Content Providers but if this is not possible then work
through the most recent past exams on our website. However, please note if you are using the
past exams that these are not updated for syllabus changes or changes to the exam format and so
should be used with caution – so check the latest syllabus and study guide for changes.

Some of the more challenging areas of the F7 syllabus have specific articles describing them in
more depth in the technical articles section and these should provide greater understanding. The
exam technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Examiner’s report – F7 December 2017 7

Examiner’s report
F7 Financial Reporting
September 2017

General Comments

The F7 Financial Reporting paper continues to be offered in both computer-based (CBE) and
paper-based (PBE) formats. The structure of both formats is the same, but the model of delivery
for the CBE exam means that candidates do not all receive the same set of questions. In this
report, the examining team share their observations from the marking process to highlight
strengths and weaknesses in candidates’ performance and offer constructive advice for future
candidates.

The exam consisted of three sections

 Section A – 15 objective test questions of 2 marks each (30 marks) – the report focuses on
two questions that caused specific difficulties for candidates
 Section B – 3 scenarios each with five 2 mark questions (30 marks) – the report focuses on
the key challenges for this section of the exam
 Section C – 2 constructed response questions of 20 marks each (40 marks) – the report
provides commentary around some of the main issues that affected candidates’
performance, including knowledge gaps, common errors and offering guidance on where
exam technique could be improved. The report also offers guidance in the use of the CBE
functionality in answering questions in this format.

Section A

Section A questions test a broad range of the syllabus and candidates need to be prepared for this.
They should avoiding question spotting as there are no “core” learning outcomes and all learning
outcomes carry the same degree of importance. Where answer options are available, candidates
should resist looking at these until they have fully worked the question. As can be seen in the
following two examples, some of the distractors can appear genuine but miss a stage of the
calculation, thereby offering an incomplete answer. The following two questions are reviewed with
the aim of giving future candidates an indication of the types of questions asked, guidance on how
much work is involved in answering 2 mark questions and to provide a technical debrief on the
learning outcomes tested by the specific questions asked.

Sample Questions for Discussion

Here we take a look at two Section A questions that proved to be particularly difficult for
candidates.

Example 1
Jetsam Co entered into a lease for an item of plant on 1 April 20X0 which required payments of
$15,000 to be made annually in arrears. The present value of the lease payments was estimated to
be $100,650 at the inception of the lease and the rate of interest implicit in the lease was 8%. Both
the lease term and the plant’s estimated useful life was ten years.

Examiner’s report – F7 September 2017 1

What is the total amount that should be charged to profit or loss for the right-of-use asset
for the year ended 31 December 20X0?

A $11,250
B $6,039
C $7,549
D $13,588

What does this test?

An understanding that, as the leased asset is capitalised as a non-current asset, the charge to the
Statement of profit or loss in respect of the right-of-use asset will include both depreciation and the
finance cost.

What is the correct answer?

The correct answer is D

Depreciation for the year: 100,650/10 = 10,065

Finance cost for the year: 100,650 x 8% = $8,052
Total charge for the year: 10,650 + 8,052 = $18,702
1 April – 31 December 20X0 = 9 mths so 9/12 x $18,702 = $13,588

Why the correct answer is none of the other options?

 Option A is 9/12 x $15,000. This option uses the lease repayment as the basis of the SOPL
charge. It therefore fails to recognise that the asset has, in substance, been purchased and
financed by a loan.
 Option B is 9/12 x $8,052 and so recognises the finance cost only, thereby ignoring the
depreciation
 Option C is 9/12 x $10,065 and so recognises the depreciation only, thereby ignoring the
finance cost

Example 2

Paprika Co purchased 75% of the equity share capital of Salt Co on 30 April 20X4. Non-controlling
interests are measured at fair value.

The cost of sales of both companies for the year ended 30 April 20X6 are as follows:

Paprika Salt
$ $
Cost of sales 60,000 100,000

The following additional information is provided:

1) Salt Co had machinery included in its net assets at acquisition with a carrying amount of
$120,000 but a fair value of $200,000. The machinery had a remaining useful life of eight
years at the date of acquisition. All depreciation is charged to cost of sales.
2) During the year, Salt Co sold some goods to Paprika Co for $32,000 at a margin of 25%.

Examiner’s report – F7 September 2017 2

 Three-quarters of these goods remained in inventory at the year end.

What is the cost of sales in Paprika Co’s consolidated statement of profit or loss for the
year ended 30 April 20X6?

A $144,000
B $132,000
C $176,000
D $140,000

What does this test?

The ability to process routine consolidation adjustments; in this case (i) additional depreciation
when an increased fair value is used to measure non-current assets at acquisition; (ii) the
elimination of intra-group sales and (iii) the adjustment of unrealised profit which may arise as a
result of intra-group sales of inventory.

What is the correct answer?

The correct answer is A

Additional depreciation: (200k-120k)/8 = $10,000

Unrealised profit in inventory: (32k x 25%) = $8,000 x 3/4 = $6,000
Consolidated Cost of sales = $60,000 + $100,000 + $10,000 - $32,000 + $6,000 = $144,000

Why the correct answer is none of the other options?

 Option B deducts the unrealised profit instead of adding it on
 Option C omits to cancel the intra-group sales
 Option D calculates unrealised profit assuming ¾ of goods sold to third parties (instead of
¾ remaining in inventory)

Section B (questions 16 to 30)

This section of the exam presents three scenarios around which 5 (two mark) objective questions
are based. This approach allows the examining team to test a particular learning outcome in some
depth. These scenarios can be based on any of the F7 learning outcomes which means that future
candidates need to have a knowledge of the syllabus which is both wide and deep. They also need
to be able to apply that knowledge in the context of a specific scenario. In September 2017,
candidates demonstrated a superficial knowledge of the following learning outcomes: intangible
assets; leases and revenue recognition. This is surprising given that IFRS 15 Revenue from
Contracts with Customers and IFRS 16 Leases are standards that have been issued by the IASB
relatively recently and so should have been well understood by candidates as they are topical.
There have also been recent technical articles written by the examining team and published on the
ACCA web-site to address these topics. However, it demonstrates that candidates need to use up-
to-date texts and technical articles to ensure that their knowledge is contemporary.

Examiner’s report – F7 September 2017 3

Section C (questions 31 and 32)

Across both PBE and CBE formats, questions covered the following topics:
 Analysis of single entity or consolidated financial statements
 Preparation of single entity or consolidated financial statements

This report makes comment on one question type from each of the above topics.

Analysis of single entity financial statements

Questions asking for the analysis of financial information will continue to be asked in the F7 exam.
Unfortunately, this is consistently the weakest area for many candidates and this diet was no
exception.

Candidates continue to score well on the calculation of ratios although net asset turnover
(revenue/capital employed) is sometimes overlooked/misunderstood. Candidates should show
their workings for all ratios calculated so that markers can understand the figures used and allow
for any obvious arithmetic errors. CBE candidates were noticeably reluctant to provide workings to
the six ratios asked for.

The level of discussion for the analysis of performance and position required more than merely
saying that a ratio was higher or lower than the previous year or represented a percentage
improvement or deterioration. Many candidates explained how the ratio was calculated or what the
resulting figure represented. None of this is analysis of the financial statements because it doesn’t
use the scenario provided.

When marking interpretation questions, markers look for meaningful use of the scenario provided.
For example, it does not make sense to use an investment in non-current assets during the year to
explain the change in an accounting ratio when the scenario clearly states that no such investment
took place. Had candidates properly read the financial statements, they would have seen that the
increase in non-current assets was almost entirely attributable to a revaluation during the year.

Indeed, the company had a worse set of results in the second year (for five of the six ratios) but it
required a combination of the ratios, the financial statements and the additional information in the
scenario to provide a coherent commentary on the issues facing the company. Possible reasons
for key changes between the two years reported should have been identified and discussed.

In a discussion question of this sort candidates are expected to finish with a brief conclusion.
Separate headings for key sections of the answer (including a conclusion) were used by some
candidates but more use of this technique is encouraged.

Many attempts at the analysis questions (particularly the CBE responses) were very brief which
may be indicative of poor time management. Candidates are encouraged to use the marks clearly
indicated within the questions to plan their time.

Where the interpretation question is based on a set of consolidated financial statements,

candidates must think about the impact of the consolidation on the ratios. Please look at the
suggested solutions provided in the specimen exams

Examiner’s report – F7 September 2017 4

(http://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f7/specimen-exams.html#) and consider similar issues in the context of the question
being asked.

Preparation of consolidated financial statements

The main principles behind the preparation of consolidated financial statements is an area of the
syllabus where candidates generally perform well. The importance of clear workings to support
answers to this type of question cannot be over-emphasised and there has been an improvement
over recent diets. CBE candidates are also encouraged to provide workings because markers still
need to be able to understand where numbers have come from.

The goodwill calculation was generally done well although some candidates were unclear about
dealing with fair value adjustments and the split between the position at the dates of acquisition
and consolidation. Many candidates used a three-column table (at acquisition, at consolidation,
post-acquisition) to analyse the subsidiary’s net assets. Whilst this approach is not required, it is
an example of making it easy for the examiner to understand where the candidates’ numbers are
coming from. Other alternative approaches may also be used provided they can be substantiated
with appropriate workings.

A small number of candidates used proportional consolidation however this is a fundamental error
and entirely inconsistent with the principle of control on which consolidation is based. Candidates
who show share capital other than that of the parent only, quickly reveal a lack of understanding of
the nature of consolidation processes.

The deferred consideration calculation was not well attempted. Candidates were required to
discount this for the goodwill calculation and then “unwind” (in this case) the first year’s interest
which should be deducted from the parent’s retained earnings (or added to finance costs) and
added to the discounted liability. Mark-up and margin continue to confuse many candidates when
calculating the unrealised profit on inventory transferred within the group.

Candidates should know how to treat a revaluation surplus that is reported by the subsidiary.
Many candidates correctly reported the pre-acquisition element in their goodwill calculation and
then included this amount again in the consolidated statement of financial position. The
revaluation surplus of the group is all that of the parent plus the group’s share of the post-
acquisition revaluation surplus of the subsidiary (the remainder of this is part of any non-controlling
interest).

Exam technique for both PBE and CBE formats

As for any exam, good technique is important for success. Strong candidates used good and clear
workings for ratios and in preparing financial statements.

For analysis and discussion, all points made in PBE should be legible (spelling errors, particularly
on CBE answers, are not penalised) and good use of ordered paragraphs should be made. As
suggested above, headings (such as “performance”, “position” and “conclusion”) are indicative of
well organised answers.

Examiner’s report – F7 September 2017 5

It was pleasing to note that most candidates attempted all exam questions. Where time did seem
to be an issue it was the discussion part of the analysis question that saw the greatest impact; this
seemed to be more evident on CBE responses than on the paper-based format.

Word processing and spreadsheet technique for the CBE format

As noted earlier, candidates using the word processing tool were less likely to show workings; this
issue should be addressed so that marks are not lost. Narrative answers were often well
presented although the use of headings would improve them further.

For those preparing financial statements layout was generally good (there are no specific format
marks awarded). For those using the spreadsheet tool, workings were often provided on either the
spreadsheet itself or in the cells using formulae. These different approaches are all acceptable as
markers will check cells for workings and formulae.

There are extensive resources on the ACCA website to support the use of CBE functionality and
candidates are encouraged to engage with this material as part of their preparation for the exam.

Guidance and learning support resources

There are a range of resources available to candidates to help with the F7 exam. Many of the
themes noted in this report regarding exam technique, and ways to improve answers, are
comments commonly made from previous diets. Previous examiner’s reports can be found at
http://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f7/examiners-reports.html and offer good and consistent guidance for what the
examining team are looking from well-prepared candidates.

A key to success in this exam is question practice by attempting questions and reviewing the
answers available to check points of difference. This approach is particularly relevant to the
analysis questions. Although candidates may feel comfortable with their own attempt, a review of
answers available can show the depth of the discussion that is sought. An up-to-date question and
answer bank from one of the Approved Content Providers (and/or the selection of recent past
exams on the ACCA’s website – http://www.accaglobal.com/uk/en/student/exam-support-
resources/fundamentals-exams-study-resources/f7/past-exam-papers.html) is strongly
recommended as a study and revision aid. If using past exam papers, it should be noted these will
not have been updated for changes to the syllabus, format of the paper or accounting standards –
so should be used with caution.

Using the latest syllabus and study guide (http://www.accaglobal.com/uk/en/student/exam-support-

resources/fundamentals-exams-study-resources/f7/syllabus-study-guide.html) is essential from the
start of studying for this paper. Technical articles (http://www.accaglobal.com/uk/en/student/exam-
support-resources/fundamentals-exams-study-resources/f7/technical-articles.html) describe recent
changes and the more challenging areas of the syllabus and the exam technique section provides
guidance for approaching the analysis question and further guidance for resit candidates.

Examiner’s report – F7 September 2017 6

Examiner’s report
F7 Financial Reporting
June 2017
General comments

The F7 Financial Reporting exam is offered in both computer-based (CBE) and paper formats. The structure is
the same in both formats but our model of delivery for the CBE exam means that candidates do not all receive
the same set of questions. In this report, the examining team share their observations from the marking process
to highlight strengths and weaknesses in candidates’ performance, and to offer constructive advice for future
candidates.

 Section A objective test questions – we focus on two specific questions that caused difficulty in this
sitting of the exam
 Section B objective test case questions – here we look at the key challenge areas for this section in the
exam
 Section C constructed response questions - here we provide commentary around some of the main
themes that have affected candidates’ performance in this section of the exam, identifying common
knowledge gaps and offering guidance on where exam technique could be improved, including in the use
of the CBE functionality in answering these questions.

Section A : sample objective test questions for review

The following two questions are reviewed with the aim of providing future candidates with an indication of the
types of questions asked, guidance on how to answer them and a technical analysis of the topics tested.

Example 1:
Which of the following should be accounted for as subsidiaries in the consolidated financial statements of Preece
Co?

(1) Gilber Co Preece Co currently owns 40% of the share capital of Gilber Co and holds options to
purchase another 20% which it can exercise immediately

(2) Grovez Co Preece Co owns 60% of Grovez Co and has appointed the majority of the board of directors

(3) Roge Co Preece Co owns 80% of Roge Co. Roge Co is loss-making and Preece Co is considering
selling it in the near future

A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1, 2 and 3

What does this test?

This tests a candidates understanding of the definition of a subsidiary. The candidate is expected to apply that
knowledge in three simple scenarios.

What is the correct answer?

The correct answer is D because the options are exercisable immediately in (1), control is established in (2)
because of Preece Co’s ability to appoint the board and in (3), Preece Co still has control even though it is

Examiner’s report – F7 June 2017 1

considering the sale of the subsidiary. Most candidates ignored the options even though they were exercisable
immediately.

Example 2:
A 60% owned subsidiary sold goods to its parent for $150,000 at a mark-up of 25% on cost during the year
ended 30 June 20X5. One fifth of these goods remained unsold as at 30 June 20X5.

What is the debit adjustment to be made to group retained earnings to reflect the unrealised profit in inventory at
30 June 20X5?

A $6,000
B $3,600
C $2,400
D $4,500

What does this test?

This tests the effect of intra-group trading in the consolidated financial statements.

What is the correct answer?

The correct answer is B:
150,000/125 x 15 = 30,000
30,000/5 x 60% = $3,600

Why the correct answer is none of the other options?

Option A does not take account of the 40% NCI adjustment
Option C uses a 60% NCI adjustment
Option D uses a margin as opposed to a cost-plus approach
Most candidates did not take account of the 40% NCI adjustment. Candidates need to be able to think about
these consolidation adjustments in isolation ie not necessarily as part of a full set of consolidated financial
statements.

Section B
Section B has three case-based scenarios, each of which has five (two mark) objective test questions. The cases
in the June 2017 paper-based exam were based on IAS 38 Intangible assets and IAS 36 Impairment of assets;
IAS 8 Accounting policies, changes in accounting estimates and errors and IFRS 5 Non-current assets held for
sale and discontinued operations and IFRS 15 Revenue from contracts with customers. These questions are
written to test the candidates’ depth of knowledge on a particular topic and their ability to apply that knowledge
to a particular set of circumstances. Each case will therefore contain a balance of knowledge and application-
based questions that use both computation and narrative type questions. Performance in case-based questions
was encouraging. Candidates should be prepared for the knowledge based questions will draw from all areas in
the syllabus. To perform well in the application-based questions, candidates should practice these case questions
in materials provided by Approved Content Providers, specimen exams and past exams.

Section C

Candidates were presented with the following question types:

- Single entity accounts preparation

- Analysis of consolidated financial statements
- Preparation of consolidated financial statements

Examiner’s report – F7 June 2017 2

 - Analysis of single entity financial statement

Single entity accounts preparation

This area of the syllabus requires candidates to prepare a set of financial statements for a single entity. This is a
fundamental skill for an accountant, and has been a large part of the F7 syllabus for many years. Performances
in this area were generally good, with this often being the area students performed best on across the exam.

As in previous diets, candidates were required to produce financial statements from a trial balance and set of
adjustments. This tests the candidates’ knowledge of the presentation of financial statements, their ability to
identify the correct elements accordingly and also tests knowledge of a variety of accounting standards.

Candidates still find it difficult when not asked to complete a full set of financial statements, and are instead
asked for calculations based on adjusting profit or retained earnings. The September 2016 question Triage Co is
a good example to look at in terms of how questions of this type could be attempted and laid out.

Questions requiring the preparation of statements of changes in equity can also be an area candidates find
difficult, and there was again evidence of a significant number of candidates omitting this statement from their
answer. This is one of the primary financial statements, and candidates must ensure they are comfortable with
the layout and contents of this. Candidates who produced statements of changes in equity often picked up the
majority of the marks, but only a small minority were able to identify that a prior year error must be corrected
through the opening retained earnings of an entity.

Candidates continue to show a solid understanding of the accounting around non-current assets, but struggled
over accounting for financial instruments, particularly around those held at amortised cost where the effective
interest rate differs from the coupon rate. Candidates must work to understand the principles of these
instruments as these are likely to be examined in more detail at the professional level.

Students continued to layout the answers well, showing good workings, enabling them to score marks even when
the final answer was not completely correct. Candidates who did not provide workings are likely to lose marks, as
it is essential that markers can follow the work done on the question, rather than simply the final total.

There were a wide variety of layouts used by CBE candidates. CBE candidates should ensure that all workings
are easy to link together, and writing the formula in the cell is completely acceptable. A small minority completed
workings many rows beneath (or to the right) of their financial statements. This should be avoided, and workings
should be done either next to or below the main answer.

Analysis of consolidated financial statements

Candidates will be asked to analyse financial information in F7, and the analysis is constantly the weakest area
of the exam for many candidates. In questions where the analysis is based on group issues, candidates may be
asked for minor calculations, such as goodwill or the gain/loss on disposal of a subsidiary. These are core items
that candidates should be able to produce.

Examiner’s report – F7 June 2017 3

Candidates continue to be able to score well on the calculation of ratios, but the calculation of net asset turnover
is one which appears to be a significant weakness. It is crucial to show workings for the calculation of these
ratios so that markers are able to see the figures used by the candidate. In recent sittings it has been noted that
CBE candidates are significantly more likely to put the ratios without workings, possibly due to the answer being
in a word processing format rather than a spreadsheet. It is good practice for students to show their workings
behind each ratio, and the candidates that showed these, whether in a table or just over several lines, scored
much higher than those simply writing the percentage figure calculated.

The analysis surrounding consolidated financial statements must involve comments on group-related issues.
Some students answer this type of question without reference to any differing margins earned by the companies
within the group or considering the elements of removing a subsidiary from a set of consolidated financial
statements. Generic statements about whether expenses have been managed well will continue to score very few
marks, as the question is looking for the candidate to bring in the information provided in the scenario,
particularly focusing their answers on group-related topics.

Candidates should look at the September 2016 question Gregory Co as an example of how to incorporate
knowledge of consolidations into an answer. Also, Tangier Co, one of the additional constructed response
questions available here will show how this can be examined. This type of question is one which can often divide
candidates. Those who are well prepared can often score good marks, but sadly far too many individuals are
picking up either very limited marks or no marks at all for their discussion. A minority continue to attempt ratios
with no attempt at discussion, which highlights that further question practice is required.

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remain an area that candidates
perform well on. Candidates with clear workings often scored highly on this area. Again, it was noted that CBE
students had less workings displayed, instead showing the total consolidated figure with no guidance to how that
figure had been calculated.

Candidates demonstrated a good ability to remove intra-group adjustments from financial statements and
continue to perform well in relation to fair value adjustments. It was slightly disappointing to see candidates
being less able to deal with consideration for the acquisition of a subsidiary being in shares. This is a topic which
has been frequently examined in the past and one which has traditionally been done quite well. Quite often the
calculation as part of goodwill was correct, but only a minority of candidates considered the impact on the equity
section of the statement of financial position, following the issue of new shares.

Very few candidates were able to identify that contingent liabilities need to be recognised in consolidated
financial statements at fair value, either completely ignoring them or incorrectly stating that these should simply
be a disclosure. This demonstrated that while candidates understand the principles of contingent liabilities
consistent with IAS 37, they lacked the understanding that these need to be recognised within the process of
producing consolidated financial statements.

Analysis of single entity financial statements

Many of the problems already discussed in the analysis of consolidated financial statements are also relevant in
the analysis of single entity financial statements. As noted above, CBE students appear less likely to show

Examiner’s report – F7 June 2017 4

workings for ratio calculations, therefore potentially losing out on marks which could be given for individual
components of the calculation.

Candidates did demonstrate an improvement in using the narrative information from the scenario here, which
was pleasing to see. A significant minority continue to ignore all narrative information from the scenario, instead
simply commenting on increased margins being a result of better performance rather than attempting to explain
how this better performance had arisen.

While the analysis of consolidated financial statements was often disappointing in that candidates failed to
identify group issues, the performance in analysing a single entity financial statements did improve on previous
diets as candidates were able to demonstrate their ability to bring the scenario into the answer more and more.
After providing similar comments for numerous sittings, this was an encouraging sign and one which we hope
continues.

Exam technique

Good exam technique is vital for success in F7. Strong candidates continue to use good workings for the
preparation of financial statements, enabling them to maximise the marks gained here. As stated earlier,
candidates who failed to provide workings often scored much lower marks on both the preparation of financial
statements and the calculation of ratios.

The analysis discussion points should be laid out clearly, using headings for each area requested, such as
‘performance’ and ‘position’. Candidates should only be making one or two points per paragraph and leaving
space between paragraphs. Too many candidates attempt to make all of their points in one block of text, which is
difficult to mark and not a professional layout.

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible conclusion
summarising the main points of the analysis is important, and marks will be given here.

The completion rate of questions continues to be high, suggesting that many candidates are able to manage time
well. The majority of candidates attempted all sections. The most commonly omitted sections tended to be areas
where candidates were asked to explain issues. The F7 exam will involve elements of discussion, so candidates
cannot afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less likely to show
their workings for calculating ratios than those sitting the paper-based exam, which needs to be improved so that
marks are not lost.

Conversely, the narrative answers were often well presented, with headings and spacing used well.

For the preparation of financial statements question, candidates often laid out the financial statements are
workings well. Some candidates tended to put figures in individual cells and add the cells across for the answer,
whereas others did the entire working in one cell using a formula. Both are perfectly acceptable as markers will
follow both methods.

Examiner’s report – F7 June 2017 5

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet software. A video
introducing the main functionality and how to make best use of these in F7 can be accessed here.

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the F7 exam. Many of the common themes
discussed in this report regarding exam technique and ways to improve are comments that are commonly made
across sittings. Previous examiner’s reports can be found here and will give good, consistent guidance in what the
examining team is looking for from well prepared candidates on F7.

One of the keys to success in the F7 exam is question practice, attempting questions and reviewing the answer to
see any areas you may have missed. This is particularly relevant on the analysis questions. Often on this question
candidates feel comfortable, but reviewing the answers can show the depth of discussion that is being sought
here. We strongly recommend that you use an up to date question and answer bank from one of our Approved
Content Providers but if this is not possible then work through the most recent past exams on the ACCA website.
However, please note if you are using the past exams that these are not updated for syllabus changes or changes
to the exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the F7 syllabus have specific articles describing them in more depth in the
technical articles section and these should provide greater understanding. The exam technique section also
provides guidance for approaching the analysis question, and further guidance for resit students.

Examiner’s report – F7 June 2017 6

F7 Examiner’s report
March 2017
Introduction

The Candidate performance on this diet was generally pleasing with some candidates scoring well in all three
sections. In this report, the Examining Team share their observations from the marking process to highlight
strengths and weaknesses in candidates' performance and seek to offer constructive advice for future candidates.

General comments

The F7 Financial Reporting examination is now offered in both computer-based (CBE) and paper-based (PBE)
formats. The structure and standard of both exams are the same, but the model of delivery for the CBE paper
means that candidates do not all receive the same set of questions.

In both formats, the examination consisted of three sections: Section A consisted of 15 objective test questions of
2 marks each, for a total of 30 marks; Section B consisted of three scenarios with 15 objective test questions of
2 marks each, also for a total of 30 marks; Section C consisted of two constructed response questions of 20
marks each, for a total of 40 marks.

This format requires candidates to cover the entire syllabus in their studies and not rely on "question spotting" for
a few selected areas. Future candidates are advised to work through questions from published past papers and
the material provided by Approved Content Providers. The exam was a fair test of familiar topics and well-
prepared candidates had the opportunity to score well in all three sections.

Although there were similar levels of performance in all three sections, there was some evidence that candidates
were not allocating sufficient time to the final two questions in section C. Future candidates should ensure that
they are fully aware of the time available to them during the exam and practice past papers under exam
conditions.

Section A (Questions 1 to 15)

It was pleasing to see that almost all candidates attempted all of the objective test questions in Sections A and B.

Section A sample objective test questions for review

The following two questions are reviewed with the aim of providing future candidates with an indication of the
types of questions asked, guidance on how to answer them and a technical debrief on the technical topics
covered by the specific questions.

Example 1. In accordance with IAS 16 Property, Plant and Equipment, which of the following is true?

A If an entity decides to use the revaluation model, then all of its non-current assets must be revalued
B An entity must transfer excess depreciation from the revaluation surplus to retained earnings on an
annual basis in respect of any property which it revalues
C If an entity decides to revalue property annually, then this property will not need to be depreciated
D There is no requirement for an entity to revalue property on an annual basis

What does this test?

This is knowledge based question that tests the use of the revaluation model for non-current assets

What is the correct answer?

Examiner’s report – F7 March 2017 1

The correct answer is D.

IAS 16 requires revaluations (where the revaluation model is chosen) to be made with "sufficient regularity" to
ensure the carrying amount does not differ materially from the fair value. There is therefore no automatic
requirement for an annual revaluation of non-current assets.

Why the correct answer is none of the other options:

Answer A (selected by most candidates) is incorrect as IAS 16 only requires "the entire class" to which an asset
belongs to be revalued. Examples of separate classes given in the Standard are land and buildings (property) and
machinery (plant). An entity could revalue its property, but does not have to also revalue its plant.

Answer B is incorrect because IAS 16 states this as an option: the excess depreciation on the revaluation surplus
may be transferred annually OR on the derecognition of the asset.

Answer C is incorrect as any asset with a finite life (which includes the building component of property) should
be depreciated on a systematic basis over its useful life.

Future candidates are advised to read the question carefully before answering it.

Example 2. An entity has decided to adopt the revaluation model for the first time from 31 December 20X6.

At that date, details relating to two properties were as follows:

Asset at 31 December 20X6: Carrying amount Fair value

($'000) ($'000)
Head Office 10,200 10,800
Factory 7,875 7,500

What is the total gain to be recorded in the revaluation surplus at 31 December 20X6?

A $0
B $225,000
C $375,000
D $600,000

What does this test?

This question requires the application of the candidates’ knowledge to the accounting treatment of revaluation
deficits and surpluses.

What is the correct answer?

The correct answer is D.

A revaluation deficit should be recognised in the statement of profit or loss (unless the asset has been revalued
upwards before which, in this case, it has not).

Examiner’s report – F7 March 2017 2

(All figures given as $’000.) As the fair value of the Head Office is given as 10,800, there is a revaluation
surplus on this asset of 600 (10,800 - 10,200) and this should be credited to the revaluation surplus and
recognised as other comprehensive income.

As the fair value of the factory is 7,500 there is a revaluation deficit on this asset of 375 (7,875 - 7,500) and
this should be written off in the statement of profit or loss.

Why the correct answer is none of the other options:

Answer A is incorrect as it suggests no adjustments. However, the question states the entity has decided to
adopt the revaluation model for the first time and so surpluses should be recognised.

Answer B (the most popular choice) is incorrect as it nets off the revaluation surplus (600) with the deficit (375).

Answer C is incorrect as it is the deficit only (which would not be recognised in the revaluation surplus).

Future candidates need to be aware that the full breadth of the syllabus will be examined in both sections A and
B of the exam and that, over several diets, most of the IFRSs in the list of examinable documents will be tested
in some depth.

Section B (questions 16 to 30)

Section B has three case-based scenarios, each of which has five (two mark) objective tests questions. In the
current diet, these cases were based on IAS 16 Property, plant and equipment and IAS 23 Borrowing costs, IAS
37 Provisions, contingent liabilities and contingent assets and IAS 12 Income taxes. These questions are written
to test candidates’ depth of knowledge on a particular topic and their ability to apply that knowledge to a set of
circumstances. Future candidates should practice these questions as much as possible by using the materials
provided by Approved Content Providers, specimen exams and past papers.

Section C (questions 31 and 32)

For this diet, candidates were presented with a question that related to the interpretation of the financial
statements of a single entity and another that required the preparation of a consolidated statement of financial
position. This report will consider issues that are associated with the former question type.

Interpretation of the Financial Statements of a Single Entity

These questions often require candidates to make a number of adjustments to profit; for example, adjustments
for the effect of the disposal of a division. Candidates are then often required to calculate some ratios and then
comment on the entity's performance and position by comparing it to either industry averages, a prior period or
another entity.

In these types of questions, most of the profit adjustments are dealt with correctly by candidates, though it is not
always clear whether the adjustments made have increased or decreased profit. This is because candidates do
not always show workings – this is especially true in the CBE version. The use of word-processing or spreadsheet
software does not mean that there is no need to show workings.

In these types of questions, the analysis is usually based on the adjusted financial statements and ratios and so
marks are awarded using the “own figure rule” i.e. if candidates use the correct formula to calculate a ratio but it
is based on the incorrect adjusted figure and they subsequently use that ratio to provide an analysis, appropriate
credit will be given for the ratio calculation and the analysis, although not for the adjustment. This is why it is so

Examiner’s report – F7 March 2017 3

important to provide workings. Sometimes the question will state how the overall adjustment to profit should be
made thereby testing candidates’ understanding of double-entry. However, candidates do not always read the
question carefully and so do not make the correct adjustment. This can mean that a number of ratios are
calculated incorrectly. However, candidates can be assured that, due to the “own figure rule”, they will not lose
all of the marks available. Future candidates should ensure that they continue to answer the remainder of the
question, even if they think they have calculated an adjustment or a ratio incorrectly. Markers are unable to
award marks to an empty answer space.

Future candidates are also advised to review the logic of their ratio calculations; for example, sometimes the
receivables collection period (days) is calculated as trade receivables/cost of sales x 365. There is no underlying
logic to this calculation; the use of credit sales gives the most logical denominator, but total revenue is an
acceptable substitute.

The analysis often shows little insight into the scenario provided in the question. Most answers confine
themselves to giving an explanation of whether the entity's ratio was higher or lower than its comparative. Very
few answers provided any further analysis as to why this increase or decrease might be the case. Better answers
often make use of the information in the scenario; for example, comment on the differing performance of a
division that has been disposed of or the likely implications if a company was acquired. Although a formal report
is not often required, many candidates provide a short conclusion to their analysis which is encouraged.

Examination technique

Candidates are encouraged to be organised in their approach and ensure that all complex workings are
appropriately referenced. For Section C questions, where workings are simple, it is adequate to show the
arithmetic of these numbers on the face of the answer. Markers continue to see candidates who show too few
or even no workings and those who spend considerable time preparing over-elaborate workings that earn no
marks. For example, some candidates provide lengthy consolidation journal entries for the intra-group balances
that are not required and waste time.

Word processing and spreadsheet technique

There are common issues arising with CBE answers whether the requirement is to use an Excel spreadsheet (one
page) or a Word document. Some candidates are spending too much time on the "neatness" of their answers,
particularly for Word document based answers. Questions requiring Excel spreadsheet answers should either
show workings on the face of the spreadsheet or in the respective cell which markers can see during the marking
process.

Guidance and Learning Support resources to help be successful in the examination

Preparing for the F7 exam may appear daunting but there are many resources available to help you. You should
refer to these throughout your studies.

You should make sure you have made use of all of the resources found under technical articles for F7 – these
include technical articles, study support videos and exam technique resources – all developed with you in mind.

It is essential to practise as many exam standard questions as you can in the lead up to your exam. We strongly
recommend that you use an up to date question and answer bank from one of our Approved Content Providers
but if this is not possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the exam format and
so should be used with caution – so check the latest syllabus and study guide for changes.

Examiner’s report – F7 March 2017 4

It is essential that you have a good understanding of the verbs typically used in ACCA exam questions. Take a
look at the article What is the examiner asking? which sets out some of the most commonly used verbs, and
ensure that you understand how these are used in the F7 questions.

Work through the F7 resource A guide to using the examiner’s report if you are sitting the exam for the first time
or A guide to reflection if you are retaking your exam. Both of these interactive tools can be found under the
technical articles page for F7. These have been developed to sit alongside the self-study guide and the retake
guide respectively, and provide you with further pointers for using the examiner’s reports for previous sittings.

Conclusion

This report draws attention to some objective test questions that were answered poorly and common errors with
the constructed response questions. As noted in the introduction, these comments are intended for the benefit of
future candidates. However, it is pleasing to note that many candidates had clearly prepared well for all sections
of this exam and they were rewarded accordingly.

Examiner’s report – F7 March 2017 5

Examiner’s report
F7 Financial Reporting
December 2016

Introduction

Performance at the December 2016 diet was good and there were some excellent individual performances.

Overall, candidates were well prepared for this examination in financial reporting, which was pleasing to see.

General Paper Comments

The examination consisted of three sections.

Section A contained 15 objective testing questions of 2 marks each, for a total of 30 marks, Section B contained
three scenarios consisting of 15 objective testing questions of 2 marks each, for a total of 30 marks and Section
C contained two questions of 20 marks each, for a total of 40 marks.

Candidates need to have knowledge of the entire syllabus and will not be successful if they simply rely on
‘question spotting’ a few selected areas for study. This is especially important given the format of the examination
outlined above. To pass F7, students must have a good all-round knowledge of financial reporting, rather than
attempting to focus on what students may perceive to be ‘major’ areas of the syllabus.

The paper was a fair test of familiar topics, and well prepared students would have been able to score well.

The most pleasing thing regarding the results showed that there were similar levels of performance across all
three sections, highlighting that students are studying the wider syllabus well rather than focusing on the areas
covered in section C.

Examiner’s report – F7 December 2016 1

Section A (questions 1-15)

It was very pleasing to see that almost all candidates attempted all of the questions, suggesting that students
were able to manage time well and at least provide an attempt at an answer rather than leaving an item blank.

The following questions are reviewed as they relate to items which candidates found particularly difficult.
Example 1 is a narrative question showing the importance of understanding ratios rather than being able to just
calculate them. Example 2 included an element of calculation, but was testing the knowledge of how a
revaluation surplus is constructed for a consolidated statement of financial position.

Example 1

Fifer Co has a current ratio of 1·2:1 which is below the industry average. Fifer Co wants to increase its current
ratio by the year end.

Which of the following actions, taken before the year end, would lead to an increase in the current ratio?

A Return some inventory which had been purchased for cash and obtain a full refund on the cost
B Make a bulk purchase of inventory for cash to obtain a large discount
C Make an early payment to suppliers, even though the amount is not due
D Offer early payment discounts in order to collect receivables more quickly

This question tested the understanding of the current ratio. The lack of numbers in the question was deliberate as
it meant that candidates were required to think of how the ratio was constructed and the way in which
transactions can influence it.

The correct answer was C. This would cause an equivalent decrease in both current assets and liabilities, so
numerous candidates discounted this thinking it would therefore have no impact on the ratio. By applying simple
figures to this, candidates could have seen that it had decreased. For example, if current assets were $120,000
and current liabilities were $100,000, this would give the original current ratio of 1.2:1. If an entity paid
$20,000 to suppliers, this would make current assets $100,000 and current liabilities $80,000, giving a
current ratio of 1.25:1.

Many candidates opted for B here, thinking that the discount would affect things. This would lead to an increase
in inventory but equivalent decrease in cash, meaning that current assets (and therefore the current ratio) was
unchanged.

Option A would cause an equivalent movement in inventory and cash, again leaving current assets unchanged.

Option D would actually cause a decrease in the current ratio, as the receivables would decrease more than the
cash would increase due to the discount being offered.

Example 2

On 1 October 20X8, Picture Co acquired 60% shares in Frame Co. At 1 April 20X8, the credit balances on the
revaluation surpluses relating to Picture Co and Frame Co’s equity financial asset investments stood at $6,400
and $4,400 respectively.

Examiner’s report – F7 December 2016 2

The following extract was taken from the financial statements for the year ended 31 March 20X9:

Picture Co Frame Co
$ $
Other comprehensive income: loss on fair value of equity financial investments (1,400) (800)

Assume the losses accrued evenly throughout the year.

What is the amount of the revaluation surplus in the consolidated statement of financial position of Picture Co as
at 31 March 20X9?

A $4,520
B $4,760
C $5,240
D $9,160

This question was testing the knowledge that a consolidated statement of financial position’s revaluation surplus
consists of 100% of the parent’s revaluation surplus and the parent’s share of the post-acquisition revaluation
surplus of the subsidiary.
B
The correct answer was A. This took the parent’s revaluation surplus at year-end of $5,000 (being the $6,400
less the $1,400 loss in the year) and then took the subsidiary’s post-acquisition loss of $400 (being the $800
time-apportioned for 6 months) multiplied by the parent’s percentage of 60% to give $5,000 - $240 = $4,760.

A high number of candidates opted for C, showing they understood the principle but had added the $240 rather
than deducting. This highlights the importance of reading the question carefully as these candidates knew the
rule but had been unable to spot that the post-acquisition movement was a loss.

The candidates opting for A had also missed some information. In this case they had deducted a full year’s loss,
rather than time apportioning it to reflect the post-acquisition loss.

Any candidate selecting D had added the total revaluation surplus of both companies together, before adjusting
for the post-acquisition movement.

Section B (questions 16-30)

Each of the three Section B scenarios is followed by five objective testing questions which, whilst based upon the
scenario, can come from any area of the syllabus. As with Section A, future candidates should aim to revise all
areas of the F7 syllabus, rather than attempting to question spot.

The first of the three questions focused on the area of non-current assets and was easily the best answered of the
three questions in section B.

Examiner’s report – F7 December 2016 3

The second scenario looked at events after the reporting period and non-current assets held for sale. Students
could identify non-adjusting events well but were less able to obtain marks in relation to the non-current assets
held for sale. One of the questions required the statement of profit or loss charge in relation to the asset. This
needed the inclusion of depreciation and an impairment. Many students calculated the depreciation but not the
impairment, meaning that the statement of profit or loss charge was understated.

The third scenario related to financial instruments. Calculations involving a convertible instrument were done
particularly well, but students scored lower on the definitions of equity and identifying the correct treatment for
financial assets. This highlights the need for students to understand definitions and theories as well as being able
to produce accurate calculations.

Examiner’s report – F7 December 2016 4

Section C (questions 31-32)

Question 31

This was a consolidation question in two parts. Part (a) asked for a calculation of goodwill, whereas part (b)
required the completion of a consolidated statement of profit or loss.

This question was generally very well answered, with many students able to score maximum marks on the
goodwill particularly.

In part (a), the candidates were faced with a share exchange and deferred consideration, both of which were
calculated well generally.

The students were also able to deal well with a fair value adjustment to plant at acquisition. A significant
minority of students deducted the fair value depreciation from the asset at acquisition, when this should only be
applied to the post acquisition period.

One of the more unusual adjustments involved a fair value adjustment to inventory. This required an adjustment
being made to increase the net assets at acquisition. As the inventory had been sold by the year end, this meant
that the cost of sales also needed to be increased to reflect the increased value of the inventory sold in the post-
acquisition period.

Candidates found part (b) more challenging in general, but were still able to score well on average. Students who
failed to spot that the acquisition of the subsidiary was partway through the year were unable to obtain any
marks for consolidating the subsidiary for 9 months of the year. This is a common scenario within a consolidated
statement of profit or loss and one which students should continue to be aware of.

The question also contained a number of common adjustments to consolidated statements of profit or loss,
including fair value adjustments, intra-group sales and unrealised profits. The calculations surrounding the fair
value depreciation and unrealised profits were done well, showing that candidates are well able to produce these
key adjustments.

Common areas where students did not pick up marks included intra-group sales. A disappointing number of
candidates were unable to remove the full amount of the intra-group sale from cost of sales, therefore meaning
that the cost of sales calculation was inaccurate.

The biggest single issue within the question was the missing calculation surrounding the non-controlling interest.
Several students omitted this calculation completely, meaning that they failed to obtain any marks for this. The
calculation of the profit attributable to the non-controlling interest is a key part of the construction of a
consolidated statement of profit or loss and students must ensure they provide this calculation.

Question 32

This longer-form question comprised three parts, totalling 20 marks.

Examiner’s report – F7 December 2016 5

Part (a) involved the restatement of figures relating to a target company, to provide equivalent figures once
benefits gained from trade with a competitor company were lost. Calculations in this part were done well, but a
common mistake was to exclude a revaluation gain from equity, meaning that candidates did not gain these
marks.

Part (b) then required the recalculation of ratios. This section was answered excellently, with many students
scoring full marks. The major issues around the ratio calculations involved the use of the restated figures, which
the candidates needed to use from part (a). A small minority of candidates attempted to restate the figures in part
(a) but then ignored those figures in part (b), simply using the figures given in the question.

Part (c) involved a discussion of the performance and gearing of a company targeted for acquisition. As in
previous sittings too many candidates either omitted this section or simply provided answers explaining that
decreases in the ratios represented a decline. Commentary focusing solely on this will only ever score limited
marks, as it can be rote-learned and is not at all focused on the scenario in the question.

The highest scoring candidates were able to utilise the scenario and discuss its effect on the performance and
gearing of the target company. The information in the scenario referred to the loss of the use of a brand name,
the reduction in a licence fee payable and the loss of a discount. In addition to this, loan notes were replaced
with higher-interest loan notes. To score well, candidates needed to discuss the impact of the lack of brand name
on the revenue, and the impact of the discounts on the gross margin and return on capital employed.

The candidates who provided discussions along this line were following the ‘because’ principle, looking to provide
reasons for any improvements or declines in ratios rather than simply stating that the ratio had improved or
deteriorated. This is the analysis that is hoped for in these questions, and students must attempt to use the
information given in the scenario to inform their answers.

Examiner’s report – F7 December 2016 6

Examiner’s report
F7 Financial Reporting
September 2016

General Comments
The September 2016 was sat by candidates using the traditional paper-based exam (PBE) and, for
the first time, the new computer-based exam (CBE). The format of the exam was the same for
PBE and CBE candidates. A new exam structure was introduced in September 2016 which will
continue going forward. The exam comprised three sections and all questions were compulsory.
Section A contained 15 2-mark individual objective test questions, (30 marks) Section B contained
three objective test cases, with each case containing five 2-mark objective test questions (30
marks) and Section C consisted of two constructed response questions for 20 marks each (40
marks) which were expert marked. Sections A and B covered a broad range of the syllabus;
Section C tested knowledge of financial statement preparation and interpretation of consolidated
financial statements.

Overall performance on the Section A and B objective test questions was encouraging although
the performance on Section C was a little disappointing. The Examining Team believes this might
be for two reasons: insufficient time devoted to Section C and the combination of interpretation and
consolidation issues into one question. It is recognised that this has been the first time that
interpretation and consolidation have been combined, although the information given and the
structure of the question should have allowed candidates to work through both parts of the
question in a logical manner.

It is essential that candidates prepare for the F7 examination by working through the examples
provided in published past papers and the material provided by approved content providers. This
material and past examiner's reports combine to give examples of all types of past questions and,
where possible, a commentary on common errors and issues that have caused difficulty for
candidates. The exam questions cover the whole syllabus and therefore candidates are required
to have a broad knowledge of financial reporting rather than just revising what are deemed to be
the main syllabus areas.

Specific comments

Section A
As might be expected, almost all candidates attempted all questions; as a last resort an educated
guess is better than no answer at all. This report provides examples of two questions that proved
to be particularly difficult for candidates.

Sample objective test questions for discussion

Example 1
On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to equipment
which cost $90,000 and had a useful life of six years. The grant was netted off against the cost of
the equipment. On 1 January 20X7, when the equipment had a carrying amount of $50,000, its
use was changed so that it was no longer being used in accordance with the grant. This meant the
grant needed to be repaid in full, but by 31 December 20X7 this had not yet been done.

Examiner’s report – F7 September 2016 1

Which journal entry is required to reflect the correct accounting treatment of the
government grant and the equipment in the financial statements of Gardenbugs Co for the
year ended 31 December 20X7?
A Dr Property, plant and $10,000
equipment
Dr Depreciation expense $20,000
Cr Liability $30,000

B Dr Property, plant and $15,000

equipment
Dr Depreciation expense $15,000
Cr Liability $30,000

C Dr Property, plant and $10,000

equipment
Dr Depreciation expense $15,000
Dr Retained earnings $5,000
Cr Liability $30,000

D Dr Property, plant and $20,000

equipment
Dr Depreciation expense $10,000
Cr Liability $30,000

Commentary
This question tested candidates' understanding of the treatment of government grants, in particular
the entries for the repayment of such a grant. The liability at 31 December 20X7 of $30,000 is
clearly not an issue as all four alternatives recognise this balance as being the grant due for
repayment. The correct answer was A: debit PPE $10,000 and debit depreciation expense
$20,000.

At the start of the year, and without reference to the repayment of the grant, the net cost of the
plant was $60,000 ($90,000 cost – $30,000 grant received) and therefore the annual depreciation
was $10,000 ($60,000/6 years) and the carrying amount at the end of the year was $50,000
($60,000 - $10,000) as stated in the question.

The repayment of the grant should be treated as a change in accounting estimate. We must
increase the cost of the asset as we can no longer offset the grant and there will be a resulting
change in depreciation. Without the grant the cost of the asset would have been $90,000 and
depreciation would have been $15,000 a year ($90,000/6 years). The carrying amount at 31
December 20X7 should be $60,000 ($90,000 cost - $30,000 accumulated depreciation). We are
required to increase the carrying amount by $10,000 debit to restore the plant's carrying amount
from its opening carrying amount ($50,000) to the corrected carrying amount ($60,000). The
$20,000 ($30,000 - $10,000) depreciation expense is the charge to profit or loss to reflect the
amount of extra depreciation that should have been charged for the first two years.

Answer B is a similar adjustment, but assumes the adjustment at the end of the first year of the
plant's useful life. Answer C attempts a prior period adjustment for the increased depreciation

Examiner’s report – F7 September 2016 2

charge. This is not necessary as the financial statements prepared for 20X6 correctly reported the
use of the asset in accordance with the terms of the grant. Answer D (the most popular response)
assumes the depreciation for 20X7 has been charged in the financial statements already, but this
is not the case; all the adjustments for 20X7 are needed for the correct answer.

Example 2
Patula Co acquired 80% of Sanka Co on 1 October 20X5. At this date, some of Sanka Co's
inventory had a carrying amount of $600,000, but a fair value of $800,000. By 31 December 20X5,
70% of this inventory had been sold by Sanka Co.
The individual statements of financial position at 31 December for both companies show the
following:
Patula Co Sanka Co
$'000 $'000
Inventories 3,250 1,940

What will be the total inventories figure in the consolidated statement of financial position
of Patula Co as at 31 December 20X5?
A $5,250,000
B $5,330,000
C $5,130,000
D $5,238,000

Commentary
The correct answer is A: $3,250,000 (Patula) plus $1,940,000 (Sanka) plus $60,000 (30% x
($800,000 - $600,000) fair value excess of inventory not sold) equals $5,250,000. The inventory of
the subsidiary, Sanka Co, should be included at fair value at the date of acquisition. The inventory
in the individual accounts of Sanka Co will be at cost and therefore an adjustment is needed to
include the fair value of the unsold inventory. Answer B is incorrect as it adds $140,000 (fair value
excess of inventory sold) (3,250 + 1,940 + (70% x 200) = 5,330). Answer C is incorrect as it
deducts the fair value excess of the inventory not sold (3,250 + 1,940 - 60 = 5,130). Answer D is
incorrect as it adds 80% of the fair value excess of inventory not sold (3,250 + 1,940 + 48 (80% x
60) = 5,238) and proportional consolidation, reflecting the parent's ownership interest in assets, is
not an appropriate consolidation technique as it does not reflect control of those assets.

Section B
This section included three objective-test cases. Each case uses a common scenario as the basis
for five 2-mark objective test questions. The first related to non-current assets, with particular
emphasis on impairment; the second to lease agreements (using IAS 17); and the third to revenue
(using IFRS 15) and income tax.

For the first scenario (questions 16 to 20) most questions were answered correctly by a substantial
majority of candidates. The exception was the question requiring the allocation of an impairment
loss where an asset was written down to a specific value first, then goodwill was written off entirely
and the remaining impairment loss was split proportionately between the remaining non-current
assets.

For the second scenario (questions 21 to 25) there were two questions that caused some difficulty.
The first was in respect of an operating lease where no rental payment was made for the first year

Examiner’s report – F7 September 2016 3

of the lease. Under the accruals concept (and IAS 17) the total rentals due are spread over the
term of the lease, on a straight line basis, to determine the annual lease rental expense. The
second question that caused difficulty was the treatment of profit on a sale and leaseback
arrangement. The profit is the difference between the sale proceeds and the carrying amount (at
the time of the sale and leaseback) and this is spread over the remainder of the asset's useful life
or, if shorter, the remaining lease term.

For the third scenario (questions 26 to 30) the three revenue questions were generally well
answered, but the two income tax questions caused difficulties. The first tax question asked about
the impact of two property revaluations on the income tax expense. For a downward property
revaluation (there had been no previous upward revaluation) the decrease is charged directly to
profit or loss so the income tax expense will decrease by the tax share of the decrease. For the
upward property valuation, a deferred tax charge arises and both are reported separately through
other comprehensive income. The second tax question asked about development costs fully
allowed for tax purposes where the deferred tax adjustment had not been made. This is an
example of a taxable temporary difference as the expenditure will be amortised in the statement of
profit or loss and therefore gives rise to a deferred tax liability, thus increasing the tax expense by
the income tax rate applied to the development expenditure. More candidates said the tax
expense would decrease than said it would increase.

Section C

Question 31
This was a 20 mark question requiring the calculation of a company's revised profit for the year
and the statement of financial positon, including adjustments for: a convertible loan note, a mid-
year leased property revaluation, a fraud (including a prior period adjustment) and taxation
adjustments. This type of question has been examined before, including December 2014
(question 2, Kandy) and was commented on in the examiner's report for the March 2016 paper.

The question was reasonably well answered with many candidates scoring at least half marks.
In part (a) a significant number of candidates were either not prepared to, or did not know how to,
present the required schedule of adjustments. The starting point is the draft profit before interest
and tax for the year given in the trial balance, followed by a series of relevant additions or
subtractions to arrive at a figure of profit for the year. Frustratingly for markers, many candidates
prepared a series of workings but did not attempt to either summarise these or state their effect on
the statement of profit or loss, which restricted the number of marks that could be awarded. The
requirement for a schedule is an alternative approach to the preparation of a full statement of profit
or loss, whilst still testing key principles of profit measurement.

Future candidates should ensure that they avoid the common errors noted in this session.:
 Some candidates did not attempt to calculate the debt component of the convertible loan
note and a few calculated interest at the underlying rate rather than the "coupon" rate.
 A number of candidates did not correctly split the amortisation of the leased property
between the two halves of the year and often used an incorrect remaining useful life to
determine the amortisation charge for the second half of the year.
 Many candidates did not correctly split the fraud between the amount related to the current
year and the remainder which related to the previous year and therefore was not relevant to
profit or loss.

Examiner’s report – F7 September 2016 4

  Some candidates included the estimated amount the directors hoped could be recovered
from insurers (this was a contingent asset and, as many candidates correctly noted, should
be ignored).
 Candidate’s understanding of current and deferred tax issues seems to have been a
particular problem. In this case, the tax charge for the current year and the under-provision
(a debit balance) for the previous year both reduce the profit for the year. Many
candidates, in calculating the movement on the deferred tax provision, included the
deferred tax element of the leased property revaluation in part (a). Both this amount, and
the surplus to which it related, are reported under other comprehensive income and this
was not required as part of the answer to part (a). The overall increase (in this case) in the
deferred tax provision should have been split between the tax on the revaluation surplus
and the balance (a credit in this case) which was part of the income tax expense.

Part (b) required the preparation of the statement of financial position incorporating figures in the
given trial balance and the adjustments from part (a). In many instances common errors noted in
part (b) were often errors followed through from part (a) although candidates are reminded that
they would never be penalised twice for making an error. Other common errors noted in part (b)
were:
 Some candidates did not include the equity component of the convertible loan note (even
where this had been calculated) as an "other component of equity" and sometimes included
it as a liability rather than equity.
 A number of candidates did not reduce the revaluation surplus by the deferred tax element
or did not report the revaluation surplus at all.
 Candidates also incorrectly showed an incomplete (or omitted to show) deferred tax
provision
 Some candidates included the convertible loan note as if at the end of the second year
even though it was issued on the first day of the current year
 Some candidates omitted the current tax liability or incorrectly adjusted it by the under-
provision for the previous year.
 Disappointingly, a few candidates who showed interest paid as a current liability which
demonstrates a clear lack of understanding of basic principles.

Part (c) required a calculation of the company's potential diluted earnings per share for the year.
This required the profit for the year (using the candidate's own figure) to be increased by the after-
tax saving of interest on the convertible loan note, using the correct charge (debt component at the
underlying interest rate) and the number of shares to be increased by the (maximum) number that
could be issued on the conversion of the loan note. Many candidates either did not attempt this
part of the question or made neither of the adjustments noted above. As the question did not ask
for the basic earnings per share no marks were awarded for calculating it - the marks were
specifically for the adjustments noted.

Question 32
This is the first time a question combining interpretation with an element of consolidation has been
examined and candidates did find this a challenging question. The Examining Team felt the
question was sufficiently well structured to have introduced the consolidation aspects gradually,
with one party-owned subsidiary, acquired mid-year, for the second year only.

For part (a) the comments required in response to the Chief Executive Officer (CEO)'s four

Examiner’s report – F7 September 2016 5

observations were not at the expected standard. Most candidates launched into irrelevant detail
regarding ratio movements (even before they had been asked to calculate them - it was expected
candidates would answer part (a) first) and did not step back and consider the reason for the
difference between the two years' financial statements, specifically that the statement of profit or
loss for the second year included the consolidated results of the newly-acquired subsidiary but,
crucially, only for six months. In the statement of financial position, at the end of the second year,
the subsidiary’s assets were included on the basis of their fair values and those of the parent were
at historical cost (in the absence of a revaluation surplus).

The inclusion next year of a full year's results for the subsidiary should improve the reported
profitability of the group. There were two corrections to the CEO's calculation of earnings per
share (EPS) (using the profit for the year attributable to the equity holders of the parent and the
weighted average for the shares issued mid-year) but a majority of candidates missed both these
adjustments although many did point out that the EPS had barely changed as although more
shares had been issued, profit had increased. The low margin on inter-company sales was seen
by many candidates as, correctly, not affecting the consolidated financial statements or the overall
profitability of the group. Some candidates did mention the impact of any unrealised profit on
inventories held from such trading, but this was not likely to have a material effect. The final
observation was rarely addressed: candidates needed to work out the price at which the shares
were issued by the parent (they were the only shares issued during the year) using the share
capital and share premium figures and compare this with the 15% increase in the share price since
acquisition as an indicator of the market's favourable view of the acquisition.

For part (b) the four ratio calculations were generally well done although: for ROCE, capital
employed should include the non-controlling interest as this is part of equity (those who took total
assets less current liabilities had no problem with this) and the calculation of net asset turnover
(revenue/capital employed) was either omitted or the figures inverted. A minority of candidates
attempted to adjust for the inter-company transactions before calculating ratios which was not
required as we must assume that inter-company sales (and purchases) had already been correctly
eliminated on consolidation.

For the comments on comparative performance, the usual observations on past papers continue to
apply. To suggest ratios have increased or decreased does not qualify as analysis; suggesting the
change is better or worse begins to show understanding, but more than this is required. In many
cases the impact of the acquisition (as answered in part (a)) was completely ignored and
candidates compared this year and last year results as if they were directly comparing like with
like. An example of this is the impact of reporting just six months results for the subsidiary in the
second year; this was often commented on in part (a) and then ignored in part (b).

The gross profit margin fell between the two years; this was the ultimate cause of the fall in the
ROCE but, as was mentioned quite often, it is not enough to say gross margin fell because cost of
sales increased without also suggesting prices may have fallen. The relationship between gross
and operating profit margin was often misunderstood. Many candidates stated that the decrease in
the operating margin was caused by increased operating costs when in fact operating costs were a
lower % of revenue in the second year (despite any one-off costs of the acquisition) and the cause
of the decrease was the reduction in the gross profit margin.

Very few candidates used the information in the question regarding the non-controlling interest in

Examiner’s report – F7 September 2016 6

the subsidiary's profit to determine the subsidiary's possible contribution to the group's profit for the
year and thus determine that there could have been a decline in the profit earned by the parent
alone in the second year. Also the subsidiary's net assets (including goodwill) are included in the
statement of financial position at their fair value (this was the reason the question said values of
property, plant and equipment had been rising) but the parent's assets are still at their (lower)
historical cost and this could distort comparison between the ROCE and asset turnover of both
years.

Conclusion
Generally, recognising the change of format, the performance on this paper was fairly encouraging,
but there is room for improvement particularly for the analysis and interpretation question. The F7
syllabus is extensive and good preparation covering the whole syllabus is required for success.
Future candidates are advised to use all available study material to aid their preparation (including
revision) across the whole syllabus. Although there is evidence of some improvement, candidates
are reminded of the need for answers to be organised and with an appropriate level of workings to
support their answers so that markers can understand how figures have been arrived at.

Many of the comments, particularly in respect of Section C, focus on where candidates made
errors or otherwise lost marks. This report is intended as a guide to future candidates and
highlights poor techniques and approaches with a view to improving performance. There were
many excellent scripts and these were rewarded appropriately.

Examiner’s report – F7 September 2016 7

Examiner’s report
F7 Financial Reporting
June 2016

General Comments
The June 2016 paper represented the final paper in the current format. There were two sections;
Section A consisted of 20, 2-mark multiple-choice questions (MCQs) which covered a broad range
of syllabus topics, Section B consisted of three questions (two questions for 15 marks and one for
30 marks). These questions covered the main syllabus areas of consolidated financial statements
(extracts), ratio calculation and analysis and the preparation of single entity's financial statements.
All questions on the paper were compulsory.

The results for both sections were well correlated, although most candidates scored slightly better
in Section A than in Section B. The numerical parts of the Section B questions were generally very
well answered; however, as in past papers, the interpretation question was not as well answered
with many candidates stating the obvious (e.g. this year's ratio is higher than the previous year's )
without offering any real interpretation or analysis and largely ignoring the effect of a very important
discontinued operation.

Specific comments

Section A

As might be expected virtually all candidates attempted all the questions; as a last resort an
educated guess is better than no answer at all. As these questions are auto-marked, it is difficult to
know exactly what type of errors candidates make but candidates preparing for the F7 examination
are advised to work through the specimen paper and available past exam papers. This examiner's
report provides examples of MCQs that have proved difficult for candidates. The commentary
below on two selected poorly-answered MCQs goes through the correct answer and suggestions
of why candidates may have selected a distracter (wrong answer). Section A questions are
intended to examine the syllabus broadly and so candidates need to be competent in all areas of
the F7 syllabus, rather than rely on trying to pass by just revising bits of the syllabus.

Sample multiple-choice questions for discussion

Example 1
Which of the following are required to meet the comparability characteristic of useful
financial information?

(1) Entities are required to disclose their accounting policies

(2) Corresponding information is required to be provided in financial statements
(3) Entities must use the same accounting policies from period to period
(4) All assets within a class should be depreciated at the same rate

A 1 and 2 (correct)
B 2 and 3
C 3 and 4
D 1 and 4

Examiner’s report – F7 June 2016 1

Commentary
If candidates understand what accounting concepts mean then this should have been a relatively
straight forward question . However, it seems a number of candidates simply learn the accounting
concepts (in the IASB Framework) are, without actually understanding them or being able to apply
them.

The concept of comparability, rather similar to consistency, can be applied in two circumstances.
First there is internal comparability where an entity's current year results are compared with its past
(at least one year) results. However, comparability can also be extended to the comparison of one
entity's results to that of another entity's results (for entities of a similar size, in a similar industry
sector and for the same accounting period).

Item (1) assists in the second form of the comparability in that it recognises that not all entities use
the same accounting policies (not that they should). In these circumstances the disclosure of
accounting policies allows users to identify when the financial statements of entities differ because
they have used different accounting policies. From this information, users may be able to make
notional adjustments (if appropriate) to achieve a form of comparability when assessing relative
performance.

Item (2) is self-evident; to compare current year performance to past performance, users need to
be provided with past (comparative) results.

The statement in Item (3) is incorrect; entities are permitted to change their accounting policies, the
reporting requirements of which are determined by IAS 8 Accounting policies, changes in
Accounting Estimates and Errors. Also, if it were applied, this statement would not provide
comparability but rather uniformity. It is widely recognised that uniformity is not necessarily the
same as comparability because different accounting policies are appropriate to entities that have
different operating conditions.

Item (4) is a sub-form of item (3). Assets should be depreciated over their estimated useful lives
(straight-line or reducing balance as appropriate) and clearly different assets, even of the same
class, have different lives (and perhaps also different usage patterns).

From this, items (1) and (2) are relevant to comparability and items (3) and (4) are not; thus A is
the correct answer.

OUTDATED
Example 2
Blue Co entered into a four-year lease agreement on 1 January 20X0. It required payments of
$19,000 to be made annually in arrears. The asset had an estimated economic life of four years
and a fair value of $60,000 with nil residual value. The interest rate implicit in the lease is 10%.
Blue has incorrectly treated the lease agreement as an operating lease in its financial statements.

What is the effect of the incorrect treatment on Blue Co’s profit for the year ended 31
December 20X0?

A Overstated by $2,000 (correct)

B Understated by $2,000

Examiner’s report – F7 June 2016 2

C Overstated by $13,000
D Understated by $13,000

Commentary
This question tested an understanding of the effect on profit or loss of treating a lease as an
operating lease as opposed to a finance lease. To compute the correct answer, it is necessary to
calculate the charges to profit or loss for depreciation and finance costs that would be reported
from treating the lease as a finance lease and comparing those charges with the charge that had
been made by treating the lease as an operating lease (the annual rental of $19,000). With the
lease capitalised at $60,000 and a life of four years this would give an annual depreciation charge
of $15,000. As the annual rental was payable in arrears there would be a finance charge of $6,000
($60,000 x 10%). This would give total charges to profit or loss of $21,000, the difference between
this and the $19,000 operating lease rental charge would require an additional charge of $2,000.
Thus, incorrectly treating the lease as an operating lease would mean the profit for the year was
overstated (as expenses were understated) by $2,000 – answer A.

Many candidates calculated the difference as $13,000, presumably comparing the operating rental
of $19,000 with the finance cost of $6,000 thus ignoring the depreciation. Of the candidates that
correctly calculated the difference as $2,000, a significant number thought the effect was an
understatement rather than an overstatement of profit.

Commentary on Section B

Question One
This was a 15 mark question requiring the calculation of extracts from the consolidated statement
of financial position for goodwill, retained earnings and non-controlling interest. Pleasingly this
question was very well answered and some candidates gained full marks.

However, a word of caution – a number of candidates produced a full consolidated statement of

financial position which was not asked for and so merely wasted time.

The calculation of goodwill involved dealing with a share exchange, deferred consideration and fair
value adjustments. Most candidates correctly calculated the consideration for the acquisition; the
main problems were in calculating the net assets at the date of acquisition. A common error was
not time apportioning the $3,000 loss for the year and many candidates treated this as profit.
Another common error was to either ignore, or not realise, that the unrecorded deferred tax in the
subsidiary's financial statements should be recognised as an asset on consolidation (due to the
circumstances described in the question).

Many candidates scored well in the calculation of retained earnings, however some had difficulty
calculating the post-acquisition profits of the subsidiary. In particular they did not account for a loss
on equity investments or adjust for the over-depreciation on the fair value (which was below the
carrying amount of the plant in the subsidiary's financial statements); many candidates seemed to
think the plant was under-depreciated. Other common omissions were: incorrect deductions of the
unrealised profit in inventory (especially using margin rather than mark-up) and ignoring (or not
time apportioning) the unwinding of the finance cost on the deferred consideration.

Examiner’s report – F7 June 2016 3

Most candidates gained full marks for the calculation of non-controlling interest even if they had
made a previous error in the calculation of the subsidiary's post-acquisition profits. It is important
that candidates realise that errors in previous calculations are not penalised in subsequent
calculations. This principle is referred to as method marking or applying the 'own-figure' rule.

Question Two

Part (a) was a short 3 mark section requiring the calculation of the ROCE based upon continuing
operations. Part (b) for 12 marks required the calculation of four further ratios of the candidates'
choice to form the basis for an analysis of the performance and financial position of an entity over
a two-year period.

Very few candidates correctly calculated the ROCE in part (a); by far the most common error was a
failure to deduct the value of the assets held for sale (relating to the discontinued operation) from
the denominator representing the capital employed. The other, less common, error was not adding
back the finance costs to give profit before interest and taxation. Despite this, most candidates
gained two out of the three marks available.

In part (b) many candidates scored well for calculating up to four further ratios but some candidates
only calculated ratios for various profit margins (or cost percentages) and therefore ignored ratios
relating to the financial position. By contrast, the interpretation and analysis was disappointing and
many candidates merely described the ratios as being higher or lower without any explanation or
implications which is not really interpretation. An important aspect of the comparison between the
two years was the effect of the decision to discontinue an operation. Where this occurs, the figures
and the ratios for the continuing operation are more important as it is these that form the basis of
future performance. Many candidates did not adopt such an approach. Ancillary to this was
whether the discontinuance itself was a good decision. In this case, as the discontinued operation
had gone from being profitable to making a considerable loss, the decision to terminate the
activities was well advised. Worryingly, some candidates that did comment on the discontinuation,
thought the opposite. In a previous examination question there had been a disposal of a very
profitable operation which appeared to be a poor decision and it looked as if some candidates had
'memorised' the suggested solution and applied it incorrectly to what was a very different situation.

Despite this, there were many good comments on the gearing and liquidity position which gained
appropriate marks.

Question Three

This 30 mark question was on the familiar and seemingly popular topic of the preparation of the
financial statements of a single entity from a trial balance with several adjustments. There were
four parts: a statement profit or loss and other comprehensive income (a), a statement of changes
in equity (b) a statement of financial position (c), which was followed by part (d) for 5 marks that
tested an understanding of the meaning and usefulness of diluted earnings per share figures.

The adjustments required by the notes to the trial balance included: the treatment of a discount on
revenue for combining servicing costs with a product sale, a (construction) contract, the issue of a

Examiner’s report – F7 June 2016 4

convertible loan note, the upward revaluation of land and buildings and current and deferred tax
adjustments.

Most well-prepared candidates had a very good attempt at this question and generally scored good
marks. The basic preparation and formatting of the statements seemed to be understood although,
perhaps as expected, it was some of the adjustments that caused most problems.

Common errors:
IFRS 15 Revenue from contracts with customers outlines the required treatment where a discount
is given if products are sold in combination with an accompanying discount. Broadly, the discount
is applied in proportion to the underlying value of the product and, in this case, the servicing. In
addition to dealing with this, candidates needed to realise that three years of future servicing work
should be treated as deferred income. Many candidates seem to appreciate the principles involved
(for which marks were given) but made various errors in the calculations.

Many candidates correctly calculated (in the workings) the correct figures for the contract;
however a common error was then not to include contract revenue and costs in the statement of
profit or loss or the contract balance in the statement of financial position. Some candidates
incorrectly calculated the percentage completion of the contract by comparing the payment
received to the total contract price. The question clearly stated the progress towards completion
should be based upon the input method (ie costs incurred to date in comparison to total expected
costs).

Most candidates did very well dealing with the revaluation of land and buildings and the
subsequent depreciation of buildings. The depreciation/amortisation and carrying amounts of plant
and the patent were generally well done. The patent had suffered an impairment and many
candidates effectively combined the amortisation and impairment charges, whereas strictly they
should be identified separately. The question said that the entity intends to make an annual
transfer from the revaluation surplus to retained earnings, many candidates omitted this from the
statement of changes in equity; others transferred the full amount of the revaluation surplus rather
than the additional depreciation for the year.

The treatment of the convertible loan note was mixed; some candidates have mastered the
process of separating the compound financial instrument into its debt and equity components
(though many omitted the equity component from the statement of changes in equity). However,
many others became confused and produced calculations that looked more like the treatment of a
finance lease. Finance cost charges in profit or loss should have been based on the effective
interest rate of 8% applied to the debt component of the loan, some candidates used 5% on the
nominal amount of the loan; the interest paid (on the nominal amount) reduces the carrying amount
of the liability and is not a finance cost.

Some of the adjustments required should be very familiar; for example, the calculation of a
provision for income tax, an adjustment from the previous year and a change in deferred tax have
all been examined many times. Many candidates did well when calculating the profit or loss charge
and the balances to be included in the statement of financial position. However there was some
confusion over signing (adding items when they should have been deducted) and exactly which
figures should appear as current and non-current liabilities.

Examiner’s report – F7 June 2016 5

Part (d) required candidates to appreciate that the convertible loan notes gave rise to a dilution of
earnings per share (EPS), and indeed many candidates did say this. A second aspect of the
question was that the chief executive officer (CEO) had expressed concern over the (given) diluted
EPS figure and implied that the CEO thought that the diluted EPS figure was a representation of
what the actual EPS would be in the near future. Candidates were asked to comment on the
CEO's views.

Many answers did not address this issue at all and many of those that did were rather confused in
that they agreed with the CEO's view but did not realise that diluted EPS is not a prediction of
future EPS. The diluted EPS represents a computation of what EPS would have been for the
current year if the diluting circumstances had already taken place (in this case the conversion of
the loan notes). Many commentators see the diluted EPS as a warning; however the future
earnings per share will be based upon future profits and the weighted number of shares in issue at
that time.

Conclusion

The F7 syllabus is extensive and good preparation of the whole syllabus is required. Generally the
performance in June 2016 was very encouraging, particularly in the MCQs in Section A. In
section B, candidates are reminded that analytical and interpretive skills are key, as is an
appropriate level of referenced workings which allow markers to understand how answers have
been derived. Future F7 candidates are advised to use the Practice and Revision kits of the
Approved Content Providers to aid their revision and to review F7 past papers to identify the skills
required in applying their knowledge in the examination.

Examiner’s report – F7 June 2016 6

Examiner’s report
F7 Financial Reporting
March 2016

General Comments

This paper continued the format of recent diets with two sections; all questions were compulsory.
Section A consisted of twenty 2-mark multiple-choice questions (40 marks) (MCQs) which covered
a broad range of the syllabus. Section B consisted of three questions (two for 15 marks and one
for 30 marks - 60 marks) and was expert marked. Section B questions tested financial statement
preparation and interpretation skills.

The overall pass levels for both sections of the paper were well correlated and overall, the
performance was very pleasing. The numerical parts of the Section B questions were generally
well answered although, as on previous occasions, the interpretation question was not well
answered. The short written element of the consolidation question was either not attempted or, for
the few attempts seen, not answered that well.

The paper was regarded by commentators as a fair test of familiar topics on which a well-prepared
candidate should have been successful.

Specific comments

Section A

As might be expected, virtually all candidates attempted all the questions; an educated guess is
better than no answer at all. As these questions are automatically marked it is difficult to know
what sort of errors candidates made. These questions allow each diet to cover most of the
syllabus which means candidates cannot rely on trying to pass just by studying the main syllabus
areas. The continuing advice is for candidates to work through the practice and revision kits
provided by approved content providers and the exam papers made available on the ACCA
website (including the specimen exam).

This and previous Examiner's Reports give examples of MCQs that have caused particular
difficulty for candidates. The commentary below, on two poorly-answered questions from the
March 2016 paper, goes through both the correct answer and suggests why candidates may have
selected a distracter (an incorrect answer).

Sample multiple-choice questions for discussion

Example 1

Pink Co is a company which is not part of a group. It has the following intangible assets:

(1) A licence to distribute a particular product. This was purchased on 1 January 20X3 for
$100,000 and is for 5 years.
(2) The right to use a trademark on its products for 10 years for which Pink Co paid
$40,000 on 1 January 20X4. Pink Co also spent $30,000 on the same date constructing a
concrete representation of the trademark for display at its premises which is expected to last for
15 years.

Examiner’s report – F7 March 2016 1

(3) A customer list which has been independently valued at $15,000 at 31 December 20X4.
Pink Co is negotiating with several companies interested in buying the customer list.

What carrying amount should appear in Pink Co's statement of financial position for
intangible assets as at 31 December 20X4?

A $96,000
B $124,000
C $111,000
D $139,000

Commentary

This question tested candidates’ knowledge of the initial measurement and subsequent recognition
of intangible assets. The correct answer was A ($96,000): (1) the licence is recognised at cost
less two year's amortisation ($100,000 - $40,000 [100,000/5 x 2] = $60,000; (2) the trademark is
recognised at cost less one year's amortisation ($40,000 - 4,000 [40,000/10] = $36,000. The
concrete replica would be separately recognised as a part of property, plant and equipment
(tangible assets) and the customer list would not be recognised as an asset as it is not possible to
distinguish this from the costs of developing the business as a whole and, at the reporting date,
there is no transaction to say it is probable the expected future economic benefit (of $15,000) will
flow to Pink Co. Distracter B incorrectly includes the concrete representation at cost less one
year's depreciation ($30,000 - $2,000 [30,000/15] = $28,000); distracter C incorrectly includes the
customer list at $15,000 and distracter D incorrectly includes both the concrete representation and
the customer list.

Example 2

On 1 August 20X4, Flash Co received a $12 million training grant from the government on
condition that it employed ten graduates from local universities in each of the next three years. If
the condition were to be broken, the full amount of the grant would be repayable. On the date the
grant was received it was considered virtually certain that the condition would be met.

However, during August 20X6, it became apparent that the economy was entering a severe
recession. In that month Flash Co decided it would not employ any further graduates for the
foreseeable future.

By how much will Flash Co's profit for the year ended 31 July 20X7 be reduced as a result of
the repayment of the grant?

A It would not be reduced

B $4 million
C $8 million
D $12 million

Commentary

This question tested the accounting treatment of a government grant over a number of periods and
applying the specified condition attached to its possible repayment. The correct answer was C ($8
million): the company's statement of profit or loss had been credited with $4 million ($12 million/3

Examiner’s report – F7 March 2016 2

years) in the year ended 31 July 20X5 and with a further $4 million in the year ended 31 July 20X6.
Given the change in circumstances, these two amounts should be reversed (i.e. debited) so profit
for the year ended 31 July 20X7 would fall by this amount. Distracter A ignores that any grant has
been credited to profit or loss that now needs to be reversed; distracter B only takes account of
one year's adjustment; distracter D (the most common answer) assumes that all of the grant had
already been credited to profit or loss although the year stated in the question is the final year, but
no adjustment for the grant has been made.

Commentary on Section B

Question 1

This was a 15 mark question requiring the calculation of a company's revised profit for the year
and the statement of financial position, including adjustments for: a share issue at a premium,
dividend, property revaluation, development expenditure, an inventory write off and taxation
adjustments. The question was generally well answered with many candidates gaining high
marks.

In part (a), a large number of candidates were either not prepared to, or simply didn't know how to,
prepare a schedule of adjustments. This particular approach has been examined before (e.g.
December 2014, question 2, Kandy). The starting point should be the draft profit before tax given
in the trial balance followed by a series of relevant additions (or subtractions) to arrive at a figure of
profit for the year. Many candidates prepared a series of unrelated (and often correct) workings,
but did not attempt to summarise these or even state their effect on the statement of profit or loss.
The requirement for a schedule is an alternative approach to the preparation of a full statement of
profit or loss, but one which still tests key principles of profit measurement.

Common errors were: not adjusting the amortisation on the leased property to take account that it
had been revalued at the start of the year and that a number of years of its life had already passed,
so subsequent amortisation was over a reduced period; using the straight line (rather than
reducing balance) method of depreciation for plant and equipment; not writing off the early month's
development expenditure and then correctly amortising the remaining asset; incorrectly calculating
the net realisable value of the inventory and subsequently writing off the difference between this
amount and the cost; including the revaluation of the property (which is other comprehensive
income), with or without the related deferred tax, as part of the calculation of profit for the year.
Many weak answers also deducted the dividend paid, although this is not an expense under IFRS.

Part (b) required the statement of financial position incorporating figures in the given trial balance
and the adjustments from part (a). Provided clear workings were shown, markers awarded the
allocated marks in part (b) for following through candidate's figures from part (a) under the "own
figure rule" used during marking. As such, the common errors noted in part (b) were both the
errors followed though from part (a) and specifically: showing the bank balance as an asset (it was
a credit balance in the trial balance); only showing the original value or the amount of the write off
for inventory; ignoring the revaluation of the property or (more commonly) not adjusting the surplus
for deferred tax; incorrectly splitting the share premium from the share capital (or showing the
premium element under both amounts). A number of candidates prepared a full statement of
changes in equity as part of their answer, although this was not required by the question (and so
wasted time).

Examiner’s report – F7 March 2016 3

Question 2

Part (a) of this question required candidates to calculate six equivalent ratios to the sector
averages. The question specifically stated the treatment of the finance lease obligations in the
ratio calculations. Many candidates scored full marks and showed appropriate workings to
support the ratios.

A surprising number of candidates either avoided or incorrectly calculated asset turnover (a very
common error was calculating net assets/turnover which is the inverse of the correct calculation);
Candidates also incorrectly excluded the current liability finance lease obligation from capital
employed and gearing. In differing combinations, weaker scripts: took profit before tax as operating
profit for the operating profit margin; excluded the non-current liability finance lease obligation from
capital employed and gearing; included the other current liabilities in these ratios; calculated
gearing as debt/capital employed although this question specifically stated debt/equity.

Part (b) of this question was generally poorly answered - many candidates merely stated a
particular ratio was higher or lower than the sector average, often without even stating whether this
meant the company's financial performance or position was better or worse than that of the sector.
Few candidates displayed any ability to connect the ratios and discuss causes or implications
arising from them. An example is that the ROCE of the company was much lower than the sector
average, but an analysis of this would reveal that the main cause of this was the lower gross profit
margin, which may be due to a combination of lower selling prices and higher manufacturing costs.
Many candidates stated that the poorer operating margin was a consequence of the high level of
finance costs, although these should be excluded from the operating margin. Candidates also
commented that high operating costs caused the lower operating profit margin whereas, in fact, the
company's operating costs were a lower proportion of revenue than for the sector. Beyond stating
that gearing was much higher than the sector, better scripts linked this to the high level of finance
costs and the significance of the finance leases to the company.

Particularly weak scripts commented as if this was a comparison between this year and last year,
rather than the company and the sector for the same period. Very few candidates mentioned the
impact on ROCE, net asset turnover and gearing of the property revaluation; of those who did, a
majority explained the effects incorrectly.

Question 3

This 30 mark consolidation question was in three parts with marked variations in candidate
performance. Many candidates earned 7 or 8 marks for part (a), but few achieved any marks
(where it was attempted) for part (c).

Part (a) was a goodwill calculation, the principles of which most candidates seem to be familiar
with. Common errors were: taking the contingent consideration at the date of consolidation rather
than the date of acquisition; incorrectly calculating (or excluding) the pre-acquisition profits for the
first three months of the year or even deducing these from retained earnings brought forward
(working backwards rather than forwards); omitting the provision for the onerous contract (by some
margin this was the most common error in this part); deducting the goodwill impairment, which was
not required by the question (candidates were not penalised for this, but did waste time showing
this adjustment).

Examiner’s report – F7 March 2016 4

Part (b) required a consolidated statement of profit or loss and other comprehensive income
incorporating the type of adjustments seen on many past papers. Many candidates scored well,
although very few avoided making some errors.

The errors made by a substantial number of candidates included: not eliminating the dividend from
the subsidiary on consolidation; showing the share of underlying profit from the associate and the
dividend from the associate (already accounted for) without realising this was double counting;
recognising the increase in the value of land at the date of acquisition as part of the other
comprehensive income for the year (this was already part of the goodwill calculation); omitting the
decrease in the contingent consideration; incorrectly treating the dividend (part of investment
income) and gain on the fair value (part of other comprehensive income as stated in the question)
of the equity investment.

Other errors made by a minority of candidates included: not time apportioning the revenue and
expenses of the subsidiary; proportional consolidation of the revenue and expenses of the
subsidiary; not correctly treating or calculating the unrealised profit on inventory held; making a
time apportioned adjustment for the onerous contract provision (in the absence of any mention of
the settlement of this liability no adjustment is needed in profit or loss); omitting the given goodwill
impairment amount from operating expenses (or even disclosing it as part of other comprehensive
income); omitting one or more of the adjustments to determine the non-controlling interest's share
of the subsidiary's profit for the year.

Part (c) was a short written question testing the two alternative methods of valuing the non-
controlling interest (NCI) and the effect these methods have on the treatment of goodwill. Previous
F7 computation questions have used the (full) fair value method for valuing NCI and goodwill; this
question concentrated on the different effect of using the proportionate share of a subsidiary's
identifiable net assets method. Answers were either non-existent or clearly had no real
understanding of either method or the differences between them. A good answer would have
referred to the latter method computing goodwill without reference to the NCI and therefore both
goodwill and the NCI would have lower reported values. The question also referred to the
treatment of the impairment of goodwill; under the latter method goodwill needed to be "grossed
up" to determine if there was any impairment; if there was any impairment only the parent's share
of this should be charged against the parent's profit in the consolidated statement of profit or loss.

Conclusion

Generally, the performance on this paper was encouraging, but with room for improvement
particularly on the written answers. Candidates are reminded of the importance of working through
study resources provided by Approved Content Providers and the exam papers (and answers)
made available on the ACCA website (including the specimen paper). The syllabus for this paper
is recognised as extensive and candidates need to prepare for the whole syllabus. Once again,
future candidates are reminded of the need for an appropriate level of workings to support answers
which will allow markers to understand how figures used have been arrived at.

Many of the above comments, particularly in respect of the numerical questions, focus on where
candidates made errors. This is intended as a guide to future studies and highlight poor
techniques and approaches with a view to improving performance. There were also many
excellent scripts that were rewarded appropriately.

Examiner’s report – F7 March 2016 5

Examiner’s report
F7 Financial Reporting
December 2015
General Comments
This paper continued the format of recent diets having two sections and all questions were compulsory. Section A
consisted of twenty 2-mark multiple-choice questions (MCQs) which covered a broad range of syllabus topics.
Section B consisted of three questions (two for 15 marks and one for 30 marks). These questions covered the
main syllabus areas of financial reporting, interpretation and analytical.

Overall, candidates’ marks for both sections were well correlated. The numerical parts of the Section B questions
were generally very well answered; however, as in past papers, the interpretation of ratios question was not very
well answered with many candidates stating the obvious (e.g. this company's ratio is higher than the other
company's ratio) without offering any real interpretation or analysis.

Specific comments

Section A

As might be expected, virtually all candidates attempted all the questions; as a last resort an educated guess is
better than no answer. It is essential that candidates prepare for the F7 examination by working through the
examples provided in the specimen papers and the materials provided by Approved Learning Partners. This and
previous examiner's reports give examples of past MCQs that have caused particular difficulty for candidates. The
commentary below is based on two such questions from the December 2015 exam and explains the correct
answer and suggests why candidates may have selected a distracter (wrong answer). Section A questions are
intended to examine across the syllabus and therefore candidates are required to have a broad F7 knowledge
rather than just revising what are deemed to be the main syllabus areas.

Sample multiple-choice questions for discussion

Example 1
Ponto acquired 100% of the equity share capital of Sonto on 1 January 20X7. A fair value exercise conducted at
this date identified two issues:

Issue 1 – Sonto owned the rights to a brand which it had developed internally. The fair value of the brand at 1
January 20X7 was reliably measured at $20,000.

Issue 2 – Sonto was defending a legal claim brought against it by a former employee. The fair value of the
potential liability for damages payable was reliably measured at $85,000 on 1 January 20X7. Sonto’s legal team
had advised that there was only a 30% chance that they would lose the court case.

Both of these issues had been treated correctly in the separate financial statements of Sonto at 1 January 20X7.
The purchase consideration paid by Ponto had already been agreed and will not be adjusted for the above issues.

What effect will these issues have on the calculation of the goodwill arising on the acquisition of Sonto in the
consolidated financial statements of Ponto?

A Both issues will increase goodwill

B Both issues will decrease goodwill
C Issue 1 will increase goodwill and issue 2 will have no effect on goodwill
D Issue 1 will decrease goodwill and issue 2 will increase goodwill

Examiner’s report – F7 December 2015 1

Commentary
Once the purchase consideration for an acquisition has been agreed, then the recognition of an asset or an
increase in the fair value of an asset will act to decrease the calculated goodwill figure (compared to the goodwill
if no asset increase is recognised). This is because goodwill is equal to the purchase consideration less the fair
value of the net assets at the date of acquisition The opposite of this is also true; where a liability is recognised
as part of the fair value exercise, this will increase the calculated goodwill. Once this is understood, the question
amounts to understanding whether issue 1 and 2 create assets or liabilities (or neither).

Most candidates would be aware that issue 1 creates a recognisable asset as the value of the brand can be
measured reliably. The effect of this would be to decrease goodwill.

Issue 2 may have caused more problems. In the subsidiary's own financial statements this would correctly be
treated as a contingent liability and disclosed in a note rather than be provided for. This is because the
probability of a liability (losing the court case) is only 30%. However, on acquisition, where the fair value of a
contingent liability of a subsidiary can be reliably measured, it should be recognised in the consolidated financial
statements. On this basis issue 2 creates a liability on acquisition and would act to increase the calculated
goodwill (the opposite of issue 1).

Answer D is therefore correct, however over 60% of candidates thought answer C was correct. This implies that
they believed a reliably measurable contingent liability has the same treatment on consolidation as it does in the
financial statements of the subsidiary. I suspect candidates answering A or B were simply guessing.

Example 2
During 20X4, Bloop incurred expenditure on two projects.

Project 1 costs relate to the initial design work on a new product which the company expects to develop for
production over 20X5 and 20X6. At the beginning of the year, the company spent $2m on design equipment
(which has an expected life of four years) and $1m on related salaries and materials.

Project 2 involves the testing of a new product which will be introduced to the market in 20X5 and is expected to
generate profits over a four-year period. The company spent $4m on salaries and materials.

What is the total charge to profit or loss in 20X4 for the two projects in accordance with IFRS?

A $5·5m
B $3m
C $1·5m
D $1m

Commentary
This question tested an understanding of intangible assets relating to research and development. Project 1 is the
initial design of a potential new product, at this stage the project does not meet the criteria for capitalisation and
so related costs should be charged to profit or loss. The $2m spent on design equipment is a tangible non-
current asset (property, plant and equipment), thus the depreciation ($0.5m = $2m/4 years) should be
expensed, together with the related costs of $1m on salaries and materials ($1.5m in total).

Examiner’s report – F7 December 2015 2

Project 2 is at the testing stage of the development process, at which point any expenditure meets the criteria for
capitalisation and therefore should not be expensed to profit or loss (until it is amortised when the product is
introduced to the market in 20X5).

Answer C is therefore correct. The most common answer from candidates was A, which means those candidates
thought both projects were at the research stage. Answer B was also quite popular, which implies that
candidates had not treated the design equipment as property, plant and equipment and instead fully expensed it,
whereas answer A (about 10% of answers) ignored or forgot to depreciate the plant.

Commentary on Section B

Question One

This was a 15 mark question requiring the calculation of consolidated goodwill (part (a) for 4 marks) and the
preparation of a consolidated statement of profit or loss and other comprehensive income for 11 marks (part (b)).
This question was generally well answered by candidates, with some gaining very high marks.

Part (a) contained many items that have been extensively examined in past papers; for the purchase
consideration there was a share exchange, contingent consideration and non-controlling interest valued at fair
value. The net assets acquired required an adjustment for the fair value of plant. The most common error was to
include the contingent consideration at its value on the date the financial statements were being prepared (the
year-end). It should have been at its original estimate with any change reported in profit or loss.

Part (b), the preparation of a consolidated statement of profit or loss and other comprehensive income, required
time apportionment (nine months post-acquisition) for the acquisition of the subsidiary together with adjustments
for unrealised profit (URP) in inventory and replacing the dividend income from an associate with the parent's
share of its underlying profit (after tax). The other comprehensive income related to the revaluation of the group's
property.
This was generally well done; however, the most common errors were:
- failure to time apportion some line items (commonly the associate's profit and additional depreciation
on the plant)
- excluding all of the intra-group sales/purchases in the year (only post-acquisition intra-group items
should be eliminated)
- using the wrong margin to calculate URP (and sometimes basing the URP on all intra-group sales,
rather than on the inventory at the year-end)
- omitting the increase in the contingent consideration (following on from part (a))
- time apportioning the property revaluation gain of the subsidiary, even though the question clearly
stated this gain was all post-acquisition
- failure to adjust the subsidiary's profit for the time apportionment, URP in inventory and additional
depreciation, before calculating the non-controlling interest figures

Question Two

Examiner’s report – F7 December 2015 3

Part (a) was an 11 mark question based on assessing the relevant performance of two companies that were
being considered for acquisition by a third company, followed by part (b) for 4 marks describing what further
information would be useful when making an acquisition decision.

The information provided in the question for each company was (summarised) statements of profit or loss and
financial position, together with nine selected ratios that had already been calculated. A minority of candidates
recalculated or checked the given ratios which wasted their time.

On the whole, part (a) was poorly answered with many candidates gaining only 3 or 4 marks. The main problem,
which has been commented on many times in previous examiner’s reports, was that the majority of the
interpretation consisted of repeating what the ratios were for each company and saying that one was higher than
the other. A slight improvement on this was that sometimes candidates added that the higher ratio indicated a
better performance.

A good answer to an interpretation question has to go deeper than this and suggest why one company's ratios
may be higher (or better) than the other. To this end there was a lot of information (in addition to the ratios)
provided in the financial statements. For example, one company had received a government grant which
(unusually, but allowable) had been deducted from the carrying amount of the related asset. The relevance of this
is that it would create a lower capital employed (and therefore a higher ROCE) than if the grant had been treated
as, more usually, a deferred credit. Other important differences between the companies were: one company
owned plant, the other mainly leased plant (and the owned plant it did have was nearing the end of its life,
which too has important implications for the future). Also one company revalued its property (evidenced by a
revaluation surplus in reserves) whilst the other did not, this might have had implications for security of
borrowings. Both companies had $5m in loan notes, but one company's interest rate was 5% whilst the other
was 10%, again worthy of questioning why this should be.

Answers discussing liquidity and gearing were a little better and gained appropriate marks.

Pleasingly answers to part (b) were much better and more incisive with several candidates gaining full marks for
this part; however, calculating further specific accounting ratios in answer to this part earned no marks.

Question Three

This 30 mark question was set on the preparation of the financial statements of a single entity company from a
trial balance with several adjustments. There were four parts: a statement profit or loss and other comprehensive
income, a statement of changes in equity (SOCIE), a statement of financial position and some statement of cash
flows extracts.
The adjustments required by the notes to the trial balance included, a property revaluation with related deferred
tax, finance leases including a new lease at the beginning of the year to be incorporated with existing leases, a
redemption of convertible loan notes (by a combination of cash and equity) including a new issue of equity shares
to fund part of the redemption, and income and deferred tax provisions.
Most well-prepared candidates had a very good attempt at this question and generally scored good marks. The
basic preparation and formatting of the statements seemed to be understood although some of the adjustments
caused problems.

Common errors:

Examiner’s report – F7 December 2015 4

 - some candidates had difficulty working out the remaining life of the revalued property, the original life
was 20 years and the accumulated amortisation at the date of revaluation amounted to five years which meant
the remaining life was 15 years.
- many candidates tried to separate the new finance lease from the existing leases in calculating both the
amortisation charge and finance costs. For the latter, the question specifically said not to do this, and, indeed,
there was insufficient information to be able do this. Rather inexplicably, a minority of candidates tried to
calculate the lease finance costs and outstanding lease obligations (current and non-current) by starting with the
opening carrying amount of the leased assets (rather than the opening lease obligation). Despite this, most
candidates did seem to understand the principle of finance leases and gained appropriate credit even if one or
two incorrect figures were used.
- some candidates did not separate the dividend paid from the loan interest paid, effectively treating the
equity dividend as an expense rather than as a deduction from retained earnings.
- the issue of the equity shares used to partly fund the redemption of the convertible loan notes was
generally correctly accounted for and reflected in the SOCIE; however, the actual conversion caused more
problems, the most common of which was to only account for the nominal value of the conversion (ignoring the
imputed premium) in the SOCIE.
- the taxation aspects were generally well done, but there were some problems with deferred tax. The
deferred tax liability relating to the revaluation gain should have been shown in other comprehensive income
(alongside the revaluation itself) and several candidates got some signing wrong, deducting items that should
have been added. Also, on the statement of financial position, many included the opening balance (instead of the
closing balance) for deferred tax and included the previous years under provision (settled by the year end) in the
current tax liability at the year-end.

The last part of this question asked candidates to prepare the cash flows from financing activities as an extract
from the statement of cash flows. This was similar (in principle) to part (e) of question 3 in June 2015 which
was very poorly answered. It was pleasing to note that the answers for this paper were much improved, most
candidates at least attempted it, but there were still several errors. The main problems were that most candidates
could not work out the cash repayment of the finance lease which was the cash payments during the year less
the amount attributable to (and reported as) finance costs. The redemption of the loan notes was either omitted
or shown at the full amount (rather than the just the cash element).

Conclusion

Generally the performance was good, but with room for improvement, particularly on the MCQs. Candidates are
reminded of the importance of working through the resources provided by Approved Learning Partners and
reviewing F7 past papers to identify the skills required in applying their knowledge in the examination. An
appropriate level of referenced workings are essential to allow markers to understand how answers have been
arrived at - excessively lengthy or absent workings do not allow markers to do that. The F7 syllabus is extensive
and good preparation of the whole syllabus is required as well as key technical skills such as analysis and
interpretation. Well-developed examination techniques are also important to your success.

Examiner’s report – F7 December 2015 5

Examiner’s report
F7 Financial Reporting
September 2015
General Comments
There were two sections to the examination paper and all questions were compulsory. Section A consisted of 20
multiple-choice questions (two marks each) which covered a broad range of syllabus topics. Section B consisted
of three questions (2 for 15 marks and one for 30 marks). These questions covered the main syllabus areas in
more depth, supporting both financial statement preparation and interpretation skills.

The numerical aspects of the Section B questions were encouraging and it would appear that candidates are
becoming increasingly familiar with IFRS terminology and formats. Basic errors seen previously, such as
proportional consolidation, were very rare. The interpretation question was the weakest as candidates relied too
heavily on the ratios and did not make sufficient use of the additional information provided ; for example, the
timing of the changes in the second year and their influence on the results of that year.

Specific comments

Section A

It was pleasing to note that, once again, most candidates attempted all of the multiple choice questions.
Candidates preparing for a subsequent F7 examination are advised to work through the pilot paper, past exam
papers and the two sample questions from this paper provided below. The development of the correct answers
in the two questions used below should be reviewed carefully as these are examples of questions where students
made common errors. Section A questions will continue to provide a broad coverage of the syllabus and
therefore candidates should aim to revise all areas of the F7 syllabus, rather than attempt to "spot questions".
The following two questions are reviewed with the aim of giving future candidates a technical review of the
question, guidance on how to approach such questions and an indication of the types of questions posed in
Section A of the exam.

Sample questions for discussion

Example 1

Jetsam Co entered into a lease for an item of plant on 1 April 20X0 which required payments of $15,000 to be
made annually in arrears. The fair value of the asset was estimated at $100,000 at the inception of the lease
and Jetsam Co's cost of borrowing is 8%. The lease was for a three- year period and the plant's estimated
economic life was ten years.

What amount should he charged to profit or loss relating to the lease for the year ended 31 December 20X0?
(Answer to the nearest thousands)

A $11,250 8,000
B $6,000 18,000
C $7,500 31,000
D $13,500 41,000

This question tested candidate's knowledge of lease agreements and the distinction between an operating and a
finance lease. Although information was given that referred to a finance lease agreement for the asset,
candidates were expected to understand that, by leasing the asset for only three years of its ten year life, it was

Examiner’s report – F7 September 2015 1

 The correct answer is C.

an operating lease. The lease rental, as an expense, needed to be time apportioned at $15,000 x 9/12 =
$11,250 = Answer A.

Many candidates treated the lease as a finance lease and calculated the depreciation charge ($100,000/10
years x 9/12 = $7,500 = Answer C) or the finance charge ($100,000 x 8% x 9/12 = $6,000 = Answer B) or
combined the two charges to $13,500 (Answer D). As already noted this was an operating lease and therefore
these figures were not appropriate in this case.

This topic covers a key area of financial statement preparation and leases have been regularly examined. The
distinction between the two types of lease and the accounting treatment of both, following IAS 17 Leases, is a
topic that future candidates should be aware of.

Example 2

Inventory may be measured on a first in, first out (FIFO) or a weighted average cost (WAC) basis. For property,
plant and equipment (PPE) the choice is between the cost and revaluation models.

In a period of rising prices, which of the following combinations would lead to higher profitability ratios?

Inventory PPE

A FIFO Revaluation model

B FIFO Cost model
C WAC Revaluation model
D WAC Cost model

As the question gives all four combinations, and specifically mentions rising prices, it needed deductive reasoning
to determine that the correct answer was B.

FIFO would give a lower cost of sales than WAC and therefore higher profits and profitability ratios (such as gross
and operating profit margins). This would eliminate distractors C and D.
The PPE cost model would give lower depreciation charges than the revaluation model and therefore higher
profits and lower capital employed (both combining to give a higher return on capital employed). This eliminates
answer A.

The analysis of financial statements and the impact of alternative valuation models on financial ratios is a key
area of the F7 syllabus and will continue to be examined in a variety of forms.

Section B

Question One

This was a fifteen mark question requiring the preparation of a statement of profit or loss and other
comprehensive income and a statement of changes in equity for a single company using IFRS formats. This was
generally well answered by candidates.

Examiner’s report – F7 September 2015 2

However, many candidates wasted valuable time by preparing lengthy journal entries to support the adjustments
in the question. These were not necessary to answer the question and candidates should refer to similar F7
single company financial statement preparation questions in recent past papers. A number of candidates also
prepared either the statement of financial position or supporting workings (such as non-current asset carrying
amounts) which was also not necessary and earned them no marks.

It continues to be the case that, even at this level, a significant number of candidates cannot distinguish between
straight line (cost-based) and reducing balance (carrying amount-based) depreciation. The question will always
makes clear which method is to be used (and if time apportionment is to be used).

The finance cost of a loan note should, always be based on the effective cost (rather than the "coupon" rate) and,
of course, time apportioned where necessary. In this question there was also an in-substance loan (based on a
cash receipt treated as sales rather than a loan) which would also attract a finance charge based on the given
rate of interest. Many candidates either ignored or incorrectly accounted for these costs.

The question included the revaluation of property and many candidates took the revaluation surplus as the
difference between the asset's cost and fair value. The correct treatment is the difference between the asset's
carrying amount and fair value.

In the statement of changes in equity, a majority of candidates worked forwards and, in effect, accounted for the
share issue a second time. The information in the question stated the balances as at the reporting date so for
this statement it was necessary to work backwards to determine the opening balances on share capital and share
premium. The error with share capital meant that the dividend was calculated on the wrong number of shares,
but candidates gained marks under the own figure rule for deducting dividends from retained earnings (those
candidates who deducted dividends from other elements of equity did not obtain those marks).

Question 2

This was a two-part interpretation question with part (a) (for four marks) requiring candidates to calculate two
specified ratios. There was sufficient information given in the question to indicate figures that should be included
in, and excluded from, the ratios. The only exception was operating profit (or profit before interest and tax - the
same figure in this question) which candidates were expected to use as the numerator for ROCE. Whilst many
candidates, by showing full workings, gained all four marks there were others who had little idea of how to link
the numerator and denominator to obtain meaningful ratios for both years.

Part (b) for 11 marks was less well answered. Many candidates simply repeated the ratios from part (a) and
stated whether they had increased or decreased (not even suggesting whether they gave a better or worse
position). The central aim of the question was to comment on the changes that had taken place during the
second year, although these had only been implemented half way through the year so the results could not reflect
a full year's benefit from them. Few candidates realised that, although there was only half a year's results from
the changes in the statement of profit or loss, the statement of financial positon reflected the year-end position as
a result of the changes. The changes made during the second year should lead to improved results in the future.

Although the basis of the ratio calculations was clearly stated in part (a), for part (b) candidates should have
discussed the impact of the property revaluation (in the second year only) and the change from an operating
lease to a finance lease. It was not necessary to recalculate numbers or new ratios to reflect these changes -

Examiner’s report – F7 September 2015 3

although many candidates wasted time by doing so - but to discuss their impact and the lack of direct
comparability between the two year's financial statements as presented.

Question 3

This 30 mark question required the preparation of a consolidated statement of financial position which has been
examined many times in the past (for 25 marks) and a short separate written relating to an associate (for 5
marks).

With respect to the goodwill calculation, the common problems were: (i) missing one or more elements of the
calculation of the controlling or non-controlling interest at the date of acquisition; (ii) not correctly determining
the pre-acquisition element of the retained earnings from the year of acquisition (a seasonal or a time-
apportioned adjustment); (iii) adding the fair value adjustment of an asset where its fair value was less than its
carrying value ; (iv) ignoring the intangible asset to be recognised by the parent on acquisition although this asset
would not be separately recognised by the subsidiary in its own financial statements; and (v) ignoring the fair
value adjustment (at acquisition) of the subsidiary's own financial asset investments.

For the consolidation itself common problems were: (i) not increasing the carrying amount of property, plant and
equipment by the reduced depreciation charge from the fair value adjustment noted above (if the fair value of the
asset is decreased then the post-acquisition depreciation charge should also be reduced); (ii) not amortising the
intangible asset recognised separately in the goodwill calculation; (iii) using (in this case) margin rather than
mark-up to determine unrealised profit on inventory held and in transit; (iv) not accounting correctly for goods in
transit and inter-company balances and ensuring the correct elimination of items; (v) not correctly adjusting share
capital and share premium from the purchase consideration calculated at the goodwill stage; (vi) not accounting
for the deferred consideration or the outstanding interest (as a deduction from post-acquisition profits and an
addition to the liability); and (vii) not accounting for the acquisition taking place part way through the year, thus
requiring several items to be time apportioned.

Part (b) for 5 marks was generally poorly answered. It may be that candidates felt the 95% already completed
would be sufficient to gain a pass mark, although there was no other evidence of particular time management
problems and all three Section B questions were attempted by nearly all candidates.

The question required candidates to distinguish between the first part of the year when an investment was held
as an associate (with a level of shareholding and board representation to give significant influence over the
investee) and the second part of the year when, although the shareholding was unchanged, there was no longer
any representation on the board. This change meant that there was no significant influence and it was no longer
an investment in an associate and equity accounting could no longer be used. Few candidates appreciated the
status of the investment changed once board representation was lost or that, from that point onwards it would be
treated as an investment at fair value through profit or loss.

Conclusion

For this first September sitting, performance was generally good and encouraging. Candidates are, once again,
reminded of the importance of reviewing past F7 papers to identify the skills required in applying their knowledge
in the examination. An appropriate level of workings supports good answers and allows markers to understand
how answers have been arrived at - excessively lengthy and absent workings do not allow that to happen. The

Examiner’s report – F7 September 2015 4

F7 syllabus is extensive but good exam (and exam preparation) techniques are just as important as learning the
key elements of International Standards, with preparation and analytical skills.

Examiner’s report – F7 September 2015 5

Examiner’s report
F7 Financial Reporting
June 2015

General Comments

Section A of this exam contains twenty 2 mark (40 marks in total) multiple choice questions (MCQs)
whilst Section B comprises of two 15 mark questions and one 30 mark question. The performance on
both sections was closely correlated.

The paper, particularly section B, was regarded by most commentators as a fair test of familiar topics
on which a well-prepared candidate should have been successful.

Section A
The inclusion of MCQs allows each diet to cover most of the syllabus. This means that it is necessary
for candidates to study the whole of the syllabus and not concentrate solely on what are perceived to
be 'core' areas. The scores on individual MCQs varied considerably and the comments below relate to a
number of questions that were not very well answered. The first two are examples of narrative
questions, whereas the third example is computation based.

Example 1
Faithful representation is a fundamental characteristic of useful information within the IASB’s
Conceptual framework for financial reporting.

Which of the following accounting treatments correctly applies the principle of faithful representation?

A Reporting a transaction based on its legal status rather than its economic substance

B Excluding a subsidiary from consolidation because its activities are not compatible with those of the
rest of the group

C Recording the whole of the net proceeds from the issue of a loan note which is potentially
convertible to equity shares as debt (liability)

D Allocating part of the sales proceeds of a motor vehicle to interest received even though it was sold
with 0% (interest free) finance

The correct answer to this question was D. The principle of the cost of finance has been examined at
F7 several times and with this type of 0% interest product, the finance cost is built into the selling
price. A similar principle would also apply to other 'offers' such as free maintenance or insurance.

Approximately half of candidates believed C to the correct answer. This is really surprising as the
treatment of a convertible loan note which involves splitting the initial proceeds between debt and the
value of the equity option has been examined often (and answered well). Perhaps many candidates
did not read or think about the words 'whole of the proceeds' or 'convertible' properly.

Examiner’s report – F7 - June 2015 1

Example 2
Which of the following statements relating to intangible assets is true?

A All intangible assets must be carried at amortised cost or at an impaired amount; they cannot be
revalued upwards

B The development of a new process which is not expected to increase sales revenues may still be
recognised as an intangible asset

C Expenditure on the prototype of a new engine cannot be classified as an intangible asset because the
prototype has been assembled and has physical substance

D Impairment losses for a cash generating unit are first applied to goodwill and then to other intangible
assets before being applied to tangible assets

The correct answer to this question was B. It seems most candidates assumed that, because the
process would not generate additional sales revenues, it could not deliver future economic benefits (the
core definition of an asset, intangible or otherwise). This is not the case, many development processes
are intended to save costs, such as new cheaper and better materials or more efficient production
methods. These too can deliver future economic benefits and so can be capitalised (subject to other
criteria being favourable). The most frequent incorrect answer was D, followed by C. After applying
impairment losses to goodwill, IFRS requirements do not differentiate between intangible and tangible
assets, they are both written down pro rata (subject to other factors). With C, candidates did not
seems to realise that it is the technology involved in the prototype that is the real asset (IAS 38
specifically indentifies technology as an intangible asset), not the physical components of it.

The poor performance on this question is perhaps due to an inability to apply knowledge to a given
situation, rather than an issue of examination technique.

Example 3
19 Hindberg is a car retailer. On 1 April 2014, Hindberg sold a car to Latterly on the following terms:
The selling price of the car was $25,300. Latterly paid $12,650 (half of the cost) on 1 April 2014
and would pay the remaining $12,650 on 31 March 2016 (two years after the sale). Hindberg’s cost
of capital is 10% per annum.

What is the total amount which Hindberg should credit to profit or loss in respect of this transaction in
the year
ended 31 March 2015?

A $23,105
B $23,000
C $20,909
D $24,150

The correct answer is D. At 31 March 2015 (one year after the initial sale), the deferred

Examiner’s report – F7 - June 2015 2

consideration of $12,650 would need to be discounted by 10% for one year to $11,500 (effectively
deferring a finance cost of $1,150). The total amount credited to profit or loss would be $24,150
(12,650 + 11,500 or 25,300 - 1,150).

Over half of candidates arrived at A as their (incorrect) answer which discounted the finance for two
years (but only one year remained at 31 March 2015). The other possible explanation of this error is
that this figure of £23,105 is the sales revenue to be reported, but the question asked for the total
amount credited to profit and loss (which must include the interest receivable for one year). Distracters
B and C discount the whole of the proceeds (rather than half) for one year and two years respectively.

Section B
The questions in section B were generally well answered by well-prepared candidates.

Continuing the trend from the last diet, perhaps due to the new structure, most candidates attempted
all the required questions in section B, however many candidates did not attempt sections (d) (EPS)
and (e) (cash flow extracts) of question 3. There were other examples of poor examination technique,
in particular, not reading the question requirement carefully and not planning the answer (including
timing) properly.

Other familiar poor examination technique issues were: a lack of understandable workings for some
figures and poor handwriting that many markers struggled to read.

Report on individual questions

Question One
This question was on consolidation. Part (a) required candidates to calculate consolidated goodwill
and part (b) required extracts of the main line items of the consolidated statement of profit or loss. The
question included the treatment of fair value of plant at acquisition, unrealised profit in inventory and
goodwill impairment. Most candidates scored well on part (a), many gaining full marks. The two most
common errors relating to the consideration were using the share price of the subsidiary where it
should have been that of the parent, and failing to discount the deferred consideration (using $1.54
instead of $1.40).

A slightly unusual aspect of calculating the subsidiary's net assets at acquisition was that the pre-
acquisition profits needed to be increased for an amount of borrowing cost (interest) that should have
been capitalised under IFRS. This adjustment cause difficulty for many candidates (it was commonly
ignored or deducted from pre-acquisition profits and/or not time apportioned), but other than this, most
candidates were able to calculate the net assets at acquisition.

Part (b) required the calculation of consolidated revenue, cost of sales, finance costs and non-
controlling interest in profit for the period. The revenue and cost of sales calculations were generally
well done although occasionally candidates missed the impairment of goodwill or gave an incorrect
additional depreciation calculation or incorrectly calculated the unrealised profit in inventory.

The most common error with the finance costs figure was not to include the unwinding of the deferred
consideration, and sometimes for those that did account for this, they failed to time apportion the cost.

Examiner’s report – F7 - June 2015 3

The capitalisation of the borrowing costs referred to in (a) also caused similar problems with this
calculation.

Most candidates understood the principle of calculating the non-controlling interest, but often made
errors with the adjustments for the impairment of goodwill, the additional depreciation and including
the unrealised profit (although it was the parent that made the sale). A slightly worrying error was that
some candidates started their calculation with the non-controlling interest used in the calculation of
goodwill.

Many candidates prepared a full consolidated statement of profit or loss as well as the specific figures
required which only wasted time and earned no additional marks.

Overall most candidates scored well on this question.

Question Two
This question was a traditional interpretation question; part (a) required the calculation of specified
ratios and part (b) required a comparative analysis of the financial performance they revealed. The
complication introduced in this question was that at the beginning of the current year (ended 31
March 2015) the company sold one of its divisions. The question gave four selected ratios for the year
ended 31 March 2014 (which included the results of the division that had been sold) and then
identified the division's separate profit or loss figures for that year.

Part (a)(i) required the recalculation of the given 2014 ratios after excluding the results of the sold
division and (a)(ii) required the calculation of the equivalent ratios for the current year (2015). The
purpose of this was that the ratios in (a)(i) and (a)(ii) would then be comparable.

The calculation of the ratios was disappointing, many candidates did not seem able to adjust properly
for the effect of the sale of the division, in particular candidates failed to eliminate the carrying amount
of the division when calculating the ROCE and net asset turnover for the adjusted ratios for 2014 (i.e.
those for (a) (i)). Another common error was the failure to exclude the profit on the sale of the division
when calculating the operating profit margin for 2015, despite the question requirement specifically
stating this. Even some of the straightforward ratios, which are required knowledge at F3, were not
calculated correctly and a significant number of candidates did not calculate the net asset turnover
ratios at all.

The answers to part (b) were mixed; good answers correctly identified the effects of the disposal
(overall a detrimental effect on the results and probably an unwise sale) and other important issues.
Those answers that merely reiterated in words the movements in the calculated ratios did not score
highly. For example, merely saying that the return on capital employed has increased by x% without
giving the breakdown of the increase between profit margins and asset utilisation (the secondary ratios)
or suggestions as to what may have caused the changes, is not interpretation. Many answers made no
reference to the sale of the division at all and merely commented on the changes in the ratios.

Another poor exam technique included the calculation of many ratios that were not asked for (usually
liquidity ratios) and then to discuss these in fine detail. It sometimes seems that candidates have
prepared a specific approach to answering an interpretation question which they proceed to give,

Examiner’s report – F7 - June 2015 4

without focusing on what the question is actually asking for. Very few candidates commented on the
lack of wisdom in paying such a large dividend and the effect of paying off half of the loan notes and
the bank overdraft.

It should be understood that where candidates made errors in the calculation of the ratios in part (a)
and assessed the comparative performance accordingly, markers were instructed to mark such
interpretation as being correct (assuming it was), even though it may have been different to that in the
published answers. This is a form of the 'own figure' marking principle.

Question Three
This was a traditional preparation of the financial statements for a single entity. The three main parts
(a) to (c) were the usual preparation of statements of profit or loss, changes in equity and financial
position. Part (d) was a 3 mark section on the calculation of basic earnings per share, involving the
effects of a share issue at below market price and part (e) was short extracts from the statement of
cash flows.

The question included notes requiring accounting for a rights issue of shares, redemption of loan notes,
capitalisation of environmental costs, plant on both finance and operating leases, fair valuing and
disposal of investments and the usual tax adjustments including deferred tax.
Most well-prepared candidates were expecting this type of question and scored very well on it, even if
they weren't able to complete it. However, a significant number of candidates did not attempt the
earnings per share and cash flow extracts of parts (d) and (e). Both of these topics have been
examined many times, were not difficult, and thus represented a lost opportunity to gain some
relatively easy marks.
The more common errors are detailed below:
Part (a) statement of profit or loss:
 Depreciation as part of cost of sales should have been straightforward (85 million × 20%),
however many candidates separated two new acquisitions of plant (one under a finance lease)
when the question clearly stated that these items were already included in property plant and
equipment. A significant number of candidates applied reducing balance depreciation although
the question clearly stated the straight line basis should be used. The other problem area
within cost of sales was the incorrect treatment of the operating lease premium. Such
premiums, payable at the beginning of the lease, should be spread over the lease term, in this
case for four years. The deferred element of the premium is treated as an asset.
 Finance costs often excluded the second-half of the loan note interest (which was part of the
suspense account), showed incorrect finance lease interest (some marks were given for
incorrect figures here), and omitted the finance cost on the unwinding of the environmental
provision.
 In the calculation of the investment income, candidates sometimes incorrectly deducted sales
of $1.4 million from the investment's carrying amount before calculating the fair value gain at
$1.9 million instead of the correct figure of $500,000 (the sale proceeds had already been
deducted from the investment's carrying amount in the trial balance). A minority of candidates
showed the gain (of $1.9 million or $500,000) as other comprehensive income when the
question clearly stated the investments were at fair value through profit or loss.

Examiner’s report – F7 - June 2015 5

  The most common mistake on taxation was to get either the adjustment for the previous year's
overprovision or the movement on deferred tax the wrong way around although overall there
was a marked improvement in the treatment of taxation items compared to recent diets.

Part (b) statement of changes in equity:

The only significant error in this section was that several candidates did not realise that the figures for
share capital and share premium in the trial balance already included the 1 for 5 rights issue; thus
they showed opening share capital of $30 million and calculated the rights issue at $6 million,
whereas the correct answer was to work back from the closing share capital of $30 million to calculate
the rights issue had been for 5 million $1 shares (with an equivalent effect on the share premium).
'Own figures' were marked as correct for the profit for the year but some candidates forgot to deduct
the dividends paid. Some candidates showed the dividends received from the investments in this
statement rather than in the statement of profit or loss and many candidates either showed the
dividends paid as a deduction from profit after tax or (worse still) as a finance cost in the statement of
profit or loss.

Part (c) statement of financial position:

As with questions of this type, many errors in the statement of financial position were the knock-on
effects from previous calculations. Again under the 'own figure rule' such errors were marked as being
correct assuming the correct principles had been followed.

This point particularly applied to non-current assets as nearly all errors here related to previous errors
made in the calculation of profit or loss account items, the most common being depreciation charges
and not correctly deferring the operating lease premium. Some candidates accrued six months interest
on the loan notes whereas it had already been paid, but included in the suspense account.

Some candidates included the trial balance figure for deferred tax rather than the closing balance, this
was usually because they had not calculated the movement on deferred tax.

Where candidates had not calculated a finance cost for the environmental provision, it was also
omitted from the liability and often the environmental provision itself was completely omitted. Most
candidates had a good attempt at dealing with the finance lease, the most common error was to treat
the annual payment as occurring at the beginning rather than the end of the year. This is relatively
minor error, and as long as the principles were still followed, such an answer attracted most of the
marks available. Worryingly, some candidates treated the overdraft as cash in hand whilst some forgot
to include the current tax payable in current liabilities.

Part (d) earnings per share:

As mentioned earlier, this part (and (e)) was often not answered at all. Of those that did answer it,
many gained most, if not all, of the marks. Most of the errors related to an incorrect profit figure or
using the incorrect amounts for share capital pre- and post- the rights issue, but, provided candidates
were consistent with the use of the figures that they had calculated in parts (a) and part (b) for these
figures, they were given the appropriate marks. Most of the marks lost on this section were mainly due
to the incorrect calculation of the theoretical ex-rights value of the shares (or inverting the diluting
effect of this calculation).

Examiner’s report – F7 - June 2015 6

Part (e) extracts from the statement of cash flows:
Apart from where candidates did not give any answer for this section, there were other worrying errors.
Several candidates did not seem to know the contents of investing and financing activities, instead
these candidates often (tried to) reproduce the cash flows from operations or even a full statement of
cash flows. By contrast, some candidates that did know the contents of the required sections,
produced a 'pro forma' extract which contained no figures. This may have been in the mistaken belief
that such an answer would attract some format marks, this is not the case; the marks available are for
the figures. It is also possible in this situation that the candidates were running out of time, if this is
so, it is better to give some of the figures for the cash flows (which will gain some marks) rather than
the whole of a cash flow extract with no figures (this gains no marks).

As a point of examination technique, most of the figures required to answer this section were available
either directly from the question (e.g. the cash price purchase of plant (item 1) and sale of
investments) or from calculations made in answering the previous parts (e.g. the issue of shares,
redemption of loan notes and equity dividends). Thus an answer should have been very quick to
prepare. The only calculation necessary was for the repayment of the finance lease which required the
deduction of the interest charge from the total of the deposit and the first annual payment of the lease.
Again the marks in this section would have been given for 'own figures'.

Conclusion

Overall many candidates appeared not to have progressed their knowledge sufficiently beyond F3.
There also seemed to be a lot of poor examination technique, perhaps caused by not spending enough
time practicing past questions and/or spending too much time on Section A.

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. There were also many excellent scripts that were rewarded
appropriately.

Examiner’s report – F7 - June 2015 7

Examiner’s report
F7 Financial Reporting
December 2014
General Comments
This paper consisted of twenty 2 mark (40 marks in total) multiple choice questions (MCQs) in Section A which
are electronically marked and a 60 mark Section B with two 15 mark and one 30 mark question which are
professionally marked. Candidates’ performance on both sections was closely correlated and the overall
performance has maintained the satisfactory performance of recent diets.

The paper was regarded by most commentators as a fair test of familiar topics which a well-prepared candidate
should have comfortably passed.

Section A
As may be expected, the scores on individual MCQs varied considerably and the following comments relate to
two questions that were not very well answered.

Question 3
Although most items in financial statements are shown at their historical cost, increasingly the IASB is requiring
or allowing current cost to be used in many areas of financial reporting.

Drexler acquired an item of plant on 1 October 2012 at a cost of $500,000. It has an expected life of five years
(straight-line depreciation) and an estimated residual value of 10% of its historical cost or current cost as
appropriate.
As at 30 September 2014, the manufacturer of the plant still makes the same item of plant and its current price
is $600,000.

What is the correct carrying amount to be shown in the statement of financial position of Drexler as at 30
September 2014 under historical cost and current cost?
historical cost current cost
$ $
A 320,000 600,000
B 320,000 384,000
C 300,000 600,000
D 300,000 384,000

Less than a third of candidates got this answer correct.

The correct answer B is worked out as:

Historical cost
Annual depreciation = $90,000 ((500,000 x 90%)/5 years).
After two years carrying amount would be $320,000 (500,000 - (2 x 90,000))

Current cost
Annual depreciation = $108,000 ((600,000 x 90%)/5 years).
After two years carrying amount would be $384,000 (600,000 - (2 x 108,000))

Most candidates chose A or C meaning that they did not appreciate that the manufacturer's current list price (of
$600,000) was for a NEW item of plant as at 30 September 2014, whereas, at this date, the item of plant

Examiner’s report – F7 December 2014 1

owned by Drexler is two years and the list price needs to be depreciated for two years to give an appropriate
current value.

D was the least popular wrong answer and choosing it would imply that a candidate had not taken account of
the estimated residual value (of 10%) when calculating the historical cost, but had when calculating the current.

Question 19
During the year ended 30 September 2014 Hyper entered into two lease transactions:
On 1 October 2013, a payment $90,000 being the first of five equal annual payments of a finance lease for an
item of plant. The lease has an implicit interest rate of 10% and the fair value (cost to purchase) of the leased
equipment on 1 October 2013 was $340,000.

On 1 January 2014, a payment of $18,000 for a one-year lease of an item of excavation equipment.

What amount in total would be charged to Hyper’s statement of profit or loss for the year ended 30 September
2014 in respect of the above transactions?

A $108,000
B $111,000
C $106,500
D $115,500

This question involves a finance lease and an operating lease which require different treatments. The
requirement is for the amount of the charge to the profit or loss account for both leases. Observing the dates
given, the finance lease charge is based on a full year and comprises of depreciation of the fair value of the plant
plus a finance cost; whereas the operating lease charge is an apportionment of the annual rental as it covers only
nine months of the current year.

The correct answer is C:

$
Depreciation of finance leased plant (340,000/5 years) 68,000
Finance cost ((340,000 - 90,000) x 10%) 25,000
Charge for finance lease 93,000

Rental of excavation equipment (18,000 x 9/12) 13,500

Total charge to profit or loss 106,000

The most common error was answer A which simply treated both lease payments as the annual charge
($90,000 + $18,000 = $108,000). This wrong on two counts; treating the finance lease as an operating lease
and not time apportioning the actual operating lease.

Selecting the incorrect answer of B meant a candidate had treated the finance and operating lease correctly in
principle, but forgot to time apportion the operating lease (which would give $93,000 + $18,000 =
$111,000).

The last incorrect answer of D meant the candidate, again understood the principles of finance and operating
leases, but had treated the finance lease payment as occurring at the end of the year (in arrears) rather at the

Examiner’s report – F7 December 2014 2

beginning of the lease (in advance). Thus the finance charge would have been calculated as $34,000
($340,000 x 10%) instead of $25,000 ((340,000 - 90,000) x 10%) giving answer $9,000 more than the
correct answer.

Although the answers B and D meant that the candidate got most of the question correct, neither gain any marks
which is a feature of multiple choice questions in general.

Section B

The questions in section B covered the areas which in past papers were usually regarded as 'core' topics and as
such were generally well answered, particularly Q3 on consolidation.

A welcoming feature of this diet, perhaps due to the new structure, is that most candidates attempted all the
required questions in section B, although question 1 was the most often omitted when not all questions were
attempted.

Despite the above, there were still some areas of poor examination technique, in particular, not reading (or
thinking about) the question requirements carefully enough. This was particularly true of Q1 (ratio calculation
and interpretation) where a number of candidates calculated and discussed ratios that were not required and
provided a revised statement of financial position. This wasted considerable time and, no matter how accurate
the calculations may be and how good their interpretation, this gained no marks.

Other familiar poor examination technique issues were: a lack of understandable workings for figures and poor
handwriting that many markers struggled to read.

Report on individual questions

Question One
The scenario of this question was that an acquisitive company was seeking to acquire an investment in another
company as part of an expansion programme. The target company's results had been favourably influenced by it
being one of several family owned businesses. It had received a favourable price on its purchases, a lower charge
for directors' remuneration (based on commercial rates of remuneration) and effectively received interest free
directors' loans.
Four ratios for the company (based on the presented results) and the sector averages were provided in the
question.

Requirement (a) asked candidates to recalculate the given ratios after making appropriate adjustments for the
favourable treatments.
Many candidates made a good attempt at the adjustments, the most problematic was an inability to correctly
gross up the actual cost of sales by the 10% discount given by another family company. Many calculated it at
$4.5 million (10% of the $45 million cost of sales) apparently not realising that the cost of sales represented
90% of the 'full' cost and thus the discount was $5 million ($45 million/90% - $45 million). A number of
candidates reduced the cost of sales to $40.5 million and others even reduced revenue by 10%. A substantial
number of candidates added the new amount directors' remuneration to the old amount, whereas the new
amount replaced the previous remuneration.

Examiner’s report – F7 December 2014 3

Other common errors were when calculating return on equity (ROE) many candidates instead calculated return
on capital employed (ROCE), which is a very different ratio, and using equity (rather than capital employed) for
net asset turnover. Despite this, most candidates scored quite well with some gaining full marks.

Part (b) required candidates to comment on the performance of the target company (based on the given and their
adjusted ratios) in comparison to the sector average. Some did quite well; the main issue, relating to most of the
ratios, was that the performance based on the reported results showed the company to be performing much
better than the sector average, but when the favourable effects of being part of a family group were removed, the
company's performance was much closer, but still slightly better, than the sector average. Less well-prepared
candidates simply reiterated the ratios without any real attempt at interpretation, often saying nothing more
than the ratios were higher/lower than the sector averages.

Question Two
This question was a shortened form of a traditional preparation of a single company's financial statements
requiring a schedule of adjustments to retained earnings figure (part (a)) and the preparation of a statement of
financial position (part (b)) from a summarised trial balance (i.e. after a draft statement of profit or loss had been
prepared). Adjustments were required for: the issue of a loan note with an effective interest rate different to the
nominal rate (due to issue costs and a redemption premium); a revaluation of land and buildings; depreciation
and income and deferred tax calculations. This question was generally well answered with most candidates
showing a sound knowledge of preparing financial statements. Most of the errors by candidates were made
within the adjustments:

 The loan note issue costs were sometimes added to (rather than deducted from) the issue proceeds (with
consequential effects on the calculation of interest charges and the loan carrying value in the statement
of financial position). In this case only the initial error caused marks to be lost provided the correct
method of calculation had been used.

 Most did well with the revaluation, but some forgot to include the revalued amount of the land (in the
carrying value of the assets) and some incorrectly depreciated the land. Some candidates that had
calculated the carrying amount of the land and buildings (and the plant) did not adjust the retained
earnings for the related depreciation in part (a); others incorrectly included the revaluation surplus as
part of their calculation of retained earnings.

 The deferred tax seem to cause the most problems; many correctly calculated the movement on deferred
tax for the year at $1.9 million, but they then debited the whole of this to profit or loss (via the schedule
of adjustments to retained earnings). However deferred tax of $2.4 million related to the revaluation of
the land and buildings and should have been debited to the revaluation reserve leaving a credit of
$500,000 ($2.4 million - $1.9 million) as the correct adjustment to retained earnings.

A significant minority of candidates did not prepare a schedule of adjustments to retained earnings (as required
by part (a)) even where the relevant figures had been calculated as part of the preparation of the statement of
financial position. This left markers trying to allocate some credit for these items in the workings. This was
especially true of the depreciation and income tax charges. This is an example of poor examination technique on
the part of those candidates.

Generally the answers to the statement of financial position were quite good and most errors related to previously
mentioned issues.

Examiner’s report – F7 December 2014 4

Question Three
In part (a), this question required candidates to prepare the consolidated statement of profit or loss and other
comprehensive income and the consolidated statement of financial position for 27 marks, with a short three-
mark written part (b) on the recognition of intangible assets at acquisition. Part (a) tested fair value adjustments,
intra-group trading with unrealised profits (URP) and cash in transit, an intra-group loan and a goodwill
impairment.

Part (a) was generally done very well and was the best answered of the section B questions. The majority of
candidates have a good understanding of the principles of consolidation. Nearly all candidates did time apportion
(pre- and post-acquisition) profit or loss items and there were very few examples of (incorrect) proportional
consolidation. There were however some recurring errors of principle in relation to pre- and post-acquisition
adjustments; several candidates treated the post acquisition additional deprecation on the fair value of the plant
(and sometimes the URP on inventory) as part of the goodwill calculation at the date of acquisition. Another
common error was the incorrect determination of the subsidiary's pre-acquisition profit . Several candidates took
the subsidiary's retained earnings at the year-end and added to this the post acquisition share of the subsidiary's
profit for the year. The correct calculations were either to deduct the post-acquisition element (9 months) of the
subsidiary's profit for the year from the retained earnings at the year end, in effect, working back to the pre-
acquisition profit or to calculate the subsidiary's retained earnings at the start of the year and add the pre-
acquisition element (3 months) of the subsidiary's profit for the year, in effect working forwards.

The main errors on the consolidated statement of profit or loss and other comprehensive income related to:
 a deduction of 12 months ($300,000 x12) intra-group sales from revenue (and cost of sales); it
should only be the post-acquisition sales of 9 months ($300,000 x 9)
 URP in inventory was calculated as 25% x $600,000 (i.e. as a gross profit margin) rather than
20% (25/125) x $600,000 (a mark-up on cost) and sometimes even the whole of the inventory
was treated as the URP amount
 additional depreciation of the fair value of plant was sometimes ignored or even time
apportioned, although the question stated this charge specifically referred to the post-acquisition
period
 the goodwill impairment was sometimes deducted from administrative expenses, in effect
treating it as income and this was sometimes time apportioned
 very few candidates got the finance costs amount entirely correct. This was mainly due to the
unwinding of the deferred consideration; some completely ignored it, some based it on $1.98
million rather than the discounted (at 10%) $1.8 million and many included a full year's cost
($180,000) rather than only the post-acquisition amount of nine months ($180,000 x 9/12).
Many candidates also included a full year's interest on the intra-group loan ($100,000)
although as this was accepted on the year-end date there would be no interest charge for the
year (even if there was it would have to cancel with the issuer's interest income)
 the correct reporting of the property revaluation (of the subsidiary) within other comprehensive
income was very mixed; some candidates incorrectly took in the pre-acquisition fair value
increase of the subsidiary's property ( $4 million) and some (also incorrectly) time apportioned
the post-acquisition increase of $600,000
 several candidates did not attempt to calculate a non-controlling interest in the profit for the
year, and even fewer in the total comprehensive income.

Comments on the consolidated statement of financial position:

Many errors in the statement of financial position were 'knock on' errors from calculations made when preparing
the statement of profit or loss and other comprehensive income and, as such, were not marked as being

Examiner’s report – F7 December 2014 5

incorrect. This particularly applied to the revaluation and additional depreciation of plant, URP in inventory,
revaluation surplus, non-controlling interest and deferred consideration (although this item was often completely
omitted).

The calculation of goodwill generally scored well, but errors were made in the calculation of the consideration
mainly due to using incorrect share prices, and the previously mentioned determination of the pre-acquisition
retained earnings.

There was some confusion over the cancellation of intra-group trading and cash in transit (CIT); the elimination of
the payables/receivables was often reversed and the CIT added to inventory or receivables, also the bank
balances were sometimes incorrectly netted off (which is not allowed as the parent and subsidiary are separate
legal entities). A significant number of candidates adjusted the subsidiary's bank balance for the CIT although
the question stated that all cash timing differences should have been adjusted in the parent's financial statements
(thus reducing the parent's reported bank overdraft).

Several candidates did not account correctly (or at all) for the share exchange increasing share capital and share
premium. The non-controlling interest in the statement of financial position was often confused with the non-
controlling interest in total comprehensive income.

Many candidates missed marks on retained earnings by not deducting URP on inventory and/or the finance cost
on the deferred consideration.

Part (b) asked candidates to consider if a subsidiary's in-process research costs and a list of customers were
intangible assets that should be recognised separately (to goodwill) on consolidation. The short answer to this is
they both should be, however most candidates thought the first shouldn't be.
In-process research is an example of where its treatment in the entity financial statements (it should be
expensed) differs to that on consolidation, where it should be recognised if its fair value can be reliably measured

Conclusion
Overall this was an encouraging performance with many candidates displaying good knowledge and technique.
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 necessarily the case. There were many excellent scripts that were rewarded appropriately.

Examiner’s report – F7 December 2014 6

Examiner’s report
F7 Financial Reporting
June 2014

General Comments
The paper was regarded by most commentators as a fair test of familiar topics which a well-prepared candidate
should have comfortably passed and that candidates’ results maintained a satisfactory performance.

The best answered questions were the core questions on consolidated financial statements (Q1) and the
preparation of a single company's financial statements (Q2). The ratios required in question 3 were also generally
very well answered. This gave most candidates a strong base on which to attempt the rather less predictable
questions 4 and 5. Another welcome feature of this diet was that more candidates attempted all five questions
although marks earned on questions 4 and 5 were generally much lower than on the other parts of the paper

However, there were still some examples of poor examination technique; for instance not reading (or thinking
about) the question requirement carefully enough, thus misinterpreting what was required (particularly in Q5 (i)
and Q5 (iii)).

Other issues relating to poor examination technique included: (i) a lack of cross-referenced understandable
workings; (ii) poor handwriting that many markers struggled to read; and (iii) the needless repetition of figures
and/or question requirements which resulted in a waste of the candidates’ time.

Specific Comments

Question One
Part (a) required the calculation of consolidated goodwill dealing with a share exchange and deferred
consideration as well as fair value adjustments for land and plant and the recognition of a separate sales-related
intangible asset (good customer trading relationships).

Part (b) required the preparation of a consolidated statement of profit or loss including the results of an associate.
Some ‘familiar’ adjustments were required: (i) time apportionment of the subsidiary's results; (ii) intra-group
trading and unrealised profits (URP); (iii) additional depreciation of plant and amortisation of the intangible asset
from the fair value exercise; (iv) unwinding of part of the deferred consideration; and (v) dealing with post-
acquisition increases in the value of land for the subsidiary.

The majority of candidates displayed a reasonable working knowledge of consolidation techniques and thereby
gained appropriate marks. However, there is still a small minority of candidates who used proportional
consolidation for the subsidiary and some did not time apportion the subsidiary’s results to reflect the mid-year
acquisition.

For the benefit of future candidates, the most common errors were:

Consolidated goodwill

- Not discounting the deferred consideration by 10% (and consequently not making a finance charge in
the six months post-acquisition period), although credit was given for a finance charge based on non-
discounted consideration.

- Omitting the value of non-controlling interests in the calculation or using the share price of the parent $4
(rather than the share price of the subsidiary at the date of acquisition $2.50).

- Incorrectly calculating the subsidiary’s retained earnings at the date of acquisition and not realising that
the sales-related intangible asset required separate recognition from goodwill itself.

Examiner’s report – F7 June 2014 1

 - Time apportioning the share capital, retained earnings brought forward and the fair value adjustments
which suggest a lack of understanding. Some candidates included post-acquisition additional
depreciation/amortisation charges in the calculation of goodwill (these amounts should be reported in
profit or loss).

Consolidated statement of comprehensive income.

- A small number of candidates deducted the closing inventory ($4 million) from revenue and cost of sales
instead of all of the intra-group sales ($20 million). A number of candidates also deducted the sales to
the associate of $15 million from revenue and cost of sales, even though these were not part of the
consolidated figures. The URP for the associate was often deducted in full at $3 million, rather than
correct figure of $900,000, based on the parent’s holding (30%) in the associate. Many candidates
adjusted this URP (in whole or in part) against the profit of the associate, not recognising that it was the
parent that had made the sales to the associate (a "downstream" transaction).

- Additional depreciation/amortisation charges were often not time apportioned (even where other profit or
loss figures had been).

- Most candidates did not correctly account for the investment income which should have been reported
as two separate elements: firstly, from the associate being 30% of earnings (profit after tax) for the post-
acquisition six months (many incorrectly based this on the retained earnings or the dividend received or
even added the dividend received back to profit after tax) and secondly, other investment income where
many candidates did not deduct the dividend received from the associate (although some candidates
deducted all of the associate's dividend).

- As mentioned above, many candidates either totally ignored the finance costs of the deferred
consideration or did not time apportion it.

- A very common error occurred with the reporting of other comprehensive income, most candidates (who
attempted this part at all) time apportioned the annual increase in the value of the subsidiary’s land to
get a post-acquisition increase of $1.5 million ($3 million x 6/12), whereas, as per the question, it
should have been split $2 million pre-acquisition and $1 million post-acquisition.

- The non-controlling interest in the profit for the year was generally well done, but many candidates did
not attempt the equivalent figure for total comprehensive income.

Question Two

This question required the traditional preparation of a single company's financial statements (statements of profit
or loss, changes in equity and financial position) from a trial balance combined with several adjustments
including: (i) an agency sale; (ii) basic depreciation; (iii) the issue of a convertible loan note (using the effective
interest rate);(iv) a rights issue of shares and dividends paid pre-and post-rights;(v) provision for taxation
including deferred tax and (vi) basic earnings per share (EPS).

This question was generally well answered with most candidates showing a sound knowledge of preparing
financial statements in this format. Most errors occurred within the following adjustments:

The effect of the agency sale was generally well understood in the statement of profit or loss (although some
calculated the commission on the remittances rather than the actual sales), however, surprisingly few candidates
accounted for the net payable ($3 million) owed to the principal in the statement of financial position. Markers
accepted the agency income of $2 million in either revenue or as other income.

Examiner’s report – F7 June 2014 2

The rights issue (which should have been reported in the statement of changes in equity) caused several
problems and the most common was that candidates applied the rights issue to the share capital and share
premium in the trial balance. However the question stated the rights issue had already been recorded indicating
that the trial balance figures already included the issue. In effect, candidates had to work backwards (to the
opening balances) when preparing the statement of changes in equity. Another error candidates made was taking
the shares as denominated at $1 whereas they were actually denominated at 25 cents (this also affected the
dividend calculations).

Most candidates had a reasonable attempt at recording the split between debt and the equity option of the
convertible loan note, but there were several common errors:

- using a 5% discount rate rather than the effective (interest) rate of 8%

- charging the interest paid of $2.5 million (at 5%) to profit or loss (even where the candidate had
used the correct 8% when discounting)

- some candidates worked on the basis that the reporting date was two years after issue (it was one
year)

- not including the equity option in the statement of changes in equity (some credit was given where
this first appeared in the statement of financial position under equity).

Most candidates handled the taxation adjustment well, but there were some errors in identifying whether the
previous year’s tax provision and the movement in deferred tax were debits or credits and incorrect figures thus
appeared in both the statement of profit or loss and the statement of financial position.

The last part of the question asked for a calculation of the basic EPS which was complicated by the rights issue.
This seemed a familiar topic and most scored well. There were some errors in the calculation of the theoretical
ex-rights value (TERV), incorrect application of the dilution factor and some candidates miscalculated the date of
the issue at three months (or five months) into the financial year (it was four months).

Other errors included:

- the application of the plant depreciation rate ( 12 ½% per annum) to the 20 year leased property, followed
by depreciating plant and equipment at 12½% based on cost (rather than reducing balance).

- no attempt to properly account for the loan note (or its finance cost), leaving it at $50 million (and
$2.5 million)

- including the bank overdraft incorrectly in current assets and/or showing bank interest as income

- showing dividends (however calculated) as an expense

- no attempt at the statement of changes in equity or the EPS (9 marks in total)

It is worth mentioning that, in this type of question, an error in an earlier part often follows through to create a
further error in a later calculation (often called a ‘knock on’ error). These knock on errors are not penalised as
ACCA adopt a 'method marking' principle which means the same error is not penalised twice and this was
particularly the case in the marking of this question.

Examiner’s report – F7 June 2014 3

Question Three

This question required candidates to calculate two sets of specified ratios for a company (Woodbank) and use
these to provide a previous year comparative analysis of the performance of the company. The calculation of the
first set of ratios was quite straightforward and most candidates achieved high marks for these. The second set of
ratios required more work as the exclusion of the results of a newly-acquired business (Shaw) from the overall
results was required. These ratios were designed to help portray the underlying performance on a like-for-like
basis. Although marks for this second group of ratios were not as high as for the first, most candidates gained
good marks with the exception of net asset turnover which, specifically by computing it the wrong way round (as
capital employed/revenue). ROCE also proved difficult where candidates did not add back finance costs (or
sometimes did not include the loan as part of capital employed). A few candidates did not attempt to calculate
the second set of ratios at all, and some calculated the ratios of the newly-acquired business (Shaw) itself instead
of those of the Woodbank excluding the results of Shaw as asked for.

As usual with this type of question, it was the interpretation of the ratios that separated well-prepared candidates
from the others. Those candidates that did not score well simply stated that a ratio has increased or decreased,
without saying whether it is good or bad, or without offering any reason as to why an increase/decrease may have
happened; this is not an interpretation in any meaningful sense.

In their interpretation, many candidates paid too little regard to the incremental effect of the acquisition of Shaw,
even though the question specially asked for it. Likewise, few candidates commented on the fact that the
reported statement of profit or loss only included the results of Shaw for a three month period; the implication
being that in the next accounting period much higher profit or loss figures could be expected from Shaw, thereby
contributing positively to Woodbank's results. This ‘distortion’ is worse for ratios that combine profit or loss
figures with figures from the statement of financial position (for example, ROCE and net asset turnover). This is
because the former only includes 3/12ths of the expected results of Shaw, whereas the latter includes all of the
net assets of Shaw at the reporting date.

This phenomenon was not properly understood by most candidates. To illustrate, take the figures for ROCE; the
reported figures showed an improved ROCE from 10.5% in 2013 to 12% in 2014; however the ROCE for 2014
excluding Shaw was 13%. This led many candidates to suggest that the acquisition was not advantageous to
Woodbank (as the ROCE would have been higher without the new business). This is illusory because, if there
had been a full year’s results of Shaw included in the profit or loss figures (which in future there would be), the
ROCE of the combined business would be much higher than 12%. Although the actual calculation of this figure
was not expected it would be 22% (returns of $13 million from Woodbank plus annualised $20 million from
Shaw on capital employed of $150 million). Very few candidates appreciated that Woodbank had paid a
dividend of $5.5 million in 2014 (from working through the change in retained earnings).

Other aspects of the interpretation were generally quite good:

- appropriately valid comments on the declining liquidity, due mainly to a fall in the bank, which in turn was
mainly caused by paying a $5.5 million dividend (though many candidates spent a lot time calculating other
liquidity and working capital ratios that were not asked for)

- identifying a much higher level of gearing (although still within acceptable limits) caused by financing the
acquisition of Shaw solely from increased borrowings

- reasonable conclusions summarising the main aspects of the interpretation.

Examiner’s report – F7 June 2014 4

Overall the performance on this question was very mixed with too much reliance on scoring marks on just the
ratio calculations.

Question Four

This question was on the familiar area of the IAS 16 Property, plant and equipment.

Part (a) was a written section requiring candidates to explain the requirements of IAS 16 in relation to the
revaluation and subsequent accounting of property, plant and equipment in response to a concern that traditional
(depreciated) historical cost ‘undervalues’ assets on the statement of financial position. The candidates’ answers
were mixed ,however, some did obtain full marks. Many candidates discussed what could be capitalised as part
of the cost of non-current assets; this wasted time as, although this has been a topic of previous questions, it is
not related to the requirements of this question. Weaker candidates also spent most of their answer discussing
the cost model of valuing non-current assets, different methods of depreciation or elaborating in detail on the
depreciation charge depending whether a revaluation was at the start or the end of a financial period. A number
of candidates also took the question to be about the nature and treatment of impairment (which it wasn't) and
many candidates insisted that assets had to be revalued every year. It is very important to read the requirements
of the question and ensure that your answer satisfies these requirements.

Part (b) was a numerical example of applying IAS 16, including revaluations. Candidates had to calculate how
two assets would be reported in the financial statements over a two-year period. It contained most elements
relating to non-current assets: (i) revaluation surplus and deficit; (ii) depreciation based on revalued amounts and
remaining lives; (iii) subsequent expenditure to be capitalised; (iv) transfer of the revaluation surplus (reserve) to
retained earnings and; (v) a profit on disposal.

Most candidates were reasonably competent in this area although there were a number of errors:

- offsetting the revaluation deficit against the revaluation surplus (the correct treatment is that a
surplus goes to reserves (via other comprehensive income) whereas a deficit is charged immediately
to profit or loss). This particular error was made frequently.

- not following through the transfer of "excess" depreciation to retained earnings in 2013 and
transferring the remainder of the revaluation surplus to retained earnings in 2014 on the
sale/realisation of the asset

- not capitalising the subsequent expenditure or not depreciating over the remaining life after
capitalisation (i.e. over four, not five, years)

- ignoring the disposal or including the asset in the statement of financial position after it had been
sold (sometimes showing the asset sold as "held for sale" when it had already been sold).

The main problem for markers on this question was that many candidates gave a working schedule for each
asset without actually preparing (relatively short) extracts from the statement of profit or loss or the statement of
financial position that were asked for, in effect, asking the marker to do much of the work.

Question Five

This question concerned the accounting treatment of three unrelated items: (i) a change in accounting policy;(ii)
whether and how much to provide for two liabilities (provisions); and (iii) the treatment of a government grant.

Examiner’s report – F7 June 2014 5

Many candidates did not attempt this question and those that did showed very mixed abilities.

(i) This was about the validity of the directors’ decision to change the classification of research and amortised
development costs from cost of sales to administrative expenses because of the favourable effect this has on the
gross profit margin. Far too many candidates thought the question was about the circumstances where
development costs should be capitalised or written off (and often wrote a full wasted page on this area). In doing
so, they missed the point of the question, which was about requirements relating to a change in accounting
policy (albeit framed as the classification of research and development costs). The answer simply required
candidates to recognise this was a change of accounting policy, discuss the circumstances where these are
permitted and the effect on comparatives by retrospective application.

(ii) This part was answered much better, with many of the candidates who did answer it gaining full marks.
Candidates were required to identify that a liability for an ongoing court case should be recognised as a provision
at the most likely outcome (the 65% probability) for $4 million. By contrast, the second liability was for
outstanding product warranties which required a provision based on expected values. The errors that occurred
included taking an expected value approach to the court case and concluding that the warranties were a
contingent, rather than an actual, liability.

(iii) In this scenario the directors wanted to take credit for a government grant in relation to the stages (in time)
when it became no longer repayable. This treatment is incorrect as government grants must be credited to profit
or loss in relation to the life of the asset to which they relate (not any potential repayment schedule). This is
especially the case when there is no intention of selling the related asset.

A few candidates thought that the directors’ proposal was acceptable, and most were not fully aware of the
grant’s correct treatment in the financial statements. Many candidates wasted time by discussing the accounting
treatment of the related plant which was not required or insisted that the grant should be deducted from the cost
of the asset, even though the question clearly stated that the alternative deferred income approach was used.

Conclusion

Overall this was an encouraging performance with many candidates displaying good knowledge and technique.

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 necessarily the case. There were many excellent scripts that were rewarded appropriately.

Examiner’s report – F7 June 2014 6

Examiner’s report
F7 Financial Reporting
December 2013

General Comments
The paper was regarded by most commentators as a fair test of familiar topics which a well-prepared candidate
could have comfortably passed.

However, candidates’ scripts showed evidence of the bad habit of focussing on the ‘banker’ questions
(consolidation, preparation of single company financial statements from a trial balance and cash flow statement)
to the point where most of the rest of the syllabus is given very little, if any, attention. This approach often leads
to a lot of undoubtedly capable candidates getting good marks of 40 to 45 for the first three questions and then
either scraping through on the last two questions or completely running out of steam and ending up with a
marginal fail. It was also probably responsible for an increase in the number of candidates that did not answer all
five questions.

A salient feature of this diet’s performance was that in certain sections candidates either did not read the
question properly or did not apply sufficient thought before answering. For example, question 4 part (a) required
candidates to distinguish between fundamental and enhancing qualitative characteristics of information, but most
answered this by adopting a rote-learned approach of listing the supporting secondary characteristics in the
Conceptual Framework with no attempt to explain the distinction. Another example, in the same question (part
(b)(ii)), was of a sale and lease back. A majority of candidates ignored the fact that the transactions were on
normal commercial terms and ‘automatically’ assumed it was an example of applying substance over legal form
(which it was not).

As usual I have to report some examination technique issues almost all of which I have commented on in
previous reports:

The issue of answer workings is important; any detailed calculations must have legible and referenced workings
that are laid out in a logical manner that can be followed by markers. Several figures worth substantial marks
had scant or no workings making it impossible for markers to know how the figures have been derived.

Poor handwriting is still an important concern for many markers (particularly for the written elements); if markers
cannot read what a candidate has written, no marks can be awarded.

A minority of candidates wasted a lot of time; needless repetition of written points (for example, answers to
3(b)(ii) often repeated parts of 3(b)(i)), writing out a question's requirement before answering it, providing
unnecessary workings (for simple line item calculations) and sometimes even duplicating an answer by writing it
out again more neatly.

The composition and topics of the questions was such that on this diet there was no difference between the
International Paper (the primary paper) and other adapted papers, except for question 1 where separate
comments are provided for the UK/IRL adapted papers.
Thus these comments generally apply to all streams.

Report on individual questions

Question One
This required the preparation of both a consolidated statement of profit or loss and statement of financial
position. Because of this, the required consolidation adjustments were relatively few; a fair value adjustment for a
leased property, intra-group trading with unrealised profit (URP) and a valuation adjustment to fair value through
profit or loss investments.

Examiner’s report – F7 December 2013 1

The majority of candidates displayed a good working knowledge of consolidation techniques and gained
appropriate marks. Although answers to this question were good, they were not as good as I would have
expected. Many candidates made errors which confused the accounting treatment in profit or loss with that of the
statement of financial position, especially in the area of the non-controlling interests, eliminating intra-group sales
from receivables/payables and also URP from inventories and profit. A small number of candidates time
apportioned the figures for line items in the statement of financial position. It is hard to imagine that such
candidates have ever practiced past examination questions. A similar fundamental error, though quite rare, was
the use of proportional consolidation in both statements. It should not be used in either; indeed, this technique is
not examinable in F7.

For the benefit of future candidates the common errors were:

Consolidated goodwill
The question clearly stated that a ‘bargain purchase’ was expected. Some candidate's calculations came out as
positive goodwill (which should have flagged they had made an error) and, of those that did arrive at a bargain
purchase (negative goodwill), few knew that it should be credited in full to profit or loss; most showed it as a
negative asset, some even showed it as a liability.
The main errors in the calculation of the negative goodwill were:
basing the cash consideration (and value of non-controlling interests) as if the shares in the subsidiary
were $1 each (they were 50 cent shares)
using the year-end estimate of the contingent consideration, rather than its initial estimate (the difference
should be accounted for in profit or loss, not in goodwill)
the value of the non-controlling interests based on the share price paid by the parent ($1.50), rather
than the market price of $1.20
many treated the losses of the subsidiary for the pre/post-acquisition split as if they were profits
it was common to see post-acquisition figures for URP and additional depreciation included in the
calculation of goodwill; these, by definition, are post-acquisition adjustments and should form part of the
post-acquisition results in the statement of profit or loss and retained earnings.

Statement of profit or loss

The intra-group sales elimination caused real problems; most candidates eliminated only the sales from the
subsidiary to the parent and ignored the sales from the parent to the subsidiary. A similar issue seem to cause
problems in calculating the URP in inventory.
It was also a recurrent error for the adjustment for additional depreciation to be based on a full year rather than
the six months post-acquisition period.
Many candidates did not include the loss on equity investments or the decrease in contingent consideration (as a
gain) in profit or loss even though they had included these items in their working for retained earnings. The
reverse was also true.
A careless mistake was to treat the subsidiary’s tax relief on its losses as a tax charge.
The previously mentioned confusion of the losses (being treated as profits) was also present in the calculation of
the non-controlling interest in the statement of profit or loss. Even some of the candidates who did recognise they
were losses, then deducted the adjustments for URP and additional depreciation from the losses (they would
increase the losses).

Statement of financial position

On the whole, the statement of financial position was well done. Other than ‘knock on’ errors from the points
mentioned above (such as additional depreciation being for a full year and not including items in retained
earnings), the common errors were:
not deducting the cash consideration and the loss on the equity investments from the balance on the
parent’s investments when determining the carrying amount of the residual equity investments.
not deducting URP from inventory (even when it had been correctly treated in cost of sales).

Examiner’s report – F7 December 2013 2

 inexplicably, a significant minority of candidates treated the cash consideration as if it had been an issue
of shares and created various amounts of share capital and share premium.

Despite the long list of above errors there were still many good marks for this question.

UK and IRL adapted papers

The above papers had a shorter consolidation requirement to allow for a part (b) which asked candidates to
describe how the treatment of the negative goodwill under UK GAAP differs to that under International Financial
Reporting Standards.
This was not answered at all by a large number of candidates, and very few of those that did answer it gave good
answers. The UK GAAP treatment of negative goodwill as a "negative asset" and its subsequent recognition in
profit or loss was mentioned by very few candidates.

Question Two
This question was a traditional preparation of financial statements from a trial balance combined with several
adjustments including: a construction contract, a revaluation of land and buildings (at the start of the year), a
finance leased property (in its second year), the reversal of a provision for self-insurance and adjustments relating
to taxation including deferred tax on the property revaluation. There was also a loan note where the effective
interest cost had to be accrued and rolled up into a redemption premium.

As with question 1, this was generally well answered with most candidates showing a sound knowledge of
preparing financial statements in this format. Also, as usual, it was the adjustments that caused most of errors:

Statement of comprehensive income

I was surprised that most candidates did not account for the construction contract correctly. Common errors were
an incorrect calculation of the estimated profit (usually caused by not taking into account estimated future costs)
and basing the percentage of completion on cost rather than on the percentage of the work completed and
certified. Some candidates took a single figure of profit to profit or loss (rather than include the relevant items in
revenue and cost of sales) and many candidates either ignored the amount due from the customer in the
statement of financial position or calculated it incorrectly.
Most candidates scored well on accounting for the non-current assets including the revaluation of the land and
building and subsequent depreciation of the building; however, many did include the deferred tax on the
revaluation in profit or loss rather than in other comprehensive income. For some reason a minority of candidates
did not calculate depreciation on the leased plant at all or charged depreciation based on the opening net
carrying amount ($28 million) rather than the initial carrying amount ($35 million).
The self-insurance caused some problems; most candidates adjusted administrative expenses for a reversal of the
$400,000 provision, but did not then account for the $250,000 costs incurred (or sometimes the other way
round).
It was common for candidates to miss or incorrectly account for the various finance costs. Most got the mark for
the bank interest, but some did not accrue for the loan note interest and some based the 10% lease finance cost
(and the statement of financial position liability) on the initial carrying amount of the asset ($35 million) or its
net carrying amount ($28 million) rather than on the opening finance lease liability of $29.3 million.
Most candidates had a good attempt at the income tax charge, but there were several fairly common errors: the
credit for the overprovision in the previous year was often debited and, as mentioned above, the deferred tax on
the revaluation was included in the profit or loss charge rather than in other comprehensive income where the
revaluation surplus itself was reported.

On this point, some candidates that calculated the revaluation surplus on land and buildings in their workings
(and included it the carrying amount in the statement of financial position) did not report the surplus in other
comprehensive income.

Examiner’s report – F7 December 2013 3

Statement of financial position
This was generally well prepared with most errors being a ‘knock on’ from errors referred to above made when
calculating profit or loss items such as contract costs, lease obligations, not accruing for loan note interest or
non-current asset errors. Generally such errors are not penalised as ACCA adopt a 'method marking' principle
which means the same error is not penalised twice. It is worth mentioning that candidates should not despair if
they do not know how to deal with a particular adjustment, or if they think they have made some errors, as high
marks can still be scored in spite of this.
As mentioned in several previous examiner's reports, a basic error was that the bank overdraft was often shown
as a current asset.

Question Three
This question was on the familiar and popular topic of preparing a statement of cash flows (14 marks) followed
by an analysis of the cause of a fall in profit (6 marks) and how rising prices may affect the interpretation of
financial statements (5 marks).
As is common in this type of question, the statement of cash flows was generally well answered, many
candidates got full marks on the operating cash flows; however there were the usual mix of errors in getting the
signing of the cash flows wrong and including non-cash flow items, such as revaluations and the property
transfer, within the statement. The written sections were not as well answered.

(a) Statement of cash flows

The main errors were:

It was common for candidates not to allow for the movement in the accrued finance costs when computing the
interest paid and a significant minority simply treated the profit or loss expense for tax as a cash flow, rather than
adjusting for the opening and closing provisions. I am very surprised at the latter as it is tested in almost every
cash flow question.

The cash flow to acquire new property, plant and equipment was quite complicated and not surprisingly caused
some problems. The most common errors in computing this figure were not allowing for the transfer from
investment property to property, plant and equipment and treating a downward revaluation as an increase in
value; also some candidates accounted for the disposal at its sale proceeds rather than its carrying amount.
Some candidates did not include the sale of the property, plant and equipment or the purchase of a new
investment property in investing activities (or anywhere else), and many did not include the cash received from
investment property rentals in their statement.

The only other significant error was in relation to the dividends paid, many candidates did not reconcile the
movement in retained earnings to see if a dividend had been paid and, some of those that did used the figure for
total comprehensive income rather than the profit for the year in their reconciliation.

(b)(i) This was a relatively straightforward requirement asking candidates to explain the cause of the fall in the
company’s profit before tax. There were some very good answers, but I was surprised by the many weak
answers; such as not answering the specific question (in effect treating it as general ratio calculation and
interpretation) and writing just one or two sentences. All that was required to achieve a good answer was to
systematically go through the items of profit or loss and make sensible comments on what had caused the profit
to fall.
The main issues to spot were: the fall in gross profit was due to failing to fully pass on (through selling prices)
the 8% increase in cost of sales; an increase in overheads, particularly administrative expenses; and the
performance of investment properties had deteriorated, both in terms of rentals received (perhaps due to changes
in the portfolio) and fair value changes that had gone from a surplus to a deficit (perhaps due to market
conditions).

Examiner’s report – F7 December 2013 4

In general most low scores were not so much a case of candidates getting things wrong, as an insufficient
response to the question.

(b)(ii) It was a common occurrence for candidates not to answer this section at all, and many of those that did
gave poor or irrelevant answers or repeated points that they had made in answering the previous section. The
question required candidates to describe the main effects which rising prices may have on the interpretation of
financial statements. The main thrust of the answer should have been around the issue that rising prising can
distort trend analysis (year-on-year comparison). These have a tendency, over time, to understate comparative
costs (thus overstating profit) and also understate asset values.
Many candidates discussed largely irrelevant items such as shareholders unwilling to invest or cash flows being
tightened or working capital management being more difficult. Some candidates commented that rising prices
(applying to costs) leads to lower profits, however this is only true (as was the case with the company in this
question) if they are not passed on in selling prices; if rising prices are (fully) passed on, profits would actually
rise.

Question Four
This question was on the familiar area of the Conceptual Framework.

Part (a) required candidates to distinguish between fundamental and enhancing characteristics and explain why
faithful representation was important. Part (b) contained two examples involving the issue of faithful
representation for which candidates had to explain how they should be treated in the financial statements.

Part (a) was answered disappointingly, with many candidates not really answering the question asked. Most
candidates simply described fundamental and enhancing characteristics in terms of their component
characteristics; faithful representation and relevance for fundamental and comparability, verifiability etc. for
enhancing. Some credit was given for this, but it did not answer the question asked; fundamental characteristics
are those that if they are not present render the presented information as not useful (maybe even misleading) to
users, whereas an absence of enhancing characteristics means that financial statements would be less useful
(but not useless) than if they were present.
In answering the issue of the importance of faithful representation, many candidates approached this by giving
examples of its application in terms of reflecting a transaction’s substance (such as the appropriate treatment of
various finance arrangements), rather than actually explain its importance i.e. that the accounting treatment of
transactions must faithfully represent the economic phenomena that they purport to represent.

The first example in part (b) was factoring trade receivables. In such an arrangement the main determining point
for applying the correct accounting treatment is to look at which party bears the risk of slow/non-payment of the
receivables. In this case it was the company ‘selling’ the receivables (Laidlaw). Most candidates scored well by
correctly realising that the payment from the finance company was an in substance loan secured on the
receivables and should be treated as such by reversing the original credit to receivables and instead crediting
current liabilities and accounting for administration and finance costs as accrued expenses.
The second example was a different matter; it was an example of a sale and leaseback of a property. In some
cases such transactions can be examples of financing arrangements where the leaseback is for the majority of the
remaining life of the asset. Thus the risk of ownership has not been transferred and the asset should continue to
be recognised on the statement of financial position (albeit as a leased asset) and the ‘proceeds’ treated as a
loan.
It seems that most candidates believe all sale leaseback transactions are financing arrangements; this one was
not. As the sale and the subsequent rentals were at commercial values, as indeed was the opportunity to
repurchase the property, then this transaction is fairly represented by its legal form; it is a true sale on which the
profit should be taken to profit or loss and the rental should be expensed as an operating lease arrangement. The
opportunity to repurchase is not an asset (or a contingent liability as some suggested) and should be ignored.

Examiner’s report – F7 December 2013 5

As a result most candidates scored few or no marks on this section. My view is that candidates did not think
about the question, they simply answered it along the lines of a perhaps a tutorial question that they may have
studied which was an example of a financing arrangement.

Question Five
This question concerned the accounting treatment of alterations to a property leased under an operating lease
together with a requirement to restore the property to its original condition at the end of the operating lease.
Part (a) asked candidates to explain how the items should be treated and part (b) asked for extracts from the
financial statements reflecting the treatment. As referred to earlier this question had a relatively high number of
candidates that did not attempt it. It is difficult to explain why this would be the case as the topics of an
operating lease, capitalisation of non-current assets and provisions for rectification/restoration costs have all been
asked (several times) in past examinations.

For part (a) several candidates wrote down everything they had rote learned about the difference between
operating and finance leases. This gained no marks as it was not what the question asked. Those that had
attempted to answer the question asked made some fundamental errors; many said that the operating lease
rentals should be capitalised, effectively treating it as a finance lease when the question clearly said (in bold
print) that it was an operating lease. Another common misunderstanding was to write off the cost of the
alterations (they should be capitalised), and, although most said the restoration costs should be provided for,
they either said they should be accrued over the 8-year remaining life of the lease, or they should be expensed
immediately. The correct answer is that they should be provided for in full immediately and also capitalised by
adding them to the capitalised alteration costs and then depreciated over the 8-year life.

Answers to part (b) generally reflected the answers to part (a). Most gained marks for expensing the rental cost
and unwinding the finance cost of the restoration provision; gaining the marks available for the extracts of the
statement of financial position depended on whether they had correctly capitalised the alteration and restoration
costs. Several candidates who calculated depreciation in the statement of financial position failed to show the
charge in profit or loss.

Conclusion
Overall many candidates displayed poor technique and adopted the bad habit of not answering all the questions,
particularly questions 4 and 5, indicating inadequate coverage or understanding of the full range of syllabus
topics. However the first three questions were generally very well answered.

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 necessarily the case. There were many excellent papers that were rewarded appropriately.

Examiner’s report – F7 December 2013 6

Examiner’s report
F7 Financial Reporting
June 2013

General Comments
The overall performance of candidates on this diet was rather disappointing compared to the trend of previous
recent papers. The main cause seems to be a return to many of the old ‘bad habits’ I had hoped had been
overcome; poor performance on questions 4 and 5 (due to poor coverage of the wider syllabus) and not
answering all five questions. This also extended to parts of questions; particularly part (b) in questions 1 and 2
for 5 and 3 marks respectively, which were left unanswered in many scripts.

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.

The normal pattern was seen, with questions 1 (except part (b)) and 2 and the cash flow element of Q3 again
being the best answered.

Despite overall disappointment, there were many very good scripts scoring 70 or more and some were in the high
80s; a truly impressive performance.

As usual there were some examination technique issues that caused problems:

Not reading the question properly seemed to be a common problem particularly with those that attempted part
(b) of question 1. Similarly for part (b) of question 3 (the interpretation), many candidates calculated and
interpreted working capital ratios which were not required; the question specifically asked for only ROCE and its
constituent elements (profit margins and asset utilisation) and gearing.

Yet again poor handwriting was an important concern for many markers (particularly for the written elements). I
have commented on this issue in every one of my recent reports and, if anything, handwriting has got worse. All
markers do their best to read what candidates have written. But if markers cannot read what a candidate has
written, no marks can be awarded. I have also commented before on the use of excessive workings which only
serve to waste candidate's time; the answers published on the ACCA website provide a useful guide to the level of
detail required for a successful answer. At the other extreme, it is worth mentioning that candidates who show
no workings at all are likely to get nil marks for unsupported figures.

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 adapted papers, with the exception of question 3 (b) on
the UK and IRL papers, thus these comments generally apply to all F7 papers.

Specific Comments

Question One (a)

This required the preparation of a consolidated statement of financial position. It included a fair value adjustment
for plant which was below its carrying that many candidates treated as a surplus. Some of the candidates that
did get the plant write down in the right direction and then proceeded to make the consequent depreciation
adjustment the wrong way. Further adjustments were required for the elimination of intra group trading/current
accounts, cash in transit and unrealised profit (URP) in inventory.

A slight twist in this question was that candidates did not have to calculate and time apportion to derive the pre-
acquisition losses as this figure was available from draft financial statements prepared by the subsidiary at the
acquisition date.

Examiner’s report – F7 June 2013 1

The majority of candidates displayed a good working knowledge of consolidation techniques which showed
through in very good marks for this question; as usual it was the more complex aspects where errors occurred.
Consolidated goodwill:

Most candidates correctly calculated (and accounted for) the value of the share exchange and the NCI, however
there were a number of errors in the calculation of the loan notes issued. The main error was NOT basing the
loan note issue on the shares acquired by the parent (instead it was often based on the number of shares issued
by the parent).
The other area that caused several problems was the calculation of the (unadjusted) post-acquisition profits of
the subsidiary. The profit for the full year was $8 million and there were pre-acquisition losses of $2 million, this
meant the post-acquisition profit was $10 million; many candidates calculated this as a net $6 million.

Other consolidation errors:

Several candidates eliminated the intra-group inventory ($4.6 million) from the total inventory, rather than just
the URP in the inventory of $600,000. There was also confusion with the elimination of current account
balances. Cash in transit (CIT) of $900,000 from the subsidiary to the parent meant that the payable of the
subsidiary ($2.8 million) was $900,000 less than the receivable of the parent. The treatment of this should be
relatively straightforward: eliminate the balance each company shows in its own books from payable/receivables
and the difference (CIT) is added to bank. Conventionally the CIT is added to the parent's bank, but it was
marked as correct if the CIT had been deducted from the subsidiary’s overdraft.

Although the principle of the parent's retained earnings seemed well understood the question required
adjustments to this figure for URP in inventory (as the parent had sold the goods to the subsidiary) and a loss on
the parent's equity investments which were often omitted. Other common errors were that the reduction in
depreciation of the plant (resulting in an increase in the subsidiary's post-acquisition profits) and the gain on the
subsidiary’s equity investments were often treated as those of the parent.

A minority of candidates decided to time apportion the assets and liabilities of the subsidiary, presumably as it
had been acquired part way through the year; this is clearly meaningless in the consolidated statement of
financial position.
Despite the above errors there were many high marks for this part.

Question One (b)

This required candidates to advise a prospective purchaser of the subsidiary on the appropriateness of using the
consolidated financial statements as a basis for an investment decision. As mentioned earlier, less than half of
candidates attempted this part, and those that did generally performed badly.
The most common error was that candidates treated this part as a ‘mini interpretation’ answer, commenting on
the overdraft, current ratios, liquidity, gearing, etc. of the subsidiary (which would not be available if only the
consolidated financial statements were accessible). The main issue is that consolidated financial statements are
not useful for assessing the performance of a single company within the group as they contain the aggregated
results of all the companies within a group. So, the main point to be made is that the entity statements of the
subsidiary itself must be used for this purpose; even then there are problems. In this case it was apparent that
the subsidiary’s post-acquisition results had been improved due to favourable pricing of the inter-company
trading (supported by the closing inventory) originated by the parent on the terms stated in the question. This is
an example of the possible effect of related party transactions which are an (normally) unknown danger when
dealing with a subsidiary. Very little of this was mentioned by the vast majority of candidates.

Question Two (a)

This question was a traditional preparation of financial statements from a trial balance combined with several
adjustments including: a sale and repurchase of goods which was an in substance loan; a non-current asset held-

Examiner’s report – F7 June 2013 2

for-sale; a revaluation of property at the start of the year; a rights issue of shares and the usual adjustments
relating to taxation.
Part (b) was a small part requiring the calculation of basic earnings per share.

As with question 1, this was generally well answered most candidates showing a sound knowledge of preparing
financial statements in this format. Also, as usual, it was the adjustments that caused most of errors:

Statement of profit or loss and other comprehensive income

Most candidates correctly deducted the in substance loan from revenue, but did not make an adjustment to the
cost of sales or closing inventory to bring the goods back into inventory. It was also very common for the finance
cost of the in substance loan to be omitted (or not time apportioned).
There were several errors in the calculation of the depreciation of property, plant and equipment, partly due to
incorrect revaluation techniques and partly by not treating the held-for-sale plant correctly. Some of those that
did separate the held-for-sale plant still classed it as non-current, some revalued it to its market value rather than
leaving it at its (lower) carrying amount and many failed to depreciate it up to, but not beyond, the date of
reclassification.

There were the usual errors in the tax charge: adjusting the prior year balance the wrong way and charging the
whole of the provision for deferred tax rather than the movement in the provision. Similar tax calculations are
examined nearly every diet.

Statement of changes in equity

This was generally well prepared, but the most common error was not realising that the share capital and
premium in the trial balance were stated after accounting for the rights issue, thus in the statement of changes
in equity it was necessary to ‘work backwards’ to the opening figures. Many candidates still do not seem to
understand that equity dividends paid are not an expense but a deduction from retained earnings in this
statement.

Statement of financial position

This was generally well prepared with most errors being a ‘knock on’ from errors made when calculating profit or
loss items e.g. incorrect carrying amounts of property, plant and equipment, not accruing for loan interest (or
omitting the loan completely), incorrect deferred and current tax provisions. Generally such errors are not
penalised as ACCA adopt a 'method marking' principle which means the same error is not penalised twice. A
surprisingly common and worrying error was that the bank overdraft was shown as a current asset. Many
candidates did not show the (accrued) directors' bonus as an expense and a current liability and seemed unable
to distinguish between 1% and 10% (the latter amount often being used to incorrectly compute the bonus).

Question Two (b)

Answers to the earnings per share (EPS) were rather mixed. With a similar calculation having appeared as
recently as June 2012, I was expecting this to be well answered, but many candidates did not even attempt it
and, of those that did, several struggled with it. That said with the application of method principle, there were a
good number of maximum scores. It seems that those who knew the procedure to compute basic EPS did well,
but many candidates appeared to have no idea of the approach required.

However, despite the above errors, this was a high scoring question.

Question Three
This should also have been a familiar type of question with part (a) being a 15 mark statement of cash flows and
part (b) requiring some ratio calculations and interpretation.

Examiner’s report – F7 June 2013 3

As expected, the statement of cash flows was generally well answered (especially the operating cash flows)
although the interpretation rather less so.

(a) Statement of cash flows

The main errors were:

For some reason many candidates thought the finance lease interest was not a cash flow. Taxation caused some
difficulty, mainly in relation to the deferred tax element of the property revaluation. A similar issue often caused a
wrong cash flow for the purchase of property, plant and equipment because many candidates calculated the
revaluation surplus net of the deferred tax. The correct treatment of the deferred tax on the property revaluation is
to debit the revaluation reserve and credit deferred tax; it does not affect the carrying amount of the property.
Many did not adjust development expenditure for its amortisation when calculating the cash outflow. The (capital
element) repayment of the finance lease was often incorrectly calculated due to omitting the new finance leases
acquired in the year and some incorrectly included the lease interest payment in the calculation.
Those that remembered to test the movement in retained earnings for an equity dividend paid usually got the
correct amount (although some candidates incorrectly used total comprehensive income instead of profit for the
year), but many omitted this process altogether.

(b) INT Ratios and performance assessment

Up to 4 marks were available for appropriate ratio calculations. Most scored well on this as it was a relatively
flexible requirement, but ratios for items that were NOT required (mainly working capital ratios) in the
interpretation scored no marks.

Whilst the ratios scored well, the same cannot be said for their interpretation. Although there were some good
and insightful answers, particularly in the attempt to analyse the change in the ROCE, far too many answers were
of the type’ this has gone up, that has gone down’. Such comments are not interpretation; they merely reiterate
what the ratio calculations say. There were several indications in the financial statements and notes which
should have prompted comments, including: additions to property, plant and equipment; development
expenditure coming on stream; the effects of the repayment of the loan notes and the increase in finance lease
obligations on gearing.

Some answers showed a lack of understanding: many candidates said that the increase in revenue was the
cause of the increase in the gross profit percentage. This is simply not true: it is perfectly possible to increase
revenue and decrease the gross profit percentage. It was also common to read that the increase in property, plant
and equipment had led to the improvement in the asset utilisation ratio. Again this is not the case: an increase in
property, plant and equipment, without a proportionately higher increase in the revenue they generate, would
actually lead to a decrease in asset utilisation (although creditably to the company in this question, the increase
in property, plant and equipment was also accompanied by an increase in asset utilisation). Many of these
misunderstandings appear to be based on interpreting absolute numbers rather than the ratios of the absolutes.
As referred to above, just because revenue increases it does not necessarily mean gross profit (or gross profit
percentage) will increase.

(b) UK and IRL

This part was in two sections. Section (i) asked how the UK treatment may differ to the international treatment
for the revaluation of non-current assets (including deferred tax effects), the finance lease and the development
expenditure. This was often not answered at all (neither was part (ii)) and where it was answered, it seemed
mostly incorrect guesswork. Section (ii) asked candidates to state how the differences in section (i) would affect
the ROCE and gearing as compared to the international treatment. Surprisingly, in view of the answers to section
(i), where this was answered many candidates did identify the correct differential effects.

Examiner’s report – F7 June 2013 4

Question Four
This was on the topic of IFRS5 Non-current Assets Held for Sale and Discontinued Operations.
Part (a) was straightforward, asking for the definition of a discontinued operation and why its disclosure was
important. Most candidates had a fair understanding of the definition element in terms of discontinuance, but
very few identified the important aspects of a separate line of business or a geographical area with
distinguishable results and cash flows (they are often cash generating units). As regards the importance of the
disclosure of discontinued operations, answers were mixed; some appreciated its importance in terms of
comparability and assessing future prospects, whilst weak answers just referred to ‘true and fair view’ or simply
repeated that it was important without saying why. An answer to the definition that simply said this was an
operation that had been discontinued scored no marks.

Part (b) gave two examples for which candidates had to decide (and explain why) whether they should be treated
as discontinued operations or not. The first example was clear cut in that it was a discontinued operation as it
met the ‘geographical’ criteria; the second example was less conclusive and really required some debate. Most
answers said it was not discontinued on the basis that the hotels were still trading (which was worth a mark),
but very few debated whether or not the change of target market for the hotels represented a change in a
‘separate line of business’.

Part (c) was about a factory closure (that constituted a constructive obligation) and what items should be
provided for. The question specifically said the closure was NOT a discontinued operation, but despite this many
candidates said it was and tried to answer accordingly. Most answers were very vague in that they just listed the
cost and revenue items given in the question without explaining what should be done with them; specifically
whether or not (and when) they should be provided for. This type of ‘non-commitment’ gains no marks as it
means candidates do not demonstrate any understanding of the issues raised by the question.
In terms of the constructive obligation, the cost of retraining cannot be provided for (until it is incurred). The
redundancy costs should be provided for as should the impairment of plant and the onerous contract (at the
lower amount) and the penalty payments. The surplus on the fair value of the factory cannot either be recognised
in the year (as it had not been sold) or be used to offset any other costs.

Question Five
This question tested candidates’ knowledge of IAS 40 Investment Property. Section (a) was in two parts ; one
requiring the definition of an investment property and why it is treated differently from owner-occupied property,
and the second part focused on the difference between the fair value model for investment property and the
revaluation model for owner-occupied property. Of the candidates that answered this question, most were quite
good on the definition of investment property, but were less forthcoming as to why their accounting treatment
was different (very few mention investment property generating cash flows independent of other assets). Similarly
most candidates were aware that investment property is not depreciated (and owner-occupied is) and that fair
value gains and losses on investment property go to profit or loss whereas for owner-occupied property
revaluation gains go to a revaluation reserve via other comprehensive income.

Part (b) was a numerical example testing the understanding of the above. Property A was an owner-occupied
property that had to be reclassified as an investment property during the year due to a change of use, and
property B was a property sub-let to a subsidiary which meant it was an investment property in the parent’s
entity financial statements and owner-occupied from a group perspective. Many candidates correctly calculated
the depreciation on property A up to reclassification (some did not time apportion) and identified the gains on
both properties, but it was a surprisingly common mistake for the fair value gains to be treated as revaluation
gains, despite correctly stating how they should be treated in part (a). Weak answers listed a collection of
calculations and seemed to expect the marker to decide where they should be reported.

Examiner’s report – F7 June 2013 5

Conclusion
Overall this was a rather disappointing performance with many candidates displaying poor technique and
adopting the bad habit of not answering all the questions, particularly questions 4 and 5 indicating inadequate
coverage or understanding of the full range of syllabus topics. However the first three questions were generally
very well answered.

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 that were rewarded appropriately.

Examiner’s report – F7 June 2013 6