Financial Accounting Professional Stage March 2010

PROFESSIONAL STAGE FINANCIAL ACCOUNTING OT EXAMINERS COMMENTS

The performance of candidates in the March 2010 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed well across all syllabus areas.
When practising OT items, care should always be taken to ensure that the principles underlying any
particular item are understood rather than rote learning the answer. In particular, candidates should ensure
that they read all items very carefully.
The following table summarises how well* candidates answered each syllabus content area.
Syllabus area

Number of questions

Well answered

Poorly answered

LO1

LO2

LO3

Total

15

13

*If 50% or more of the candidates gave the correct answer, then the question was classified as well
answered.
Brief comments on the two poorly answered questions, which covered LO1 (accounting and reporting
concepts) and LO2 (preparation of single company financial statements), are below (this paper was marked
under the new electronic marking system and no further information regarding responses was available):
Item 1
This item asked which roles are undertaken by the International Accounting Standards Committee
Foundation (IASCF). Candidates clearly do not understand the structure that surrounds and supports the
International Accounting Standards Board.
Item 2
This item, required candidates to identify which adjustments should be recognised as a prior period error.
Four short scenarios were provided which included a settled legal claim, a computational error, a fraud and a
revised tax liability.

The Institute of Chartered Accountants in England and Wales 2010

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Financial Accounting Professional Stage March 2010

MARK PLAN AND EXAMINERS COMMENTARY

The mark plan set out below was used to mark these questions. Markers are encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks
are available than could be awarded for each requirement, where indicated. This allows credit to be given for
a variety of valid points, which are made by candidates.

Question 1
Overall marks for this question can be analysed as follows:

Total: 18

General comments
This question is a typical question testing the preparation of an income statement and statement of financial
position from a trial balance. A number of adjustments were required, including the reversal of a provision,
an inventory valuation issue, an adjustment for the over provision of tax and deferred revenue.
(a)
Karonga plc Statement of financial position as at 31 December 2009

ASSETS
Non-current assets
Property, plant and equipment (W5)
943,435

Current assets
Inventories (W3)
Trade receivables (1,075,000 60,750 (W4))
Cash and cash equivalents

1,161,000
1,014,250
189,500
2,364,750

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital
Retained earnings (28,090 + 227,895)

3,308,185

1,325,000
255,985
1,580,985

Non-current liabilities
Bank loan
Current liabilities
Trade and other payables (583,700 + 12,500(W1))
Taxation (W5)

1,025,300

596,200
105,700
701,900

Total equity and liabilities

The Institute of Chartered Accountants in England and Wales 2010

3,308,185

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Financial Accounting Professional Stage March 2010

Karonga plc Income Statement for year ended 31 December 2009

Revenue (W1)
6,196,400
Cost of sales (W2)
(3,506,501)
Gross profit
Administrative expenses (W2)

2,689,899
(2,315,434)

Operating profit
Finance costs
Profit before tax
Income tax expense (105,700 8,300)

374,465
(49,170)
325,295
(97,400)

Net profit for the period

227,895

Note: Marks will be awarded if items are included in a different line item in the income statement
provided that the heading used is appropriate.

W1 Revenue adjustment

Trial balance revenue

Fitness machine deposits (250 x 50)

6,208,900
(12,500)
6,196,400

W2 Expenses

Trial balance
Opening inventory
Less: closing inventory (W3)
Bad debt reversal (W4)
Depreciation charge buildings (12,710 (40% / 60%)
Depreciation charge plant & equipment
Provision reversal

Admin
expenses

2,324,000

(1,650)
5,084
(12,000)
2,315,434

Cost of
sales

3,553,100
1,093,800
(1,161,000)
7,626
12,975
3,506,501

W3 Inventory adjustment

Closing inventory
Net realisable value write down (20 - 15) x 500 items

1,163,500
(2,500)
1,161,000

W4 Bad debt

Opening allowance
Movement in year (balancing figure)

62,400
(1,650)

Closing allowance (53,750 + 7,000)

60,750

The Institute of Chartered Accountants in England and Wales 2010

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Financial Accounting Professional Stage March 2010

W5 Property, plant and equipment

Trial balance L&B

Trial balance P&E

Cost

985,500
103,800

Depreciation charge for year (103,800 / 8yrs)

Depreciation charge for year ((985,500
350,000) / 50yrs)
At 31 December 2009

Acc dep

88,970
31,210
12,975
12,710

1,089,300

145,865

943,435

As in previous sittings, candidates were clearly very well-prepared for this type of question. Almost all
candidates produced a well-laid out income statement and statement of financial position with all narrative
and sub-totals completed. Some candidates lost presentation marks for the statement of financial position
by not adding across numbers in brackets, failing to complete sub-totals or by having incomplete or
abbreviated narrative. On the income statement the most common presentational failing was to not
include a sub-total for profit from operations. However, overall presentation is improving with each sitting.
As ever, candidates should remember that this type of question requires financial statements to be in a
form suitable for publication.
Workings generally were set out clearly, with the standard cost matrix generally being produced.
Candidates must remember that if they do not provide clear workings for calculations and their final
answer is incorrect they risk gaining no marks for a working that may be worth 2 or 3 marks. Clear
workings, even if only bracketed will score partial marks for incorrect answers.
Most candidates were able to deal with the more straightforward adjustments such as the depreciation
charges, closing inventory and adjusting revenue for the payments made in advance, although the
corresponding entry in current liabilities was not always included.
Common errors included the treatment of the tax figures which seemed to cause some confusion as to
how to deal with the over provision from the previous year. Candidates commonly put the same figure in
the income statement and statement of financial position, although this was split between whether it was
the income tax charge or the liability.
Candidates often used the correct brought forward and carried forward figures for the specific bad debt
allowance but missed the additional allowance that needed making of 7,000. Other candidates correctly
calculated the carried forward figure and hence calculated that an adjustment of 1,650 was needed but
then either didnt recognise this in the income statement or added it to expenses rather than deducting it.
Only a few candidates carried the double entry through completely by deducting the full closing allowance
from trade receivables, 7,000 was a more common deduction.
The treatment of the legal provision also caused a few problems. Very few candidates realised that the
provision needed reversing. A mix of treatments were seen with candidates either including the provision
in the statement of financial position or providing for it in the current year even though it was a brought
forward balance.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2010

18
18

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Financial Accounting Professional Stage March 2010

Question 2
Overall marks for this question can be analysed as follows:

Total: 19

General comments
This question tested the preparation of a consolidated statement of cash flows and supporting note. A
subsidiary was disposed of during the year. Missing figures to be calculated included dividends paid (to the
group and to the non-controlling interest), interest paid, tax paid, depreciation and amortisation charge for the
year and proceeds from the issue of share capital following a bonus issue during the year.
Chitipa plc
Consolidated statement of cash flows for the year ended 31 December 2009

Cash flows from operating activities

Cash generated from operations (Note)
331,900
Interest paid (W1)
(73,000)
Income tax paid (W2)
(76,050)
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
(360,000)
Disposal of Thyolo Ltd net of cash disposed of (200,000
192,100
7,900)
Net cash from investing activities
Cash flows from financing activities
Repayment of borrowings (736,300 561,700)
(174,600)
Proceeds from share issue (W4 & W5)
175,000
Dividends paid (W6)
(27,500)
Dividends paid to non-controlling interest (W7)
(11,850)
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

182,850

(167,900)

(38,950)
(24,000)
172,500
148,500

Note: Reconciliation of profit before tax to cash generated from operations

Profit before tax (222,000 + 12,600)
Finance cost
Depreciation charge (W3)
Impairment loss on goodwill (373,700 364,200)
Increase in inventories (401,300 393,800)
Increase in trade and other receivables (496,300 475,200 + 25,400)
Increase in trade and other payables ((21,700 5,000) (11,700 7,000) +
36,100)
Cash generated from operations

The Institute of Chartered Accountants in England and Wales 2010

234,600
71,000
22,700
9,500
(7,500)
(46,500)
48,100
331,900

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Financial Accounting Professional Stage March 2010

Workings
(1) Interest paid

Cash ()
C/d

73,000
5,000
78,000

B/d
CIS

7,000
71,000
78,000

(2) Income tax paid

Cash ()
C/d

76,050
33,900
109,950

B/d
CIS (69,900 + 3,750)

36,300
73,650
109,950

(3) PPE

B/d
Additions

695,000
360,000

Disposal of sub
Deprecation charge ()
C/d

1,055,000

308,900
22,700
723,400
1,055,000

(4) Share capital

C/d

550,000
550,000

B/d
Bonus issue
Cash received ()

400,000
100,000
50,000
550,000

(5) Share premium

Bonus issue
C/d

50,000
215,000
265,000

B/d
Cash received ()

140,000
125,000
265,000

(6) Retained earnings

Dividends in SCE ()
Bonus issue
C/d

27,500
50,000
303,140
380,640

B/d
CIS

295,100
85,540
380,640

(7) Non-controlling interest

Cash ()
Disposal (306,100 x 20%)
C/d

11,850
61,220
448,260
521,330

B/d
CIS

The Institute of Chartered Accountants in England and Wales 2010

490,800
30,530
521,330

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Financial Accounting Professional Stage March 2010

Candidates generally performed well on this question, adopting a good exam technique that allowed them to
gain a good pass in this question but miss out some of the more tricky areas. Presentation of the statement
of cash flows was good, although candidates often missed sub-totalling each section and the date for the
period for which the cash flow was prepared was missed by a significant minority of candidates.
Candidates generally calculated the repayment of borrowings correctly and the purchase of property, plant
and equipment, although a minority of candidates showed the latter as an inflow of cash rather than outflow.
Interest paid was also generally shown correctly. A common mistake was in relation to the income tax
expense where a significant number of candidates missed the tax expense in respect of the discontinued
operation.
The calculation of the proceeds from the share issue were mixed with candidates gaining the marks for the
brought forward and carried forward figures but often getting the entries for the bonus issue back to front. The
calculation for the cash flows from the disposal of the subsidiary was one of the most disappointing areas
with candidates showing all kinds of long and complicated net assets workings, when a, simple netting off of
two figures was required.
Candidates seemed happy with the T-account for dividends paid, although the treatment of the bonus issue
was not always correctly dealt with, sometimes it was shown on the wrong side of the T-account or missed
entirely. However, the calculation of the dividend paid to the non-controlling interest was disappointing with a
good majority of candidates simply electing to ignore the calculation entirely. Candidates who did show a
working for this generally were unable to calculate the disposal value or simply missed it out.
A good attempt at producing the reconciliation of profit before tax to cash generated from operations was
made by almost all candidates. Common errors however included not including the profit before tax for the
discontinued operation, adding back the loss on disposal even though it was not included in the parents
profit before tax figure, ignoring the impact of the goodwill impairment and deducting the individual assets
and liabilities at disposal in the movements calculations, rather than adding them, or ignoring them
completely.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2010

19
19

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Financial Accounting Professional Stage March 2010

Question 3
Overall marks for this question can be analysed as follows:

Total: 22

General comments
This question required the preparation of a consolidated statement of financial position. The group has an
associate, with the acquisition of a subsidiary during the year. A fair value adjustment in relation to a piece of
equipment, with depreciation adjustment, was required. Inter-company trading had taken place during the
year between the parent and associate company and a suspense account needed eliminating, which was
created on the acquisition of property, plant and equipment on deferred payment terms.
Rumphi plc
(a) Consolidated statement of financial position as at 31 December 2009
000
Assets
Non-current assets
Property, plant and equipment (W8)
Intangibles
Goodwill
Investment in associate (W7)
Current assets
Inventories
Trade and other receivables (120,840 + 945,600)
Cash and cash equivalents (72,600 + 189,500)

000

1,488,350
36,000
143,723
108,585
1,776,658

52,960
1,066,440
262,100
1,381,500
3,158,158

Total assets
Equity and liabilities
Equity attributable to Rumphi plc shareholders
Ordinary share capital
Retained earnings (W5)
Attributable to the equity holders of Rumphi plc
Non-controlling interest (W4)

930,000
802,840
1,732,840
348,948
2,081,788

Non-current liabilities
Deferred payment (W8)
Current liabilities
Trade and other payables (236,380 + 470,330)
Taxation (172,000 + 157,660)
Total equity and liabilities

40,000

706,710
329,660
1,036,370
3,158,158

Workings
(1) Group structure

Rumphi

245,000 / 350,000 = 70%

Luwa Ltd

The Institute of Chartered Accountants in England and Wales 2010

14,175 / 56,700 = 25%

Dedza Ltd

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Financial Accounting Professional Stage March 2010

(2) Net assets Luwa Ltd

Share capital
Share premium account
Retained earnings
Goodwill on business
PPE FV uplift
FV depreciation adjustment (12,000 / 8yrs x 4/12)

31 Dec 2009

350,000
125,000
748,260
(71,600)
12,000
(500)
1,163,160

Acquisition

350,000
125,000
600,710
(71,600)
12,000

1,016,110

Post acq

147,550

(500)
147,050

(3) Goodwill Luwa Ltd

900,000
(1,016,110)
304,833
188,723
(45,000)
143,723

Consideration transferred
Net assets at acquisition (W2)
Non-controlling interest at acquisition (1,016,110 (W2) x 30%)
Less: Impairment

(4) Non-controlling interest Luwa Ltd

Share of net assets (1,163,160 (W2) x 30%)

348,948

(5) Retained earnings

751,320
(1,700)
102,935
(45,000)
13,285
(10,000)
(8,000)
802,840

Rumphi plc
Less:PURP (6,800 x 25%)
Luwa Ltd (147,050 (W2) x 70%)
Less: Impairment
Dedza Ltd ((145,695 92,555) x 25%))
Less: Impairments to date
Machine depreciation adjustment (W8)

(6) PURP
%
100
(60)
40

Sale price
Cost
Gross profit
13,600 x = 6,800

Dedza Ltd

34,000
(20,400)
13,600

(7) Investment in associate Dedza Ltd

Original cost
Add: Share of post acquisition increase in retained earnings
Less: Impairment to date
Less: Share of PURP

107,000
13,285
(10,000)
(1,700)
108,585

(8) Property, plant and equipment

Rumphi plc
Luwa Ltd
Fair value adjustment
FV depreciation adjustment (W2)
New machine (80,000 40,000)
Depreciation adj on new machine (40,000 / 5 yrs)

The Institute of Chartered Accountants in England and Wales 2010

800,300
644,550
12,000
(500)
40,000
(8,000)
1,488,350

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Financial Accounting Professional Stage March 2010

The majority of candidate answers to this question were very good. Most notably candidates coped far
better with the provision for unrealised profit on sales made by the parent to the associate than they have
at previous sittings. Where errors were made in respect of the provision for unrealised profit it was by
deducting the full amount of the unrealised earnings from retained earnings and investment in associate
rather than the parents share. A significant minority of candidates made the adjustment to consolidated
inventory instead of to the investment in associate.
Presentation was very good, although candidates still seem to not complete statements in some way,
most typically by not showing the sub total before the non-controlling interest line and therefore they
inevitably lose marks.
Workings were generally well laid out, although the property, plant and equipment workings were often
squashed on the face of the statement of financial position which made it quite difficult to read. This was
compounded by the fact that these scripts were scanned for electronic marking and therefore squashed
workings became even harder to read. Candidates should be made aware of this, to try and avoid such an
approach in the future.
The majority of candidates made a good attempt at the net assets working. However, a number of
common errors were made in this area including not deducting the goodwill recognised by the subsidiary,
instead candidates included this as part of consolidated intangible assets, and forgetting that the fair value
uplift on the equipment meant that additional depreciation needed to be calculated. For candidates that
did appreciate that additional depreciation should be recognised they often missed that it was only four
months worth, rather than a full year. Another common error was not including the subsidiarys share
premium in the net assets working but instead showing it on the face of the consolidated statement of
financial position.
One surprising error was that whilst almost all candidates correctly calculated the percentages of the
subsidiary and the associate held by the parent, a significant minority of candidates subsequently mixed
up the associate percentage (25%) with the non-controlling interest percentage (30%).
Other common errors included correctly adding the 40,000 due on the new machine to consolidated
property, plant and equipment but either showing the corresponding liability as current or not showing a
corresponding liability at all, or simply adding 80,000 to property, plant and equipment rather than only
40,000.
A worrying few consolidated either only four-twelfths or 70% of the subsidiarys assets and liabilities.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2010

22
22

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Financial Accounting Professional Stage March 2010

Question 4
Overall marks for this question can be analysed as follows:

Total: 21

General comments
The first part of this question is a single topic question focusing on non-current assets, including aspects on
leasing. Candidates were required to prepare a finance lease calculation, assess a research and development
project and also carry out an impairment review. Parts b) and c) covered concepts issues, with a discussion on
substance over form and how the four qualitative characteristics related to lease transactions.
Blantyre Ltd
(a) Summary of costs included in income statement for the year ended 31 December 2009

Administrative expenses:
Depreciation (85,000 / 5yrs)
17,000
Amortisation (192,000 / 4yrs x 6/12 months)
24,000
Impairment of know-how (W3)
11,000
Research costs
70,000
Promotional advertising costs
15,000
Staff training costs
13,000
Finance costs (W1)
6,400
Statement of financial position as at 31 December 2009 (extracts)

Non-current assets
Property, plant and equipment (85,000 17,000)
Intangible assets (120,000 15,000 + 157,000)

68,000
262,000

Non-current liabilities
Finance lease liabilities (W1)

43,200

Current liabilities
Finance lease liabilities (62,400 43,200) (W1)

19,200

(1) Finance lease

Deposit
Instalments (4 x 24,000)
Fair value of asset
Finance charges

5,000
96,000
(85,000)
16,000

SOTD = (4 x 5) 2 = 10
B/fwd (85,000 5,000) = 80,000
Year ended
31 December 2009
31 December 2010

B/f

80,000
62,400

Interest

(16,000 x 4/10) 6,400

(16,000 x 3/10) 4,800

Payment

(24,000)
(24,000)

C/f

62,400
43,200

(2) Technical Know-how

Original cost
Legal costs
Manufacturing supervisors time
Testing costs

(3) Impairment
Carrying amount at 31 Dec 2009 (192,000 24,000)
Recoverable amount
Impairment

The Institute of Chartered Accountants in England and Wales 2010

180,000
4,000
3,200
4,800
192,000

168,000
(157,000)
11,000

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Financial Accounting Professional Stage March 2010

In part (a) most candidates picked up a considerable number of marks for correct calculations, however many
lost marks for their statement of financial position extracts, as these were not properly presented.
The majority of candidates made a good attempt at the leasing table. The most common error was to not
deduct the deposit of 5,000 paid upfront. Candidates however often made a mistake in allocating the lease
liability between current and non-current, with a significant minority of candidates allocating the full 24,000
payment as current thereby not understanding that it should only be the capital element of this.
Common errors included calculating an incorrect sum-of-digits figure, taking the fair value of 152,000 as the
recoverable amount of the technical know-how rather than the estimated future cash flows of 157,000, not
excluding 13,000 staff training costs from the amount originally recognised for the technical know-how and
failing to compare the amortised carrying amount of the technical know-how to the recoverable amount.
Total possible marks
Maximum full marks

13
13

(b)
Substance over form is an accounting concept that should be applied to all accounting areas in accordance
with the IASB Framework. Leasing is an example of the application of this concept.
To recognise the substance of a transaction, its economic reality should be reflected rather than merely its
legal form.
IAS 17, Leases looks at the economic reality of a lease through the assessment of which party carries the risks
and rewards of ownership, rather than looking at legal ownership. If the effect of the lease transaction is such
that in commercial effect it is similar to borrowing the money and buying the asset outright, both IAS 17 and the
IASB Framework require the asset and in effect a related loan to be recognised.
Conversely, if the risks and rewards of ownership remain with the lessor, as they do in an operating lease, then
in effect the substance of the transaction is the same as its legal form and no asset or corresponding liability
should be recognised.

Answers to part (b) were adequate, with most candidates quoting a reasonable definition of substance over
form, recognising that the way finance leases are accounted for is an example of this concept and discussing
the transfer of risks and rewards. However, most candidates focused on the recognition of the asset with no
mention of a corresponding liability. Whilst some candidates discussed the fact that assets held under
operating leases are not capitalised because the risks and rewards are not transferred, it was rare to see the
point that for operating leases substance is the same as legal form.
Total possible marks
Maximum full marks

4
3

(c)
Qualitative characteristics and IAS 17.
Relevance
Information is relevant if it can influence the economic decisions of users. By showing the true substance of a
finance lease, a company is made to show the debt that it has in its financial statements. This may influence
potential lenders in the future. The commitments note in relation to operating leases and the liability note in
relation to finance leases will also provide potential lenders essential information on what the companys
commitments and obligations already are.
Reliability
Information is reliable if it is free from error or bias, complete and portrays events in a way that reflects their
reality.

The Institute of Chartered Accountants in England and Wales 2010

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Financial Accounting Professional Stage March 2010

To be reliable information must faithfully represent a transaction. IAS 17 does this by following the overriding
criteria of substance over form.
Comparability
Users must be able to compare information with that of previous periods or with that of another entity.
Comparability is achieved through consistency and disclosure.
IAS 17 does require some subjectivity when a company assesses the risks and rewards of ownership.
However, detailed disclosure requirements, including setting out the companys accounting policies will help
with comparability.
In addition, IAS 17 ensures that financial statements are comparable between a company that has taken out a
loan to acquire an asset or one that has entered into a finance lease.
Understandability
Information must be readily understandable to users so that they can perceive its significance. It is dependent
on how information is presented.
There may be some confusion in looking at the non-current assets owned by a company, as these will include
those assets that are held under finance leases. However, the accounting policies will explain this and it is
assumed that users have a reasonable level of knowledge.

Answers to part (c) were often poor. Most marks were scored from brief general points about the four
qualitative characteristics. Reliability was probably the characteristic that was dealt with the best although
some candidates strayed into IAS 16 and discussed whether it was more reliable to record an asset at its
historic cost or its fair value. Points were often repeated and often placed under the wrong characteristic. With
regards to understandability, many cited very complex notes as an example of the application of this concept.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2010

8
5

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