The candidates that had seriously revised since the November 2013 session tended to pass convincingly.

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1 Examiner s Comments The paper covered many of the usual core areas, including share-based payments, pensions, financial instruments, groups and ratio and financial analysis, however many of the answers illustrated how genuinely unprepared the candidates were for answering on these technical areas. There was no obvious issue with time allocation as most were able to complete answers to all seven questions. The problem was in the lack of core understanding and inability to make narrative relevant to the questions. The most disappointing results came in the consolidation questions. It was abundantly evident that candidates had no understanding of what information a cash flow statement contained, many including share of associate s profit, movement on revaluation reserve, depreciation under the headings of cash flow. The majority could not identify under which heading the related cash flows would appear with acquisitions appearing under financing and share issues under investing activities. A number of candidates then attempted to prepare the cash flow from operating activities which had not been asked for. The attempts at Q6 were equally disappointing although not quite as alarming in respect of basic principles. Few were able to answer part (b). It was evident to the markers that many candidates were not equipped to progress through the financial pillar. The candidates that had seriously revised since the November 2013 session tended to pass convincingly. The Chartered Institute of Management Accountants 2014 Page 1

2 SECTION A 50 MARKS Question One (a) In accordance with IFRS 2 Share-based Payment: (i) calculate the charge to MR s statement of profit or loss for the year ended 31 December 2013 in respect of the share options AND prepare the journal entry to record it; and (ii) explain why share options, such as those granted by MR, generate a charge to the statement of profit or loss despite no cash transaction having occurred. (5 marks) (b) Explain, in accordance with IAS 19 Employee Benefits (revised) how: (i) the defined benefit pension plan would be accounted for by MR within its financial statements; (ii) the past service costs would be accounted for in the year to 31 December (5 marks) Total for Question One = 10 marks This question was intended to test two of the key areas in Syllabus Section B, being share-based payments and retirement benefits. The share-based part requires knowledge and practical application of IFRS 2 and an understanding of why the requirements are necessary. The retirement benefit pension plan section focuses on the accounting rules for a defined benefit plan and includes the revised rules for accounting for past service costs. This question examined learning outcome B1(f). Suggested Approach Candidates should have been familiar with the format required for the answer and those who had completed past exam questions in their studies are likely to have prepared their workings in the format shown in this answer. The following is an approximate guide as to how the marks were allocated to workings: (a) Calculation of share options for year and journal entry 3 Explanation of treatment 2 (b) Explanation of impact of defined benefit plan on financial statements 3 Accounting for past service costs 2 Total for Question One 10 The Chartered Institute of Management Accountants 2014 Page 2

3 Examiner s Comments Many candidates were able to prepare the correct journal entry for part (a) however a surprising number did not calculate the correct expense. This is a calculation that has appeared in numerous past exam questions and we would have expected this question to provide some easily attained marks. The most common mistakes included using $6.50 instead of the fair value at the grant date and credited liability rather than equity. Many candidates commented on actuarial gains and losses going through OCI but often failed to comment on the impact in P/L and SOFP. Accounting for past service costs was well done. The Chartered Institute of Management Accountants 2014 Page 3

4 Question Two Prepare the following extracts from the consolidated statement of cash flows for the ER group for the year ended 31 December 2013, in accordance with IAS 7 Statement of Cash Flows: (i) cash flows from investing activities; and (ii) cash flows from financing activities. Total for Question Two = 10 marks This question tested consolidation and required candidates to calculate and draft sections of the statement of cash flows. The question examined learning outcome A1(a) and (b). Suggested Approach The most time-efficient process would have been to annotate the question paper with the headings for the cash flows and then set up the pro-formas for the sections of the cash flow. Using the missing figure approach to calculate the cash flows would have been the most logical approach. Acquisition of PPE 2 Acquisition of subsidiary and impact on other cash flows 2 Dividend received from associate 2 Share issue for cash and repayment of loans 2 Dividends paid 2 Total for Question Two 10 Examiner s Comments The attempts submitted for this question were very disappointing. They were typically random workings of movement and even those who had calculated the movement correctly were often unable to include the movement under the correct heading and in the correct direction. The overall feeling from the marking point of view was that this group of candidates had no real awareness of the statement of cash flows and more alarmingly no understanding of what constituted a cash flow! Something that every employer would expect from an accountant. The Chartered Institute of Management Accountants 2014 Page 4

5 Question Three (a) (i) Calculate the basic earnings per share to be reported in the financial statements of NAT for the year ended 31 December 2013, including the comparative figure, in accordance with IAS 33 Earnings Per Share. (ii) Explain why the bonus issue of shares and the share issue at full market price are treated differently in the calculation of the basic earnings per share. (7 marks) (b) Calculate the diluted earnings per share to be reported in the financial statements of NAT for the year ended 31 December 2013, in accordance with IAS 33 Earnings per share. (3 marks) Total for Question Three = 10 marks This question tested the calculation of basic and diluted earnings per share. The EPS question included dealing with two issues during the year, a bonus issue and an issue at full market price. The diluted EPS required candidates to incorporate a convertible instrument when calculating diluted EPS. This question examined learning outcome C1(a). Suggested Approach The question was deliberately spilt into (a) and (b) to help candidates focus on the fact that both the bonus and full market price issue were to be included in the basic EPS and the diluted EPS then adjusted for the potential ordinary shares. The formats of candidates workings were expected to follow the approach shown below. (a) Calculation of basic eps 3 Explanation of the treatment of the two share issues 4 (b) Calculation of diluted eps 3 Total for Question Three 10 The Chartered Institute of Management Accountants 2014 Page 5

6 Examiner s comments Only a minority of candidates knew that bonus issue was not time apportioned. Many treated the full market price issue correctly but it was worrying that a great number then included a value in the share number that had been multiplied by the share price. It is difficult to believe that this is something that has ever been taught or read in a text book. It was a bit worrying that the difference between income and cash was missed by the majority of candidates. Many discussing how an issue at full market price brought income rather than distinguishing the resource that could be used to help generate income. Many made a reasonable attempt at calculating the diluted eps and were given credit where they had used their own figures from part (a). The Chartered Institute of Management Accountants 2014 Page 6

7 Question Four (a) (i) In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates: explain how RD would have established the A$ as its functional currency; and (ii) calculate the amounts to be included in the financial statements of RD for the year to 31 December 2013 in respect of the above transaction. (6 marks) (b) (i) Prepare, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, the journal entries to record: the initial measurement of the investment at 1 December 2013; and (ii) the subsequent measurement of the investment in RD s financial statements at 31 December (4 marks) Total for Question Four = 10 marks This question tested two areas. The first was a discussion of functional currency and the translation of a monetary balance in accordance with IAS 21. The second was the initial and subsequent measurement of a financial instrument. This question examined learning outcomes A2(b) and B1(e). Suggested approach In part (a) candidates should have referred to the rules for establishing functional currency as outlined in IAS 21. The second element of the foreign currency question was about restating the monetary item at the year end. Candidates should have been entirely prepared for answering part (b) of this question and for setting their answers out in journal entry format as this question is consistent with how this has been tested in past exams. (a) Discussion on functional currency 3 Calculation and journals 3 (b) Initial measurement 2 Subsequent measurement 2 Total for Question Four 10 The Chartered Institute of Management Accountants 2014 Page 7

8 Examiner s comments Part (a) of this question was in the main answered well with candidates listing the criteria from IAS 21. Poorer candidates plumped for the answer where the entity is based. The main issue with part (a) was that many recorded the FOREX difference within OCI rather than P/L, but were given credit for the recording of the PPE and the payables. Part (b) the obvious mistakes were made, mixing up the treatment of the transactions costs and recording the gain/loss in reserves. The Chartered Institute of Management Accountants 2014 Page 8

9 Question Five (a) Discuss why, despite an entity investing in staff training and development, the statement of financial position does not contain an asset relating to human resources. (6 marks) (b) Discuss why a potential investor might not wish to rely solely on the financial information within the financial statements of a service-based entity in order to make investment decisions. (4 marks) Total for Question Five = 10 marks This question was intended to test candidates understanding of human asset accounting and the issues around its reporting. This question examined learning outcome D1(d). Suggested Approach Part (a) should have been relatively easy to answer as candidates would have seen the discussion about non-recognition of human assets numerous times in previous sessions. Part (b) marks could only be earned by specifically discussing the issues from the investor s viewpoint. (a) Discussion of recognition criteria 6 (b) Investors viewpoint 4 Total for Question Five 10 Examiner s comments There were lots of good answers to this question and a number achieved 8+. Part (a) was definitely better as it was more knowledge-based, and many were well versed in the recognition criteria for an asset which was excellent. Many could not quite convert this knowledge into practical application in part (b) and failed to consider the viewpoint of investors. The Chartered Institute of Management Accountants 2014 Page 9

10 SECTION B 50 MARKS ANSWER BOTH QUESTIONS Question Six (a) (b) Prepare the consolidated statement of financial position for the MAT group as at 31 December (19 marks) (i) (ii) Explain how this additional acquisition will impact on the preparation of the consolidated financial statements of MAT for the year to 31 December Calculate the adjustment that will be required to be made to the group s statement of financial position in respect of this acquisition. (6 marks) (Total for Question Six = 25 marks) This question tested consolidation. The first section tested candidates ability to prepare a group statement of financial position, including a partly-owned subsidiary and a joint venture. Impairment and the accounting for long-term borrowing were also tested. Part (b) then tested the more complex issue of a further acquisition of shares in an entity already controlled. This question examined learning outcomes A1(a) and A1(b). Suggested Approach The most time-efficient approach would have been to draft the pro-forma for the statement of financial position and then work systematically through the headings adjusting them appropriately for consolidation. The following is an approximate guide as to how the marks were allocated to workings: (a) Goodwill 3 Investment in joint venture 4 Group retained earnings 5 Non-controlling interest 2 Consolidated SOFP and LT borrowings 5 (b) Explanation of impact of extending ownership 3 Adjustment to retained earnings 3 Total for Question 6 25 The Chartered Institute of Management Accountants 2014 Page 10

11 Examiner s Comments Only the minority managed to treat the joint venture correctly and equity account it choosing instead to fully consolidate it or ignoring it totally. It was pleasing to see that many knew that the other reserve balance was eliminated in the group accounts. There were few that managed to correctly calculate goodwill with common mistakes being including the fair value of the investment rather than the original cost and failing to include the fair value adjustment. The accounting applied to the joint venture was a disaster even those that knew it was to be equity accounted were unable to calculate post acquisition reserves (albeit many calculated it correctly within retained earnings just illustrating a total lack of understanding of the underlying accounting entries they were dealing with) very few knew to adjust the JV for the unrealised profit. Both the NCI and the long term borrowings were done very well. Part (b) gave the most surprising answers with candidates redoing their workings for retained earnings and goodwill and NCI. The majority failed to see that this was an adjustment to parent s equity. The Chartered Institute of Management Accountants 2014 Page 11

12 Question Seven (a) (b) Analyse the financial performance and the financial position of LW. (8 marks are available for the calculation of relevant ratios.) Discuss why investors may find it useful to review the segmental information of LW when attempting to assess the future profitability of LW. (20 marks) (5 marks) Total for Question Seven = 25 marks The question formed the main test of financial analysis and required candidates to calculate relevant ratios and analyse the information. There was a deliberate focus on the investors needs when commenting on the analysis. The question examined learning outcomes C1(a), C2(b) and C2(c). Suggested Approach Calculation of the ratios and then re-reading the opening scenario would have been the natural first steps, ensuring that the ratios selected were relevant for this question and covered both financial performance and position and in particular the investor ratios. Again there is an element of fluidity about the marking in this question as we are committed to awarding credit for well-analysed points with good back-up explanations. Ratios 8 Analysis of financial performance 6 Analysis of financial position 6 Segmental discussion 5 Total for Question Seven 25 Examiner s comments Part (a) -This was surprisingly one of the best answered questions on the paper. There was improvement in the ratio calculation, the ability to absorb the scenario and remain relevant to the question and the quality of the analysis in general. Part (b) was not answered well with most failing to discuss segmental disclosures from the investors viewpoint. A number of candidates still believed that different segments would be subject to different accounting standards which simply shows they do not appreciate the core accounting principles. The Chartered Institute of Management Accountants 2014 Page 12