Qualification Programme Examination Panelists Report. Module A Financial Reporting (June 2016 Session)

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1 Qualification Programme Examination Panelists Report Module A Financial Reporting (June 2016 Session) (The main purpose of the following report is to summarise candidates common weaknesses and make recommendations to help future candidates improve their performance in the examination.) (I) Section A Case Questions General Comments The case study questions tested the candidates knowledge of the accounting treatment for the recognition of game product revenue and the accounting implication of the office move. In addition, candidates were required to prepare the consolidated statement of financial position. In general, many candidates were able to prepare the consolidated statement of financial position. However, many candidates were unable to properly account for the office move and most candidates were unable to properly account for the recognition of game product revenue. Specific Comments Question 1 26 Marks This question required candidates to prepare the consolidated statement of financial position. The performance was satisfactory. However, many candidates were unable to properly account for the investment in associates. Some candidates left the consolidated worksheet completely blank and only prepared the consolidation journal entries even though the question specifically required the consolidation adjustments to be presented in the form of a worksheet. Question 2(a) 7 Marks This question required candidates to advise as to how and when the game product revenue should be recognised. The performance was unsatisfactory. Many candidates discussed only the general concepts of revenue recognition instead of discussing the proper accounting treatment of the consumable virtual items and durable virtual items specifically. Upon the sales of virtual items, revenue should be recognised only when the services have been rendered. However, many candidates wrongly concluded that the revenue could be recognised upon the sales. Module A (June 2016 Session) Page 1 of 5

2 Question 2(b) 5 Marks This question required candidates to advise as to whether the revenues of the mobile games and webgames should be recognised on a gross basis or net basis. The performance was unsatisfactory. Most candidates were unable to identify that in an agency relationship, the primary obligor, i.e. the principal, would report the gross revenue and thus the gross amount for mobile games would be recognised as revenue since a reasonable estimation for the gross amount could be made. However, for webgames, the gross revenue could not be estimated and thus only the amount received and receivable, i.e. the net amount, could be recognised. Most candidates were unable to identify the difference and unable to explain the reason behind it. Question 3 12 Marks This question required candidates to advise as to the accounting implication of the office move, determine the carrying amount of the two properties and calculate the amount of income and expenses. The performance was less than satisfactory. Some candidates simply copied the accounting standards without applying them to the case. Some candidates wrongly determined the date of the change in classification. As a reclassification from an owner-occupied property to an investment property, HKAS 16 should be applied only up to the date of change in use. The refurbishment cost should be capitalised as part of the value of the investment property. However, some candidates wrongly reclassified the property from owner-occupied property to an investment property only after the completion of the refurbishment. (II) Section B Essay/Short Questions General Comments The questions in this section tested candidates on both their conceptual understanding and application of specific financial reporting standards in those cases which commonly occur in actual practice. Reading the background and questions/requirements in detail was important. Candidates may not possess sufficient knowledge on the specific topic especially failing to apply them in the calculation but they were able to explain the relevant accounting concepts for those they were familiar with. Time management was also critical for getting a reasonably high score, marks were not given for stating in the answer those accounting concepts which were not required by the question. Candidates who scored full or high marks normally gave their answer in a precise manner with a focus on what was required in the questions. In general, the performance in this section was average. Module A (June 2016 Session) Page 2 of 5

3 Specific Comments Question 4(a) 5 Marks This question required candidates to prepare the journal entries for the issuance of share options. Generally students showed a lack of knowledge with regard to the implication of vesting condition, fair value of share options granted and the relevant accounting entries. For the share options granted to the management, some students took into account the estimated departure rate of management in the calculation even though the question had stated that those options are vested immediately. Question 4(b) 3 Marks This question required candidates to calculate the weighted average number of shares outstanding for the relevant year, which is the most basic element for calculating the earnings per share. Most of the students performed well and were able to get full marks. Question 4(c) 7 Marks This question required candidates to calculate the basic and diluted earnings per share. Many students performed well and were able to get full marks for the calculation of basic earnings per share. Some of them could calculate correctly the portion of free shares issued at nil paid in relation to the share options granted to the management. However, the majority of students failed to account for the share options granted to staff in the calculation of diluted earnings per share which showed that they have a poor understanding in this regard. Question 4(d) 3 Marks This question tested candidates knowledge of the anti-dilutive effect of share options. Students understood the requirement but failed to apply the relevant accounting literature under HKAS 33. Instead, they commonly used the concept of in/out-of-the money option in their answer. About one-third of the students did not attempt to answer the question. Module A (June 2016 Session) Page 3 of 5

4 Question 5(a) 10 Marks This question required candidates to classify the leases as a finance lease or an operating lease in the given cases. In general, candidates performed well in this question and they presented and organised their answers in a logical way. They were able to identify the relevant criteria in distinguishing between a finance lease and an operating lease. Some candidates could not get the majority of the marks available as they did not calculate the total gross rental correctly and they did not give a comprehensive answer including the discussion of all the relevant criteria or a conclusion to the discussion. Question 5(b)(i) 4 Marks The requirement of this question was similar to Question 5(a) and the performance of the candidates shared the same observations as above. Question 5(b)(ii) 6 Marks This question tested candidates on their knowledge of correcting an error. Most candidates did not realise that the topic tested is in relation to HKAS 8. About half of the candidates understood that the accounting treatment at inception is an error or incorrect and were able to advise to correct the treatment retrospectively by restating the comparative amounts. Many of them had an improper focus on the accounting treatment of recognising Machine C under an operating lease instead of correcting the error in the given scenario. Question 6(a) 3 Marks This question tested candidates on their knowledge of the repurchase of shares in the consolidated financial statements. Candidates performed unsatisfactorily in this question. Many students misinterpreted the question as requiring them to comment on the financial impact in the separate financial statements of the parent or the financial statements of the subsidiary. Half of the students did not attempt to answer this question. Question 6(b) 3 Marks This question tested candidates on their knowledge of the repurchase of shares of the parent by its subsidiary. Candidates performed unsatisfactorily in this question. Many students did not understand the question and the relevant requirement properly. They answered in a wrong direction or were even unable to draw any conclusion. Module A (June 2016 Session) Page 4 of 5

5 Question 6(c) 6 Marks This question tested candidates on their knowledge and reaction in a situation concerning an unethical issue. Candidates generally demonstrated a good understanding and most candidates were able to mention or explain the fundamental principles of integrity, professional competence and due care, and objectivity. They also understood that they should refuse to co-operate. (III) Conclusion and Recommendation Overall, the performance of the candidates was average. Candidates are advised to read the questions carefully so as to answer them thoroughly according to the requirements of the questions. In addition, candidates should be familiar with the accounting literatures of earnings per share, correction of an error and repurchase of own shares which are very common and should be basic knowledge in any work environment. Candidates should understand the importance of good analytical and application skills which are required in the actual practice and daily work of a professional accountant. Candidates are reminded to make a reasonable attempt at answering each part of the questions. Good time management is critical for success. Module A (June 2016 Session) Page 5 of 5

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