Examiner s general comments

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1 Examiner s general comments The following provides guidance to candidates preparing for future examinations and has been prepared with that in mind. The guidance mentions the main errors that were commonly made by candidates, but by no means did all candidates make such errors, and there were many excellent scripts presented. There was evidence of a number of well-prepared candidates with a wide range of knowledge, able to tackle most of the sub-questions in questions 1 and 2 and prepare a good answer to questions 3 and 4. However some candidates had not prepared for some of the topics on the paper. Questions that had a significant number of particularly poor answers were, question 1 (1.1 direct tax and 1.10 underlying tax); question 2b the purpose of the Conceptual framework. Question spotting is not advised in this paper as most learning outcomes are covered in each examination. Question 1 seemed to have better marks this time with most candidates scoring over half marks. Some candidates seemed unprepared for some questions in this section. Questions 1.1 and 1.10 seemed to cause the most problems. A number of candidates wrote long answers to the narrative questions in this section, causing time constraints for later questions. Question 2 was generally answered quite well, many candidates were able to score half marks on the question overall. Some candidates were obviously ill prepared for Q2b the purpose of the Conceptual framework. Question 3 produced some very good answers but there were very few candidates scoring full marks. A considerable number of candidates were unable to correctly calculate or treat some of the adjustments required. E.g. depreciation of non-current assets and the treatment of a finance lease. Question 4 Most candidates seemed to understand what a statement of cash flows should look like but there were still some including statement of profit or loss items and statement of financial position items in the statement of cash flows. It is essential that adequate, clear workings are shown for every question or marks could be lost. The Chartered Institute of Management Accountants 2014 Page 1

2 SECTION A 20 MARKS ANSWER ALL TEN SUB-QUESTIONS Question One consists of 10 objective test sub-questions. These are drawn from all sections of the syllabus. They are designed to examine breadth across the syllabus and thus cover many learning outcomes. Question Define the meaning of the term a direct tax. Answer: A direct tax is one that is imposed directly on the person/entity required to pay the tax. Question 1.2 Under the current structure of regulatory bodies, which organisation is responsible for seeking out the views of its members and passing them on in summary form to the International Accounting Standards Board (IASB)? A B C D IFRS Interpretations Committee International Organisation of Securities Commissions IFRS Foundation IFRS Advisory Council Answer D. The Chartered Institute of Management Accountants 2014 Page 2

3 Question 1.3 MX suffered a major fire in its central warehouse on 14 March Inventory held in the warehouse with a value of $700,000 was either damaged or destroyed. An external audit of MX s financial statements discovered that the loss had not been recognised in MX s financial statements. This is regarded as material but not pervasive. What type of audit report should the auditor issue for MX s financial statements for the year ended 31 March 2014? A B C D A modified report, with a qualified opinion based on insufficient appropriate evidence. A modified report, with a qualified opinion, with a qualified except for opinion. An unmodified report with an unqualified opinion. An unmodified report with an emphasis of matter paragraph relating to the inventory. Answer B Question 1.4 Define the meaning of the term tax gap. Answer: The tax gap is the gap between the tax theoretically collectable and the amount actually collected. The Chartered Institute of Management Accountants 2014 Page 3

4 Question 1.5 The tax rules of Country X allow an entity ceasing to trade to carry back terminal losses against the previous two years profits. QT ceased trading on 31 March 2014, having incurred a trading loss of $122,000 for the year ended 31 March QT s profits for the previous 3 years were: Year to 31 March Taxable profit 2011 $89, $62, $53,000 Assuming that QT had paid all tax due up to 31 March 2013, calculate how much tax refund QT can claim for its terminal loss: A $28,750 B $30,500 C $115,000 D $122,000 Answer A Maximum offset against 2013 $53,000 Maximum offset against 2012 $62,000 $115,000 $115,000 x 25% = $28,750 Question 1.6 ABC is registered for tax in Country X. ABC purchases goods and services from suppliers, including VAT at standard rate and sells goods to customers, including VAT at standard rate. The formal incidence of the VAT is on: A B C D ABC s customers ABC s suppliers ABC Country X s tax authority Answer C The Chartered Institute of Management Accountants 2014 Page 4

5 Question 1.7 Country X is considering an excise duty of $1,000 per vehicle on all new motor vehicles sold. (i) (ii) (iii) (iv) (v) A progressive tax An indirect tax An ad valorem tax A regressive tax A unit tax Which TWO of the above would be regarded as a correct description of the $1,000 excise duty? A B C D (i) and (ii) (ii) and (v) (iii) and (iv) (iv) and (v) Answer B Question 1.8 The IASB s Conceptual Framework for Financial Reporting (2010) (Framework) lists four enhancing characteristics of financial statements. Comparability and timeliness are two of the enhancing characteristics, list the other two enhancing characteristics. Answer: Verifiability and Understandability The Chartered Institute of Management Accountants 2014 Page 5

6 Question 1.9 PX is registered for VAT in Country X. PX is partially exempt for VAT purposes. During the latest VAT period, PX purchased materials and services costing $661,250, including VAT at standard rate. These materials and services were used to produce both standard rated and exempt goods. Goods sold to customers, excluding VAT were: Standard rated goods $820,000 Exempt goods $205,000 Assume PX had no other VAT related transactions. Input tax that PX can claim on its purchases in its VAT return for the period is: A $69,000 B $86,250 C $79,350 D $99,188 Answer A Proportion that is not exempt: 820/1,025 = 80% Input VAT = $661,250 x 15/115 = 86,250 Answer 86,250 x 80% = $69,000 Question 1.10 Describe the meaning of underlying tax. Answer: When an entity pays a dividend out of post-tax profits to another entity the dividend received has already suffered tax. If the dividend is paid by an entity in a foreign country the tax suffered is referred to as underlying tax. The Chartered Institute of Management Accountants 2014 Page 6

7 SECTION B 30 MARKS ANSWER ALL SIX QUESTIONS Question 2a Required: (i) (ii) Explain why the CIMA code of ethics is principles-based rather than rules-based. Describe TWO of the principles of the CIMA code of ethics. (3 marks) (Total for sub-question (a) = 5 marks) To test the candidates understanding of CIMA s code of ethics. Tests learning outcome B2c. Suggested Approach Explain the reasons why the CIMA code of ethics is principles-based. Describe two of the principles in the code of ethics. Marking Guide Marks Giving an explanation why the CIMA code of ethics is principles-based. 3.0 Describing two principles of the CIMA code. 2.0 Maximum marks awarded 5.0 Examiner s Comments This question was generally well done with many answers scoring full marks. Common Errors Not relating the answer specifically to the question, in part (i) a number of candidates did not explain why CIMA used principles. Most candidates were able to identify two principles but not all were able to correctly describe them. The Chartered Institute of Management Accountants 2014 Page 7

8 Question 2b Required: Explain the purpose of the Conceptual framework for financial reporting. (Total for sub-question (b) = 5 marks) To test candidates understanding of the purpose of the Conceptual framework for financial reporting (2010). Tests learning outcome B1d. Suggested Approach Explain the purpose of the Conceptual framework for financial reporting (2010). Marking Guide Marks Explaining up to 5 purposes of the Framework. 5 Maximum marks awarded 5 Examiner s Comments This question was not well answered, few candidates answered the question set. Too many answers explained the concepts and definitions contained in the framework rather than its purpose. Common Errors An inability to identify any purpose of the framework. Explaining in detail the qualitative characteristics and elements of financial statements. Many answers were too vague and repetitive in nature. The Chartered Institute of Management Accountants 2014 Page 8

9 Question 2c Required: Explain with reasons which of ACZ s geographical segments will be classified as reportable operating segments in accordance with IFRS 8 Operating Segments. (Total for sub-question (c) = 5 marks) To test candidates knowledge of IFRS 8 Operating Segments. Tests learning outcome C2a. Suggested Approach Explain the 10% rule for identifying reportable segments. Apply the 10% rule to each geographical segment, to identify the reportable segments. Apply the 75% rule to check that sufficient segments have been included. Marking Guide Marks Explain the 10% rule and the 75% rule for identifying reportable segments. 2.0 Apply the 10% rule to each geographical segment, to identify the reportable segments. 2.0 Apply the 75% rule to check that sufficient segments have been included. 1.0 Maximum marks awarded 5 Examiner s Comments This question was reasonably well done. Marks were often lost through applying the rules incorrectly to the data. Some answers did not explain the rules that were being applied. Common Errors Not explaining the 10% rule. Incorrectly applying the 10% rule. Not referring to the 75% rule. Quoting and applying incorrect percentages instead of 10% and 75%. Only using 10% of revenue to identify reportable segments. The Chartered Institute of Management Accountants 2014 Page 9

10 Question 2d Required: (i) Calculate the goodwill that will be included in XYK s statement of financial position at 31 March (ii) Explain, with supporting calculations, how XYK s consolidated interest in EZ would affect its consolidated statement of financial position at 31 March (Total for sub-question (d) = 5 marks) To test the candidates understanding of the treatment of a subsidiary entity in the statement of financial position. Tests learning outcome C1b&d. Suggested Approach Explain how the investment in EZ should be classified in the consolidated financial statements. Calculate goodwill arising on the acquisition of EZ and make the adjustment for the impairment. Explain the impact on the statement of financial position. Marking Guide Calculate goodwill arising on the acquisition of EZ and adjust for the impairment of goodwill Explain how the goodwill and other assets and liabilities of EZ should be treated in the consolidated financial statements. Marks Maximum marks awarded 5 Examiner s Comments Most candidates could calculate the goodwill arising on the initial acquisition of EZ. A significant number of candidates did not give an adequate explanation of how EZ s financial data would be recognised in the consolidated financial statements. Common Errors Not explaining that the goodwill in EZ should be recognised in the consolidated financial statements. Not stating that the impairment would be recognised in the statement of financial position as a reduction of goodwill and as a reduction of retained earnings. Not mentioning the treatment of any other assets and liabilities in the consolidated statements. The Chartered Institute of Management Accountants 2014 Page 10

11 Question 2e Required: Calculate SMB s corporate income tax due for the year ended 31 March (Total for sub-question (e) = 5 marks) To test candidates understanding of corporate income tax calculations. Tests learning outcome A3a. Suggested Approach Calculate SMB s accounting depreciation charge for the year ended 31 March Calculate SMB s tax depreciation charge for the year ended 31 March Calculate SMB s taxable profits for the year to 31 March Multiply by the tax rate to give the tax due for the year ended 31 March Marking Guide Marks Calculate SMB s accounting depreciation charge for the year ended 31 March Calculate SMB s tax depreciation charge for the year ended 31 March Calculate SMB s taxable profits for the year to 31 March 2014 and the tax due for the year. 2.5 Maximum marks awarded 5 Examiner s Comments The data presented was for use in question 2e and 2f. Some candidates were unable to identify when the various data items should be used. This part of the question was generally answered quite well with most candidates scoring more than half marks. Common Errors Using more than one year for calculation. Taking the first year as year ended 31 March 2013 instead of Ignoring the additional vehicle s depreciation and/or tax depreciation. Ignoring the depreciation and/or tax depreciation of the other assets. Adding back the non-taxable grant. The Chartered Institute of Management Accountants 2014 Page 11

12 Question 2f Required: (i) (ii) Calculate the deferred tax balance that will appear in SMB s statement of financial position under non-current liabilities at 31 March Calculate the amount of income taxes charged to SMB s statement of profit or loss for the year ended 31 March (Total for sub-question (f) = 5 marks) To test candidates knowledge of tax base and the calculation of deferred tax. Tests learning outcome A4a. Suggested Approach Calculate the temporary difference arising in the year to 31 March Calculate the deferred tax balance at 31 March Calculate the tax charge to the statement of profit or loss for the year ended 31 March Marking Guide Marks Calculate the temporary difference arising at the end of the year. 1.5 Calculate the deferred tax balance at 31 March Calculate the tax charge to the statement of profit or loss for the year ended 31 March Maximum marks awarded 5 Examiner s Comments See comment under 2e. This part of the question was not answered as well as part (e). Common Errors Including deferred tax balance in the charge to profit or loss. Including tax paid or tax due in the calculation for deferred tax. Not understanding the difference between tax due for payment and the tax charge to the statement of profit or loss. Not using the answer from part (e) in the calculation of the tax expense for the year. The Chartered Institute of Management Accountants 2014 Page 12

13 SECTION C 50 MARKS ANSWER TWO QUESTIONS FROM THIS SECTION Question 3 Required: Prepare the statement of comprehensive income and a statement of changes in equity for ZXC for the year ended 31 March 2014 and a statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a statement of accounting policies. (Total for Question Three = 25 marks) To test candidates ability to prepare a set of financial statements for a single entity, including the application of a number of IFRS/IAS. Tests learning outcome C2a and C1a. Suggested Approach Prepare the non-current asset depreciation and development amortisation calculations. Prepare workings for cost of sales, administration and distribution. Prepare all other required workings. Prepare the statement of comprehensive income. Prepare the statement of financial position. Prepare the statement of changes in equity. Marking Guide Marks Prepare the non-current asset depreciation & amortisation calculations. 2.0 Prepare workings for cost of sales, administration and distribution. 4.5 Prepare the statement of profit or loss. 3.5 Prepare the statement of financial position - assets. 5.0 Prepare the statement of financial position equity & liabilities. 5.0 Prepare the statement of changes in equity. 2.5 Formats and presentation. 2.5 Maximum marks for Question Examiner s Comments This question was generally well done with many candidates scoring 20+ marks. The Chartered Institute of Management Accountants 2014 Page 13

14 Common Errors Not applying reducing balance depreciation to plant and equipment correctly. Not adjusting for disposal of assets before calculating depreciation for the year. Allocating depreciation to the wrong cost headings. Charging depreciation and loss on disposal of plant and equipment directly to profit or loss. Charging the cumulative depreciation to cost of sales and/or distribution instead of the annual figure. The treasury shares were treated in many different incorrect ways: adding to equity shares; deducting from equity shares and adding to non-current assets were the most common treatments. Some candidates treated the deferred development expenditure as a liability in the statement of financial position. Closing inventory balance was deducted from cost of sales. The finance lease was calculated as paid in arrears instead of paid in advance each year. Some candidates mixed up depreciation and interest paid in the same set of workings for the lease. The Chartered Institute of Management Accountants 2014 Page 14

15 Question 4 Required: Prepare EBS s Statement of cash flows, using the indirect method, for the year ended 30 June 2014 in accordance with IAS 7 Statement of Cash Flows. Notes to the financial statements are not required, but all workings must be clearly shown. (Total for Question Four = 25 marks) To test candidates understanding of a Statement of cash flows. Tests learning outcome C1a. Suggested Approach Draft the outline headings for a statement of cash flows. Complete the cash generated from operations section. Calculate the tax and interest paid and put in statement of cash flows. Calculate the cash flows from movements in non-tangible assets and complete cash flows from investing activities. Calculate dividends paid and complete cash flows from financing activities. Complete the statement of cash flows. Marking Guide Marks Cash generated from operations section of the statement. 9.0 Calculate the tax and interest paid and put in statement of cash flows. 4.0 Calculate the cash flows from movements in non-current assets and complete cash flows from investing activities. 6.0 Calculate dividends paid and complete cash flows from financing activities. 4.0 Formats and presentation and cash balances. 2.0 Maximum marks for Question Examiner s Comments There were some very good answers to this question with some candidates scoring full marks. However there were many more very poor answers with some candidates clearly not able to distinguish cash flows from accounting adjustments. The main error was in the calculation of depreciation and purchases of non-current assets. Many candidates failed to realise that you can t use net book values to calculate two missing figures. The Chartered Institute of Management Accountants 2014 Page 15

16 Common Errors Many candidates had very poor formats, with several items in the wrong section of the statement of cash flows. Some answers started with the wrong profit figure. Many candidates did not include several of the non-cash adjustments, e.g. amortisation of development expenditure. A number of candidates still get the direction of the changes in working capital the wrong way round. Very few candidates were able to calculate the expenditure incurred in the year on the purchase of noncurrent assets. A large proportion of candidates lost marks for deducting depreciation, amortisation and loss on sale of an asset instead of adding them to the statement of cash flows. Including revenue and expenses items from the statement of profit or loss or assets and liabilities from the statement of financial position in the statement of cash flows. The Chartered Institute of Management Accountants 2014 Page 16