Qualification Programme Examination Panelists Report. Final Examination (December 2014 Session) Paper II

Transcription

1 Qualification Programme Examination Panelists Report Final Examination (December 2014 Session) (The main purpose of the following report is to summarise candidates common weaknesses and make recommendations to help future candidates improve their examination performance.) (I) Section A Case Questions General Comments As in Paper I, candidates could handle the basic accounting treatment issues. They ran into difficulties when the requirement was more analytical or in depth. In general, the candidates performance in Module B was not satisfactory. Many candidates performed well in the computation parts, e.g. Question 2(a)(i) to Question 2(a)(iii). However, they failed to answer the questions about listing rules especially topics about privatization, general offer, takeover and model codes. The questions in Module C focused on the audit reporting and communication with those charged with governance, which was an area in which candidates might only have limited practical experience. In future, candidates should pay more attention to ensure that they are able to distinguish different types of audit reporting and the related audit procedures to be performed. Specific Comments Question 1(a) 11 marks The question required the candidates to state the matters the audit manager should address, in the discussion with the client s accounting manager, for the agreed-upon engagement procedures covering the level of assurance and the nature of engagement. The question also required the candidates to review the agreed-upon procedures, drafted by the client's accounting manager, for changes to the draft and to identify the areas in the Letter of Representation that the audit manager should discuss with the accounting manager. Generally, candidates understood the nature of an agreed-upon procedures engagement and the level of assurance that should be given. However, some candidates were not able to highlight that agreed-upon procedures should be very specific and only report on factual findings. There should be no judgement involved. Many candidates were able to identify the issues in the Letter of Representation and answered the question well. Final Examination (December 2014 Session) Page 1 of 7

2 Question 1(b) 4 marks The question required the candidates to suggest what the audit manager should coach the audit team with regard to certain ethical issues. The candidates were able to identify the ethical issues. However, some candidates did not focus on the coaching of the audit team and spent time discussing issues such as client acceptance, which were irrelevant. Question 1(c) 10 marks The question required the candidates to state the audit procedures one should perform to address the finding that the audit client did not comply with a regulatory requirement that certain beauty treatments had to be performed by a registered doctor rather than a beauty consultant. The question also required candidates to state the factors that should be considered for non-compliance with a regulatory requirement before communicating with those charged with governance, as well as before preparing the auditor's report. Some candidates were not able to identify the relevant auditing standard and thus they could not state the audit procedures that should be performed. Candidates were also not familiar with the related requirements on communication with those charged with governance and the requirements in audit reporting. Question 2(a) 12 marks Questions 2(a)(i) & 2(a)(ii) required the candidates to compute how many BFH shares should be issued under the rights issue, for the funding of the privatisation plan. The question also required candidates to compute the theoretical ex-rights price of one BFH share. The candidates performance was good in Questions 2(a)(i) and 2(a)(ii). In general, candidates were good at performing the calculation and answered the questions well. Question 2(a)(iii) required the candidates to compute the theoretical value attaching to a right (nil-paid right) tradable on the Hong Kong Stock Exchange during the rights issue period. The candidates performance was average in Question 2(a)(iii) while some candidates chose not to answer it. Some candidates did not understand the concept of theoretical value attaching to the rights, so they provided the same answers as in Question 2(a)(ii) or computed the answers incorrectly. Question 2(a)(iv) required the candidates to discuss the impact on Mr. Teddy Gee when only 10 million rights shares were taken up. The question also required the candidates to comment on BFH's issued shares distribution. Final Examination (December 2014 Session) Page 2 of 7

3 The candidates performance was not satisfactory in Question 2(a)(iv). Many candidates did not answer this question or failed to address the question requirement correctly. This indicated that many of them did not understand the impact on Mr. Teddy Gee when only 10 million rights shares were taken up. Only a few were able to mention that Teddy, as the underwriter in the case, had to subscribe for the rights issue shares not taken up. Also, very few candidates could compute the changes in shareholding of the controlling shareholders and to recognize that BFH would fail to maintain the minimum public float requirement. Question 2(a)(v) required the candidates to differentiate between an open offer and a rights issue. The candidates performance was average in Question 2(a)(v). In general, candidates understood that the shares to be issued under an open offer were not allotted to existing shareholders on renounceable documents. Some candidates correctly mentioned that the existing shareholders under an open offer were not allowed to sell their rights to subscribe for the shares. The candidates were able to understand the basic concept of a rights issue in providing the rights to existing shareholders to subscribe to new shares. Question 2(b) 11 marks Question 2(b)(i) required the candidates to discuss what the offeree company should do when it received a general offer from the offeror, if the privatisation of Subco was executed by way of a voluntary general offer. The candidates performance was not satisfactory in Question 2(b)(i) and many candidates did not answer it. Only a few candidates were able to address the question correctly by copying the relevant materials from the Learning Pack. Many of them suggested setting up independent committees and considering the fairness of the offer but not the other possible actions. Question 2(b)(ii) required the candidates to discuss with reasons whether BFH could proceed with the privatisation. The candidates performance was not satisfactory in Question 2(b)(ii). Some candidates also chose not to answer this question. They appeared to have an inadequate understanding of the requirements of the compulsory acquisition rights under the Takeovers Code, requiring at least 90% of the disinterested shares to accept the offer. Question 2(b)(iii) required candidates to discuss the implications for BFH, as far as the general offer and the Listing Rules were concerned, if the condition of acceptance by not less than 90% of disinterested shares was waived by BFH. Final Examination (December 2014 Session) Page 3 of 7

4 The candidates performance was not satisfactory in Question 2(b)(iii). Many candidates did not answer the question. Very few candidates were able to mention the temporary waiver and the minimum public float deficiency. Some candidates suggested the use of a bank loan to raise capital but it was not relevant to the question. Question 2(b)(iv) required the candidates to state what difference it made if the privatisation was effected by a scheme of arrangement instead of a general offer. The candidates performance was not satisfactory in Question 2(b)(iv). Not many candidates could tackle the question well and many candidates did not answer the question. Some candidates suggested pledging the shares to banks but it was not relevant to the question requirement. Question 2(c) 2 marks The question required the candidates to suggest what a listed company director could do, under the Model Code, to sell his shares to meet his financial difficulty during the blackout period for the publication of the financial results. The candidates performance was not satisfactory. Only a few candidates could address the question well and suggested that a director could sell his shares during the blackout period in an exceptional situation. Many candidates incorrectly answered the question by suggesting the director should borrow money or resign. Question 3(a)(i) 5 marks The question required the candidates to analyse and explain the accounting treatments for the benefit payments relating to the termination of employment of some BBG administrative staff after the acquisition by BodyFit. Many candidates did not understand that employee termination benefit falls within the scope of HKAS 19. There were some typical incorrect answers. For example, some candidates applied and explained HKAS 37 and/or HKFRS 5 in this question. Question 3(a)(ii) 5 marks The question required the candidates to analyse and explain the accounting treatments for the turnover rent paid. Only a few candidates were able to apply HKAS 17 for the turnover rent in this question. There were some typical incorrect answers too. Some candidates incorrectly applied HKAS 37 or HKAS 18 to explain the accounting treatment on the turnover rent. Some candidates even suggested that the turnover rent was an embedded derivative. Final Examination (December 2014 Session) Page 4 of 7

5 Question 3(b) 13 marks The question required the candidates to analyse and explain the accounting impacts of the following matters from BIL s perspective: For Question 3(b)(i), whether the transfer of all the ordinary shares of WPL from BBG to BIL constituted a business combination. Many candidates were able to state that the acquisition was not a business combination. However, candidates were unable to analyse the case information and concluded that the acquisition was an acquisition of an asset. For Question 3(b)(ii), whether any deferred tax should be recognised at the date of acquisition and for subsequent financial periods, if the fair value of Property B held by WPL had increased since the end of the last financial year-end and up to the date when BIL acquires the ordinary shares of WPL. Some candidates were able to explain the accounting treatment on deferred tax and the rebuttable presumption concept as specified in HKAS40. However, some candidates did not understand that there were different accounting treatments on deferred tax recognition at the initial recognition stage and in subsequent periods. Also, only a few candidates commented on the accounting treatment if the investment properties were depreciable. Question 3(c) 2 marks The question required the candidates to explain the accounting treatment of the promissory note for acquiring the ordinary shares of WPL from BBG in BIL's financial statements. Many candidates got little marks in this question. It was obvious that candidates were not familiar with the accounting treatment for a promissory note and they failed to answer the question properly. (II) Section B Essay Questions General Comments The candidates demonstrated good time management skills as many of them could answer all the questions. However, their organizational and presentation abilities should be further improved. For instance, only a few candidates could present their arguments systematically on the services fee arrangement in Question 4. The candidates should understand that the way used by them to present their technical knowledge would make a marked difference to their scores. As an area for improvement, short paragraphs could be used to make a better presentation. Final Examination (December 2014 Session) Page 5 of 7

6 Good handwriting would also make it easier for the markers to understand the contents of the answers. Question 4 10 marks The question required the candidates to advise whether and how the Inland Revenue Department ( IRD ) would challenge the clinic administrative service arrangement with BBG under the Inland Revenue Ordinance ( IRO ) and the relevant Departmental Interpretation and Practice Notes ( DIPN ). The candidates answered well on the possible application of s.61 and s.61a. Many of them were able to refer to DIPN 24 and explain the basis of calculating the service fee. However, many mixed up the Type I and Type II arrangements and incorrectly referred to s.9a in their answers, which was not relevant to the question requirement. Also, only a few could mention about the possible penalties. Some even discussed whether BBG would be chargeable to Hong Kong profits tax under s.14(1) and DIPN 21, which was irrelevant to the question. Question 5(a) 5 marks The question required the candidates to advise as to the Hong Kong profits tax exposures of BBG in the disposal of the commercial property, Property A. The question also required the candidates to specify the tax consequence in case the IRD considered that the gain on the disposal of Property A was revenue in nature. Some candidates simply copied the six badges of trade without reference to the case information. Many candidates mistakenly assumed that the gain on disposal of the property was revenue in nature. Only a few candidates were able to cite the Sharkey v Werner case. Question 5(b) 6 marks The question required the candidates to advise as to the stamp duty exposures, including Ad Valorem Stamp Duty, Special Stamp Duty ( SSD ) and Buyer s Stamp Duty ( BSD ), with regard to the transfer of property A. The question also required the candidates to advise regarding the conditions that had to be fulfilled in case there were ways to mitigate or reduce the tax burden. Generally, candidates could answer well with regard to the issues of SSD and BSD exemption. They were able to explain the s.45 group relief provision and the meaning of associated body corporate. However, not many candidates mentioned the third party financing restriction requirement. They also could not explain correctly the implications of the disposal of BBG. Final Examination (December 2014 Session) Page 6 of 7

7 Question 6 4 marks The question required the candidates to advise as to the Hong Kong salaries tax exposures of the payment in lieu of notice and the severance payment to be received by the BBG administrative employees who would be terminated after the acquisition of BBG by BodyFit. On average, candidates performed very well in this question. Some candidates mistakenly explained whether such payments to employees would be deductible in the hands of employer. A few candidates incorrectly referred to s.11d and suggested an application to relate back the severance payment. Final Examination (December 2014 Session) Page 7 of 7