Qualification Programme Examination Panelists Report. Final Examination (June 2015 Session) Paper I

Transcription

1 Qualification Programme Examination Panelists Report Final Examination (June 2015 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 The candidates performance in financial reporting demonstrated that candidates were good at the basic accounting principles and treatment. However, candidates were expected to present to their senior colleagues comprehensive accounting solutions in workplace contexts, with due consideration of disclosure requirements and practical elements. For the questions on corporate financing, the candidates were familiar with the basic computation of net present value. However, they had difficulties in appreciating its practical application in sensitive and scenario-based analyses. Candidates should note that a company s management is required to make rational investment decisions and it is never a simple plus or minus decision in a dynamic business world, characterized with constant change and upheaval. For the auditing-related questions, many candidates were able to respond to the question requirements by applying the relevant auditing standards. The candidates were also familiar with the ethical requirements of a CPA, but their practical understanding of the requirements was below expectations when quite a number of candidates did not realize that a welcome gift worth HK$2,000 would not be trivial and inconsequential when considering an auditor s independence. The candidates also had difficulties in tackling auditing issues with more practical requirements. Also, some candidates did not perform well because they misinterpreted or did not understand the question requirements. This situation is usually due to inadequate examination preparation or a lack of practical experience leading to the requirements being misunderstood. Specific Comments Question 1(a) 2 marks The question required the candidates to explain whether the acquisition of Dim Sum was a business combination. Final Examination (June 2015 Session) Page 1 of 7

2 The candidates performance was satisfactory. Candidates were able to explain the correct accounting treatment and responded to the question with answers from the standards relating to the definition of business combination. However, some candidates did not analyze whether Dim Sum constituted an acquisition of a business or an asset. Question 1(b)(i) and (ii) 9 marks The question required the candidates to explain the accounting treatments for the business combination (including the goodwill and deferred tax generated) as at 30 September 2014 and calculate the goodwill, arising from the acquisition of Dim Sum as at 30 September The question also required the candidates to explain whether it was necessary to re-assess the impairment for the goodwill arising from the acquisition of Dim Sum as at 31 December The candidates performance in Question 1(b)(i) was average. Generally, candidates were able to compute the fair value of considerations but they failed to consider the deferred tax impact on the fair value adjustments, arising from the assets acquired or liabilities assumed. Candidates should become more familiar with the treatment of deferred tax arising from a business combination. Many candidates did not perform satisfactorily in Question 1(b)(ii). They only explained the general requirement of an annual impairment test on goodwill rather than the specific requirements as stated in paragraph 96 of HKAS36 Impairment of Assets. Not many candidates were able to mention that an impairment test should be performed as at 31 December 2014 even though Dim Sum was acquired during the year and that the impairment test should be carried out at the same time every year. Question 1(b)(iii) 3 marks The question required the candidates, as the CFO of the Group, to identify any three missing disclosures in the extract of the relevant disclosure notes provided. The performance in this question was not satisfactory. Many candidates were not familiar with financial reporting disclosure requirements. Only a few candidates were able to identify the missing disclosures. Many were unable to mention what should be disclosed in the relevant disclosure notes. Question 2(a) and (b) 5 marks The question required the candidates to explain the impact of the new Companies Ordinance on the capital account in the consolidated financial statements of the Group for the year ended 31 December The question also required the candidates to explain the accounting treatments for the capital account transactions including (i) the issue of new shares for the acquisition of Dim Sum and (ii) the conversion of the entire convertible bonds, under the new Companies Ordinance. Final Examination (June 2015 Session) Page 2 of 7

3 The performance in this question was good. However, some candidates did not realize that the interest expense elements of the convertible bonds should be taken into account upon conversion. Question 3 6 marks The question required the candidates to advise the accounting treatment related to the classification and financial statements disclosure for the disposal of Deluxe Furniture in Yummy Group s consolidated financial statements for the year ended 31 December The performance in this question was not satisfactory. Candidates were not familiar with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations. They misinterpreted the case information that the disposal was confirmed as at 31 December 2014 and answered instead regarding the de-recognition of assets and liabilities and the calculation of gain or loss on disposal. Some candidates were able to apply HKFRS 5 and responded to the disclosure requirements. However, the answers relating to disclosure should have been more comprehensive. Question 4(a) 9 marks The question required the candidates to compute the Net Present Value ( NPV ) for Project Dessert in the base-case, the best-case and the worst-case. The candidates performance was not satisfactory. Many candidates did not understand the meaning of worst and best scenarios and some of them could not compute the tax shield. In general, many candidates did not have a good understanding of the concept of a scenario test. Question 4(b) 6 marks The question required the candidates to calculate the sensitivity of the base-case NPV in response to a change in the fixed costs from HK$9 million to HK$10 million. The candidates performance was not good. Some candidates were not familiar with a sensitivity test and failed to answer the question well. Many of them mixed up the concept of internal rate of return ( IRR ) and NPV. Question 4(c)(i) and (ii) 6 marks The question required the candidates to explain why scenario analysis is used in addition to sensitivity analysis when the management makes an investment decision to accept or reject a proposed project. The question also required the candidates to discuss if scenario analysis is an investment decision rule, like NPV, for the management to judge whether to accept or reject a proposed project. Final Examination (June 2015 Session) Page 3 of 7

4 For Question 4(c)(i), the candidates performance was average. Some candidates could not understand the use of a sensitivity test in exploring how a change in a variable resulted in the change of the relevant NPV. Many candidates failed to answer that a scenario test could provide management with a picture of potential outcomes of changes in various scenarios. For Question 4(c)(ii), the candidates performance was average. Not many of the candidates were able to explain that management needed to apply their experience and knowledge to make an investment decision. Question 4(d) 4 marks The question required the candidates to list the drawbacks relating to sensitivity analysis. The candidates performance was very good. Many of them were able to answer the questions correctly. The answers could easily be extracted from the Learning Pack. Question 5(a) 3 marks The question required the candidates to state whether the AEB engagement team could accept the welcome gift. In general, candidates were able to identify the potential self-interest threat. However, some candidates did not realize that a welcome gift worth HK$2,000 would not be trivial and inconsequential and the engagement team should not accept the gift. Also, some candidates did not draw the decline conclusion and suggested consulting the internal independence department. Question 5(b) 8 marks The question required the candidates to propose the audit procedures that should be performed to address the non-recognition of deferred revenue related to the sale of gift vouchers, from the opening balance perspective. Many candidates were able to respond with reference to HKSA 510 (Clarified) Initial Audit Engagements Opening Balances that the engagement team had to contact the previous auditor to review their work paper but they were not able to further elaborate other relevant points to gain higher marks. Some candidates were not able to properly apply their concepts and understanding. Other candidates suggested audit procedures which were neither relevant to the deferred revenue nor to this case. Question 5(c)(i) and (ii) 8 marks The question required the candidates to list 5 items that the auditor had to consider in planning for the inventory observation in J-Food and suggest alternative procedures that could be performed to obtain sufficient appropriate audit evidence for the existence and condition of fresh food items as at 30 September Final Examination (June 2015 Session) Page 4 of 7

5 Many candidates were able to list out the majority of key points that had to be considered during the planning stage. However, many of them were not able to suggest alternative procedures if the inventory observation was not performed on the period-end date. Only a few candidates responded that the engagement team could obtain audit comfort from the validation of internal controls and the inspection of subsequent sales. Although the question had already stated that the inventory observation had been performed and adequate audit comfort could not be obtained from the roll forward to 30 September 2014, many candidates ignored this and suggested performing the inventory observation again, which was not practical. Some candidates suggested the involvement of experts which was not relevant in this case. Question 5(d)(i) and (ii) 6 marks The question required the candidates to state the points that the auditor should cover with the client s accounting manager for the scenarios that (i) there was no disclosure in relation to the rental arrangement between J-Food and Super Wasa (the company owned by Ms. Yuki Chan s husband); and (ii) there was a disclosure in relation to the rental arrangement between J-Food and Super Wasa, where the management had made an assertion that the rental arrangement between J-Food and Super Wasa had been conducted on terms equivalent to those prevailing in an arm s length transaction. Many candidates were able to identify the existence of related party transactions but only a few of them went further to understand and evaluate the internal controls in relation to the identification of related parties and related party transactions as well as to further understand the reason behind the failure of disclosures. Answers related to linkage from the non-disclosure to fraud risk assessment were very rare. Also, only a few candidates were able to explain the need to perform additional audit procedures to verify the management s assertion on the arm s length transactions. However, the audit procedures were mainly based around the inquiry with management. Also, many candidates did not realize that the audit procedures for a related party transaction should not simply cover the pricing but should also cover other aspects such as credit terms or other specific charges. (II) Section B Essay Questions General Comments The candidates generally performed well in relatively straightforward questions like Question 7(a) & (b), but they showed their weakness in applying accounting knowledge to a tax question, i.e. identifying goodwill in Question 6(a)(i), and applying tax rules to practical situations. Final Examination (June 2015 Session) Page 5 of 7

6 Specific Comments Question 6(a)(i) 7 marks The question required the candidates to identify the different types of intangibles to be transferred in the acquisition of All Happy Ltd and the related tax treatments as to the deductibility of the cost of acquisition of these assets. Whilst many candidates could identify that know-how and the trademark were transferred, only a few could identify the goodwill as part of the intangible assets acquired. These candidates might have thought that this was a pure tax question and were unable to apply their accounting knowledge to analyze this question. Question 6(a)(ii) and (iii) 8 marks The question required the candidates to highlight the tax deductibility problem related to the acquisition of the intangibles altogether and the acquisition of the trade receivables (in case any trade receivable subsequently goes bad). The question also required the candidates to give advice with recommendations that may address the problems identified. It is encouraging to see that many candidates could recommend the registration of the trademark before the transfer as a way of mitigating tax exposure. Nevertheless, many candidates were not familiar with the requirements for the tax deduction of know-how and goodwill. This led to their failure to identify good advice/recommendations. As for bad debt deduction, only a few candidates could apply their knowledge in this practical situation although many of them understood the deduction criteria well. Question 6(b) 4 marks The question required the candidates to highlight the tax implications, including problems, related to the disposal of the plant and machinery to Delicious Food and give advice with recommendations that might address the problems identified. Many candidates only focused their answers on the tax implications for the buyer, but failed to address it from the tax perspective of the seller. They thus were unable to identify the problems and provide the corresponding solution. Question 7(a) 3 marks The question required the candidates to explain the three most important factors in determining the source of employment income. Many candidates performed well in this question. Final Examination (June 2015 Session) Page 6 of 7

7 Question 7(b) 3 marks The question required the candidates to list the type of transactions which could be exempt from stamp duty under s.45 of the Stamp Duty Ordinance and the requirements in respect of the relationships between the transferor and transferee at the time of the transfer if s.45 applied. Many candidates performed well, though a number failed to point out that the transactions should cover the transfer of immovable properties. (III) Conclusion and Recommendation The candidates showed their hard work in tackling their last examination before becoming a CPA. They showed difficulties in questions related to practical situations or in-depth analyses. Some candidates did not understand the question requirements and so they wrote answers only in a general sense. Apart from a lack of practical experience, they most likely did not prepare well for their examination or believed that an open-book examination allows them time to dig out the answers from reference materials during the examination. Candidates should understand that success in the CPA professional examinations, in particular the Final Examination, cannot be accomplished without personal exertion and hard work. Final Examination (June 2015 Session) Page 7 of 7