PROFESSIONAL STAGE FINANCIAL ACCOUNTING OT EXAMINER S COMMENTS

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1 PROFESSIONAL STAGE FINANCIAL ACCOUNTING OT EXAMINER S COMMENTS The performance of candidates in the June 2011 objective test questions section for the Professional Stage Financial Accounting paper was below the average performance on this section of the paper over all sittings to date. Candidates performed less well on syllabus area LO2. When practising OT items, care should always be taken to ensure that the principles underlying any particular item are understood rather than rote learning the answer. In particular, candidates should ensure that they read all items very carefully. The following table summarises how well* candidates answered each syllabus content area. Syllabus area Number of questions Well answered Poorly answered LO LO LO Total *If 50% or more of the candidates gave the correct answer, then the question was classified as well answered. Comments on the three most poorly answered questions, two on LO2 (preparation of single company financial statements) and one on LO3 (preparation of consolidated financial statements), are given below: Item 1 This item required candidates to calculate the amounts to be recognised in the financial statements in accordance with IAS 18, Revenue, for a property sold in the current year with an option to repurchase in future years at a higher price. Whilst almost all candidates correctly calculated the resultant interest charge for the income statement, a majority of those failed to add this amount to the non-current liability. Item 2 This item tested candidates understanding of when a provision should be made in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The most common error was to believe that a provision should be made at the current year end when legislation necessitating the work had been passed, when the legislation did not come into force until the following year. Item 3 This item featured an unrealised profit arising on the sale of inventory by an associate to its parent. Candidates were required to calculate the figures for investment in associate and inventories for the consolidated statement of financial position. The most common errors were to reduce group inventories by the full amount of the unrealised profit, as opposed to just the group share, or to reduce the investment in associate by the group share of the unrealised profit, instead of reducing inventories. Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 1 of 16

2 MARK PLAN AND EXAMINER S COMMENTARY Financial Accounting Professional Stage June 2011 The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion and to award partial marks where a point was either not explained fully or made by implication. More marks were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid points which were made by candidates. Question 1 Overall marks for this question are analysed as follows: Total: 23 General comments This question tested the preparation of an income statement and statement of financial position from a trial balance plus a number of adjustments. A note showing the movements on property, plant and equipment was also required. Matters to be adjusted for included post year-end sales returns, the issue of redeemable preference shares, dividends on ordinary and redeemable preference shares and the income tax charge for the year. Movements on property, plant and equipment comprised annual depreciation charges, a revaluation, a disposal and a new leased asset. Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 2 of 16

3 Tarragon plc (i) Income statement for the year ended 31 March 2011 Revenue (678,900 26,500) 652,400 Cost of sales (W1) (387,500) Gross profit 264,900 Administrative expenses (W1) (106,100) Profit from operations 158,800 Finance costs ((100,000 x 6%) + 1,600 (W3) (OF)) (7,600) Profit before tax 151,200 Income tax expense (31,000) Profit for the period 120,200 (ii) Statement of financial position as at 31 March 2011 Assets Non-current assets Property, plant and equipment 974,100 Current assets Inventories 61,400 Trade and other receivables (67,800 26,500) 41, ,700 Total assets 1,076,800 Equity and liabilities Equity Ordinary share capital 400,000 Share premium 160,000 Revaluation surplus (900, ,600) 169,400 Retained earnings (W2) 135, ,200 Non-current liabilities Preference share capital (redeemable) 100,000 Finance lease liabilities (W3) 18, ,800 Current liabilities Trade and other payables (45, ,000 (OF) (i)) 51,600 Finance lease liabilities (W3) 8,800 Taxation 31,000 Borrowings 1,400 92,800 Total equity and liabilities 1,076,800 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 3 of 16

4 (iii) Property, plant and equipment note Land and Plant and Total buildings equipment Cost/valuation At 1 April , ,500 1,039,500 Additions - 36,000 36,000 Disposals - (12,000) (12,000) Revaluation 59,000-59,000 At 31 March , ,500 1,122,500 Accumulated depreciation At 1 April , , ,700 Disposals - (7,200) (7,200) Revaluation (110,400) - (110,400) Charge for the year (200,000 25) ((36,000 8,000 46,300 54,300 4) + ((198,500 12,000) x 20%)) At 31 March , , ,400 Carrying amount At 31 March ,000 82, ,100 At 31 March ,600 97, ,800 Workings (1) Allocation of expenses Cost of sales Administrative expenses Per Q 345, ,100 Opening inventories 52,500 Closing inventories (61,400) Adj re ordinary dividend (50,000) Loss on scrapped plant (12,000 7,200) 4,800 Depreciation (iii) 46,300 8, , ,100 (2) Retained earnings At 1 April ,600 Ordinary dividend (50,000) Profit for the year 120,200 At 31 March ,800 (3) Finance lease Total payments (4 x 10,000) 40,000 Less Fair value of asset (36,000) Finance charges 4,000 SOTD = (4 x 5) 2 = 10 B/f Interest Payment C/f 31 March ,000 1,600 (10,000) 27, March ,600 1,200 (10,000) 18,800 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 4 of 16

5 As in previous sittings, candidates were clearly very well-prepared for this type of question. Most candidates produced a well-laid out statement of financial position and income statement in the correct format. A minority of candidates extended their income statement into a statement of comprehensive income or a statement of total changes in equity. Those that did the former often then lost marks by including the revaluation surplus arising during the year in the figure taken to retained earnings. With regard to the income statement and statement of financial position, very few errors were made regarding the adjustments for closing inventory, the post year end credit note, the error relating to the treatment of a dividend in respect of the redeemable preference shares and the recognition of the estimated income tax expense. The most common error was a failure to include the loss on disposal as an expense. Other less common errors included the following: Failing to follow through on the double entry for the credit note (most commonly by deducting it from revenue but failing to adjust trade receivables/trade payables). Treating the redeemable preference shares as equity (and therefore treating the dividend as a deduction from equity rather than a finance cost). Recognising the above dividend as a finance cost but failing to accrue for it (another failure in double entry). Treating the overdraft as a positive cash balance. Misanalysing the depreciation charges in the cost matrix/income statement (for example, analysing the plant and equipment charge as an administrative expense). Calculating the revaluation surplus which had arisen during the year as 59,000, instead of 169,400 by increasing the revalued asset from its cost to the valuation figure, as opposed to uplifting from its carrying amount. With regard to the disclosure note for property, plant and equipment, almost all candidates did attempt to create a proper disclosure note although many failed to complete all the necessary sub-totals and total column. By far the most common error in this area related to the calculation of the depreciation charge on the leased asset where most candidates used useful life rather than the shorter lease term. Other errors included the following: Not understanding how the revaluation should be presented in the disclosure note, ie by increasing cost and reversing out the brought forward accumulated depreciation. Candidates occasionally tried to deal with the entire revaluation in the cost section of the note. Putting the loss on disposal into the disclosure note rather than treating it as an expense. Including depreciation on the asset sold as part of the depreciation expense. Generally, the finance lease was well dealt with although the occasional candidate did recognise it at the gross amount of the payments rather than the fair value of the asset and others failed to calculate the sum of digits correctly. However, what was more worrying was the number of candidates who dealt with the finance lease correctly but then also included the annual payment as an expense. This indicated a real lack of understanding of both the underlying concept and the double entry. Others made a good attempt at the finance lease table but were unable to extract the correct figures from their table for disclosure on the statement of financial position. Finally, there were two key areas where candidates failed to demonstrate good exam technique. A significant number wasted considerable time by writing out extensive workings for property, plant and equipment and then effectively copying them all out again as the disclosure note. A sensible candidate would have realised that the disclosure note could effectively act as the working and that the only calculations actually needed were for the current year depreciation charges. A minority of candidates lost marks by failing to show the audit trail where numbers had been added together (particularly with regard to closing retained earnings) or by writing out lists of journals, rather than simply showing the relevant adjustments on the face of the financial statements. Total possible marks Maximum full marks Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 5 of 16

6 Question 2 Overall marks for this question are analysed as follows: Total: 20 General comments This question tested the preparation of a consolidated statement of cash flows and supporting note. Missing figures to be calculated included dividends received from an associate, dividends paid (to the group and to the non-controlling interest), interest paid, tax paid, and the amortisation charge for the year and cash consideration for a subsidiary acquired during the current year. Bayleaf plc Consolidated statement of cash flows for the year ended 31 March 2011 Cash flows from operating activities Cash generated from operations (Note) 1,145,700 Interest paid (W1) (35,500) Income tax paid (W2) (170,000) Net cash from operating activities 940,200 Cash flows from investing activities Purchase of intangibles (950,000) Acquisition of subsidiary Parsley Ltd net of cash acquired (331,400 (W8) 1,500) (329,900) Dividends received from associate (W4) 16,300 Net cash used in investing activities (1,263,600) Cash flows from financing activities Proceeds from issue of ordinary share capital (W7) 145,000 Dividends paid (W5) (83,000) Dividends paid to non-controlling interest (W6) (122,400) Net cash used in financing activities (60,400) Net increase in cash and cash equivalents (383,800) Cash and cash equivalents at beginning of period (25, ,000) (227,600) Cash and cash equivalents at end of period (1, ,000) (611,400) Note: Reconciliation of profit before tax to cash generated from operations Profit before tax 780,400 Share of profits of associate (125,800) Finance cost 35,000 Amortisation charge (W3) 445,800 Decrease in trade and other receivables ((401,900 52,000) 399,600) 49,700 Decrease in trade and other payables ((66,600 1,000 48,000) (58,500 1,500)) (39,400) Cash generated from operations 1,145,700 Workings (1) Interest paid Cash (β) 35,500 B/d 1,500 C/d 1,000 CIS 35,000 36,500 36,500 (2) Income tax paid Cash (β) 170,000 B/d 180,000 C/d 205,000 CIS 195, , ,000 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 6 of 16

7 (3) Intangibles B/d 769,500 Additions 950,000 Amortisation charge (β) 445,800 Acq of sub goodwill 156,000 develop(320, ,000) 370,000 C/d 1,799,700 2,245,500 2,245,500 (4) Investment in associate B/d 514,100 Cash (β) 16,300 CIS 125,800 C/d 623, , (5) Retained earnings Dividends in SCE (β) 83,000 B/d 358,500 C/d 715,000 CIS 439, , ,000 (6) Non-controlling interest Cash (β) 122,400 B/d 258,600 C/d 357,200 CIS 145,900 Acq of sub (W8) 75, , ,600 (7) Share capital and premium B/d (500, ,000) 600,000 Acq of sub (100,000 x 125, ) C/d (720, ,000) 870,000 Cash (β) 145, , ,000 (8) Acquisition of Parsley Ltd Net assets at acquisition (325, ,000) 375,500 Less: Attributable to NCI (375,500 x 20%) (75,100) 300,400 Goodwill arising 156,000 Share consideration (W7) (125,000) Cash consideration (β) 331,400 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 7 of 16

8 Candidates were clearly very well prepared for this question and most candidates produced a well-presented consolidated statement of cash flows with all the relevant headings. The vast majority of candidates showed a strong grasp of the double-entry techniques which underpin the preparation of a statement of cash flows, although some are still losing marks for failing to show outflows of cash in brackets on the face of the statement. Most candidates produced workings in the form of T accounts, although some completed these T accounts with the debits and credits the wrong way round. However, once again, some candidates produced tabular workings or workings in brackets on the face of the statement of cash flows. This can make it more difficult to see evidence of correct double entry and to award marks where the final figure is incorrect (or uses the incorrect bracket convention). Pleasingly, very few candidates produced no workings at all an even riskier approach as if figures are calculated incorrectly it is not possible to award any partial marks. The majority of candidates scored high marks on the reconciliation note, and on the figures for tax paid, interest paid and the dividend received from the associate. However, a significant number failed to show the correct opening and closing figures for cash and cash equivalents with many failing to realise that this should be the net of the positive cash figure and the bank overdraft. Most who made this mistake then went on to treat the overdraft as a loan, showing the movement in financing activities. The learning materials specifically state that candidates should assume, in the absence of other information, that bank overdrafts are repayable on demand and therefore should be classed as cash and cash equivalents. Other common errors included the following: Not entering the shares issued to acquire the subsidiary into the share capital and share premium accounts and therefore miscalculating the proceeds of the subsequent cash issue. Those candidates who did attempt to deal with this frequently included the first issue on the wrong side of the T accounts. Not including all the relevant figures on the debit side of the intangibles T account. Most candidates included some of the figures but very few included all three of the relevant entries and/or included the book value of the intangibles acquired rather than the fair value. Failing to include the non-controlling interest arising on the acquisition of the subsidiary in the noncontrolling interest T account (even where this figure had been calculated as part of calculating the cash paid for the new subsidiary). Taking the whole of the profit for the year to the retained earnings T account instead of only the group share. Not making the correct adjustments to trade receivables and payables relating to the acquisition of the subsidiary (although most did adjust for the accrued interest included in trade payables). In addition, workings in this area were often difficult to follow. The most challenging part of this question required candidates to work backwards to arrive at the cash element of the purchase consideration for the new subsidiary. Pleasingly, nearly all candidates made an attempt at this and a significant number calculated the correct figure. The most common errors were as follows: Including the net assets acquired at book value not fair value. Failing to deduct the non-controlling interest from the net assets (and even those who did do this often then omitted the figure from the non-controlling interest T account). Not adjusting for the element of the purchase consideration that was made up of shares not cash. Not deducting the cash acquired in the subsidiary to arrive at the net cash outflow. Treating the share consideration as the cash consideration. Total possible marks Maximum full marks 20½ 20 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 8 of 16

9 Question 3 Overall marks for this question are analysed as follows: Total: 21 General comments This question required the preparation of a consolidated statement of financial position and featured a subsidiary acquired on the first day of the current year, and an associate acquired half way through the current year. Intra-company trading and the sale of an asset had taken place during the period between the parent and the subsidiary, necessitating the elimination of both unrealised profits and a year-end intracompany balance. Candidates also needed to adjust the post-acquisition profits of the associate to reflect additional depreciation due to a fair value adjustment on acquisition. The question also featured an impairment of goodwill, a future issue of shares and an adjustment to be made to the parent company s accounts in respect of an operating lease taken out during the year. Dill plc Consolidated statement of financial position as at 31 March 2011 Assets Non-current assets Property, plant and equipment (500, ,300 6,750 (OF) (W8)) 1,411,450 Intangibles (W3) 150,920 Investment in associate (W7) 266,400 1,828,770 Current assets Inventories (345, ,900 15,000 (OF) (W6)) 576,500 Trade and other receivables (205, ,800 45,000) 340,300 Cash and cash equivalents (1, ) 2, ,000 Total assets 2,747,770 Equity and liabilities Equity attributable to owners of Dill plc Ordinary share capital 600,000 Shares not yet issued (W3) 280,000 Revaluation surplus 250,000 Retained earnings (W5) 839,190 1,969,190 Non-controlling interest (W4) 197,030 Total equity 2,166,220 Current liabilities Trade and other payables (166, ,800 45, ,550 3,750 (OF) (W9)) Taxation (120, ,000) 200, ,550 Total equity and liabilities 2,747,770 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 9 of 16

10 Workings (1) Group structure Dill plc = 40% = 80% Rosemary Ltd Basil Ltd (2) Net assets Rosemary Ltd Year end Acquisition Post acq Share capital 500, ,000 - Revaluation surplus 150, ,000 - Retained earnings Per Q 356, ,600 PURP (W6) (15,000) PPE PURP (W8) (6,750) - 117, , , ,550 (3) Goodwill Rosemary Ltd Consideration transferred (600,000 + (200,000 x 1.40)) 880,000 Non-controlling interest at acquisition (867,600 (W2) x 20%) 173,520 Net assets at acquisition (W2) (867,600) 185,920 Impairment to date (35,000) 150,920 (4) Non-controlling interest Rosemary Ltd Share of net assets (985,150 (W2) x 20%) 197,030 (5) Retained earnings Dill plc 767,500 Adj re operating lease (3,750) Rosemary Ltd (117,550 (W2) x 80%) 94,040 Basil Ltd (W7) 16,400 Less: Impairment to date (35,000) 839,190 (6) Inventory PURP Rosemary Ltd % SP ,000 Cost (100) (30,000) GP 50 15,000 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 10 of 16

11 (7) Investments in associates Basil Ltd Cost 250,000 Add: Share of post acquisition increase in net assets Share of post acquisition profits (42,500 x 40%) 17,000 Less: Share of additional depreciation based on FV (15,000 5 x (600) 6/12 x 40%) 16, ,400 (8) PPE PURP Rosemary Ltd Asset now in Dill plc s books at 25,000 x 3/4 18,750 Asset would have been in Rosemary Ltd s books at 20,000 x 3/5 (12,000) 6,750 (9) Adjustment re operating lease (5,000 x 3) 4 = 3,750 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 11 of 16

12 Candidates were clearly very well prepared for this question and generally scored highly. Almost all candidates demonstrated a sound technique, following that set out in the learning materials. The most problematic areas proved to be the unrealised profit on the office equipment sold by the subsidiary to the parent, the associate calculations and the adjustment for the operating lease. It was also rare to see a line in equity for shares not yet issued and when it was present the amount was generally incorrect. A good number of candidates correctly calculated that the initial unrealised profit on the office equipment was 9,000 but then failed to adjust for the subsequent depreciation on this amount to arrive at the overall adjustment of 6,750. Others did calculate both elements but then failed to adjust for the net of the two in the net assets working and against property, plant and equipment. A higher success rate was seen amongst those candidates who calculated the 6,750 in the way shown in the model answer above. With regards to the associate, although a number of candidates did correctly calculate and adjust for the additional depreciation due to the fair value adjustment on acquisition, few completed the double entry by taking the net adjustment made to the cost of the associate (ie share of profit for the year and share of this adjustment) to retained earnings. It was very common to see different figures in these two calculations regardless of what had been done in respect of the additional depreciation. A significant minority of candidates took six-twelfths of the profit figure given (which was already the correct figure for the postacquisition period). Others wasted time attempting to recalculate this figure via a net assets working for the associate an approach that has not been used in the leaning materials for some time. Only a minority of candidates correctly calculated the correct adjustment for the operating lease and correctly posted this to both retained earnings and accruals. The most common (and worrying error) was to see 5,000 in current liabilities and 10,000 in non-current liabilities. Other common errors included the following: Failing to include the revaluation surplus in the net assets table for the subsidiary (instead adding the group share of this to the parent s revaluation surplus for the consolidated statement of financial position). In the goodwill calculation, valuing the shares issued at 1.60 per share, instead of at the price ruling at acquisition. Including the impairment loss in the net assets table for the subsidiary instead of writing it off calculated goodwill. Taking the incorrect figure for post-acquisition profits from the subsidiary s net assets table (ie simply taking the movement on retained earnings, not as adjusted for the two provisions for unrealised profits, even when those had been included in the year-end column. Once again, a number of candidates failed to provide workings for assets and liabilities on the face of the consolidated statement of financial position. Where these figures were incorrect no partial marks could then be awarded. Candidates must show their workings in all cases so that partial credit can be given. Presentation of the consolidated statement of financial position was generally good, although very few candidates gained credit for clearly disclosing the non-controlling interest as a separate component of equity. Total possible marks Maximum full marks Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 12 of 16

13 Question 4 Overall marks for this question are analysed as follows: Total: 16 General comments This question was based around a discontinued operations scenario. Part (a) required the calculation of figures from the statement of financial position and a revised profit for the year from discontinued operations, involving consideration not only of IFRS 5 but also the related standards IAS 36 and IAS 37. In addition, some inventory lines needed to be written down to their net realisable value in accordance with IAS 2. Part (b) required an explanation of what, according to qualitative characteristics set out in the IASB s Framework, might make the analysis of continuing and discontinued operations required by IFRS 5 more or less useful to users. Mint plc (a)(i) Profit for the year from discontinued operations Original profit 245,600 Less: Impairment write-down re building (1) (84,500) Depreciation on building (1) (13,125) Provision (3) (10,000) Inventory write-down (38,500 20,600 (2)) (17,900) 120,075 (ii) Figures for the statement of financial position as at 31 March 2011 (1) Impairment of building Non-current asset held for sale 298,000 Revaluation on 31 March ,000 Depreciation for year to 31 March 2010 (700,000 40) (17,500) Depreciation to 31 March 2011 (17,500 (OF) x 9/12) (13,125) Carrying amount on classification as held for sale 669,375 Fair value less costs to sell (300,000 (298,000) 2,000) Impairment 371,375 Revaluation surplus on 31 March 2009 (700,000 (500,000 x 40/50)) 300,000 Transfer to retained earnings for year to 31 March 2009 (17,500 (400,000 40)) (7,500) Transfer to retained earnings for year to 31 March 2010 (7,500 x 9/12) (5,625) Revaluation surplus on classification as held for sale 286,875 Total impairment (371,375) Impairment to go to profit on discontinued operations 84,500 (2) Inventory write-down NRV per unit Valued at NRV JX98 ((8.00 x 70%) 1)) ,600 BC76 ((12.00 x 70%) 1)) ,100 VT52 ((3.00 x 70%) 1)) ,500 Inventories (value at lower of cost and NRV (4, , ,500)) 20,600 (3) Onerous contract Current provision (10,000 8,000) 2,000 Non-current provision (2,000 x 4) 8,000 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 13 of 16

14 Many candidates struggled with the calculations within this question, though most provided a presentation consistent with the requirements of the question, ie a schedule clearly showing the adjustments to profit and the figures which would appear in the statement of financial position. Extracts from the latter were not strictly required, but many candidates used extracts to provide the required information which was a sensible approach. There were in fact three distinct sets of calculations to be made: an impairment calculation in respect of a held for sale asset, inventory to be written down to the lower of cost and net realisable value and a provision to be calculated for an onerous lease all calculations which have featured in previous written test questions and which are comprehensively covered in the learning materials. Almost all candidates made some attempt at calculating the impairment write-down. However, only the better candidates recognised that part of this needed to be offset against the revaluation surplus and calculated the balance on the revaluation surplus for that purpose. Most candidates seemed to realise that they needed to do something with the revalued amount although this often resulted simply in a mess of unconnected calculations. The most common errors in the impairment calculation included the following: Not adjusting the fair value for the costs to sell. When calculating the carrying amount of the asset at the point that it was classified as held for sale, depreciating the asset for the whole of the current year, instead of only up to the point that it was so classified (ie a nine-twelfths charge) and/or failing to depreciate the asset for the previous year (ie the one immediately following its revaluation). Using a different depreciation figure in the adjusted profit calculation to that used in the impairment calculation. Although a number of candidates did arrive at the correct figure for inventory a worrying number were unable to calculate the correct net realisable values, or even if they did, failed to take the lower of cost and net realisable value on a line-by-line basis. Few arrived at the correct provision (split by current and non-current) for the onerous lease. Total possible marks Maximum full marks 11½ 10 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 14 of 16

15 (b) Qualitative characteristics and what would make continuing/discontinued disclosures more or less useful The IASB Framework states that it is the qualitative characteristics of financial statements which make them useful to users. The four principal qualitative characteristics are understandability, relevance, reliability and comparability. Understandability information must be readily understandable to users. If it is not then the information will be less useful to them. For example here, the fact that non-current assets have been written down to their fair values may not be obvious to a user without an accounting background. Relevance information must be relevant to the decision-making needs of users. To know what proportion of an entity s profits has been generated by an activity that has been/is to be discontinued will aid users in their decisions. Reliability information must be free from error and bias and represent faithfully that which it purports to represent. If, for example, there is a misallocation between continuing and discontinued figures then users could make incorrect decisions. Comparability users must be able to compare the financial statements of an entity through time and with other entities. The consistent application of IFRS 5 and its requirement for comparative figures (involving restatement of prior periods in line with the current period s continuing/discontinued analysis) should achieve this and make the information more useful. The Framework refers specifically to constraints on relevant and reliable information. These are discussed below. Timeliness undue delay in reporting of information may mean it may lose its relevance. For example here, if gathering information on the discontinued activity delayed the production of the financial statements, then those financial statements as a whole could lose relevance. Balance between cost and benefit the Framework states that the cost of gathering information should not exceed the benefits derived from it. For shareholders, who will ultimately bear such costs this may be true they may rather have less information on the discontinued activity than incur substantial cost in obtaining that information, but this may not be true of all users, such as, for example, potential new investors. Balance between qualitative characteristics for example, more up-to-date information may be more relevant, but may also be less reliable. For example here, where the plant has been restated to its fair values, such a figure is not as reliable as the original cost of the asset but it is more useful (relevant). Tutorial note: Marks were also awarded for discussion of more general constraints such as the information being historic, lack of narrative explanation and the aggregation of information. Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 15 of 16

16 Answers to the written part of the question were also disappointing. The majority of candidates that made an attempt at this written element generally correctly identified the four qualitative characteristics. Most of these candidates then were able to explain the definition of the characteristics although less were able to relate them back to the scenario. Only a very small minority went on to tackle the second part of the concepts question on the constraints of relevant and reliable information. Some confusion was evident over the difference between relevant and reliable with a good number of candidates stating that to show a held for sale asset at fair value was more reliable than to show it at its historic cost. Many gave the aggregation of information as a constraint of the information provided under IFRS 5, but seemed not to realise that a breakdown of the figure for a profit or loss on discontinued operations is required by IFRS 5 to be given in the notes to the financial statements. Total possible marks Maximum full marks 8½ 6 Copyright The Institute of Chartered Accountants in England and Wales 2011 Page 16 of 16

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