STUDENTS SECTION. Preparing for open book examinations

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1 Students Director s Section Message Preparing for open book examinations Dear Registered Student, May I extend a warm welcome to new students for the latest intake of QP. We are pleased with the steady growth of QP numbers and the feedback that graduates find QP a better programme to qualify as professional accountants. As the examining and certifying body, the Society does not limit its role to setting of the examinations and fulfillment of the many stringent quality assurance and examination handling procedures. We are interested in ensuring our graduates achieve the highest standards of competency. Therefore, a great deal of effort is put in by the Society to the processes of skills building and examination enhancement that help graduates skills attainment. That is why QP is not purely examination-based. It encompasses a training component the QP workshops and supplementary support - to develop generic and other relevant skills, for an edge in successful career development. Since 1999, the Society has introduced open-book examinations. The objective is to design professional examinations that will simulate the working environment where assignments are required to be completed in a given time, with the necessary references readily available. Unlike close-book examination, rote learning is no longer sufficient to secure a pass. This style of testing requires candidates to understand the subject matter well and focuses more on application skills and developing analytical and problem-solving skills, rather than an understanding of content alone. Good research skills are essential to broaden the understanding of a topic or subject. Knowing what is expected of you New students joining our programme are strongly encouraged to attend the Student Orientation session. This will enable them to have a clear understanding of the expected requirements of QP, such as the structure of the programme, what is needed to prepare for workshops, module examinations and the Final Professional Examinations. This should provide a good start for the programme because students will have a better idea of what is expected of them right from the beginning. Additional support In past examinations, our examiners generally commented that the major weakness of those who failed was the inability to analyse questions properly and identify the issues to be addressed. Copying chunks from textbooks is often tempting but without relating them to the exam questions will often result in getting little or no marks. Students will have to demonstrate a good understanding of the issues under examination. To help candidates who need extra tuition to improve their skills in answering case type questions and learn how to apply what they had assimilated to case scenarios, the Society has organised supplementary training sessions. Two of these were held on 16 August, especially for those candidates sitting the current session of Modules A and C. For those of you who were unable to attend, you can download the PowerPoint slides and case questions presented in the training from the Notice Board or Exam Stuff of the QP Learning Support Centre (LSC). Those preparing for the Final Professional Examination (FPE) may wish to look up a webcast of a seminar presented by its Examination Panelists in April this year. This online support is available from the LSC. After every examination, we publish the Examiners Reports in this journal. Those who are preparing for the examination should read the Examiners Report in conjunction with the past exam Q&A to avoid the pitfalls of those who failed. To make it easier for students, all Examiners Reports are now available at the LSC. Keeping up-to-date To do well in the examinations candidates are required to keep up with the latest technical developments. Since there is a leadtime between the publications of the Candidate Learning Pack and the exams, all QP candidates are encouraged to read the Society s TechWatch and technical articles published in this journal. Both TechWatch and The Hong Kong Accountant s articles can be downloaded from the Society s homepage: and respectively. Another avenue for keeping abreast of the latest developments in the accountancy profession is through our CPD programmes. These are available to registered students at members rates. You can choose a variety of flexible ways to learn from the HKSA CPD programmes, including e-seminar/conferences and e-manager courses, which are offered online. Do surf the Society s homepage at for more details. Wishing you every success in your coming examinations! Yours truly, Georgina Chan Director of Education & Training 42

2 Top FPE candidates The Society is pleased to announce the top three candidates of the June 2003 Final Professional Examination. Final Professional Examination Miss Hui Lok Yan, Jessie obtained her Bachelor of Business Administration in Professional Accountancy from the Chinese University of Hong Kong in She is now a Senior Associate at PricewaterhouseCoopers. Hui Lok Yan Mr She Shing Pang obtained his Bachelor of Arts in Accountancy from the Hong Kong Polytechnic University in He is now an Associate I at Moores Rowland. She Shing Pang Miss Wong Yin Yee obtained her Bachelor of Business Administration in Accounting & Finance from the University of Hong Kong in She Wong Yin Yee is now an Audit Assistant at Deloitte Touche Tohmatsu. A business career without boundaries AD Financial Training SEPTEMBER 2003 THE HONG KONG ACCOUNTANT 43

3 Top QP candidates The Society is pleased to announce the top candidates of Modules B & D of the February 2003 session. Module B (Financial Management) Miss Lam Sau Yee obtained her Bachelor of Business Administration in Finance from the Chinese University of Hong Kong in She is now a staff accountant II at Deloitte Touche Tohmatsu. Module D (Taxation) Mr Choi Wai Hin, Henry obtained his Bachelor of Arts in Accountancy from the Hong Kong Polytechnic University in He is now an audit assistant at Moore Stephens, CPA. Lam Sau Yee Choi Wai Hin QP Graduates June 2003 The Society is pleased to announce that 148 QP students successfully completed the Qualification Programme in the June 2003 session. The graduates are listed below. AU Yee Kwun Ada FONG Wing Yin LEE Chung Wai TAI Tsui Shan BIN Siu Pui FU Wing Lam LEE Jick Seng, Jason TAM Man Yee, Fiona CHAN Chuen Sang FU Yuk Sim LEE On Nei TAM Wing Shan CHAN Hiu Shan FUNG Sin Yee LEE Wai Ming TANG Ming Tsang, Brenda CHAN Ka Man FUNG Wing Kwan LEE Wan Yee TANG Wai Sum, Amy CHAN Ka Pong HO Chun Yu LEUNG Suet Yee TING Kin Wai CHAN Kin Kwong HO Pui Yun, Gloria LEUNG Wai Yung TSANG Hing Kin CHAN Kin Wai HON Ho Man LEUNG Yau Bong TSANG Hing Ling CHAN King Lun HON Yuk Han LI Man Wah, Eyvonne TSANG Kwai Ping CHAN Man Ying HUANG Wan Ping LI Min Chil, Michelle TSE Chi Cheung CHAN Ming Yi HUI Chun Yip LING Ching Man TSE Hiu Kwan CHAN Ting Ting, Tania HUI Hok Yi LIU Kit Ho TSE Ka Yue CHAN Tsui Shan HUI Lok Yan LO Fei Lan, Frances TUNG Ka Yan CHAN Yuen Ling HUI Lok Yee, Winnie LO Yuen Bing WAI To Chung, Andy CHENG Hok Ming HUI Sui Yuen MA Hiu Fai WONG Chi Yuen CHENG Kwan Man HUNG Mei Yu MA Mei Shing, Toby WONG Chun Fai CHENG Man Wah IP Wai MAK Wai Yiu, Willy WONG Chung Kin, Quentin CHENG Sing KO Siu Wai MAO Wai Nei WONG Chung Yin CHENG Wing Lam KU Yuk NG Cheuk Wang, Wallace WONG Hiu Chong CHEUNG Chun Yin KWAN Bik Ying NG Ka Luen WONG Ho Wing, Betty CHEUNG Chun Yiu KWOK Ban Ling NG Kar Man WONG Ka Lam, Tabitha CHEUNG Ka Ho LAI Hoi Ling NG Kwong WONG Ka Nok CHEUNG King Chi LAI King Chi NG Yuk Mei WONG Man Lun CHEUNG Wai Sum LAI Kit Yu, Florence O Pui Lui WONG Sze Man CHIU Lorenso LAI Ming Yee OR Fook Sing WONG Wai Keung CHIU Man Hin LAI Oi Lam OR Kam Ha WONG Wai Ming CHIU On Kei Angel LAM Chung Chi, Alan PANG Chui Ling WONG Wing Chi CHOI Ching Hin LAM Ka Hung PHAN Pui Fan WONG Yin Yee CHOI Wing Sze LAM Kam Chiu POON Kwok Leung YAN Ka Man CHONG Man Hung, Jeffrey LAM Lam Tin PUN Cheuk Ting YAN Lai Ming CHOW Ka Yee LAM Nga Ching SHE Shing Pang YAU Man Shan CHU On Ki LAM Wan Hei, Simon SHIN Wai Shing YAU Sui Luen CHU Yan Mei Jessica LAU Chi Ngar SHUM Wei Nga YAU Wing Chi CHUI Mo Sze LAU Pui Yee, Bassey SIN Pui Ying YEUNG Chin Wan CHUNG Chi Kwan LAU Shing Kwong, Jacky SIT Hunda YIP Shing Fung, Degas CHUNG Ming Kit LAU Tai Cheong SUN Man Chi Mandy YU Chi Kit CHUNG Wen Man, Wendy LAW Yuen Yan, Candy SZE Wing Ting YUEN Wing Han 44

4 FPE June 2003 results The sixth Final Professional Examination (FPE), in the form of a six-hour open-book examination conducted over two sessions, was held on 14 June The FPE aims to test the ability of candidates who have successfully completed the four Professional Programme Modules, to integrate knowledge and skills from the module syllabuses and apply them across all fields of competency, demonstrating a level of skill appropriate to a professional accountant. The results of the FPE (June 2003 session) are as follows: Final Professional Examination No. Sat Pass Rate per cent QP Examination panelists report Final Professional Examination (June 2003 session) General comments In what areas did candidates perform well? Time management showed significant improvement. Most candidates were able to attempt all the questions and only a limited number of candidates could not complete all questions. They could list out the relevant points step by step. In what areas did candidates perform poorly? Most of the weaknesses found in the previous session were still noted in the current session, such as: Too hasty when reading the questions. Candidates should carefully read the questions and understand the requirements of the questions. They should think for a while and identify the key words and key issues the Examiners specifically want. Weak on identifying the issues required in the answers. Weak on focusing on the key topics. They spent a lot of time on irrelevant points of a question, which gained no marks. Weak in analysing the case materials especially conflicting facts, and providing answers with appropriate arguments. Candidates should use the marks allocated to each question as an indication of the time required, in order to avoid giving too long or too short an answer. Candidates failed to think critically and systematically before applying their practical knowledge to a question. Specific comments Paper I Section A Case study This case question was in two parts. The first part (Question 1) covered the evaluation of the bidding offers from Anglo and Richard Jones and the second part (Question 2) required students to deal with accounting treatments and disclosures under each bidding situation. Question 1 was badly attempted by most students whereas Question 2 was satisfactorily attempted. The poor performance in Question 1 was primarily attributable to: Most candidates were unable to identify and discuss key issues from the case study. Most candidates were unable to present a structured and readable management report on the alternative bidding offers. Most candidates were not ready to apply and integrate their knowledge in business strategy and financial analysis to deal with a real life case study. Most candidates lacked the analytical thinking to identify the issues. Individual questions Question 1(a) Only a few candidates submitted their answers in a proper report format. Candidates should have achieved better results if: They analysed the situation and evaluated the alternative bidding offers with some business sense They recapitulated and compared the bidding offers against that of Eagle s valuation. This would help candidates visualise the key elements of the offers for commenting on the advantages and disadvantages of the alternative offers Candidates could identify key issues from the case study and present them in a readable management report Candidates considered the legal implications, financial strengths and motives of each bidding offer Candidates analysed Foster s position and preference Question 1(b) This part was poorly attempted because candidates did not critically analyse the case study prior to preparing recommendations. Many candidates also reiterated what was given in the case study and took it as their recommendations. As a result, these recommendations were superficial. Very few candidates discussed the need for seeking legal advice on the implication to the company s listed shares. Also, there were very few candidates who had properly discussed the influence, expectations and the long term relationships between the venture capital firm and the company if the Foster family decided to sell the shares to the venture capital firm. Question 1(c) Most candidates had misinterpreted stakeholders as shareholders and thus left out parties like customers, suppliers and bankers. SEPTEMBER 2003 THE HONG KONG ACCOUNTANT 45

5 Question 2(a) This question required candidates to apply and integrate their knowledge in financial reporting in order to identify all the financial accounting and reporting issues related to a disposal of a subsidiary. The major issues in accounting treatments are the determination of the date of disposal and the profit or loss on disposal of a subsidiary. Moreover, the valuation of the proceeds from disposal in this case is complicated since it involves warrants. The issue is particularly contentious since currently there are no SSAPs on the recognition and measurement of warrants. This part had been handled quite well. However, some candidates had concentrated purely on the issue of the discontinuing operation and did not discuss in detail the accounting treatment for disposal of a subsidiary. Only very few candidates were able to pick up the points about the disclosure requirement for disposal of a subsidiary under SSAP15. Question 2(b) Again, this part had been handled quite well. Although the company has not disposed of its entire holding of 58 per cent interest in a subsidiary, this will still be a disposal of a subsidiary since it no longer controls the latter after the transaction. The accounting treatments and disclosure of the disposal of a subsidiary will be more or less the same as the accounting treatments and disclosures of the disposal of the entire 58 per cent interest, except that, for example, the amount of gain/loss on disposal will be different. With a shareholding of per cent, the company is generally deemed to have a significant influence over another company and thus the latter should therefore be accounted for as an associated company after the disposal. Section B Essays In general, candidates were unable to demonstrate their in-depth analyses of the specific audit objectives in examining the valuation assertion of PPE, specific indications of impairment of PPE, and specific audit procedures for impairment of PPE. Candidates were, however, able to discuss very well the specific audit procedures for verifying the valuation assertion of the account balance of PPE. The candidates also failed to mention the difficulties in auditing accounting estimates but referred to relevant auditing standards and highlighted that auditors exercise their judgment in evaluating accounting estimate. Individual questions Question 1 Audit objectives While about half of the students were able to discuss the overall audit objective in examining the valuation assertion of PPE, only a few candidates were able to discuss the specific objectives. Indications of an impairment Candidates in general were able to point out the SSAP 31 requirements for enterprises to estimate the recoverable amount of the assets when there are indications of impairment. Audit of impairment Candidates in general just described the audit procedures for accounting estimates without stating that SAS 420 requires auditors to obtain sufficient appropriate audit evidence regarding accounting estimates (in this case impairment of PPE) as well as explain why the audit of valuation assertion of PPE becomes more complicated when there is possible impairment of PPE. Audit procedures examining the account balance of PPE Candidates performed quite well in this part. However, only a few candidates refer to KKLM s financial statements for discussing the issue of impairment of PPE. Also, some candidates did not read the question carefully. They spent efforts in discussing other assertions (existence and ownership etc) instead of focusing on the valuation assertion. Further, the questions did not require the detailed discussion of each category of assets but candidates spent time on some unnecessary areas. Paper II Section A Case study The performance of the candidates improved a lot as compared with the previous session. The possible reasons for this improvement may be the increase in available marks for certain questions, and candidates better time management. Individual questions Question 1(a) This question tested candidates knowledge in the disclosure of related party transactions. While the question focuses on the rationale and importance of disclosing related party transactions, the candidates should be aware that some relevant answers in respect of the rationale and importance can be found in SSAP 20. Most candidates performed well on the question. However, some candidates lost some easy parts, for example the definition of related party and the definition of related party transactions. Interestingly, the question clearly asked for a memo format but some candidates had still not drafted their answers in memo format and as a result lost that presentation mark. Some candidates also missed that certain disclosures on related party transactions are the statutory requirements of the Companies Ordinance. Question 1(b) The question specifically requested the required disclosures of each transaction under the relevant SSAPs and the Companies Ordinance. The candidates were thus expected to examine each transaction in detail and those who only provided general requirement of the SSAPs and the Companies Ordinance without any application of the requirements to the case materials could not gain high marks. In addition, while some candidates missed some statutory requirements, they should be aware that some statutory requirements have also been enclosed and printed in the SSAPs. Nonetheless, the disclosures pursuant to the Listing Rules are not required in the questions. 46

6 Question 1(c) Most candidates could provide the relevant answers though some candidates could not even draft a precise recommendation that focused on the key issues. Question 2 The question specifically asked how the non-disclosure on related party transactions would affect the auditors report on the company s financial statements. Thus, the answers would focus on the auditors responsibility on reporting, i.e. true and fair and compliance with the Companies Ordinance, and the reporting requirements set out in SAS 600. Providing answers on audit procedures would not be appropriate. Some candidates were also weak on making their judgment on selecting the appropriate type of report. Some candidates did not make a judgment and only discussed the different types of report that might be issued in different situations. It is not satisfactory to discuss both side of the issue without coming to a conclusion. Question 3 Most candidates were aware of the challenge of section 20 of the Inland Revenue Ordinance (IRO) but missed the challenge from sections 61 and 61A of the IRO. Besides, some detailed discussion and analysis of the sections and their application to the case was necessary. Question 4 The candidates generally performed well on this question and could discuss it by applying sections 15(1)(b) and 21A of the IRO. However, some candidates missed the application of section 14, the profits tax charging section of the IRO, to the case. The payee s statutory obligation and requirements under sections 20B(2) and 20B(3) of the IRO were also relevant but had been missed by some candidates. Candidates were also required to apply the above sections to analyse the case materials and suggest the specific tax treatment on each item. General discussion was acceptable but detailed and specific analysis on each item would definitely gain more marks. It was also important to the candidates to understand and judge that the deduction of the royalties is relevant for discussion but the critical issue in the case was the taxability on the royalties. Question 5(a) The requirements of the question specifically indicated arguments and actions that should be adopted to protect the tax position of the GM group companies and the case materials also set out the tax loss sustained by the restructured company. It clearly implied the protection on tax losses brought forward. While most candidates could discuss the application of section 61B of the IRO to the case, some candidates had mistakenly discussed from the perspective of stamp duty. How is stamp duty relevant in protecting the tax position of a company? As a specific section 61B of the IRO was relevant to the question, it was not relevant to answer with the general antiavoidance sections of 61 and 61A of the IRO. Question 5(b) Most candidates performed well on the question but some candidates made some careless mistakes as follows: The case of GM Inc and GML should have been analysed separately and some candidates missed that GML was a Hong Kong company. The interest expenses paid to GML would be deductible under section 16(2)(c). There is a difference between borrowed by financial institutions and borrowed from financial institutions. Thus, using section 16(2)(a) of the IRO to support the bank loan interest deduction was clearly not appropriate in the case as CL is not a financial institution. Some candidates only discussed the requirements of section 16(1) and 16(2) of the IRO without application to the case. Such answers could only gain limited marks. Question 6(a) The question covered three different kinds of fringe benefits. While the candidates performed well on the question, most of them missed a general discussion of section 9(1)(a). Some students also confused fringe benefits convertible into cash and those discharging the personal liabilities of an employee. Thus, they could not arrive at the appropriate answer. Question 6(b) Obviously, the question examined the application of section 9A of the IRO. Thus, a detailed analysis of the relevant sections under 9A would be expected, but any discussion on the general antiavoidance sections of 61 and 61A would not gain marks. While most candidates could identify the issues, they could not analyse the case materials specifically and individually. This limited the marks they could gain. Section B Essays Candidates answered quite well in parts (a) and (c). Candidates performance in part b was below average. Candidates were not entirely familiar with the concept of BCM. Many candidates restricted their discussion to disaster recovery of the company s computer system in part (d) and their discussion to audit impact in part (e). Many students did not attempt part (c), (d), and (e). Time management was a concern. Individual questions Question 1(a) Candidates in general performed well in this part. Question 1(b) A few candidates did not attempt this part. Candidates performance in this part was below average. Most candidates were able to cover the points regarding possible threats, probability of threats, possible impact, and cost-benefit analysis. Not many students were able to state other key issues for implementation of the BCM. SEPTEMBER 2003 THE HONG KONG ACCOUNTANT 47

7 Question 1(c) Nine candidates did not attempt this part. Candidates performance in this part was quite good. Question 1(d) Twelve candidates did not attempt this part. Was time management a problem? Or did candidates in general not understand the requirement of the question as their overall performance for this part was poor. Many candidates restricted their discussion to disaster recovery of the company s computer system only. Many candidates were unable to identify the major issues to be addressed and thus the key questions to ask. Question 1(e) Several candidates did not attempt this part. Was time management a problem? It seemed that many candidates did not understand the requirement of the question. Their overall performance for this part was poor. Many candidates restricted their discussion to audit impact, rather than discussing the argument for persuading the client to introduce BCM for their company. Exceptional consideration Examination performance If you believe your performance in the September 2003 QP examinations may have been affected by adverse circumstances (eg serious illness or bereavement of family members), please notify the Society s Director of Education and Training in writing within one week from the examination date, providing appropriate supporting documents. Workshop attendance A candidate may offer an explanation for non-attendance at a workshop, such requests for special consideration (with supporting documents) must reach the Director of Education & Training within two weeks from the date of absence. In some cases, a candidate may be awarded for workshop participation the average of the marks obtained in the workshops he/she attended. The Society will consider each of the requests received and your circumstances may be taken into account by the HKSA Examinations Board when finalising your marks. To ensure consistency the Examinations Board is the only body empowered to decide whether or not marks will be adjusted. Transitional Examinations (TE) June 2003 Diet results The Society is pleased to announce the latest results of the Transitional Examinations (TE). The results of each of the four papers are as follows: Paper Paper I (Auditing and Information Management) Paper II (Financial Management) Paper III (Management Accounting) Paper IV (Taxation and Tax Planning) Examination Pass Rates 29 per cent 37 per cent 37 per cent 26 per cent TE Examiner s Report Paper I Auditing and Information Management (June 2003 Diet) I. Overall comments The less than satisfactory results achieved by students attempting this paper can be attributed to poor examination techniques and time management of the candidates. In general, the candidates were careless in reading the facts of the questions. They were also weak in interpreting the requirement of the questions. They did not answer strictly in accordance with the requirement. In addition, some candidates failed to answer the required number of questions, leaving one, two or even three questions totally unattempted and thus no marks could be awarded. II. Specific comments Section A: Compulsory questions Question 1 This question was poorly performed. Materiality is a key concept in auditing but most candidates failed to define materiality correctly. They were also not clear about the factors that influence the determination of the audit planning materiality, the importance of the concept of planning materiality in audit planning and how auditors develop an estimate of materiality. Question 2 Many candidates did not read the 48

8 facts of the question carefully. This may explain why some of them mixed up the strengths and weaknesses of Chan Limited s sales system. This may also explain why the candidates failed to address the requirements of part (b) of the question precisely. Part (b) asks the candidates to explain the reasons why computer auditors are needed to help evaluate the accuracy of the computerised sales system in updating the inventory but most candidates failed to see the key words in updating the inventory. In addition, most candidates were not able to name and briefly explain two approaches that the computer auditor will adopt in evaluating the accuracy of the computerised sales system in updating the inventory. Question 3 This question is related to auditor independence. Most candidates had some ideas about auditor independence but were generally weak in justifying their answers. For example, in part (b), most candidates were able to state their choice but were not very successful in explaining why they chose to do so. Similarly, in part (c), most candidates failed to discuss logically whether it is appropriate for an audit partner to have a friendly personal relationship with a client or not. In addition, in respect of part (a) of the question, most of the candidates could only state one or two options that were available to Peter. Section B: A choice of two out of three Question 4 This question was straightforward but the performance was not satisfactory. Although most candidates were able to identify some of the general control weaknesses and the internal controls in the database system, they failed to interpret the requirement of part (c) of the question precisely. Part (c) requires the candidates to list the specific audit procedures used to ascertain whether the input into the database system was properly authorised based on the information given in the question. However, most candidates did not refer to the information given in the question when presenting their answer. Question 5 This question was again straightforward but the performance was below expectation. Most candidates were able to identify some of the internal control weaknesses and the possible errors/ risks. However, some candidates failed to interpret part (b) of the question correctly. Part (b) asked the candidates to list the substantive tests for detecting the possible errors/risks identified in part (a) of the question. Accordingly, the substantive tests listed should have been related to the errors/risks identified in part (a) but most candidates failed to do so. In addition, some candidates were running out of time when answering this question. Question 6 Only three candidates attempted this question. In general this question was reasonably well performed. TE Examiner s Report Paper II Financial Management (June 2003 Diet) I. Overall comments Although a few candidates performed well in the examination, most of the candidates were not well prepared. Future candidates are well advised to study the topics prescribed in the syllabus to enhance their chances of success. II. Specific comments Section A: Compulsory questions Question 1 The use of the net present value (NPV) rule is tested in this question. Most candidates had little trouble in calculating the NPV of a project and in adjusting for the effect of inflation on a project s NPV. However, many candidates confused the internal rate of return (IRR) and crossover rate, which is the discount rate at which the net present values of two projects are equal. In addition, many candidates also failed to understand that the NPV rule implicitly assumes that the rate of return from reinvesting a project s future cash flows is the discount rate. Question 2 Most candidates had difficulties in answering this question, which is related to risks and returns of investment portfolios. Although some candidates did rather well in constructing a portfolio with a desirable beta value consisting of two stocks, most of them failed to apply the concept that the optimal portfolio for a rational investor is the one with the minimum risk for a given rate of return. Most candidates could not construct a portfolio of two stocks to achieve a certain rate of return. Question 3 This question tests a candidate s understanding of the Modigliani-Miller (MM) propositions with regards to capital structure. Most candidates had little trouble in applying the MM propositions with corporate taxes only and in identifying the main advantages and disadvantages associated with the use of debt. However, most candidates failed to determine the optimal capital structure when both tax savings and financial distress costs are considered simultaneously. It is also apparent that some candidates did not read the question carefully. Section B: A choice of two out of three Question 4 Most candidates attempted this question and performed very well. Most candidates correctly identified SEPTEMBER 2003 THE HONG KONG ACCOUNTANT 49

9 the three forms of business organisation and their respective advantages and disadvantages. They also performed well in discussing the agency problem, although their comments on the mechanisms minimising the agency problem were generally unsatisfactory. Question 5 Most candidates chose to attempt this question and performed reasonably well. This question is related to valuations of stocks and bonds. Most candidates were familiar with the discounted dividend model used in stock valuations, but they did not understand some basic concepts associated with bond valuations such as the yield to maturity and current yield. Question 6 A few candidates attempted this question, which is about dividend policy and stock repurchases. Most of them could correctly list some of the main advantages of stock repurchases relative to cash dividends, and determine the share price after the repurchase or cash dividend payment. Some candidates failed to distinguish the effect on share price of dividend policy from that of dividends. TE Examiner s Report Paper III Management Accounting (June 2003 Diet) I. Overall comments Overall, candidates performance was poor in the examination. Candidates did not demonstrate satisfactory time management in the examination. Therefore, they were unable to finish all the required five questions satisfactorily. This could be due to insufficient knowledge on some specific topics. No candidates could achieve a balanced score on all questions attempted. The common weakness of the candidates was that they were unable to analyse and interpret those questions with a lot of relevant information in order to produce good answers. They tended to put down memorised facts that were not relevant to the questions. Some candidates were not well prepared for the examination. In general, candidates performed better in handling straightforward calculations than analytical essay-type questions. The application of knowledge and concepts in practical situations is weak. Specific comments Section A Compulsory questions The overall performance in Section A was poorer than that in Section B, especially question 2 which was mainly a computational question requiring interpretation and analytical skills to understand and organise diverse information. All questions were related to core management accounting concepts and applications. The candidates were weak in presentation skills in writing both qualitative answers and calculations suitable for reading by management. Question 1 The general performance was fair. Since product costing under the traditional overhead absorption system and the activity-based costing (ABC) system is an essential topic in various examinations, about half of the candidates had no problem in answering part (a), though performance in parts (b) and (c) requiring qualitative answers was weak. However, some candidates did not demonstrate the basic and necessary knowledge in applying ABC in product costing. Question 2 The general performance was very poor. While questions on budgeting and cost-volume-price (CVP) analysis are common in examinations, candidates did not have sufficient skills to understand the forecast changes in various costs and revenues for the budget period. In other words, they had difficulty separating volume and price changes. A majority of candidates interpreted the information wrongly so that their answers were incorrect. Question 3 The general performance was average. While some candidates were able to demonstrate their abilities in applying theories and concepts of management accounting information in a fast food industry with retail outlets, other candidates hardly produced sensible answers by relating their management accounting concepts to a practical situation. In general, knowledge application in the real world was very weak. Section B A choice of two out of three questions The overall performance in Section B was generally better than that in Section A. However, as is common in similar public examinations, candidates performed better in quantitative rather than qualitative questions. Very few candidates (only 14 per cent) chose to attempt question 5 and those who attempted the question had a very low score, which seriously affected their overall performance in the examination. 90 per cent of candidates attempted question 4 and 93 per cent for question 6. Question 4 The general performance was fair. Most candidates could figure out the best transfer price by applying relevant concepts in transfer pricing decisions. They could also demonstrate the possession of knowledge in assessing the pros and cons of different transfer pricing methods. Although the topic and nature of questions were straightforward, no candidates could obtain good scores because candidates generally lacked good writing skills to produce qualitative answers. Question 5 The general performance was extremely poor. Only 14 per cent of the candidates chose to answer this question, which dealt with performance evaluation using the indicators of return on investment (ROI) and 50

10 economic value added (EVA). Candidates understanding on various financial measurements in evaluating performance was weak. Also, they did not demonstrate sufficient knowledge of EVA, which is a contemporary issue in management accounting and has become more popular in recent years. Question 6 The general performance was average. The question tested the candidates knowledge of applying relevant costs concept in making business decisions. Some candidates were able to produce correct answers on most parts of the question, while others were weak in identifying relevant cost information to derive a correct decision. For part (a), only a few of the candidates could give the correct relevant cost of $20 in that situation, most candidates had an answer of $68, which, is the total variable costs of producing the product. TE Examiner s Report Paper IV Taxation and Tax Planning (June 2003 Diet) I. Overall comments The standard of the overall performance of the candidates was more or less the same as that of the previous sitting. As in the two previous sittings, candidates did well in the first two questions on profits tax and salaries tax computation, but the performance for other questions was not satisfactory. Out of the three questions in section B, very few candidates answered question five while question six (b) on estate duty was attempted by most candidates and some of them got a high mark for it. Candidates should put more effort into the understanding of the tax law and on how to apply them in answering essay types questions in the examination. II. Specific comments The result of this paper shows that candidates had a good knowledge of salaries tax and profits tax computation and estate duty, but the knowledge in other areas of taxation was poor. If a candidate got a high mark for questions 1, 2 and 6, it would not be difficult for them to get a pass in this examination. Those who failed in this paper usually answered those three questions badly. In order to improve performance in the examination of taxation subjects, candidates should pay more attention to reading the questions carefully and understand what are asked in the questions, and have a general understanding on the whole coverage of the syllabus. Section A Compulsory questions Question 1 This question asked candidates to prepare a profits tax computation for a corporation carrying on a publishing business. Many candidates got a good pass for this question. Although some candidates got full marks for computation of depreciation allowances, many candidates did not know how to compute depreciation allowances for machinery acquired under hire purchase terms and how to treat the acquisition and disposal of computers. In general, this question was satisfactorily answered. Question 2 This question asked candidates to prepare a salaries tax computation, a property tax computation, a personal assessment tax computation. Most candidates got a very high mark for this question. The result showed that candidates prepared well for this type of question. Many candidates got a perfect answer on the computation of property tax. Nevertheless, I would like to draw candidates attention on the following items: part (a) asking candidates to explain whether it would be advantageous for Mrs Pang to elect for joint assessment with her husband under salaries tax, not under personal assessment; not understanding the tax treatment of entertainment allowances, deduction of entertainment expenses and goods taken at staff price. In general, this question was satisfactorily answered. Question 3 Part (a) asked candidates how to treat the refund of rent made by an employer to an employee. However, many candidates merely put down what they knew about the different ways that an employer might provide accommodation benefits to an employee (including refund of rent). They did not answer what the question asked, and were not able to earn a passing mark for this part. If they read the question carefully, they would find that this was a straightforward question. Part (b) asked candidates how to determine the source of commission income under profits tax, but some candidates treated this part as a Type I or II service company. A large part of the answer was irrelevant. Furthermore, this question asked the possibility of apportionment of service income between onshore and offshore. Some candidates were able to quote the Hang Seng Bank and Indosuez W I Carr cases. In general, most candidates failed in this question. Section B A choice of two out of three questions Question 4 This question was divided into three parts. The purpose of part (a) was to ask candidates to distinguish the difference between onshore and offshore interest income, and the difference between exemption from profits tax and exemption from payment of profits tax, but very few were able to distinguish the latter item. The purpose of part (b) was to ask candidates to explain the differences in the treatment of deduction of interest expenses under sections 16(2)(c), (d) and (e), but many candidates merely wrote out all the six sub-sections of 16(2) without much explanation. Part (c) asked candidates when income derived from property would be taxed under property tax and profits tax. Most candidates were able to give a satisfactory answer for this part. SEPTEMBER 2003 THE HONG KONG ACCOUNTANT 51

11 In general, this question was not satisfactorily answered. Question 5 This question was divided into three parts. Part (a) asked students to explain the deduction of cost for acquisition of prescribed fixed assets under profits tax. Part (b) asked students to explain the treatment of building renovation or refurbishment under profits tax. Part (c) asked for group stamp duty relief under section 45. Very few candidates answered this question. In general, this question was very poorly answered. Question 6 This question was divided into two parts. Part (a) asked students to explain the treatment of a stock option when an employee left Hong Kong without taking up the option. Very few candidates were able to answer this part. Part (b) was a question on estate duty. Many candidates were able to give a good answer for this part. In general, this question was satisfactorily answered. Transitional Examinations Rules To be eligible to sit the TE, the former JES students must have either sat and passed a minimum of two JES papers or be exempted from or passed at least six papers. Application for exemptions, i.e. to satisfy the six-paper benchmark can be made after the cessation of the JES, but within the duration of the TE, similar to JES exemption policy, procedure and deadlines. Under the JES, the two papers (M1 & M2) passed under the Mature Student Entry Route (MSER) are counted as Exemption from Papers 1 & 3 and not as Pass. A maximum of four papers can be taken at any diet. Papers can be taken in any order. A person can only apply for TE if he/she is a registered student of the Society and has paid his/her current annual subscription fee and the required fee for the TE. Exemptions of up to three papers may be granted by application from those who have completed seven to nine papers under the JES. Examinations must be completed by the December 2004 diet. Important dates The closing date for exemption applications for the December 2003 session is 30 September The deadline for entry to the December 2003 session is 15 October Application and Syllabus Application forms for enrolment and exemption claim, as well as detailed syllabuses and recommended reading lists for each of the Transitional Examination papers can be obtained via the following means: the Society s counter by fax: December 2003 Session Examination Timetable Paper I (Auditing & Information Management) Thursday, 11 December :00 pm 5:00 pm Paper II (Financial Management) Friday, 12 December :00 pm 5:00 pm Paper III (Management Accounting) Monday, 15 December :00 pm 5:00 pm Paper IV (Taxation and Tax Planning) Tuesday, 16 December :00 pm 5:00 pm Practical training functions Code 213 Workshop on application of Advanced Microsoft Excel for productivity gain in accounting routines Objectives: 1. To equip students with an in-depth knowledge of some advanced features in MS Excel. 2. To enable student accountants to apply those advanced Excel features in accounting routines for higher productivity gains. Contents: Use of Excel s auditing function for highlighting errors Application of conditional formatting in highlighting specific data for management attention Data entry validation for controlling accuracy An introduction to Visual Basic for Application (VBA) in Excel The combined usage of VBA and Excel s built in functions for speed and accuracy in accounting routines Delivery Methodology: Demo, illustrations and mini-talk At the end of the seminar, presentation materials in disk format will be distributed to students for future reference 52

12 Prerequisite: Basic knowledge of using Excel Some knowledge on macros in Excel preferred Speaker: Medium of Instruction: Cantonese Enrolment quota: 36 Mr Alan Law Business planning manager of a technology company Date and time: Venue: Enrolment fee: 6:30 pm 8:30 pm 24 October 2003 Room C, Hong Kong Financial Services Institute, 9/F, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong. HK$145 Application deadline: 14 October 2003 Code 214 Seminar on Change Management Contents: 1. Understanding the change impact and change process 2. Managing ourselves 3. Helping others to change 4. Managing organisational change Speaker: Mr Jacob Thoe, Consultant, VC Consulting Ltd Medium of Instruction: Cantonese Date and time: 7:00 pm 9:00 pm 3 November 2003 Venue: Room B, Hong Kong Financial Services Institute, 9/F, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong. Enrolment fee: HK$145 Application deadline: 23 October 2003 Enrolment Quota: 50 Code Systematic Training Workshop on Analysing Financial Statements Objective: To enable participants to interpret the financial health of a company by critically reviewing financial statements and other relevant information. Target participants: Commercial accountants, internal auditors and external auditors with at least two years relevant experience. Contents: Objectives of performing financial analysis and review General analytical review techniques: Financial ratio analysis Variance analysis (comparing financial performance with budget and previous year s performance) How to analyse the liquidity, solvency, profitability and operating efficiency of a company: Analysis of receivables, fixed assets, intangible assets, depreciation methods and deferred charges Analysis of liabilities, shareholders equity, and book value per share Liquidity and solvency assessment Evaluation of the stability and quality of earnings Evaluation of operating efficiency Evaluation of the return on investment Evaluation of company growth Analysis of statement of recognised gains and losses Analysis of cash flow statement Identifying symptoms of window dressing Interpretation of non-financial information The Directors report The Chairman s report Management s discussion and analysis Latest company developments in the media Formation of opinions related to our objective Speaker: Enrolment quota: 36 Date and time: Venue: Mr Ip Pui Sum Partner, Sum, Arthur & Co CPA 2:00 pm 5:00 pm 8, 15 & 22 November 2003 Room B, Hong Kong Financial Services Institute, 9/F, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong. SEPTEMBER 2003 THE HONG KONG ACCOUNTANT 53

13 Enrolment fee: HK$600 10% discount (HK$ 540 per student) for group enrolment of two or more students. For details, please refer to the Fee concession for group enrolment below. VTC s Course Fee Subsidy The Accountancy Training Board of the Vocational Training Council (VTC) will subsidise 50 per cent of the course fee for eligible participants of this workshop. To qualify for the subsidy, the participant must be a full-time accounting employee at the time of application. Participants, however, must pay the fee in full on enrolment after which a reimbursement will be given provided that they have attended the full course. Reimbursement forms will be distributed at the workshop. Forms duly certified by the employer of the participant must be returned to the Society s Education & Training Department within 10 days upon completion of the workshop. Application deadline: 27 October 2003 Fee concession for group enrolment To promote enrolment in practical training functions, a 10 per cent discount for groups of two or more people will be offered. This discount is only applicable to students enrolling in the same programme. Each student should submit separate application forms and cheques; however, the forms should be submitted together. Students are also required to indicate on the application form the name(s) of the person(s) they are enrolling with to qualify for the discount. Applicants will not be entitled to the group discount if forms are submitted separately. PSS News Mentorship Programme The Society s Student Training and Development Committee and Community Services Committee will jointly launch a Mentorship Programme in November The Programme is a new coaching and counselling scheme in which the Society s Accountant Ambassadors serve as Honorary Mentors offering valuable mentoring and counselling services to PSS members. Its objectives are to establish a stronger rapport between university students and the Society; stimulate university students interests in pursuing an accountancy career; promote a supportive and caring relationship between university students and experienced accountancy career; encourage students to take QP and build up university students interpersonal and social skills. The Mentor recruitment activity ended in late July with a satisfactory response. The PSS will start recruiting student mentees when the classes resume in September PSS promotion at universities orientation functions In August 2003, accountancy students societies of various local universities have organised their respective orientation functions to their first year students. With full support from the PSS student representatives, the Society s Student Relations Officer was once again invited to visit these orientation functions. During the visits, accountancy freshmen were recruited as new PSS members and briefed on the Society, Qualification Programme and PSS activities. 54