Examiner s general comments The following provides guidance to candidates preparing for future examinations and has been prepared with that in mind. The guidance mentions the main errors that were commonly made by candidates, but by no means did all candidates make such errors, and there were many excellent scripts presented. There was evidence of a number of well prepared candidates with a wide range of knowledge, able to tackle most of the sub-questions in questions 1 and 2 and prepare a good answer to questions 3 and 4. However some candidates had not prepared for some of the topics on the paper. Questions that had a significant number of particularly poor answers were, question 1 (1.1 indirect tax and 1.10 rollover relief); question 2a IFRS 8 reportable segments and question 2d fundamental qualitative characteristics of financial statements. Question spotting is not advised in this paper as most learning outcomes are covered in each examination. Question 1 seemed to have better marks this time with most candidates scoring over half marks. Some candidates seemed unprepared for some questions in this section. Questions 1.1 and 1.10 seemed to cause the most problems. A number of candidates wrote long answers to the narrative questions in this section, causing time constraints for later questions. Question 2 was generally answered quite well, many candidates were able to score half marks on the question overall. Some candidates were obviously ill prepared for Q2a reportable segments and 2d fundamental qualitative characteristics of financial statements. Question 3 produced some very good answers but there were very few candidates scoring full marks. A considerable number of candidates were unable to correctly calculate or treat some of the adjustments required. E.g. an increase in an allowance for doubtful receivables, depreciation of non-current assets and the impairment of an intangible non-current asset. Question 4 Most candidates seemed to understand what a statement of cash flow should look like but there were still some including statement of profit or loss items and statement of financial position items in the statement of cash flow. It is essential that adequate, clear workings are shown for every question or marks could be lost. The Chartered Institute of Management Accountants 2014 Page 1
SECTION A 20 MARKS ANSWER ALL TEN SUB-QUESTIONS Rationale Question One consists of 10 objective test sub-questions. These are drawn from all sections of the syllabus. They are designed to examine breadth across the syllabus and thus cover many learning outcomes. Question 1.1 Define the meaning of the term an indirect tax Answer: An indirect tax is one that is levied on one person or entity with the intention that the tax burden is passed on to another person/entity. Question 1.2 List TWO main sources of tax rules in a country? Answer: Main sources of tax rules are: o Domestic legislation and court rulings o Practice of local tax authority o Agreements between different countries, such as double taxation treaties. (any two of the above) Question 1.3 A withholding tax is: A B C D tax deducted at source before payment to a recipient in a foreign country. tax on profits that is then paid out net as a dividend to equity shareholders. tax paid to local tax authorities with an amount withheld from payment. tax withheld from employees salaries with salaries paid to them net of tax. Answer: A The Chartered Institute of Management Accountants 2014 Page 2
Question 1.4 During the VAT period ended 31 March 2014 EDF raised sales invoices (including VAT at standard rate) totalling $74,750. EDF incurred expenses during the period of $57,000, excluding VAT. All expenses incurred VAT at standard rate. How much VAT was due for the period? Answer: Output VAT on sales revenue $74,750 x15/115 = $9,750 Input VAT on expenses $57,000 x 15% = $8,550 VAT payable = $9,750 - $8,550 = $1,200 Answer: Answer VAT due = $1,200 Question 1.5 The tax rules of Country X allow an entity ceasing to trade to carry back terminal losses against the previous two years profits. CT ceased trading on 31 March 2014, having incurred a trading loss of $75,000 for the year ended 31 March 2014. CT s profits for the previous 3 years were as follows: Year to 31 March: 2011 2012 2013 Taxable trading profit $95,000 $40,000 $25,000 Assuming that CT had paid all tax due up to 31 March 2013, calculate the tax refund that CT can claim for its terminal loss. Answer Maximum offset against 2013 $25,000 Maximum offset against 2012 $40,000 $65,000 Answer: $65,000 x 25% = $16,250 The Chartered Institute of Management Accountants 2014 Page 3
Question 1.6 (i) Power to arrest individuals (ii) Power of entry and search of premises (iii) Power to exchange information with other tax authorities (iv) Power to confiscate assets of the entity Which TWO of the above are statutory powers that a tax authority may be granted to ensure compliance with tax regulations? A B C D (i) and (iii) (i) and (iv) (ii) and (iii) (ii) and (iv) Answer: C Question 1.7 The IASB s Conceptual Framework for Financial Reporting (2010) (Framework) lists five elements of financial statements. Two of the elements are assets and liabilities, list the other three. Answer: Equity Income Expenses Question 1.8 An external audit of VH s financial statements has discovered that a customer who, at 31 March 2014, owed VH $250,000 was declared bankrupt on 8 April 2014. VH has not provided for the bad debt in its financial statements for the year ended 31 March 2014. This is regarded as material but not pervasive. Assuming that the auditors find everything else satisfactory, which ONE of the following is the appropriate audit report for the auditors of VH to issue? A B C D The external audit report should be a modified report, with a qualified except for opinion. The external audit report should be an unmodified report with an emphasis of matter paragraph relating to the bad debt. The external audit report should be a modified report, with a disclaimer of opinion. The external audit report should be a modified report, with an adverse opinion. Answer: A The Chartered Institute of Management Accountants 2014 Page 4
Question 1.9 Under the current structure of regulatory bodies, which organisation is responsible for reviewing international reporting standards and issuing revised international reporting standards? A B C D IFRS Advisory Council IFRS Interpretations Committee International Accounting Standards Board IFRS Foundation Answer: C Question 1.10 Which of the following is the correct meaning of rollover relief? A B C D A trading loss can be carried forward and used to reduce tax in a future profitable year. A capital loss incurred on the disposal of an asset can be carried forward to a future tax year. An entity ceasing to trade, carrying back a trading loss to set off against previous years profits. A gain arising from the sale of an asset is deferred provided the entity reinvests the proceeds of the sale in a replacement asset. Answer: D The Chartered Institute of Management Accountants 2014 Page 5
SECTION B 30 MARKS ANSWER ALL SIX QUESTIONS Question 2a Explain with reasons which of LKO s geographical segments will be classified as reportable operating segments according to IFRS 8 Operating Segments. Total for sub-question (a) = 5 marks) Explain the 10% rule and the 75% rule for identifying reportable segments. 3.0 Apply the 10% rule to each geographical segment, to identify the reportable segments. 1.5 Apply the 75% rule to check that sufficient segments have been included. 0.5 Maximum marks awarded 5.0 This question was reasonably well done. were often lost through applying the rules incorrectly to the data. Some answers did not explain the rules that were being applied. Not explaining the 10% rule. Incorrectly applying the 10% rule. Not referring to the 75% rule. Quoting and applying incorrect percentages instead of 10% and 75%. The Chartered Institute of Management Accountants 2014 Page 6
Question 2b (i) Explain how IUJ should account for the changes in goodwill values at 31 March 2014 and (ii) Calculate the goodwill that will be included in its statement of financial position at 31 March 2014. (Total for sub-question (b) = 5 marks) Explain how the increase in goodwill in A should be treated in the consolidated financial statements. 1.5 Explain how the impairment of goodwill in B should be treated in the consolidated financial statements. 1.5 Calculate goodwill arising on the acquisition of A and B and make the adjustment for the impairment of B. 2.0 Maximum marks awarded 5.0 Most candidates could calculate the goodwill arising on the initial acquisition of the two entities. However a surprising number of candidates stated that an increase in goodwill should be recognised in the financial statements. All candidates stated that goodwill impairment should be recognised but not all were able to correctly explain its treatment in the financial statements. Explaining that the increase in goodwill of B should be recognised in the consolidated financial statements. Stating that the increase should be treated as income in the consolidated statement of profit or loss. Not recognising that a post acquisition increase in goodwill is regarded as internally generated goodwill. Calculating IUJ s goodwill balance incorrectly including the increase in B. The Chartered Institute of Management Accountants 2014 Page 7
Question 2c Explain the ethical issues that the Finance Director may face as a result of the Chairman s instruction. (Total for sub-question (c) = 5 marks) Explain the correct accounting treatment that would be required for the sale of the factory. 1.0 Explain the main ethical issues that the accounting treatment required by the chairman may cause for the finance director. 4.0 Maximum marks awarded 5.0 Some candidates did not explain why the accounting treatment required by the chairman was incorrect. Some answers did not relate comments to the question, for example some explained the ethical issues included in the CIMA code without referring to the scenario at all. Not identifying the problem with the chairman s instruction. Not relating the answer specifically to the question, e.g. how does the instruction impact on the financial director s integrity Many candidates were able to name the ethical issues but not able to explain how they impacted on the finance director s approach. The Chartered Institute of Management Accountants 2014 Page 8
Question 2d Explain the two fundamental qualitative characteristics of financial statements as identified in the IASB s Framework. (Total for sub-question (d) = 5 marks) Identify the two qualitative characteristics of relevance and faithful representation. 1.0 Explain the characteristics of relevance. 2.0 Explain the characteristics of faithful representation. 2.0 Maximum marks awarded 5.0 A surprising number of candidates did not seem to know what the two qualitative characteristics of financial statements as identified in the IASB s Framework were. A significant proportion of candidates could not explain the two characteristics they had identified. As a result this question was not well answered. Incorrectly identifying the two qualitative characteristics of financial statements identified in the IASB s Framework. An inability to give any explanation of the meaning of relevance or faithful representation. The Chartered Institute of Management Accountants 2014 Page 9
Question 2e Calculate DTX s corporate income tax due for the years ended 31 March 2013 and 2014. (Total for sub-question (e) = 5 marks) Calculate DTX s accounting depreciation charge for the years ended 31 March 2013 and 2014. 2.0 Calculate DTX s tax depreciation charge for the years ended 31 March 2013 and 2014. 1.5 Calculate DTX s taxable profits for the years to 31 March 2013 and 31 March 2014 and the tax due for each year. 1.5 Maximum marks awarded 5.0 The data presented was for use in question 2e and 2f. Some candidates were unable to identify when the various data items should be used. There was more than one method that could be used to answer the two questions. The published answer follows the sequence: Calculate the tax due for the year Calculate temporary differences arising in each year Calculate the charge to profit or loss as the difference between tax due and the timing difference. An alternative approach could be: Calculate the tax due for the year Calculate the charge to profit or loss as the profit times the tax rate. Calculate temporary differences arising in each year as the difference between tax due and the charge to profit or loss. Adjusting tax depreciation allowances for the impairment of the asset. Not adjusting for the impairment in the taxable profit figure for 2014. Not recalculating accounting depreciation to reflect the impairment in 2014. Using the wrong years for calculation. Taking the first year as year ended 31 March 2012 instead of 2013. The Chartered Institute of Management Accountants 2014 Page 10
Question 2f (i) Calculate the amount of income taxes charged to DTX s statement of profit or loss for the years ended 31 March 2013 and 31 March 2014. (ii) Calculate the deferred tax balance that will appear in DTX s statement of financial position at 31 March 2013 and 31 March 2014. (Total for sub-question (f) = 5 marks) Calculate the temporary differences arising at the end of each year. 2.0 Calculate the tax charge to profit or loss for the years ended 31 March 2013 & 2014. 1.5 Calculate the deferred tax balance for each year. 1.5 Maximum marks awarded 5.0 See comment under 2e. Using the annual differences as the temporary differences arising instead of the cumulative differences. Not understanding the difference between tax due for payment and the tax charge to the statement of profit or loss. The Chartered Institute of Management Accountants 2014 Page 11
SECTION C 50 MARKS ANSWER TWO QUESTIONS FROM THIS SECTION Question 3 Prepare the statement of profit or loss and a statement of changes in equity for XCB for the year ended 31 March 2014 and a statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a statement of accounting policies. (Total for Question Three = 25 marks) Prepare the non-current asset depreciation & amortisation calculations. 2.5 Prepare workings for cost of sales, administration and distribution. 7.0 Prepare the statement of profit or loss. 2.0 Prepare the statement of financial position - assets. 5.0 Prepare the statement of financial position equity & liabilities. 2.5 Prepare the statement of changes in equity. 3.5 Formats and presentation 2.5 Maximum marks for Question 3 25.0 This question was generally well done with many candidates scoring 20+ marks. Not applying reducing balance depreciation to vehicles correctly. Charging the cumulative depreciation to cost of sales and/or distribution instead of the annual figure. Some candidates treated the operating licence and patent as liabilities in the statement of financial position. The impairment of the patent was frequently calculated using fair value less cost to sell instead of the higher of fair value and value in use. The charge for the provision for doubtful receivables was often charged to expenses as the total provision instead of the increase in the year. The provision for doubtful receivables balance was often listed under current liabilities on the statement of financial position. The release of the provision for the legal claim was often ignored, or treated as an addition to expenses, instead of being deducted from expenses. The new customer order was sometimes deducted from receivables or cash. Some candidates also adjusted for the full value of the order, even though the cash had not been received. Opening and closing inventory balances were sometimes reversed in cost of sales calculation. The Chartered Institute of Management Accountants 2014 Page 12
Question 4 Prepare WZQ s Statement of cash flows, using the indirect method, for the year ended 31 March 2014 in accordance with IAS 7 Statement of Cash Flows. Notes to the financial statements are not required, but all workings must be clearly shown. (Total for Question Four = 25 marks) Cash generated from operations section of the statement. 5.0 Calculate the tax and interest paid and put in statement of cash flows. 4.5 Calculate the cash flows from movements in non-current assets and complete cash flows from investing activities. 6.5 Calculate dividends paid and complete cash flows from financing activities. 7.0 Formats and presentation 2.0 Maximum marks for Question 4 25.0 There were some very good answers to this question with some candidates scoring full marks. However there were many more very poor answers with some candidates clearly not able to distinguish cash flows from accounting adjustments. Many candidates had very poor formats, with several items in the wrong section of the statement of cash flow. Some answers started with the wrong profit figure. Many candidates did not include several of the non-cash adjustments, e.g. write off of project. A number of candidates still get the direction of the changes in working capital the wrong way round. Very few candidates were able to calculate the expenditure incurred in the year on development correctly. A surprising number included the cash received from the shares in the share issue but excluded the share premium. Most candidates included the loan repayment but significantly fewer candidates included the cash raised from the new loan. Hardly any candidates treated the 30 day government bond as a cash equivalent and therefore had an incorrect opening cash and cash equivalent balance at 1 April 2013. The Chartered Institute of Management Accountants 2014 Page 13