Examiner s general comments

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. Question 4 (a) on issue of shares and 2(e) on the IASB Framework, had a number of particularly poor answers. Question spotting is not advised in this paper as most learning outcomes are covered in each examination. Question 1 was not well answered this time. Some candidates missed out some MCQs altogether. Many candidates struggled to score more than half marks. Most candidates seemed unprepared for the questions in this section, questions 1.1; 1.7 and 1.10 seemed to cause the most problems. Question 2 was not well answered this time, many candidates scored well below half marks on the question overall. Some candidates were obviously ill prepared for 2(a) benefits of a statement of cash flows; question 2(b) deferred tax; 2(e) on the IASB Framework and 2(f) benefits of an external audit. None of these topics should individually pose any problem for a well prepared candidate. Question 3 produced some very good answers with some candidates scoring full marks. However a considerable number of candidates were unable to explain the two issues in part (a) or prepare correct calculations for the patent and depreciation of property, plant and equipment. Question 4 The answers to the group accounts question were a significant improvement on the answers in November 2011. There were some very good answers from candidates who were prepared with some scoring full marks for part (b) although candidates in some centres were unable to gain more than half marks. Candidates either knew how to prepare a consolidated statement of financial position and consolidated statement of comprehensive income and scored fairly high marks or didn t really know what they were doing, suggesting that some had been question spotting and had not prepared for a question on consolidated financial statements. The Chartered Institute of Management Accountants 2012 Page 1

SECTION A 20 MARKS ANSWER ALL TEN SUB-QUESTIONS Question 1.1 Complete the following sentence. Under the OECD model tax convention an entity will generally have residence for tax purposes in... Answer Under the OECD model tax convention an entity will have residence for tax purposes in the country of its effective management. Question 1.2 XZ sells two types of product A and B. A is standard rated for VAT purposes and B is zero rated. All purchases have incurred VAT at standard rate. XZ s sales (inclusive of VAT where applicable) for the three months to 31 March 2012 were: $ A 63,250 B 24,150 87,400 XZ s purchases for the three months to 31 March 2012 were $32,333 exclusive of VAT. Calculate the amount of VAT that XZ is due to pay for the three months to 31 March 2012. Answer Input tax 32,333 x 15% = (4,850) Output tax 63,250 x 15/115 = 8,250 VAT due to be paid 3,400 Answer $3,400 Question 1.3 An entity earns a profit of $60,000 for the year to 31 March 2012. The entity is assessed as owing $15,000 tax for the year. Which one of the following types of tax would best describe the tax due? A B C D Capital tax Income tax Wealth tax Consumption tax Answer B The Chartered Institute of Management Accountants 2012 Page 2

Question 1.4 List TWO possible powers that a tax authority may be granted to enable it to enforce tax regulations. Answer Any two from: Power to review and query filed returns Power to request special reports or returns Power to examine records Powers of entry and search Power to exchange information with tax authorities in other jurisdictions Power to impose penalties Question 1.5 A customer purchases goods for $115, inclusive of VAT. From the customers point of view the VAT could be said to be: A a direct tax with formal incidence. B an indirect tax with formal incidence. C a direct tax with effective incidence. D an indirect tax with effective incidence. Answer D Question 1.6 Which ONE of the following is NOT a fundamental ethical principle indentified in CIMA s code of ethics? A B C D Professional competence Professional behaviour Integrity Independence Answer D The Chartered Institute of Management Accountants 2012 Page 3

Question 1.7 Which ONE of the following would NOT be regarded as a responsibility of the IASB? A B C D Responsibility for all IFRS technical matters Publish IFRSs Overall supervisory body of the IFRS organisations Final approval of interpretations by the IFRS Interpretations Committee Answer C Question 1.8 TY is a main contractor employing sub-contractors to assist it when required. TY has recently completed a contract replacing a roof on the local school. The roof has been leaking and some sections are now unsafe. The school is suing TY for $20,000 to repair the roof. TY used a sub-contractor to install the roof and regards the sub-contractor s work as faulty. TY has raised a court action against the sub-contractor claiming the cost of the school s action plus legal fees, a total of $22,000. TY has been advised by legal advisers that it will probably lose the case brought against it by the school and will probably win the case against the sub-contractor. How should these items be treated in TY s financial statements? A A provision should be made for the $20,000 liability and the case against the sub-contractor ignored. B A provision should be made for the $20,000 liability and the probable receipt of cash from the case against the sub-contractor disclosed as a note. C No provisions should be made but the $20,000 liability should be disclosed as a note. D A provision should be made for the $20,000 liability and the probable receipt of cash from the case against the sub-contractor recognised as a current asset. Answer B Question 1.9 BN has an asset that was classified as held for sale at 31 March 2012. The asset had a carrying value of $900 and fair value of $800. The cost of disposal was estimated to be $50. According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which ONE of the following values should be used for the asset in BN s statement of financial position as at 31 March 2012? A $750 B $800 C $850 D $900 Answer A The Chartered Institute of Management Accountants 2012 Page 4

Question 1.10 MN obtained a government licence to operate a mine from 1 April 2011. The licence requires that at the end of the mine s useful life, all buildings must be removed from the site and the site landscaped. MN estimates that the cost of this decommissioning work will be $1,000,000 in ten years time (present value at 1 April 2011 $463,000) using a discount factor of 8%. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets how much should MN include in provisions in its statement of financial position as at 31 March 2012? A $100,000 B $463,000 C $500,000 D $1,000,000 $1,000,000 x discount rate at 8% in 9 years - 0.500 = $500,000 Answer C The Chartered Institute of Management Accountants 2012 Page 5

SECTION B 30 MARKS ANSWER ALL SIX QUESTIONS Question 2a Explain the main benefits, to users of the accounts, of including a statement of cash flows in published financial statements. (5 marks) One mark for each benefit 5 Maximum marks awarded 5 Very few answers addressed the question asked, the benefits of a statement of cash flow to the users of financial statements. As a result marks for this question were very low. Explaining benefits of cash flow generally but not relating the benefits to users of financial statements. Explaining the format and content of a statement of cash flows. Explaining how managers of the entity could use the statement of cash flow. Some answers also explained the benefits of a statement of comprehensive income and statement of financial position. The Chartered Institute of Management Accountants 2012 Page 6

Question 2b (i) Explain how deferred tax arises. Use the information given above to: (ii) Identify the most likely reason for the increase of $200,000 in the deferred tax provision for the year to 31 March 2012. (iii) Explain what the over provision of $50,000 in the income statement represents. (5 marks) Explain how the deferred tax provision may have arisen. Identify the most likely reason for an increase in deferred tax provision. Explain what the over provision of $50,000 represents 1 2 2 Maximum marks awarded 5 Although most candidates seemed to understand the general concept of deferred tax very few could relate their explanation to the data provided or explain why there had been an increase in deferred tax. Not referring to temporary differences in the answer - including permanent differences. Giving the reason as an increase in tax due since last year. Not relating increase in deferred tax to possible increases in temporary differences caused by possible purchase of non-current assets. Not referring to level of first year allowance (50%) compared with possible depreciation rates. Only giving a reason why the overprovision arose without suggesting why it was in the income statement. The Chartered Institute of Management Accountants 2012 Page 7

Question 2c Calculate the estimated amount of corporate income tax that PQ is due to pay for the year ended 31 March 2012. (5 marks) Calculate the tax due in Country X. Calculate the tax paid in Country Z. Calculate the net tax payable in Country X 3 1 1 Maximum marks awarded 5 The answer to this question was quite well done, with many candidates scoring half marks or more. Not grossing up the finance income for the tax paid in country Z. Calculating the tax paid as 15% of $85,000 rather than 15/85 Deducting the tax credit from taxable profit rather than the tax due. Trying to calculate underlying tax, which was not relevant. The Chartered Institute of Management Accountants 2012 Page 8

Question 2d (i) Explain the difference between an excise duty and a single stage sales tax. (3 marks) (ii) Describe the characteristics of commodities that make them most suitable, from the revenue authority s point of view, for the application of excise duty. (5 marks) Explain the difference between an excise duty and a single stage sales tax. 3 Describe the characteristics of commodities suitable for excise duty. 2 Maximum marks awarded 5 Few candidates seemed to understand what an excise duty and a single stage sales tax are. Stating that an excise duty only applies to imports Stating the excise duty applies to exports Identifying excise duty as a % charge rather than a unit tax Identifying a single stage tax as VAT which is a multistage tax Most candidates gave the reason why excise duties are imposed, e.g. to control consumption of goods that could be harmful to the individual or the environment, rather than the characteristics that make them suitable for application of an excise duty. The Chartered Institute of Management Accountants 2012 Page 9

Question 2e (i) Define income and equity in accordance with the IASB Framework. (3 marks) (ii) Explain the criteria that must be met for income to be recognised in an entity s financial statements. (5 marks) Define income and equity in accordance with the IASB Framework. 3 Explain the criteria that must be met for income and equity to be recognised in an entity s 2 financial statements. Maximum marks awarded 5 I was very surprised at the number of candidates that could not define income according to the IASB Framework. The definition of income given in general accounting terms, sales less cost of sales rather than as defined in the framework. Equity defined as share capital plus reserves instead of using the framework definition. Many candidates referred to IAS 18 definition for the recognition of a sale of goods instead of using the criteria for income recognition specified in the framework. The Chartered Institute of Management Accountants 2012 Page 10

Question 2f Prepare a short briefing note that highlights the benefits of an external audit to ABC. (5 marks) Benefits of an audit 5 Maximum marks awarded 5 I was surprised at the low average marks on this question. The main problem, as with other questions on the paper, was not answering the question asked. A large proportion of candidates did not address the benefits of an external audit to the entity. Explaining the purpose and objective of an external audit. Explaining how or why an audit is carried out. Explaining the content of an external audit report. Explaining the different types of audit report. The Chartered Institute of Management Accountants 2012 Page 11

SECTION C 50 MARKS ANSWER TWO QUESTIONS FROM THIS SECTION Question 3 (a) Briefly explain how items (vi) and (vii) should be treated by DFG in its financial statements for the year ended 31 March 2012. (6 marks) (b) Prepare DFG s statement of comprehensive income and statement of changes in equity for the year to 31 March 2012 AND a statement of financial position at that date in accordance with the requirements of International Financial Reporting Standards. (19 marks) Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a statement of accounting policies, Total 25 marks Briefly explain how items (vi) and (vii) should be treated by DFG in its financial statements for the year ended 31 March 2012. Prepare the statement of comprehensive income Prepare the statement of financial position - assets 5.0 Prepare the statement of financial position equity and liabilities 5.5 Prepare the statement of changes in equity 2.0 Maximum marks for Question 3 25 6 6.5 This question was reasonably well done with some candidates getting full marks on part (b). However part (a) was not well answered with some candidates completely ignoring this part of the question. The treatment of the cash received as a deposit needed to be treated according to IAS 18 Revenue recognition and the impairment of the patent treated according to IAS 36 Impairment of assets. An impaired asset is written down from carrying value to the higher of value in use and fair value less cost to sell. The Chartered Institute of Management Accountants 2012 Page 12

(a) Some candidates treated the deposit as income and some accrued the full value of the order as income. A large proportion of candidates said that the patent should be impaired to the lower of value in use and fair value less cost to sell. (b) Revenue was often left unadjusted for the deposit or the full value of $150,000 was adjusted, sometimes added sometimes deducted! The calculation of depreciation of property plant and equipment caused quite a few errors. The plant and equipment that had a reduced useful life needed to be treated separately, with the remaining carrying value depreciated over the remaining useful life of two years. Many candidates got this calculation wrong. Many candidates calculated impairment of the patent as the difference between value in use and fair value less cost to sell, i.e. $3,000. Quite a few candidates deducted the foreign order from inventory or adjusted trade receivables. Both of these are incorrect as no sale had been made at the year end. I was amazed that virtually every candidate treated the credit balance on cash and cash equivalents as a current asset, a few even put it in current assets as a negative figure. As the balance was credit entry on the trial balance it should have been treated as a bank overdraft and should be listed as a current liability. A significant proportion of candidates got the interest charge incorrect. It should be the loan notes $280,000 x 5% = $14,000, with $7,000 paid liability is $7,000. Many candidates, although identifying the correct treatment of the deposit as a liability ignored it in the statement of financial position. The provision for legal action against DFG was often left out of the statement of financial position and sometimes not included in the statement of comprehensive income. The Chartered Institute of Management Accountants 2012 Page 13

Question 4 (a) Prepare the journal entry to record the purchase of River in Loch s accounting records. (3 marks) (b) Prepare the consolidated statement of comprehensive income for Loch for the year ended 31 March 2012 AND a consolidated statement of financial position for Loch as at 31 March 2012, in accordance with the requirements of International Financial Reporting Standards. (22 marks) Notes to the financial statements are not required but all workings must be clearly shown. Total 25 marks Prepare a journal entry to record the purchase of River in Loch s accounting records. 3 Calculate goodwill arising on acquisition of River. 3 Calculate investment in associated entity Stream. 1.5 Prepare workings for intra-group activities. 2 Calculate consolidated retained earnings. 3.5 Prepare the consolidated statement of comprehensive income 6 Prepare consolidated statement of financial position. 6 Maximum marks awarded 25 The answer to part (a) was very poor with many candidates not attempting an answer. The answer to part (b) was a significant improvement on the November 2011 diet with many more candidates achieving good marks. The Chartered Institute of Management Accountants 2012 Page 14

(a) Most candidates either ignored this part or used the goodwill calculation figures to try and put together a journal entry. Although this was a share for share exchange a large number of candidates put either a debit or credit entry to the bank account. (b) The most common error was the calculation of the percentage interest in the associated entity. Candidates often used the purchase price of the group holding ($223,000) instead of the number of shares acquired (156,000). Not including the fair value adjustment in the goodwill calculation. Including the excess depreciation arising on the fair value adjustment in the goodwill calculation. Trying to calculate goodwill in the associated entity and calling the result investment in associate. Using the cost of the associate as the investment in associate. Including the current accounts in the consolidated statement of financial position (CSoFP) instead of cancelling them. Including the cheque in transit in receivables instead of in current account. Cost of sales was often not adjusted for the intra-group sale, unrealised profit or excess depreciation. Expenses were not usually adjusted for the goodwill impairment, which although deducted from goodwill was often not included in the statement of comprehensive income. The intra-group loan and the interest on it were not cancelled. Including the associated entity in the CSoFP using acquisition accounting instead of equity accounting. The Chartered Institute of Management Accountants 2012 Page 15