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. It therefore may give the impression that there were few good marks and few passes as all the main errors have been listed for each question. It must be remembered though that not all candidates made the errors listed and that overall there was a good result for this paper. 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 question 3. However some candidates had not prepared for some of the topics on the paper, for example questions 2a, 2c, 2d, 2f, question 3 part (a) and finance leases and construction contracts in question 3 part (b). Question spotting is not advised in this paper as most learning outcomes are covered in each examination. In some key topics, all of which have been examined previously, some candidates still do not appear to understand the principles, for example deferred tax (question 1.14), settlement discounts (1.15), valuing a financial instrument (question 1.16), calculation of the finance cost of preferred shares (question 1.17). Question One seemed marginally improved this time. Most candidates seemed prepared for the questions in this section, except 1.14 to 1.17. Some topics continue to cause problems, even though they have regularly appeared in the paper. ll the topics have now appeared on previous examination papers and should have caused no surprises..5 caused candidates difficulty in deciding what expenditure to leave out and what to include..12 caused some candidates problems as they did not appear to have revised economic order quantity..14 deferred tax is still causing problems for some candidates, although there seemed to be a marked improvement in the number of correct answers this time..15, settlement discounts; 1.16 yield to maturity and 1.17 finance cost of preferred shares were often answered incorrectly or not at all. Question 2 (a) the question with the lowest average mark on the paper. Q2a was particularly poor, with very few even partially correct answers. Most candidates did not answer the question asked, that was to identify the purposes of the Framework. Often reliability, comparability etc was cited or the role of the International ccounting Standards oard explained. Candidates that did address the question generally scored very well, often achieving full marks. Q2c asked for the calculation of five working capital and efficiency ratios. Some candidates calculated averages rather than ratios for each year and others produced profitability ratios (which are not even in the syllabus of P7) rather than working capital and efficiency ones. Q2d most candidates ignored the fact that the contract was for services rather than goods and gave quite good answers for sale of goods but irrelevant to the provision of a service. Those that did identify the service element correctly often specified that a full year s charge should be made, missing the fact that the contract started halfway through the year. Very few candidates correctly split the liability into current and non-current. In Q2e part (i), calculation of the tax due, was reasonably well answered but few candidates addressed part (ii), preparation of the note to the financial statements. Q2f produced some poor answers to all three parts of the question. In (i) a large proportion of candidates wanted to amortise the goodwill rather than test for impairment. In (ii) some candidates wanted to treat the development cost as an expense. In (iii) most candidates The Chartered Institute of Management ccountants Page 1

assumed that rand Z should be revalued. Very few candidates correctly identified the issue regarding an active market for rand Z Q3 produced some very good answers although some candidates lost 5 relatively easy marks because they did not prepare a property, plant and equipment note. Part (a) of the question required candidates to prepare a property, plant and equipment note, but as in previous examinations the majority of candidates were not able to produce a reasonable PP&E note, many scoring only 1 or 2 out of the 5 marks. This is a relatively simple statement to prepare and candidates often missed easy marks in getting items in the wrong columns or ignoring disposals. More worrying was the number of candidates unable to calculate depreciation correctly. s in previous diets the lack of knowledge and application skills regarding the lease and construction contract caused problems in part (b). The calculations relating to the construction contract produced a variety of errors, particularly in the calculation of the amount due from customers, and the split of the finance lease into current and non-current liabilities caused some difficulties. Format marks were frequently lost as candidates did not include total columns in the various statements and included items in the wrong category in the income statement, statement of changes in equity or balance sheet. The Chartered Institute of Management ccountants Page 2

SECTION 40 MRKS 1.1 Which ONE of the following taxes would be classified as an indirect tax? C Value added tax / sales tax Corporate income tax n individual s income tax deducted at source (PYE) Capital gains tax nswer 1.2 ccording to the International ccounting Standards oard s (IS) Framework for the Preparation and Presentation of Financial Statements (Framework), which two of the following are elements of reliability? (i) Consistency (ii) Substance over form (iii) Understandability (iv) Completeness C (i) and (iii) (i) and (iv) (ii) and (iii) nswer (ii) and (iv) 1.3 Which ONE of the following matters is NOT normally covered by the auditor s report? C Whether the accounts have been prepared in accordance with relevant international accounting standards Whether the entity has kept proper accounting records Whether the financial statements agree with the accounting records nswer Whether the entity has been managed efficiently The Chartered Institute of Management ccountants Page 3

1.4 Which ONE of the following is an example of formal incidence, but not effective incidence? C n entity assessed for corporate income tax by the tax authorities n entity charges VT on its sales and pays its net VT to the tax authority n employee is assessed for income tax by the tax authority nswer resident is charged property tax by local government 1.5 JT is registered with its local tax authority and can reclaim value added tax paid on items purchased. uring the year JT purchased a large machine from another country. The supplier invoiced JT as follows: Cost of basic machine Special modifications made to basic design Supplier s engineer s time installing and initial testing of machine Three years maintenance and servicing Value added tax @ 20% Total $ 100,000 15,000 2,000 21,000 138,000 27,600 165,600 Prior to delivery, JT spent $12,000 preparing a heavy duty concrete base for the machine. Calculate the amount that JT should debit to non-current assets for the cost of the machine. nswer Invoiced amount less maintenance, excluding VT 117,000 Concrete base 12,000 129,000 The Chartered Institute of Management ccountants Page 4

1.6 JL has raised $15 million cash to pay for a contract to build and equip a new manufacturing facility. However, the project has been delayed by planning officers in the local government offices. JL is hoping that the contract will commence in approximately 3 to 6 months time. Which ONE of the following is the LEST appropriate for JL to invest the $15 million in until it is required? C Treasury bills Investment in quoted equity shares ank deposit accounts nswer Short term local authority bonds 1.7 ccording to IS 8 ccounting Policies, Changes in ccounting Estimates and Errors, which ONE of the following would require a prior period adjustment in JE s financial statements for the year ended 31 October 2009? Inventory at 31 October 2008 had been materially over-valued due to an error in the year-end inventory count that caused inventory in one warehouse to be counted twice. The straight line method of depreciation used to depreciate vehicles up to 31 October 2008 was changed by JE to reducing balance method from 1 November 2008. C JE acquired a business from a sole trader on 1 ecember 2000. JE amortised the goodwill over 20 years. On 1 November 2008 JE ceased amortisation of goodwill as required by IFRS 3 usiness Combinations. On 1 November 2008, JE decided to change the method of calculating attributable profit recognised on uncompleted construction contracts from the percentage of cost method to the percentage of work completed method. nswer The Chartered Institute of Management ccountants Page 5

1.8 Which ONE of the following is NOT an advantage of forfaiting to an exporter? C It is non-recourse, no liability remains with the exporter Trade receivables can be turned into immediate cash Future foreign exchange risk is eliminated nswer It can be held as an investment to earn high interest rate 1.9 Which ONE of the following would affect the balance on the bank statement at the year end? C bad debt write-off at the year end ank charges accrued at the year end Revaluation of a plot of land during the year nswer Entering into a finance lease during the year with rentals due in advance 1.10 Which ONE of the following is NOT a function of the IS? C Enforcing international financial reporting standards Issuing international financial reporting standards pproving International Financial Reporting Interpretations Committee s interpretations of international financial reporting standards nswer Issuing exposure drafts for public comment The Chartered Institute of Management ccountants Page 6

1.11 riefly define the meaning of tax evasion. nswer Tax evasion is the illegal manipulation of the tax system to avoid paying taxes 1.12 Calculate the economic order quantity for the following item of inventory: Cost per unit $50 Quantity required per year 61,000 Order costs $16 per order Inventory holding costs are estimated at 2.5% of inventory value, per year nswer. 2 x 16 x 61,000 = 1,249.639 = 1,250 units EOQ = 1.25 1.13 ouble tax treaties provide for the relief of foreign tax by one of three methods. List TWO of the methods used to provide double tax relief. nswer ny two from: Exemption Tax credit eduction The Chartered Institute of Management ccountants Page 7

1.14 JC purchases an item of plant and machinery costing $900,000 on 1 October 2007, which qualifies for 50% tax allowances in the first year and 25% per year thereafter, on the reducing balance basis. JC s policy in respect of plant and machinery is to charge depreciation on a straight line basis over eight years. The residual value is estimated at $100,000. ssume there are no other temporary differences in the period and a tax rate of 25%. Calculate the amount of any deferred tax balance at 30 September 2009. nswer Tax base: $000 ccounting book value: $000 Cost 1/10/07 900 Cost 1/10/07 900 30/9/08 First year allowance 50% 450 epreciation 2007/8 100 450 800 2008/9 25% 112.5 epreciation 2008/9 100 337.5 700 2008/9 $000 ccounting book value 700.0 Tax base 337.5 Temporary difference 362.5 eferred tax balance at 25% 90.625 (3 marks) 1.15 ll of JS s customers settle their accounts at the end of 30 days. JS needs to increase its cashflow and is considering offering a 2% discount to all customers for payment within 10 days. Calculate the equivalent annual interest rate to JS of offering this discount. ssume a 365-day year and use compound interest methodology. (3 marks) nswer 100 (365/20) - 1 = 1.02 18.25-1 = 1.14353 1 = 43.53% 98 The Chartered Institute of Management ccountants Page 8

1.16 government bond will repay its nominal value of $1,000 in four years time. The coupon rate is 5% and its current price is $1,100, excluding interest. Calculate the bond s yield to maturity. nswer Using 5% and 2% from tables ($50 x 3.546) + ($1,000 x 0.823) = 177.3 + 823 = 1,000.3 ($50 x 3.808) + ($1,000 x 0.924) = 190.4 + 924 = 1,114.4 1,114.4 1,100 2% + x 3 = 2% + 0.3786 = 2.38% 1,114.4 1,000.3 (4 marks) 1.17 On 1 September 2008 JS issued 200,000 $1 cumulative, redeemable 4% preferred shares at par. Issue expenses were $5,000. The preferred shares are redeemable on 31 ugust 2013 at a premium of $13,000. You may assume the effective interest rate is 5.75% Calculate the total finance cost of issuing the preferred shares and calculate the charge to each of the income statements for the years ended 31 ugust 2009 and 2010. (4 marks) nswer Total Finance Cost Issue expenses 5,000 Redemption premium 13,000 4% dividend for 5 years 40,000 58,000 Workings: alance Interest Paid Total $ $ $ $ 31/08/2009 195000 11212 8000 198212 31/08/2010 198212 11397 8000 201609 Note: only 2009 and 2010 are required for the answer The annual charge to the profit or loss is: Year ended 31/08/09 $11,212 Year ended 31/08/10 $11,397 The Chartered Institute of Management ccountants Page 9

SECTION 30 MRKS NSWER LL QUESTIONS Question Two (a) Required: Identify five of the purposes of the Framework for the Preparation and Presentation of Financial Statements, as set out by the International ccounting Standards oard. (Total for Question Two (a) = 5 marks) Rationale Tests candidates ability to identify the purposes of the Framework. Tests learning outcome (iv). Suggested pproach riefly explain five of the seven purposes of the Framework set out in the Framework. Marking Guide Marks One mark for each valid purpose 5 Examiner s Comments This question was very badly answered, with very few candidates scoring more than 2 marks. large proportion of candidates did not answer the question as asked and scored zero. Those addressing the question often scored full marks. Common Errors The majority of candidates misread this question and gave very good answers to a different question. Often the qualities of information, reliability, comparability etc were cited. nother common wrong answer was the role of the International ccounting Standards oard. The Chartered Institute of Management ccountants Page 10

Question Two (b) Required (i) Calculate how much cash J needs to raise to reduce its overdraft by $250,000 within the next three months. (ii) Identify three alternative sources of finance that J may be able to use to raise the cash it requires. (Total for Question Two (b) = 5 marks) Rationale Tests candidates ability to analyse cash flow needs and identify measures to improve cash flow. Tests learning outcome (ii) and (iii). Suggested pproach Calculate the cash expected to be generated in the three months and deduct this from the amount that the overdraft has to be reduced by. Identify three methods that J can use to raise cash in the short term. Marking Guide Marks Calculating the cash required to be raised 2 Three methods of short term finance 3 Examiner s Comments Part (i) was relatively well done, part (ii) less so. Common Errors Part (i): Only using one month s cash generation instead of three. Part (ii): Identifying sources of finance that were not short term solutions, such as issuing equity shares and raising a long term loan. Only listing one or two sources of finance. The Chartered Institute of Management ccountants Page 11

Question Two (c) Required: Calculate five relevant working capital and efficiency ratios for JE for the two years ended 30 September 2008 and 2009. (Total for Question Two (c) = 5 marks) Rationale Tests candidates ability to identify and calculate working capital and efficiency ratios. Tests learning outcome (i). Suggested pproach Calculate JE s working capital ratios, trade receivable days; trade payable days and inventory days outstanding for each of 2008 and 2009. Calculate JE s current ratio and quick ratio for each of the two years. Marking Guide Marks One mark for each correct pair of ratios. 5 Examiner s Comments This question was generally well done. Common Errors Calculating one average ratio for each heading, instead of one for each year as specified in the question. Calculating profitability ratios, although they are not in the P7 syllabus. Not calculating five ratios. The Chartered Institute of Management ccountants Page 12

Question Two (d) Required: (i) (ii) Identify the conditions that are required to be met before income from the sale of services can be recognised according to IS 18 Revenue. Explain how the repair and maintenance contract will be treated in the financial statements of JG for the year ended 30 September 2009. (Total for Question Two (d) = 5 marks) Rationale Tests candidates ability to identify the requirements of IS 18 Revenue for the sale of services and then to apply the criteria to the provision of a repair and maintenance contract. Tests learning outcome C (iii). Suggested pproach (i) Identify the requirements of IS 18 that apply to service contracts (ii) Explain how the criteria would be applied to the repair and maintenance contract and calculate the amounts that would be shown in the income statement and balance sheet Marking Guide Marks IS 18 Criteria 2.5 pplication to contract 2.5 Examiner s Comments Large proportion of candidates gave answers based on the IS 18 criteria for the sale of goods instead of the sale of services. Common Errors Giving criteria for sale of goods that do not apply to services, e.g. significant risks and rewards of ownership have been transferred or the entity does not retain any continuing influence or control over the goods. Not referring to degree of completion at all. When degree of completion was referred to, 12 months value was included in revenue instead of the elapsed 6 months. Not splitting the deferred revenue into current and non-current liability. The Chartered Institute of Management ccountants Page 13

Question Two (e) Required: (i) (ii) Calculate the estimated amount of corporate income tax that JW is due to pay for the year ended 31 ecember 2008. Prepare the note to the income statement for income tax expense for the year ended 31 ecember 2008. (Total for Question Two (e) = 5 marks) Rationale Tests candidates ability to calculate the amount of corporate income tax due for the year and prepare the relevant note to the income statement. Tests learning outcome (viii). Suggested pproach Calculate the tax due for the year by adding non-allowable items back to the profit before tax and deducting the tax depreciation allowances. Calculate the deferred tax arising during the year. Prepare the tax note for the income statement. Marking Guide Marks Calculation of tax due for year 3 Calculation of deferred tax increase 1 Note to the income statement 1 Examiner s Comments Part (i) was reasonably well done but many candidates did not attempt part (ii). Common Errors Not adding back the disallowed entertaining expenses Not adding back the depreciation charges for the year. educting depreciation from the profit before tax. Not deducting tax depreciation allowances for property, plant and equipment. Not deducting tax depreciation allowances for vehicles. Not calculating deferred tax increase in the year. Not preparing the income statement note. Preparing the income statement note but only including tax for the year. The Chartered Institute of Management ccountants Page 14

Question Two (f) Required: Explain how JX should treat the following items relating to the acquisition in its financial statements for the year ended 31 October 2009. (i) Goodwill (ii) The development expenditure (iii) rand Z (Total for Question Two (f) = 5 marks) Rationale Tests candidates ability to apply knowledge of international accounting standards to a given scenario and explain how the items should be treated in the financial statements. Tests learning outcome C (v). Suggested pproach Take each item in turn and explain how the requirements of international accounting standards apply to that item and the resulting required treatment of the item. Marking Guide Marks Goodwill 2 eferred development expenditure 1.5 rand name 1.5 Examiner s Comments Surprisingly this question was very badly answered. Common Errors Goodwill: Identifying the goodwill as internally generated and therefore written off as an expense. Correctly calculating goodwill and treating as an intangible asset, but stating that it should be amortised. evelopment expenditure: Listing all the IS 38 criteria. llowing either the purchased part and not the further expenditure, or the reverse. Writing all development off as an expense. rand name: Not allowing the brand name as an asset, writing it off as an expense. Revaluing the brand name to the higher amount. Not mentioning the active market requirement. The Chartered Institute of Management ccountants Page 15

Question 3 Required: (a) Prepare JZ s Property, Plant and Equipment note to the accounts for the year ended 30 September 2009. (5 marks) (b) Prepare JZ s income statement and a statement of changes in equity for the year to 30 September 2009 and a balance sheet at that date, in a form suitable for presentation to the shareholders and in accordance with the requirements of international financial reporting standards. (ll workings should be to the nearest $000) (25 marks) Notes to the financial statements are NOT required (except as specified in part (a) of the question) but all workings must be clearly shown. o not prepare a statement of accounting policies. (Total for Question Three = 30 marks) Rationale Tests candidates ability to prepare (from information provided in the question scenario) an income statement, balance sheet and a statement of changes in equity for the entity concerned, together with a property, plant and equipment note. The financial statements should be in a form suitable for publication and in accordance with current International Financial Reporting Standards. Tests learning outcomes (viii) and C (i). Suggested pproach Prepare workings to calculate depreciation of each category of assets. Prepare the PP&E note as required by part (a) Prepare workings for cost of sales Prepare workings for the finance lease Prepare workings for the construction contract Calculate interest and tax charges for the year Prepare the income statement Prepare the statement of changes in equity Prepare the balance sheet Marking Guide Marks PP&E note 5 Preparation of the income statement 12 Preparation of the statement of changes in equity 2.5 Preparation of the balance sheet 10.5 Examiner s comments The quality of answers overall was disappointing for this question. The majority of candidates were not able to produce a reasonable PP&E note, many scoring only 1 or 2 out of the 5 marks. More worrying was the number of candidates unable to calculate depreciation correctly. Most candidates were able to calculate something meaningful for the finance lease but fewer were prepared for the construction contract. The Chartered Institute of Management ccountants Page 16

Common Errors PP&E note - Not including the asset movements during the year in the note on PP&E. Not deducting disposals when calculating depreciation. Not including leased equipment as an acquisition during the year. The finance lease liability caused many different problems. Total finance cost did not need to be calculated as the interest rate was given. Some candidates decided to ignore the interest rate and used sum of digits. Many candidates failed to use their calculated interest and lease liability balance correctly, many did not include the figures calculated in the income statement or balance sheet. SoCIE the share premium was often missed out or included under share capital. Quite a few candidates incorrectly included a revaluation reserve column and adjusted the gain on disposal of land against it. Income statement items were frequently just listed in the income statement without any attempt to group them under the standard headings. alance sheet Non-current assets frequently not shown at all. Some candidates got mixed up with current and non-current liabilities, including deferred tax and the noncurrent loan as current and the current provision as non-current. Very few included the liability for the lease payments, when they did the split between current and noncurrent was usually incorrect. Construction contract caused a number of problems, many candidates failed to include figures from their workings in the income statement or balance sheet. The revenue was generally dealt with correctly. The cost was usually correctly calculated but often not included in cost of sales. The balance sheet amount due from client was often not calculated or calculated incorrectly. The most common error was to use the revenue figure instead of cost to date plus profit. Some just put the cash received on account in the balance sheet without any adjustment. The Chartered Institute of Management ccountants Page 17