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. Questions that had a significant number of particularly poor answers were, question 1 (1.1 overseas subsidiary and 1.5 capital gains tax); question 2c double taxation relief; question 2e deferred tax. Question spotting is not advised in this paper as most learning outcomes are covered in each examination. Question 1 seemed to have much better marks this time with many candidates scoring above half marks. A number of candidates seemed unprepared for some questions in this section. Questions 1.1, 1.5 and 1.8 seemed to cause the most problems. Question 2 was answered better than in recent examinations, many candidates were able to score more than half marks on the question overall. Some candidates were obviously ill prepared for Q2c double taxation and 2e deferred tax. 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 the adjustments required to record the construction contract. Question 4a The answer to part (a), the difference between the direct method and indirect method of preparing a statement of cash flows was very poor with many candidates not attempting an answer and a large proportion of the other candidates explaining that the difference was that the direct method only included cash flows from operations and the indirect method included investing and financing activities as well. Question 4b Most candidates seemed to have a better understanding of what a statement of cash flows should look like, with most candidates attempting an answer. 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 SB operates in Country X and is considering starting business activities in a foreign country. An entity may conduct a foreign operation through a branch or a subsidiary. Which ONE of the following is an advantage of SB operating its foreign operation as a subsidiary? A A loss made by the foreign operation will be available to the SB group. B SB will only pay tax on dividends received from its foreign operation. C All profits/losses overseas will be subject to tax in Country X. D SB can claim tax depreciation on its foreign operation s assets. Answer B Question 1.2 The government of Country X has estimated the following for the year ended 31 December 2014: Total income tax due $166 billion Total income tax expected to be collected $135 billion Income tax that will not be collected due to tax evasion $10 billion Income tax that will not be collected due to tax avoidance $15 billion The tax gap for the year to 31 December 2014 is expected to be: A $6 billion B $16 billion C $21 billion D $31 billion Answer: D The Chartered Institute of Management Accountants 2014 Page 2

Question 1.3 QR is resident in a country that uses the classical system for the taxation of entity profits paid to shareholders as dividends. QR made a profit (before tax) for the year to 31 December 2013 of $200,000 and paid a dividend of $75,000. The shareholders pay income tax of 20% on dividends received. Calculate the tax paid by QR on its profits and the tax paid by the shareholders in respect of the dividend of $75,000. Answer: $000 Tax on QR s profits (200 x 25%) = 50 Tax on dividends (75 x 20%) = 15 Question 1.4 AU is registered for VAT in Country X. AU sells two types of products, W and Y. Product W is standard rated for VAT purposes and product Y is zero rated. During the VAT period ended 31 December 2013 AU s sales and purchases were: Sales (inclusive of VAT where applicable) Product W $63,250 Product Y $23,000 Purchases (exclusive of VAT) Goods subject to VAT at standard rate $44,050 Goods subject to VAT at zero rate $20,700 Assume AU has no other transactions that require inclusion in its VAT return. Calculate the VAT that AU is due to pay for the period ended 31 December 2013. Answer: AU VAT due = (63,250 x 15/ 115) (44,050 x 15%) = 8,250 6,608 = 1,642 Answer: $1,642 VAT due to be paid. The Chartered Institute of Management Accountants 2014 Page 3

Question 1.5 YZ, incorporated in Country X, purchased a non-depreciable asset for $45,000 on 1 January 2005. YZ incurred additional purchase costs of $5,000. The asset was eventually sold for $110,000 on 31 December 2013. The indexation factor from 1 January 2005 to 31 December 2013 was 35%. The capital gains tax that YZ is due to pay on the disposal of the asset is: A $10,625 B $16,250 C $42,500 D $60,000 Answer Original cost ($45,000+$5,000)= $50,000 Indexation ($50,000x1.35)= $67,500 Sales proceeds $110,000 Taxable gain $42,500 Tax @ 25% $10,625 Answer: A Question 1.6 Which ONE of the following is NOT a fundamental principle of the CIMA Code of Ethics? A B C D Objectivity Integrity Confidentiality Responsibility Answer: D The Chartered Institute of Management Accountants 2014 Page 4

Question 1.7 Which of the following are responsibilities of the IFRS Advisory Council? (i) (ii) (iii) (iv) A B C D Give advice to the IASB on agenda decisions and priorities in its work. Annually review the strategy of the IASB. Inform the IASB of the views of the members of the Council on proposed new standards. Appoint the members of the IASB. (i) and (ii) (ii) and (iv) (i) and (iii) (iii) and (iv) Answer: C Question 1.8 The IASB s Conceptual Framework for Financial Reporting (2010) (Framework) identifies four enhancing qualitative characteristics of financial statements. List TWO enhancing qualitative characteristics identified in the Framework. Answer: Any Two from: Comparability Verifiability Timeliness Understandability The Chartered Institute of Management Accountants 2014 Page 5

Question 1.9 A customer of CDF went bankrupt on 15 January 2014 owing CDF $75,000. CDF s profit for the year ended 31 December 2013 was $750,000 and its statement of financial position at that date showed trade receivables of $300,000. CDF has not provided for any bad debts for the year ended 31 December 2013. This is material but not fundamental. Which ONE of the following types of audit report should the external auditor of CDF issue for the financial statements of CDF for the year ended 31 December 2013? A B C D A modified report with a qualified opinion in respect of receivables. A modified report with a disclaimer opinion. A modified report with an adverse opinion. A modified report with an emphasis of matter paragraph. Answer: A Question 1.10 Which ONE of the following is NOT listed as an element of financial statements by the IASB Framework? A B C D Asset Equity Profit Expenses Answer: C The Chartered Institute of Management Accountants 2014 Page 6

SECTION B 30 MARKS ANSWER ALL SIX QUESTIONS Question 2a (i) Explain the meaning of a subsidiary entity according to IFRS 10 Consolidated financial statements. (ii) Explain the meaning of an associated entity according to IAS 28 Investments in associates and joint ventures. (Total for sub-question (a) = 5 marks) Define the meaning of a subsidiary and explain how control is achieved. 2.5 Define the meaning of an associate and significant influence. 2.5 Maximum marks awarded 5 Most candidates made a reasonable attempt at this question. The main problem was not giving enough detail in the explanations. Concentrating on the more than 50% for a subsidiary rather than emphasising control. Not mentioning significant influence in the explanation of an associate. Several candidates gave lengthy descriptions on how the results of the subsidiary/associate would be incorporated into the group accounts. The Chartered Institute of Management Accountants 2014 Page 7

Question 2b Calculate the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for: (i) (ii) Goodwill Group retained earnings (Total for sub-question (b) = 5 marks) Calculate goodwill arising on acquisition, the impairment of goodwill and the remaining balance at 31 December 2013. 2.5 Calculate the group retained earnings at 31 December 2013. 2.5 Maximum marks awarded 5 Most candidates made a reasonable attempt at this question and scored more than 50% of the marks. The fair value adjustment was frequently left out of the goodwill calculation. The share premium was sometimes left out of the goodwill calculation. In retained earnings calculation, the year end figure of $324,000 was often used instead of the difference between $324,000 and $260,000. The depreciation of the fair value adjustment was rarely correct. Some candidates ignored it, most attempted an adjustment but included one or two years instead of three years adjustment. The Chartered Institute of Management Accountants 2014 Page 8

Question 2c (i) Calculate the total foreign tax suffered on the dividend. (ii) Calculate the amount of tax that FP will be liable to pay on receipt of the dividend in Country X, applying the tax credit method of double taxation relief. (3 marks) (Total for sub-question (c) = 5 marks) Calculate total foreign tax (withholding tax and underlying tax). 2.0 Calculate the tax due in Country X. 1.5 Apply the tax credit method and calculate any tax payable, if any. 1.5 Maximum marks awarded 5 I was disappointed by how few candidates managed to achieve more than 2 marks on this question. Very few candidates calculated underlying tax correctly. Many did not adjust for the tax paid. A large proportion of candidates added the withholding tax on to the $150,000 when calculating Country X tax and ignored underlying tax or deducted it. Some candidates calculated Country X tax at less than the foreign tax and then stated the difference had to be paid. The Chartered Institute of Management Accountants 2014 Page 9

Question 2d Calculate the tax payable by FY for the year ended 31 December 2013. (Total for sub-question (d) = 5 marks) Calculate the depreciation charged against profits and the tax depreciation allowance. 3.0 Calculate the taxable profit for the year and the tax due for the year. 2.0 Maximum marks awarded 5 It was surprising how many candidates were unable to correctly calculate the accounting depreciation and tax depreciation in this question. A surprisingly large proportion of candidates calculated accounting depreciation using the carrying value ($108,800 x 20%) instead of the original cost [($56,000+94,000) x 20%)]. A surprisingly large proportion of candidates calculated tax depreciation correctly but then adjusted the year s profits by both years tax depreciation ($47,000+$7,000+$28,000). A significant number of candidates adjusted profits for the travel and subsistence that were tax deductible and had already been deducted. The Chartered Institute of Management Accountants 2014 Page 10

Question 2e (i) Calculate the amount of PQ s deferred tax balance at 31 December 2013 in accordance with IAS 12 Income taxes. (ii) Calculate the change in PQ s deferred tax balance for the year ended 31 December 2013 AND explain how the change would be treated in PQ s statement of profit or loss for the year to 31 December 2013 in accordance with IAS 12 Income taxes. (Total for sub-question (e) = 5 marks) Calculate carrying value of the asset and the tax written down value of the asset for the two years. 2.5 Calculate the temporary difference at each year end, the deferred tax balance at 31 December 2013 and the change from the previous year. 2.5 Maximum marks awarded 5 Very few candidates managed to get this question completely correct. Most candidates managed to get the balances at 31 December 2012 correct. Adding the revaluation of $50,000 to the tax written down value as well as the carrying value. Dividing the revalued carrying value by 15 instead of 14 when calculating the revised accounting depreciation. Using the difference in second year accounting depreciation and tax depreciation to calculate deferred tax instead of using the carrying value and tax written down value at 31 December 2013. Some candidates calculated the difference arising as a result of the revaluation increase and then stated that this was the increase in the year. The Chartered Institute of Management Accountants 2014 Page 11

Question 2f Explain the main advantages and disadvantages to an entity of having an external audit. (Total for sub-question (f) = 5 marks) One mark for each main advantage and disadvantage to an entity of having an external audit 5 Maximum marks awarded 5 There were some very good answers to this question, some candidates scoring full marks. Not focusing on the emphasis of the question, that is the advantages and disadvantages to an entity. Not answering the question asked, for example explaining what an external audit was and what the auditor was expected to do. The Chartered Institute of Management Accountants 2014 Page 12

SECTION C 50 MARKS ANSWER TWO QUESTIONS FROM THIS SECTION Question 3 Prepare LPO s statement of profit or loss and other comprehensive income and statement of changes in equity for the year to 31 December 2013 AND the 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 calculations. 3.0 Prepare workings for cost of sales, administration and distribution. 4.0 Prepare workings for the construction contract. 3.5 Prepare the statement of profit or loss and other comprehensive income. 2.0 Prepare the statement of financial position - assets. 3.0 Prepare the statement of financial position equity & liabilities. 4.0 Prepare the statement of changes in equity. 3.0 Formats and presentation 2.5 Maximum marks for Question 3 25 This question was generally answered quite well, with most candidates achieving over half marks. Deducting the net carrying value of the disposal from the cost of plant and equipment, without adjusting depreciation. Calculating depreciation of plant and equipment based on cost less disposals instead of reducing balance. Either using $1,425,000 as cost of sales or deducting $420,000 and adding $562,000. Deducting the loss on disposal from cost of sales instead of adding. Either charging the bad debt and legal claim to cost of sales or not making any charge to the profit or loss. Ignoring the construction contract completely. Calculating profit/loss on the construction contract but not including the result in the statement of profit or loss or the statement of financial position. The Chartered Institute of Management Accountants 2014 Page 13

Question 4 (a) Explain, in accordance with IAS 7 Statement of cash flows, the difference between the direct method and the indirect method (4 marks) (b) Prepare a statement of cash flows, using the indirect method, for CX for the year ended 31 December 2013, in accordance with IAS 7 Statement of cash flows. (21 marks) Notes to the Statement of cash flows are not required, but all workings must be clearly shown. (Total for Question Four = 25 marks) Explain the meaning of the direct and indirect method of preparing a statement of cash flows 4.0 Complete the cash generated from operations. 5.5 Calculate the tax and interest paid and put in statement of cash flows. 4.0 Calculate the cash flows from movements in non-tangible assets and complete cash flows from investing activities. 4.5 Calculate dividends paid and complete cash flows from financing activities. 4.0 Complete the cash and cash equivalents. 1.5 Format and correct headings 1.5 Maximum marks for Question 4 25 More satisfactory answers than Q4 in November 2013, but many still had to improve further. 4a not explaining the two methods correctly. Stating that the direct method only covered operating activities and nothing else. Not explaining the indirect method starts with profit before tax and then needs to make adjustments. 4b Operating activities: Including the current asset (short term) investments as assets instead of cash equivalents. Listing trade receivables, trade payables and inventory with the wrong sign (reversing the plus or minus). Mis-calculating interest and/or tax, due to either treating plus as minus (or minus as plus) or leaving some items out of the calculation. Purchase of property, plant and equipment was usually incorrect due to the treatment of the disposal of plant and equipment. The 30 day government bond was hardly ever treated as cash equivalent. The Chartered Institute of Management Accountants 2014 Page 14