F2 FINANCIAL MANAGEMENT Examiner s general comments The new format adopted in F2 appeared to cause little problem with candidates. There was no evidence of any time pressure and few incomplete scripts. The quality of the written answers had generally improved and this extended to the non-uk candidates which had been an issue in the past. The new technical areas tested for the first time, namely non-controlling interest on acquisition at fair value, share-based payments and the new calculation for disposals, were handled well, especially by UK candidates. Their overseas counterparts appeared to struggle slightly more with the changes to consolidation. The main concern I have which was highlighted by this paper, was the inability of candidates to apply their consolidation knowledge when preparing a group income statement. It was evident that candidates are rote learning consolidation as many were preparing net asset tables and other workings that would only be required if preparing a statement of financial position this wasted valuable exam time and their efforts went unrewarded. The format of the consolidation workings for non-uk candidates continues to be an issue for markers and I am sure must result in candidates being at a disadvantage in respect of timing. The use of tree diagrams and T accounts was commonplace but this resulted again in T-accounts being prepared for accounts for which there were no marks available. Section A Section A included five 10 mark questions that covered technical content from all 4 syllabus sections. It was encouraging to see that many candidates were able to display competence across all of these rather than gaining marks in a couple of concentrated areas. This observation was less obvious among the non-uk scripts where it was common for candidates to score highly in one area and then miss a question altogether. Students should note how the syllabus weighting and the format of the paper combine approximately 35% of the exam will be weighted towards group accounts and the same for financial analysis. These are the areas that normally are the focus of the 25 mark questions so it should not surprise candidates to find that both areas may also appear in Section A of the exam paper as that s the only way the exam will be able to sufficiently cover the learning outcomes. Section B The group accounts question required candidates to prepare a consolidated statement of comprehensive income. It was clear from candidates workings that many were unable to adapt their knowledge of group accounts, with many preparing workings that were not relevant to the question. Candidates should note that preparation of group accounts covers the preparation of all 4 primary financial statements, statement of financial position, statement of comprehensive income, statement of cash flows and statement of changes in equity and in order to ensure that the learning outcome is met, they will all, over time, be tested. The quality of the analysis had generally improved over the last few diets of P8 and this continued to F2. I would again urge candidates to think carefully about the ratios that they calculate and remember that the calculation of the ratios is a means to an end you then need to consider the ratios in the context of the business scenario that has been provided in the question. This will enable you to draw conclusions about the cause and effect of business decisions, the impact on the financials and actions that need to be taken in the future. Candidates must avoid a report that describes the ratio that has been calculated and gives in generic terms what the ratio potentially shows. Examination technique Candidates are urged to show clear workings, including the figures used in ratios calculations. Overseas candidates are asked to take note of the syllabus, 35% on analysis and 10% on developments in external reporting they appear to be relying on the numerical questions to pass but there will rarely be a paper that has more than 50% marks for calculation. The testing of higher skills requires that discussion and evaluation are core elements in any paper and so all candidates should prepare themselves accordingly. The Chartered Institute of Management Accountants Page 1
SECTION A 50 MARKS Question One a) Explain the basis on which each of the investments should be accounted for in the consolidated financial statements of the DF Group for the year ended 31 December 2009 (calculations are not required). (8 marks) b) Briefly explain the impact of the investment in AB in the consolidated income statement for the year ended 31 December 2009. (2 marks) (Total for Question One = 10 marks) This question tested the treatment of investments in consolidated accounts. This had been tested in a narrative question before but in this case was extended to include treatment under IFRS 5 of subsidiaries not requiring consolidation and the new rules for piecemeal acquisitions, requiring goodwill to be calculated at the date control is gained. Candidates should have provided two or three relevant points for each investment using the information that is given, stating how each investment is to be treated and method of accounting to be used. They should have addressed the additional information given in the question regarding fair value adjustment and the impact on depreciation and negative goodwill. Explanation of accounting for investments 8 Impact of fair value adjustment 2 Total marks 10 Examiner s Comments This question was well answered by most candidates. Most identified the subsidiary, associate and dealt well with the step acquisition, although missed the final mark that related to incorporating the FV of the existing investment in the goodwill calculation. The more difficult point on IFRS 5 was generally missed with many suggesting that it was a financial instrument, held for trading rather than held for sale. Many candidates commented on the treatment of goodwill but few had worked out that in fact this acquisition resulted in a bargain purchase. The Chartered Institute of Management Accountants Page 2
Question Two Part (a) Briefly discuss the economic substance of JK s contractual agreement with SB and explain which entity should recognise the vehicles in inventory during the period that they were held at JK s premises. Part (b) Prepare the accounting entries to record for the year to 30 November 2009, the expense associated with the SARs. (5 marks) (5 marks) (Total for Question Two = 10 marks) This question was intended to test two distinct areas of the syllabus; substance over form and the accounting treatment for share-based payments. The first part required candidates to analyse the information provided in the question and assess the significant risks and rewards. The second part required calculations and preparation of accounting entries in accordance with IFRS 2 testing their knowledge of the need to remeasure the liability, given that it is a cash-settled transaction. Candidates that used the information given in part (i) to justify their answer scored well in this question. Ideally each point in the question should have been analysed in terms of who gained the risk/reward from each. The second part is a straight calculation, however to get to the amount to be recognised this year, only the difference needed to be charged to profit or loss. Substance over form recognition of assets 5 Share based payment 5 Total marks 10 Examiner s Comments Both parts of this question were answered very well, with many achieving full marks. This was extremely positive as this question was a test of application of skills the ability to use technical knowledge and apply to a scenario. Those with lower marks in part (a) were guilty of repeating the question but not specifically relating the points to risk or reward of the parties involved. The most common mistakes in part (b) were not allocating the total liability over the 3 years and taking two-thirds in the second year and crediting equity rather than liability. The Chartered Institute of Management Accountants Page 3
Question 3 (a) Calculate the basic earnings per share to be reported in the financial statements of CSA for the year ended 31 December 2009, including comparative, in accordance with the requirements of IAS 33 Earnings Per Share. (4 marks) (b) Calculate the diluted earnings per share for the year ended 31 December 2009, in accordance with the requirements of IAS 33 Earnings Per Share. (3 marks) (c) Briefly explain why the bonus issue and issue at full market value are treated differently in arriving at basic earnings per share. (3 marks) (Total for Question Three = 10 marks) EPS had been tested before but candidates handled the calculation of basic eps, where a full market issue had occurred, very poorly. There seemed to be confusion with what basic eps should include. The question therefore tested the calculation of basic eps including a market issue and a bonus issue and then required the calculation of diluted eps including the effects of a convertible instrument. Part (c) asked about the accounting treatment of bonus v full market issue and was intended to provide easier marks to attain. Ideally candidates should have produced two separate calculations, ensuring that the basic eps deals with both share transactions that occurred in the year. Basic eps calculation 3 Restatement of prior year Diluted eps Explanation of treatment 1 3 3 Total available marks 10 Examiner s comments This area continues to pose problems for many candidates. Many did not deal correctly with the impact of the bonus issue on basic earnings per share and although most attempted to restate the comparative many applied an incorrect fraction. The diluted calculation was better dealt with most candidates appreciating the need to revise both the numerator and denominator. The most common mistake in part (b) was time apportioning the 2.4 million shares that would be issued on conversion. The marks for part (c) were awarded for candidates that could articulate why the treatment was different rather than for a description of the accounting treatment that they had just applied. The Chartered Institute of Management Accountants Page 4
Question 4 Calculate the amounts that will appear in the consolidated statement of financial position of the MX Group as at 31 December 2009 for: (i) Goodwill; (ii) Consolidated retained earnings; and (iii) Non-controlling interest. (Total for Question Four = 10 marks) This question is intended to test the main group headings of the statement of financial position, including the new method of accounting for goodwill and non-controlling interest. Candidates should have applied the new rules for calculating goodwill on acquisition. Candidates would have saved time by recognising that the new way of calculating NCI can be based on the figures calculated in retained earnings calculating the adjusted post-acquisition earnings and then allocating them to the group and the NCI in the relevant proportions. Goodwill 4 Consolidated retained earnings 3 Non-controlling interest 3 Total marks 10 Examiner s Comments This question was well attempted by many candidates. UK candidates in particular were wellprepared for the new approach to adopt when non-controlling interest is valued at fair value on acquisition, and scored full marks. Only the calculation of NCI caused problems a number of candidates presented a hybrid calculation of NCI at FV and then added to this NCI s share of total net assets. The question was not generally well done by non-uk candidates many seemingly unaware of the impact of the alternative valuation method. The non-uk candidates continue to use tree diagrams and T-accounts to present their workings many provide valid answers, however this must use up valuable time as they are often including workings for which there are no marks available. In addition, they often enter the adjustments on the wrong side of the T-accounts, losing marks. The Chartered Institute of Management Accountants Page 5
Question 5 Prepare the report, explaining the progress to date of the convergence project. Include four examples of areas of accounting where convergence has been achieved. (Total for Question Five = 10 marks) This still remains the biggest issue in corporate reporting and therefore tested again. The progress should be expanded to include the removal of the reconciliation to US GAAP. The examples of progress should ideally have included the new standards issued and the revisions of the standards relating to business combinations. There should have been no issue at all about how candidates approached this question as they would have seen something similar in past diets. Explaining progress, including shift of approach, Norwalk agreement, Roadmap, short and 6 long term projects, dropping of reconciliation Example of technical areas where convergence achieved 4 Total marks 10 Examiner s comments It was truly astonishing how unprepared many candidates were for this question. Section D of the syllabus carries a syllabus weighting of 10% and therefore will account for approximately 10% of the exam. In terms of content the syllabus includes developments in accounting social and environmental accounting and the pressure to extend external reporting and the issue of convergence. These areas should be easy to study as there are no technical calculations or detailed rules of accounting standards to apply in addition to this, I highlighted how to prepare for section D in the recent article on how F2 would be tested. F2 s predecessor, P8 had the same learning outcomes for this section of the syllabus so comprehensively working through the past paper questions should have been preparation enough. Prepared candidates sailed through this, many scoring full marks. The others stumbled through the question often highlighting the areas that were not yet converged the complete opposite from the question being asked. The question was not well answered by non-uk candidates who either ignored the question altogether or went to the bother of setting up a report format and saying nothing technical at all. The question style and topic could not have been a surprise so I can only conclude that candidates had simply not studied the material. The Chartered Institute of Management Accountants Page 6
SECTION B 50 MARKS ANSWER BOTH QUESTIONS Question 6 Prepare the consolidated statement of comprehensive income for the SOT group for the year ended 30 September 2009. (Total for Question Six = 25 marks) This question tested the candidates ability to draft the new format SOCI. The question included a disposal during the period - fully consolidating until the date of disposal and then equity accounting for the remainder of the year and calculating the group gain on sale. The question also tested the calculation of the non-controlling interest in the revised IAS 1 format so allocating the NCI for profit for the year and for TCI. The logical start to this question was to establish a time line and the shareholdings in both entities. Then draw up a pro-forma and systematically complete the necessary workings for each line of the SOCI, remembering to insert a line for share of associates profit (in arriving at group profit before tax) and one for share of associates OCI. The gain on disposal could have been shown separately or aggregated in arriving at profit before tax. Preparation of SOCI, including goodwill impairment, time apportionment, FV adjustment, 11 elimination of inter-company dividend, OCI, disposal of AFS investments Disposal of subsidiary and accounting for retained investment as associate 8 Non-controlling interest and IAS 1 requirement allocation between parent and NCI 6 Total marks 25 Examiner s Comments The answers prepared made it clear that candidates are rote learning consolidation and are unable to adapt their approach to preparing a consolidated income statement. So many candidates wasted time calculating net asset tables and investment in associate utilising valuable time and for no marks, not to mention the fact that as markers we are losing confidence in the ability of the candidate to apply appropriate consolidation principles. The positives were that many dealt correctly with the investment in PB and with the associate and most made an attempt at the new disposal calculation common mistakes included omitting the FV of the investment retained and deducting 100% of the NA rather than the 75% that SOT had available to sell. Some candidates made a good attempt at calculating the NCI share of profit for the year and of total comprehensive income. These candidates were clearly prepared for the format of the allocations in accordance with IAS 1. The most common errors in this section were to take NCI % of the overall group profit and TCI, also preparing an allocation of OCI rather than TCI. There were, however many answers submitted where there was nothing beyond Profit for the year these candidates lost out on a huge section of the available marks remember that a core part of group income statements is the split of profits so this is of course where significant marks were allocated. The other technical area that was covered, other than the consolidation, was the treatment of the disposal of available for sale investment. Many candidates clearly knew there was an issue of recycling of a previous gain but were unsure of how this should be presented in the SOCI. Many took the 50 gain back out of profit for the year and into OCI. The Chartered Institute of Management Accountants Page 7
Question 7 (a) Analyse the financial performance and financial position of KER for the year to 31 December 2009 and comment on the Chairman s claims on expansion (8 marks are available for the calculation of relevant ratios). (20 marks) (b) Differences in accounting policies and estimates can affect the comparison of financial statements of two or more entities. Discuss three examples of where such differences could affect comparability between entities. (5 marks) (Total for Question Seven = 25 marks) This question was a basic analysis question but one that required candidates to take account of the scenario painted in the narrative of the question. It required them to calculate ratios and prepare analysis on both the performance and the financial position of the entity. Candidates were then required to conclude deciding whether or not their analysis confirms or otherwise, the claims by the entity s chairman. Candidates should firstly select ratios that are relevant to assessing the financial performance and position of the entity. Each ratio should then be commented on within the report, with a suggestion as to why any movement had occurred or suggesting the issues that need to be addressed. Candidates should have concluded on whether the analysis confirmed the chairman s claims. Good answers included an appreciation of the impact of the associate on performance and see that the increased revenue has come at the expense of profitability. Also commenting on the increase in external finance and falling interest cover being an issue for future expansion. (a) Calculation of relevant ratios and report analysing performance and position, 20 including impact of cost increases, gearing and working capital issues (b) Accounting policies and impact on comparability 5 Total marks 25 Examiner s comments The quality of the analysis was generally good with many candidates appreciating the impact of the expansion on profitability and the impact of the additional finance on gearing, finance costs and interest cover. Most correctly highlighted working capital to be a major problem. There was once again problems with the calculation of certain key ratios, namely operating profit margin, interest cover, return on capital employed and asset turnover again the dangers of rote learning are evident when candidates compare revenue with total non-current assets when the associate and available for sale investments contribute nothing to revenue. Part (b) was misunderstood by many the question asked about the impact of accounting policies and estimates and the impact that has on comparability. Many issues raised by candidates were more about business policy rather than accounting policies whether to trade in luxury or basic goods, the size of the entity, etc. The Chartered Institute of Management Accountants Page 8