Qualification Programme Examination Panelists Report Module A Financial Reporting (December 2014 Session) (The main purpose of the following report is to summarise candidates common weaknesses and make recommendations to help future candidates improve their performance in the examination.) (I) Section A Case Questions General Comments The case study questions tested candidates knowledge of the accounting treatment for the retirement plans and interest free loan from the government. In addition, candidates were required to calculate the goodwill, advise as to the accounting treatment of the disposal of shares which resulted in a loss of control as well as the disposal which did not result in a loss of control. For the disposal of shares which did not result in a loss of control, candidates were asked to prepare the consolidated statement of financial position. In general, most of the candidates were able to calculate the goodwill and prepare the consolidated statement of financial position. However, many candidates were unable to calculate the correct figures for the gain on disposal in the separate financial statements and on the consolidation level and hence to prepare the correct journal entries. Specific Comments Question 1 8 Marks Question 1(a) This question required the candidates to advise as to the appropriate accounting treatment for the retirement plans for employees in Country X and in Hong Kong. The performance was satisfactory. Many candidates could conclude that both retirement plans are defined contribution plans and thus the employer would have no obligation to pay further contributions as the fixed contribution had been paid. Question 1(b) This question required the candidates to prepare the journal entries for the employee benefit payments to the employees in Hong Kong. The performance was less than satisfactory. While candidates could conclude that both retirement plans are defined contribution plans in part (a), they only copied the background information in their answers without considering the implications behind it. Some did not know how much should be recognised as accrual and how much should be recognised as expenses. Module A (December 2014 Session) Page 1 of 5
Question 2 6 Marks This question required the candidates to advise as to the appropriate accounting treatment and the presentation of the interest free loan from the government. The performance was satisfactory. Many candidates could identify the interest free loan as a government grant and recognise it on a systematic basis. However some candidates amortised the grant over 5 years which was the loan period instead of amortising the grant over the useful life of the assets, which showed that they were not clear about the matching concept behind the question. Question 3(a) 4 Marks This question required the candidates to calculate the goodwill arising on the acquisition at the date of acquisition. The performance was satisfactory. Most candidates could calculate the goodwill correctly. Question 3(b)(i) 9 Marks This question required the candidates to advise as to the accounting treatment, with journal entries, of the disposal of shares which resulted in a loss of control. The performance was satisfactory. Many candidates could advise as to the appropriate accounting treatments on the disposal of shares which causes the loss of control and hence calculate the gain on disposal accordingly. However, many candidates could not provide correct journal entries to reverse the gain recognised in the separate financial statement and to recognise the gain at the consolidation level. Question 3(b)(ii) 8 Marks This question required the candidates to advise as to the accounting treatment, with journal entries, of the disposal of shares which did not result in a loss of control. The performance was less than satisfactory. While many candidates could advise as to the appropriate accounting treatments that, in the consolidated financial statement, changes in a parent s ownership in a subsidiary that do not result in the parent losing control are equity transactions, they could not calculate the correct figure for the noncontrolling interests and could not provide correct journal entries to reverse the gain recognised in the separate financial statement and to adjust the equity and noncontrolling interest accordingly in the consolidation financial statements. Question 4 15 Marks This question required the candidates to prepare the worksheet for the consolidated statement of financial position assuming that control remains. In general, the performance was less than satisfactory. Many candidates assumed that control was lost and they derecognised the subsidiary s assets and goodwill even though the question specifically assumed that control remains. Many candidates ignored the deferred tax implication or did not show deferred tax liabilities as a separate line item. Some candidates could not even demonstrate their knowledge of basic consolidation adjustments such as the elimination of pre-acquisition equity against investments. Module A (December 2014 Session) Page 2 of 5
(II) Section B Essay/Short Questions General Comments Section B tested candidates on both their conceptual understanding and application of specific financial reporting standards in those cases which commonly occur in actual practice. Reading the background and questions/requirements in detail was important. It was not uncommon for candidates to be able to explain the relevant accounting concepts, but fail to apply them correctly in the calculation of amounts, preparation of journal entries and determination of presentation. Time management was also critical for getting a reasonably high score, marks were not given for stating in the answer those accounting concepts which were not required by the question. Candidates who scored full or high marks normally gave their answer in a precise manner with a focus on what was "Required" in the questions. In general, the performance in this section was below average. Specific Comments Question 5(a) 11 Marks This question required candidates to explain appropriate accounting implications for each scenario which involved the treatment of property and inventories. The performance in this question was average. For the first scenario, most candidates focused on the relevant accounting treatment of properties under HKAS 16 and HKAS 40 whereas the question asked about the change in the accounting policy under HKAS 8. However, for the scenario of change in use of the property from owned occupied property to investment property, the question was straightforward and candidates were able to provide the proper treatment. For the last scenario, many of the candidates understood the inventories loss to be recognised in profit or loss but some candidates wrongly referred to HKAS 36 or failed to mention the presentation of the inventories loss in profit or loss. Question 5(b) 7 Marks This question tested candidates on their knowledge and reaction in a situation concerning an unethical issue. The performance of candidates was satisfactory. Most candidates were able to mention or explain the fundamental principles of integrity, professional competence and due care, and objectivity. They also understood that Ms. Wong should refuse to co-operate. However, some misinterpreted "safeguard" as safeguarding the inventories rather than safeguarding in order to eliminate the self-interest threats. Module A (December 2014 Session) Page 3 of 5
Question 6(a) 5 Marks This question required the candidates to discuss the accounting treatment of a convertible instrument, in which the conversion option is classified as a derivative, as well as prepare journal entries for initial recognition at the time of issuing the convertible instrument. The performance in this question was below average. Candidates generally knew that the convertible instrument should be divided into two components. They were well aware of the concept of "fix-for-fix", but they ignored the pattern of facts in the question. The conversion option was classified as an equity instrument in their answers even though it failed to meet the definition of an equity instrument. However, for the debt component of the convertible instrument, most candidates could explain the implication and prepare entries correctly. Question 6(b) 5 Marks This question required the candidates to prepare the journal entries for partial conversion of the convertible instrument. The performance was similar to question 6(a) since most candidates failed to classify the conversion option as a derivative and thus failed to prepare the correct entries. Some simply applied the principal amount of the convertible instrument for the accounting of conversion whereas some were able to consider the effective interest expense and calculate the carrying amount of the debt component correctly but ignored the fact that only 10% was converted. Question 6(c) 6 Marks This question required the candidates to account for the effective interest expense of the debt component of the convertible instrument and the fair value change of the derivative component of the convertible instrument for the year and prepare the relevant journal entries. The performance in this question was below average. Since most candidates failed to classify the conversion option properly in the first place, they failed to prepare the correct entries for the derivative component. Whilst most candidates could calculate the effective interest expense correctly, they failed to apply the concept of "amortised cost", i.e. they inappropriately separated the coupon interest as an accrual on the statement of financial position instead of treating it as part of the liability component of the convertible instrument. This question also tested candidates on the current/non-current classification of the convertible instruments under HKAS 1. Consistent with the misconception mentioned earlier, most candidates classified the debt component as non-current and the separate accrued interest as current. Module A (December 2014 Session) Page 4 of 5
Question 7(a) 3 Marks This question required the candidates to determine whether the final dividend declared after the end of the reporting period was an adjusting or non-adjusting event and explain the appropriate accounting treatment accordingly. The performance in this question was average. Some candidates could get almost full marks except that they failed to mention the relevant disclosures under HKAS 1. However, some candidates wrongly concluded that it was an adjusting event based on an incorrect rationale. Question 7(b) 4 Marks This question required the candidates to determine whether the subsequent event was an adjusting or non-adjusting event and explain the appropriate accounting treatment accordingly. The performance in this question was below average. Full marks were granted in some cases in which the candidates were able to explain the timing of different events and the relevant obligations to be borne by the entity. Question 7(c) 5 Marks This question required the candidates to discuss the criteria of assets held for sale and apply them to the case. The performance was less than satisfactory. Some candidates misinterpreted this question and thought it was related to a subsequent event under HKAS 10 and that the "production line" is an "operation" instead of a group of assets. Most of them were able to mention the consideration of the shareholders' approval as this was given in the question but they failed to mention the conditions for the sale to be highly probable. Question 7(d) 4 Marks This question required the candidates to be aware of the changes arising from the new Company Ordinance that has taken effect from 3 March 2014 in respect of financial reporting and the directors' report. The performance was below average. Some were unable to identify the change between the "old" and "new" Company Ordinance or they simply copied some administration procedures or some other areas from the new Company Ordinance which were irrelevant to the question. (III) Conclusion and Recommendation Overall, the performance of the candidates was unsatisfactory. Candidates are advised to study the appropriate accounting treatments of convertible instruments, especially when the conversion option is classified as a derivative. Candidates should understand the importance of good analytical and application skills which are required in the actual practice and daily work of a professional accountant. Candidates are reminded to make a reasonable attempt at answering each part of the questions. Good time management is critical for success. Module A (December 2014 Session) Page 5 of 5