Qualification Programme Examination Panelists Report Module A Financial Reporting (December 2016 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 the candidates knowledge of the accounting treatment for the exchange losses of foreign currency borrowing, the classification, measurement and presentation for the disposal of a discontinued operation and the impairment review of a subsidiary as a cash generating unit. In addition, candidates were required to prepare the consolidated statement of financial position and a reconciliation of investment in associate. In general, many candidates were able to prepare the consolidated statement of financial position. However, most candidates were unable to properly advise with regard to the basis of capitalisation of the exchange losses of foreign currency borrowing and many candidates were unable to calculate the impairment loss as a result of the disposal of the discontinued operation. Specific Comments Question 1 9 Marks This question required candidates to advise as to the basis of capitalisation of the exchange losses of foreign currency borrowing. The performance was unsatisfactory. Many candidates were unable to identify the specific question requirement. Some candidates wrongly interpreted the borrowing as a loan receivable and many candidates wrongly applied HKFRS 9 or HKAS 21 to the case. Of those who correctly related the case to HKAS 23, some candidates wrongly focused on the definition of qualifying assets and presentation issues. Most candidates were unable to advise that foreign exchange differences can be considered as an adjustment to interest costs if they narrow the cost differences between borrowing in functional currencies and foreign currencies. Question 2 8 Marks This question required candidates to advise with regard to the appropriate classification, measurement and presentation for the disposal of a major line of business, with calculations and journal entries. Module A (December 2016 Session) Page 1 of 5
The performance was satisfactory. Most candidates pointed out that the disposal is related to HKFRS 5. However, many candidates discussed the criteria for applying HKFRS 5 even though the case had already stated clearly that the held for sale criteria were met. In general, most candidates were able to list out the key requirements for the measurement and classification of HKFRS 5. However, quite a number of candidates did not provide calculations and journal entries. Also, some candidates wrongly stated the impairment loss as a loss on disposal. Question 3 9 Marks This question required candidates to advise as to the appropriate accounting treatment for the impairment review of a subsidiary, with calculations and journal entries. The performance was less than satisfactory. Some candidates simply copied definitions without any calculations. Since non-controlling interest was measured as a proportionate interest in the net identifiable assets of the subsidiary at the acquisition date, rather than at fair value, goodwill attributable to non-controlling interests was not recognised in the consolidated financial statements. Thus the carrying amount of goodwill should be grossed up to include the goodwill attributable to the non-controlling interests, and this adjusted carrying amount should have been compared with the recoverable amount of the unit to determine whether the cash generating unit was impaired. Question 4 21 Marks This question required candidates to prepare the consolidated statement of financial position. The performance was average. However, many candidates calculated the retained earnings and non-controlling interest as a lump sum instead of posting individual journal entries to the worksheet. Some candidates left the consolidated worksheet completely blank and prepared only the consolidation journal entries even though the question specifically required the consolidation adjustments to be presented in the form of a worksheet. Question 5 3 Marks This question required candidates to prepare a reconciliation of the investment in associate showing the value of the net assets of the associate and the implicit goodwill. The performance was unsatisfactory. A lot of candidates did not attempt this question. This might have been due to poor time management or that they did not know how to reconcile the investment in associate. Of those candidates who attempted this question, most could calculate correctly the implicit goodwill. Module A (December 2016 Session) Page 2 of 5
(II) Section B Essay / Short Questions General Comments The questions in this section 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. Candidates may not possess sufficient knowledge of the specific topic, especially in terms of failing to apply their knowledge in the calculation of amounts, but they were able to explain the relevant accounting concepts for those that they were familiar with. 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 unsatisfactory. Specific Comments Question 6(a) 6 Marks This question required candidates to explain the accounting implications for each of the events as mentioned in the question which are all about the accounting treatment of properties. The performance was satisfactory. However, some candidates applied the wrong accounting standards, such as non-current assets held for sale and subsequent event accounting and some did not discuss the change of classification during the year for certain properties. Question 6(b) 10 Marks This question required candidates to prepare the journal entries for each of the events as mentioned in the question. The performance was less than satisfactory. Some candidates only included the calculations and omitted the journal entries. Many students could not distinguish between revaluation under the treatment of property, plant and equipment and the fair value change under the treatment of investment property. Question 7(a) 10 Marks This question required candidates to explain the accounting treatments for each of the financial instruments involved, i.e. equity investment for resale in the short run, bank loans with a repayable on demand clause and a derivative. Module A (December 2016 Session) Page 3 of 5
The performance was less than satisfactory. Generally most candidates demonstrated a good understanding of technical knowledge and the question requirement whereas a number of candidates failed to cover the current / non-current classification in the financial statements as requested in the question. Many candidates also failed to provide an answer for the accounting treatment upon the initial recognition of the relevant financial instruments. Question 7(b) 8 Marks This question tested candidates on their knowledge of disclosure requirements in respect of the liquidity risk for a bank loan and the market risk and fair value measurement of the foreign currency swap. The performance was unsatisfactory. Many candidates did not attempt this question. Of those candidates who attempted it, they failed to explain the requirement under HK Interpretation 5 or identify the fair value measurement disclosure for the foreign currency swap. Question 8(a) 10 Marks This question tested candidates on their knowledge of the criteria to be fulfilled by those private entities in applying the Small and Medium-sized Entity Financial Reporting Standard ( SME-FRS ) for preparing their financial statements. The performance was unsatisfactory. Around one-third of candidates did not attempt this question. Of those candidates who attempted it, almost all of them were not aware of the transitional provision in SME-FRS. Question 8(b) 2 Marks This question required candidates to provide suggestions if private entities failed to use Small and Medium-sized Entity Financial Reporting Framework for their reporting. The performance was less than satisfactory. More than one-third of candidates did not attempt this question. Of those candidates who attempted it, only some students applied their technical knowledge to the facts set out in the case and answered correctly. Question 8(c) 4 Marks This question tested candidates on their knowledge of possible needs in using the Hong Kong Financial Reporting Standards instead of SMM-FRS. The performance was unsatisfactory. Nearly half of the candidates did not attempt this question. It was observed that candidates found it difficult to answer this type of question requiring analysis. Module A (December 2016 Session) Page 4 of 5
(III) Conclusion and Recommendation Overall, the performance of the candidates was unsatisfactory. Candidates are advised to read the questions carefully so as to answer them thoroughly according to the requirements of the questions. In addition, candidates should be familiar with the accounting literature of property-related accounting standards, financial instruments, impairment review of subsidiaries as well as the accounting requirement of disclosures in relation to financial instruments. 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 2016 Session) Page 5 of 5