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. Question 3 on preparation of financial statements for a single entity, question 2 (c) on a tax imputation system, question 2(d) the entities involved in developing and implementing IFRSs and question 2(e) the objectives of an audit and the key areas of content in an audit report had a number of particularly poor answers. Question spotting is not advised in this paper as most learning outcomes are covered in each examination. Question 1 was not as well answered this time as in previous diets. Some candidates missed out some objective test questions altogether. Many candidates struggled to score more than half marks. Most candidates seemed unprepared for the questions in this section, questions 1.2; 1.8 and 1.9 seemed to cause the most problems. Question 2 - some candidates were obviously ill prepared for 2(a) deferred tax computation; question 2(b) zero rate and exempt VAT, 2(c) imputation system of corporate taxation, 2 (d) the entities involved in developing and implementing IFRSs and question 2(e) the objectives of an audit and the key areas of content in an audit report. None of these topics should individually pose any problem for a well prepared candidate. Question 3 produced fewer good answers than usual with no candidate scoring full marks. A considerable number of candidates were unable to prepare correct calculations for the property, plant and equipment and depreciation charge for the year. Many candidates were unable to correctly deal with the research and development expenditure and amortisation. Question 4 Some very good answers from candidates who were prepared for a question on consolidated financial statements but it also produced some very poor answers with candidates scoring just a few marks. Candidates either knew how to prepare a consolidated statement of financial position and scored fairly high marks or didn t really know what they were doing. Most were able to calculate the adjustments for inventory and cash in transit but many were unable to make the correct entries in the financial statements. The Chartered Institute of Management Accountants Page 1

SECTION A 20 MARKS ANSWER ALL TEN SUB-QUESTIONS IN THIS SECTION Question 1.1 Which ONE of the following would be considered to be an example of an indirect tax? A B C D An entity assessed for corporate income tax on its profit. An individual purchases goods in a shop, the price includes VAT. An employee has tax deducted from salary through the PAYE system. An individual pays capital gains tax on a gain arising on the disposal of an investment. The correct answer is B Question 1.2 Define the meaning of a tax base. Answer: A tax base is something that is liable to tax, e.g. income or consumption of goods. Question 1.3 Which ONE of the following would cause a deferred tax balance to be included in the statement of financial position for an entity, as required by IAS 12 Income Taxes? A B C D An expense that is included in the statement of comprehensive income but is not allowed for tax. A non-current asset that does not qualify for tax depreciation. Tax depreciation being allowed on a non-current asset at a different annual rate to that used for depreciation in the financial statements. Impairment of goodwill that arose on the acquisition of a subsidiary entity. The correct answer is C The Chartered Institute of Management Accountants Page 2

Question 1.4 CFP, an entity resident in Country X, had an accounting profit for the year ended 31 December 2011 of $860,000. The accounting profit was after charging depreciation of $42,000 and amortisation of development costs of $15,000. CFP was entitled to a tax depreciation allowance of $51,000 for the year to 31 December 2011. CFP s tax payable for the year ended 31 December 2011 is: A $202,250 B $206,500 C $212,750 D $216,500 Answer $000 Accounting profit 860 Add depreciation 42 Add amortisation 15 917 Less tax depreciation 51 Taxable profit 866 Tax @ 25% 216.5 Therefore the answer is D Question 1.5 Which ONE of the following defines the meaning of hypothecation? A B C D A new tax law has to be passed each year to allow taxes to be legally collected. The difference between the total amount of tax due to be paid and the amount actually collected by the tax authority. Tax is deducted from amounts due before they are paid to the recipient. The products of certain taxes are devoted to specific types of public expenditure. The correct answer is D Question 1.6 Which ONE of the following would be regarded as a related party of CXZ? A B C D The wife of CXZ s finance director. CXZ s main supplier, supplying approximately 35% of CXZ s purchases. CXZ s biggest customer, providing 60% of CXZ s annual revenue. CXZ s banker providing CXZ with an overdraft facility and a short-term loan at market rates. The correct answer is A The Chartered Institute of Management Accountants Page 3

Question 1.7 Which ONE of the following events would result in an asset being recognised in KJH s statement of financial position at 31 January 2012? A B C D KJH spent $50,000 on an advertising campaign in January 2012. KJH expects the advertising to generate additional sales of $100,000 over the period February to April 2012. KJH is taking legal action against a contractor for faulty work. Advice from its legal team is that it is likely that KJH will receive $250,000 in settlement of its claim within the next 12 months. KJH purchased the copyright and film rights to the next book to be written by a famous author for $75,000 on 1 March 2011. KJH has developed a new brand name internally. The directors value the brand name at $150,000. The correct answer is C Question 1.8 Briefly explain how operating segments disclosed in the financial statements are determined according to IFRS 8 Operating Segments. Answer: An operating segment is defined by IFRS 8 as a component of an entity whose operating results are regularly reviewed by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Question 1.9 IAS 18 Revenue specifies conditions that are required to be met before revenue from the sale of goods can be recognised. List FOUR of the conditions specified in IAS 18. (4 marks) Answer: Four from the following: Significant risks and rewards of ownership of the goods have been transferred to the buyer The seller does not retain any continuing influence or control over the goods Revenue can be measured reliably It is reasonably certain the buyer will pay for the goods The costs to the seller can be measured reliably The Chartered Institute of Management Accountants Page 4

SECTION B 30 MARKS ANSWER ALL SIX SUB-QUESTIONS IN THIS SECTION Question 2a Calculate the amount of deferred tax movement in the year ended 31 December 2011 AND the deferred tax balance at 31 December 2011, in accordance with IAS 12 Income taxes. (Total 5 marks) To test the candidates understanding of deferred tax computations and its treatment in the financial statements. Tests learning outcome A3a. Calculate deferred tax balances at the end of the two years. Calculate the change in deferred tax for the year ended 31 December 2011. State the deferred tax movement for the year and the balance at 31 December 2011. Calculate deferred tax balances at the end of the two years. 2.5 Calculate the change in deferred tax for the year ended 31 December 2011. 1.5 State the deferred tax movement for the year and the balance at 31 December 2011. 1.0 Maximum marks awarded 5 It was disappointing to see how few candidates were able to produce a correct answer to this deferred tax question. A large proportion of candidates incorrectly adjusted the tax depreciation for the revaluation of the asset. Most candidates included revaluation in the tax base calculations. When the carrying value and tax base were calculated correctly candidates did not calculate the balance and movement correctly. Many only gave the deferred tax balance. Very few answers calculated the movement in the year. Quite a few candidates did not apply the 25% tax rate to the calculated difference. The Chartered Institute of Management Accountants Page 5

Question 2b (i) Explain the difference between the treatment of items that are zero rated and items that are exempted from VAT. (ii) Calculate the net VAT balance shown on UYT s VAT return. (3 marks) (Total 5 marks) To test the candidates understanding of VAT. Tests learning outcome A1b. Explain the difference between zero rate and exempt. Calculate the VAT paid and VAT collected. Calculate the exempt limit for VAT inputs Calculate Net VAT due Explain the difference between zero rate and exempt. 2 Calculate Net VAT due 3 Maximum marks awarded 5 Part (i) was reasonably well answered. However quite a few scripts that gave the correct answer for part (i), identifying that you cannot reclaim input VAT for exempt sales, then calculated VAT due without any adjustment for exempt sales. Reversing the zero rate and exempt items when explaining the treatment of input VAT, i.e. saying that input VAT can be reclaimed on exempt sales. Not using the answer to (i) when calculating answer to (ii). A large proportion of candidates calculated the net VAT due using the standard rate outputs less total input VAT paid. The Chartered Institute of Management Accountants Page 6

Question 2c Explain to YT how the imputation system of corporate income tax works AND whether his dividend will have been taxed twice. (Total 5 marks) To test the candidates understanding of tax bases. Test learning outcome A1a. Explain how imputation systems of corporate income tax work Explain how tax credits are used to avoid taxing the dividend twice. Explain how imputation systems of corporate income tax work 3 Explain how the dividend is not taxed twice. 2 Maximum marks awarded 5 This question was not well answered, quite a few candidates confused the imputation system with double taxation relief of foreign tax. Incorrectly referring to foreign tax, withholding tax and underlying tax. Not giving enough detail in the answer. Not referring to the fact that although YT will not be taxed twice he may have to pay additional tax if he is a higher rate tax payer. The Chartered Institute of Management Accountants Page 7

Question 2d Identify the four main entities that are involved in developing and implementing International Accounting Standards. Briefly describe the role of each entity. (5 marks) To test the candidates understanding of the organisations governing international accounting standard setting. Tests learning outcome B1c. Identify the four main entities involved in IFRS development, publication and governance of the system. Briefly describe the role of each entity. Identify the four main entities Briefly describe the role of each. 2 3 Maximum marks awarded 5 I was very disappointed to see how few candidates could name four entities. Some could only list abbreviations and did not know what they meant. Not naming four entities. Listing abbreviations without any attempt to elaborate the name or identify the roles. Giving incorrect titles to the entities Including entities other than those involved in IFRS development. Not identifying any roles. The Chartered Institute of Management Accountants Page 8

Question 2e (i) Explain the objective of an external audit of the financial statements of an entity. (ii) Briefly explain THREE key areas of content of The Auditor s Report as required by ISA 700 The Auditor s Report on Financial Statements. (3 marks) (Total 5 marks) To test a candidates knowledge of the objectives of an external audit and the content of the audit report. Tests learning outcome B1g. Explain the objective of an external audit of the financial statements of an entity. Explain three of the key areas of the audit report. Explain the objective of an external audit of the financial statements of an entity. 2 Briefly explain three areas of an audit report 3 Maximum marks awarded 5 Most candidates still cannot give a reasonable explanation of the purpose of an audit. Few candidates were able to state any key areas of the audit report other than the auditor s opinion. Stating that the audit ensures or guarantees that the financial statements are accurate. Not mentioning anything in part (i) about expressing an opinion. Not mentioning anything about the financial statements prepared according to applicable accounting standards or relevant legislation. Part (ii) only referring to the auditor s opinion section. No mention of management s responsibility. No mention of auditor s responsibility or of audit work done. The Chartered Institute of Management Accountants Page 9

Question 2f Briefly explain the ethical problem that XQ faces AND what XQ should do in this situation. Your answer should refer to the appropriate fundamental principles of the CIMA Code of Ethics. (Total 5 marks) To test the candidates knowledge and application of the CIMA Code of ethics. Test learning outcome B2c. Explain the ethical problems that XQ faces. Identify the requirements of the CIMA Code of Ethics and apply section 220 requirements to the scenario. Identify possible course of action for XQ. Identify the ethical problem faced by XQ 2 Apply CIMA Code of ethics to the scenario including section 220 and identify possible 3 solutions to the problem. Maximum marks awarded 5 A lot of answers still tend to follow a template that has been learned rather than answering the question asked. For example a large proportion of answers said that XQ should resign. This scenario deals with internal management information and would rarely lead to a situation where resignation would be necessary. Not focusing on the detail in the scenario. Giving a general answer only vaguely related to the scenario. Repeating the same points several times. Not giving realistic courses of action for the scenario. The Chartered Institute of Management Accountants Page 10

SECTION C 50 MARKS ANSWER TWO QUESTIONS FROM THIS SECTION Question 3 Prepare RTY s statement of comprehensive income and statement of changes in equity for the year to 31 January 2012 AND a 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 25 marks) To test the candidates ability to prepare a set of financial statements for a single entity. Tests learning outcome C1a. Prepare the non-current asset depreciation calculations and development expenditure amortisation Prepare workings for Cost of sales, administration and distribution Prepare all other required workings Prepare the statement of comprehensive income Prepare the statement of changes in equity Prepare the statement of financial position Prepare the statement of comprehensive income to gross profit 5.5 Prepare the statement of comprehensive income expenses and tax 3.5 Prepare the statement of comprehensive income other comprehensive income and 1.5 presentation Prepare the statement of financial position Assets 6.5 Prepare the statement of financial position equity and liabilities 4.0 Prepare the statement of changes in equity 4.0 Maximum marks for Question 3 25 The calculations required for non-current assets and depreciation/amortisation caused quite a few problems with many candidates unable to calculate the correct answer. The treatment of the asset revaluations and disposals in the statements of comprehensive income and changes in equity was rarely done correctly. The Chartered Institute of Management Accountants Page 11

Development expenditure and amortisation was rarely correct. Amortisation was frequently calculated on the carrying value rather than original cost. Property revaluation not included in the statement of comprehensive income or the statement of changes in equity. Revaluation adjustments were frequently included in the statement of changes in equity without being included in the statement of comprehensive income. The cash received from sale of assets was often used to calculate gains/losses on disposal. The cash received was also used instead of cost/valuation to calculate the carrying value of the assets at the year end. All cash from asset sales were stated as being included in the trial balance, yet many candidates added the cash from sales on to the cash balance in the statement of financial position. When adjusting for the disposal of the plant and equipment the depreciation was not deducted from the balance brought forward. When adjusting for the revaluation of the buildings very few eliminated the depreciation brought forward. Question 4 Prepare a consolidated statement of comprehensive income for the Tree group of entities for the year ended 31 January 2012 and a consolidated statement of financial position for the Tree group of entities as at 31 January 2012, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required but all workings must be shown. (Total 25 marks) To test the candidates ability to prepare a set of financial statements for a simple group. Tests learning outcomes C1b,c and d Calculate goodwill arising on acquisition of Branch. Calculate investment in associated entity Leaf. Prepare workings for intra-group activities. Calculate consolidated retained earnings. Prepare consolidated statement of comprehensive income Prepare consolidated statement of financial position. Calculate goodwill arising on acquisition of Branch. 2.5 Calculate investment in associated entity Leaf. 2.0 Calculate consolidated retained earnings. 5.0 Prepare consolidated statement of comprehensive income. 7.0 Prepare consolidated statement of financial position 8.5 Maximum marks awarded 25 The Chartered Institute of Management Accountants Page 12

This question was reasonably well done with several good answers. Most were able to calculate the adjustments for inventory and cash in transit but many were unable to make the correct adjustments in the financial statements. Not including the fair value adjustment in the goodwill calculation for Branch or deducting it from net assets instead of adding it. Including the associate on every line of the financial statements, often using proportional consolidation. Calculating the holding in Leaf as 550/830 and using 66% as group interest, yet still calling it an investment in an associate and consolidating Leaf as an associated entity. Not adjusting retained earnings for the accrued interest receivable in Tree. Not cancelling the current accounts. Not adjusting cost of sales for intra-group trading and unrealised profit in inventory. Not adjusting cost of sales for excess depreciation arising on the fair value adjustment. Incorrectly adjusting for the interest on the intra-group loan. Not cancelling the intra-group loan. The Chartered Institute of Management Accountants Page 13