F2 - Financial Management Post Exam Guide May 2011 Exam. F2 FINANCIAL MANAGEMENT Examiner s general comments

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1 F2 FINANCIAL MANAGEMENT Examiner s general comments Generally I would say that the majority of candidates appeared unprepared for this exam. It appeared from the quality of answers provided that they had studied some subjects very comprehensively but had ignored others completely. The F2 learning outcomes will all be tested over a period of time and therefore question spotting is not recommended! It appeared, however that is exactly what candidates had done. Once again Section A covered all 4 syllabus areas and was a mix of computation and discursive questions. The consistency in the requirements for certain subjects, particularly those in syllabus section B, is resulting in candidates performing well as they clearly have grasped exactly what we are looking for in terms of recognition and measurement and explain and illustrate. The candidates still have to correctly apply their knowledge but it does mean however that if they have studied past exam questions they will know exactly what is expected for the allocated marks. The questions in Section A that tested syllabus section B, being financial instruments, pensions and share-based payments were very well attempted, with many candidates scoring full marks. This was encouraging as it is an area that has caused candidates significant difficulty in the past and one that has been highlighted in the PEG for the previous few diets. Candidates clearly struggled with the two narrative questions covering segmental reporting and voluntary disclosures. The main issue once again was that candidates failed to answer the question actually asked, instead preferring to give all the details of segment thresholds something that is not a specific advantage to the reporting entity. Candidates were able to identify benefits to investors but then provided general limitations of ratio analysis rather than the limitations of segmental analysis. Again, not answering the question. The question on voluntary disclosures was better attempted but again many candidates did not focus on the potential advantages to the reporting entity, so again not answering the question. Section B contained questions on syllabus section A and C. The answers to the financial analysis question were not as strong as they have been in the previous few diets which was disappointing. Candidates seemed to be entirely unprepared for a group question including a foreign subsidiary. Workings were poorly prepared and many candidates ignored the foreign element altogether. Poor attempts generally resulted in a very low average mark for this question. I appreciate that the changes to piecemeal acquisitions and disposals represent more current developments, but it is a dangerous tactic to then ignore the other complex issues in group accounting, including foreign investment, group cash flows, fair value adjustments, etc. Please note that following requests from tutors attending the recent CIMA tutor conference I have attempted to expand the marking grids to provide in more detail how the marks are awarded. I hope this is found to be helpful. The Chartered Institute of Management Accountants Page 1

2 SECTION A 50 MARKS Question One (a) Calculate the actuarial gains or losses on pension plan assets and liabilities that will be included in other comprehensive income for the year ended 31 December (Round all figures to the nearest $000) (5 marks) (b) Prepare the accounting entry to record the expense associated with the SARs, for the year to 31 December 2010, in accordance with IFRS 2 Share-based Payments. (5 marks) (Total for Question One = 10 marks) This question was intended to examine the basic calculation of actuarial gain or loss in the period which is a key calculation for defined benefit schemes irrespective of the accounting policy for recognising them. The second part of the question tested a cash-settled share-based payment, marks being allocated to the principles of the calculations and the accounting entries. This question tested learning outcome B1(f). Easiest approach was probably to draft up the tables, one for assets and the other for plan liabilities and then work systematically through the information in the question assessing whether each item would affect the assets/liabilities/both. The question made it clear that the share appreciation rights were to be settled in cash to ensure all candidates were treating this as a cash-settled transaction and as such should have been working out the eligible employees at each year end and updating the fair value of the SAR for A key element of this part was the entry ensuring candidates appreciated that since it was to be cashsettled the credit was to liability. Adjustments to plan assets in the year 2 Adjustments to plan liabilities in the year 2 Principle of difference being actuarial and correctly identifying gain/loss 1 Part (a) total 5 Calculation of 2010 liability 2 Amount previously recognised, including calc of Accounting entry 1 Part (b) total 5 Total 10 Examiner s Comments This question was answered very well with many scoring full marks. Those who lost their way often prepared the income statement calculation for pensions, which was not required, but generally it was evident that they knew how each item affected the assets and liabilities. The most common mistakes in part (b) were failing to update the FV to $12, and forgetting to take onethird and two-thirds of the total calculated in each year. The Chartered Institute of Management Accountants Page 2

3 Question Two (a) (b) Explain the impact of the additional 20% purchase of DCA s ordinary share capital by RBE on the equity of the RBE Group. (3 marks) Prepare the consolidated statement of changes in equity for the year ended 31 December 2010 for the RBE Group, showing the total equity attributable to the parent and to the noncontrolling interest. (7 marks) (Total for Question Two = 10 marks) This question dealt with two main elements of group accounts acquisition in stages and the preparation of a consolidated statement of changes in equity. The narrative was intended to give candidates the opportunity to think through how the acquisition would be reflected in the group accounts, hoping then that they would recognise that this would have to be reflected in the SOCIE. This question tested learning outcomes A1(a) and A1(b). Candidates should first consider how the adjustment to parent s equity would be accounted for in the consolidated accounts. This should help focus them on applying this treatment when preparing the SOCI. The most logical approach would be to set up the pro-forma with separate columns for both parent and NCI and then systematically slot in movements for profit, dividend and share issue. Part (a) Piecemeal acquisition (control to control) or transaction between equity holders 1 No impact on goodwill 1 Adjustment to parent s equity or no gain or loss calculated 1 Part (b) Profit for year (including allocation of sub s profit) 2 Dividend for parent and NCI and share issue 2 Transfer from NCI to parent and adjustment to parent equity 3 Total 10 Examiner s Comments Part (a) of the question was reasonably well done with many candidates identifying that this was a piecemeal acquisition. Having correctly discussed the impact, however they failed to then apply this in part (b) with many ignoring the impact of the transfer when preparing the SOCIE. Only the minority attempted to calculate the adjustment to parent s equity. Many failed also to recognise that the parent column would only include the dividend paid to those shareholders. The Chartered Institute of Management Accountants Page 3

4 Question 3 (a) Discuss whether the managing director s comment is accurate in respect of the operating segment analysis that is required in accordance with IFRS 8. (b) (i) (4 marks) Explain why the information that is presented for operating segments is likely to be highly relevant to investors. (ii) Discuss the potential limitations of operating segment analysis as a tool for comparing different entities. (6 marks) (Total for Question Two = 10 marks) This question was intended to test candidates understanding of the rules and impact of IFRS 8 without the need for detailed calculation. It was intended to be more a test of the principles that are contained in IFRS 8 and why segmental information is important for current and potential investors. This question tested learning outcome C2(c). The most important thing in answering this question was to stay relevant and only answer the question that was being asked. There were three distinct parts designed to keep candidates on track with their answers. Part (a) IFRS 8 attempts to minimise costs by relying on internal info 1 Provides info that management already reviews to decide on resource allocation 1 Info reviewed by chief operating officer so info already there 1 Costs of compliance minimal unless the info is not already prepared 1 Part (b) Helps user assess quality of management decision-making 1 Provides breakdown of activities so helps identify profit/loss making activities and helps 1 assess risk Also highlights major customers or geographical split again useful for assessing future 1 performance and risk Segmental analysis covers the majority of the business so highly relevant 1 Management decides on segments so difficult to compare 1 Unallocated costs/allocation of head office/interest etc different basis for each entity 1 again issues of comparability 10 The Chartered Institute of Management Accountants Page 4

5 Examiner s comments Part (a) was poorly answered with few candidates realising that the standard is intended to minimise cost and designed to embrace the reporting entity s own management information so the information is already likely to exist. Many candidates ignored the questions and chose to provide an exhaustive list of thresholds and percentages from IFRS 8. Part (b) (i) was answered well but again in part (ii) candidates failed to answer the specifics of the question, instead listing generic limitations of financial analysis rather than those limitations that were specific to operating segment analysis as a tool for comparing entities. The Chartered Institute of Management Accountants Page 5

6 Question 4 (a) (b) Explain AND demonstrate how this convertible instrument would be initially measured in accordance with IAS 32 Financial Instruments: Presentation AND subsequently measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement in the financial statements for the year ended 31 December (7 marks) Explain how the preference shares would be classified in accordance with IAS 32 Financial Instruments: Presentation, AND the impact that this issue will have on the gearing of QWE. (3 marks) (Total for Question Four = 10 marks) This question tested the candidates ability to classify and initially and subsequently measure financial instruments a key area only tested in F2. This question tested learning outcomes B1(d) and B1(e). Using the tables supplied candidates should have identified the relevant discount factors to use for the principal amount and the interest annuity. Once the liability had been identified it should have been remeasured using amortised cost and we were hoping that candidates would realise that if the amount had been discounted at 7% then this was the rate to use on the unwinding most of them did. Part (b) centred on substance over form requiring candidates to identify that an obligation was inherent in the instrument and therefore debt. Part (a) Explain debt and equity being separately recognised 1 Calculation of amounts of debt and equity for initial recognition 4 Subsequent measurement at amortised cost and use of numbers as illustration 2 Part (b) 1 Classification should be debt Justification (obligation of redemption or cumulative dividend) 1 Increased gearing 1 10 Examiner s Comments Candidates have finally taken heed of my comments on how this area will be tested concentrating on initial recognition and measurement and subsequent measurement. Part (a) was answered exceptionally well. The majority of candidates demonstrating that they grasped the principles of accounting for convertible instrument. Part (b) was answered well by UK centre candidates but many overseas candidates wrongly concluded that since it used the term share it would not affect gearing. The Chartered Institute of Management Accountants Page 6

7 Question 5 (a) (b) Discuss the potential advantages that could be gained by BNM if it included voluntary narrative disclosures within the annual report. (6 marks) Discuss the potential drawbacks of voluntary disclosures being included in annual reports. (4 marks) (Total for Question Five = 10 marks) This was intended to test a core area of syllabus section D and required candidates to apply their knowledge of current developments to a specific scenario looking at advantages gained by the reporting entity. The question tested learning outcome D1(a). The question relied on candidates having adequate knowledge of voluntary disclosures but required candidates to apply their knowledge. It was essential that they make sufficient relevant individual points or, preferably make 3 or 4 points and provide sufficient analysis to be awarded 2 marks per well-made point. Part (a) were given here for advantages using the detail given about this entity, for example: Positive influence on potential investors with special interest; preferred supplier or similar competitive advantage; provides key info on staff as a revenue-generating resource as this is not found elsewhere in the accounts; traditional ratio analysis may not be appropriate for entity that relies on human capital so narrative reporting provides additional info that can be used to communicate with the market; info on key customer relationships may help investors assess future performance and have positive impact; reference to management commentary being recognised as important development. Part (b) were knowledge based points and there was no need to make specific reference to BNM. Points included: Absence of formal guidance so lack of comparability of accounts of different entities, not audited so may be unreliable and often an opportunity for entities to report only positive aspects and so biased, takes time and therefore additional costs to prepare Examiner s comments Part (a) was not answered particularly well with candidates answering this as a question on the recognition issues of human capital. Candidates must attempt to stay relevant to the questions, especially on the narrative questions for syllabus sections C and D. The core subject area tested may be the same but the focus of the question most definitely will not sometimes from the viewpoint of entities, sometimes from investors, advantages or disadvantages, ets. Candidates must answer the question asked. Part (b) was more knowledge-based and as a result was well attempted. The Chartered Institute of Management Accountants Page 7

8 SECTION B 50 MARKS ANSWER BOTH QUESTIONS Question 6 Prepare the consolidated statement of comprehensive income for the A Group for the year ended 30 September 2010 and the consolidated statement of financial position as at that date. (Total for Question Six = 25 marks) This question tests key areas of consolidation and also the principles of IAS 21. This question tested learning outcomes A1(a), A1(b) and A2(b). Candidates could have set up pro-formas for the group financial statements, inserting the group-specific headings. The accounts for the subsidiary would then be translated at the correct rate and aggregated with the parent s figures. Systematically then working through the account headings preparing workings for consolidation adjustments where necessary. Consolidated income statement Associate 2 Principles of translation and aggregation and FOREX gain/loss in OCI 6 Amounts attributable to parent and NCI 3 Statement of financial position Principles of translation and aggregation and goodwill 7 Associate 2 Retained earnings 3 NCI 2 25 Examiner s Comments This question was probably the worst attempted consolidation question we have seen in the last 4 diets. A huge number of candidates completely ignored the translation of the subsidiary or made no attempt to calculate the gain or loss on translation. This had a significant impact on the marks. The associate was very well dealt with and the preparation of accounts was well done. Having commented previously that the quality and layout of the consolidation workings had improved in the past few exam sessions, that could not be said for this question. Workings were poorly constructed and rarely completed giving the impression that candidates were at a loss as to how to deal with the translation effects of the sub. There was confusion over whether to divide or multiply on translation but candidates were not penalised for making this error as it was the principles of IAS 21 and the selection of the appropriate rates that was being tested not the ability to perform arithmetic calculations. The Chartered Institute of Management Accountants Page 8

9 Question 7 (a) Analyse and prepare a report on the financial performance and financial position of CVB. (8 marks are available for the calculation of relevant ratios). (20 marks) (b) Explain what further financial information may assist your friend in deciding whether or not to invest in CVB. (5 marks) (Total for Question Seven = 25 marks) This question tested the candidates ability to select and calculate relevant accounting ratios for a business scenario and then analyse the results taking account of the business context, dealing with an entity that is profitable but in cash crisis. This question tested learning outcomes C1(a), C2(a) and C2(b). Calculate ratios and then consider the results together with the business context and prepare analysis. Again there is an element of fluidity about the marking in this question as we are committed to awarding credit for well-analysed points with good back-up explanations. Ratios (others were considered see answers for a selection of ratios considered to be relevant for this scenario) Performance could have been discussed changing product mix and impact on GP; impact of finance costs and associate s losses on NP; impact of revaluation on ROCE. Financial position main issue is poor working capital; high inventory (could be stock piling for imminent order or old stock with risk of obsolescence); high payables (may be related to additional stocks just purchased or deliberate non-payment due to cash shortage); impact on future supplier relationships; current and quick ratio cash flow is immediate concern and risk to going concern; gearing low as result of long term borrowing repayment but replaced by short term borrowing higher risk and maybe higher costs; gearing low so potential for additional longer term finance being raised; falling interest cover may be of concern to lender; falling P/E ratio suggesting loss of investor confidence. Conclusion. Additional information that could have been requested by a potential investor could have included more up-to-date published financials as we are 9 months on from year end date; details of held for sale investments and investment in associate to get details of performance and assess possible returns from their sale; details of long-term lenders from the accounts and details of rates and repayment terms of all borrowings; dividend policy and history of paying dividend to assess potential return; narrative reports detailing future contracts and strategies of the business, additional years accounts and accounts of competitors for comparison. Generic answers were not relevant here points had to be specific to the scenario bearing in mind this was a potential investor and so would be unable to request internal details re banking and budgets etc The Chartered Institute of Management Accountants Page 9

10 Examiner s comments The quality of the analysis in this question was not up to the usual good standard, with few candidates appreciating the timescale and immediate action that is required to be taken. Many commented on all aspects of working capital but fewer were able to provide suggestions as to how the numbers all tied together and possible reasons for the movements. The calculation of certain ratios still poses problems for most candidates, in particular interest cover, return on capital employed and operating profit margin. Candidates were not able to calculate the ratios ensuring that numerator and denominator were consistent especially relating to the associate. Few candidates knew to include NCI in equity when calculating gearing and ROCE. The Chartered Institute of Management Accountants Page 10