Qualification Programme Examination Panelists Report. Module A Financial Reporting (December 2015 Session)

Transcription

1 Qualification Programme Examination Panelists Report Module A Financial Reporting (December 2015 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 accounting policies, changes in accounting estimates and errors, events after the reporting period, as well as the calculation and impairment of goodwill. In addition, candidates were required to prepare the consolidated financial statements. In general, many of the candidates were able to properly account for the change in estimated useful life of a machine, capitalisation of repair and maintenance as a building and bankruptcy of a customer. However, many candidates were unable to properly account for the impairment of the goodwill. In addition, many candidates were unable to prepare the reconciliation of opening and closing consolidated retained earnings which was specifically required by the question. Specific Comments Question 1(a) 6 Marks This question required candidates to advise as to the appropriate accounting treatment for the change in useful life of a machine. The performance was less than satisfactory. Many candidates discussed the general concepts of property, plant and equipment under HKAS 16 instead of discussing the proper accounting treatment of the change as a change in accounting estimate (HKAS 8). Some candidates wrongly concluded the change as a change in accounting policy. While most candidates could apply the adjustment prospectively, some candidates applied the adjustment only for the future, instead of applying prospectively in the period of change and future periods. Question 1(b) 5 Marks This question required candidates to advise as to the appropriate accounting treatment for the capitalisation of repair and maintenance as a building. The performance was satisfactory. Most candidates were able to state that the reversal should be considered as a correction of error and thus should be restated as far back as is practicable (HKAS 8). However, some candidates discussed the case according to HKAS 16 as to whether the repair and maintenance should be capitalised instead of discussing the change itself. Module A (December 2015 Session) Page 1 of 6

2 Question 1(c) 4 Marks This question required candidates to advise as to the appropriate accounting treatment for the impact of the bankruptcy of a customer that occurred after the reporting period. The performance was less than satisfactory. Some candidates applied HKAS 37 instead of HKAS 10. HKAS 10 specified that the bankruptcy of a customer that occurs after the reporting period usually confirms that a loss existed at the end of the reporting period on a trade receivable and that the entity should adjust the carrying amount of the trade receivable as an adjusting event after the reporting period. Question 2(a) 3 Marks This question required candidates to calculate the goodwill at the date of acquisition. The performance was satisfactory. However, some candidates calculated the goodwill based on the value at the reporting date instead of the value at the date of acquisition. Some candidates did not include the fair value adjustment in the calculation of the non-controlling interests. Question 2(b) 6 Marks This question required candidates to explain and calculate the impairment loss of goodwill for the year end. The performance was not satisfactory. Most candidates were unable to explain the fact that goodwill attributable to non-controlling interests is included in the recoverable amount but is not recognized in the consolidated financial statements and thus the carrying amount of goodwill should be grossed up for impairment review. Many candidates did not attempt to calculate the impairment loss. Question 3(a) 9 Marks This question required candidates to prepare the consolidated statement of profit or loss. The performance was not satisfactory. Some candidates consolidated the profit or loss figures for the whole year though the subsidiary is acquired only during the current year. Many candidates were unable to calculate the elimination of the interest expenses correctly because they did not make the time-apportionment. Many candidates have poor examination techniques and calculate the sub-total of each of the line items. Besides, many candidates did not attempt to calculate the profit or loss attributable to non-controlling interests. Question 3(b) 3 Marks This question required candidates to prepare the reconciliation of opening and closing consolidated retained earnings. The performance was not satisfactory. Most candidates were unable to deal with this question and they left this part blank. Most students were unable to post the relevant adjustment items to the opening consolidated retained earnings and dividend which, together with the profit attributable to owners of the parent, made up the movement of the consolidated retained earnings for the year. Module A (December 2015 Session) Page 2 of 6

3 Question 3(c) 14 Marks This question required candidates to prepare the consolidated statement of financial position. The performance was less than satisfactory. Many candidates were unable to calculate the intragroup interest receivable and interest payable correctly. They did not eliminate the intragroup interest payable and interest receivable as well as the intragroup loan payable and loan receivable. (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 were able to explain the relevant accounting concepts, but failed to apply them correctly in the calculation of amounts, the preparation of journal entries and the 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 4(a) 6 Marks This question required candidates to explain the accounting implications for each of the incurred costs as mentioned in the question, in particular, under the research phase or development phase. Most candidates understood that the topic being tested was under HKAS 38 and they were aware that there is a difference between research phase and development phase. Some of them only copied the literatures straight from the accounting standards instead of applying them properly to the case to conduct the analysis. Some candidates may even extract irrelevant topics from the accounting standards. Question 4(b) 4 Marks This question required candidates to determine the amortisation period of the relevant intangible assets. Candidates normally discussed whether the intangible asset had a finite or indefinite useful life. They failed to present their understanding on legal life and the period over which economic benefits could be expected to be generated. Hence, they were not able to provide a justification to draw a proper conclusion. Module A (December 2015 Session) Page 3 of 6

4 Question 4(c) 6 Marks This question tested candidates on their knowledge of impairment assessment including the relevant requirement and factors to be considered. Many students were aware of the general rule of impairment assessment but they did not know that impairment is required to be assessed for intangible assets that are not yet available for use. Certain candidates simply decided that there was no impairment assessment in view of no impairment indicator. Most candidates were able to comment the factors to be considered in the impairment assessment. Question 5(a)(i) 2 Marks This question required candidates to discuss the accounting treatment of a convertible instrument, in which the conversion option is classified as a derivative. Candidates were well aware of the concept of "fix-for-fix" but most candidates failed to explain the implication or simply copy the definition of derivative and equity under the accounting standards. Question 5(a)(ii) 6 Marks This question required candidates to prepare the journal entries for the issue of the convertible instrument and partial conversion of the convertible instrument. Candidates could well understand the question requirement given that the question was straightforward. However, some candidates failed to classify the conversion option as a derivative and thus failed to prepare the correct entries. Some were not able to calculate the relevant amounts due to careless mistakes. Question 5(b) 4 Marks This question required 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. It was observed that more candidates could apply their technical knowledge in this regard and were able to apply it and calculate the answer correctly. Question 5(c) 2 Marks This question required candidates to discuss the accounting treatment of a convertible instrument, in which the conversion option is classified as equity given the specific revised pattern of facts set out in the question. Candidates were well aware of the concept of "fix-for-fix" but most candidates failed to explain the implication or simply copy the definition of derivative and equity under the accounting standards. Module A (December 2015 Session) Page 4 of 6

5 Question 6(a) 8 Marks This question tested the candidates knowledge of accounting for restructuring provision under HKAS 37. However, most candidates applied the wrong accounting standards, such as discontinued operations or subsequent event accounting while some candidates only discussed the general principles of provision. During their analysis, they also omitted to mention the board decision or they combined three types of costs to draw a single conclusion without further details. Question 6(b) 7 Marks This question tested the candidates knowledge of accounting for provision and onerous contracts under HKAS 37. Some candidates were able to identify issues and commented properly while some applied the wrong accounting standards, such as revenue recognition or inventories. About one-third of the candidates did not attempt to answer this question. Question 6(c) 5 Marks This question required candidates to discuss the accounting for warranty provision and contingent assets. Many candidates lost marks when they did not specify the year as the question required to advise as to the accounting implications for the year 2014 and the accounting implication was different for 2014 and In general, candidates were weak in this topic. (III) Conclusion and Recommendation Overall, the performance of the candidates was less than satisfactory. Candidates are advised to read the questions carefully so as to answer them thoroughly according to the requirements of the questions. For example, question one asked candidates to calculate the increase or decrease in the profits in both the last year and current year but many candidates did not address in their calculations. Candidates should know how to prepare a comprehensive set of consolidated financial statements and not only the consolidated statement of financial position. Many candidates repeated their adjustments in the consolidated statement of profit or loss, reconciliation of opening and closing consolidated retained earnings and the consolidated statement of financial position though actually they are one integrated set of consolidated financial statements and thus each consolidated adjustment should appear only once. Candidates are advised to study the appropriate accounting treatments of intangible assets, provisions and convertible instruments, especially where the conversion option is classified as a derivative. Module A (December 2015 Session) Page 5 of 6

6 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 2015 Session) Page 6 of 6