Examiner’s Feedback - Steve Scott (F7)
- a compendium from several exam sittings (source ‘Student Accountant’)
Please note that this has just been amended to include most recent feedback, so differs slightly from filmed comments
Many markers reported in this session that a large number of candidates were not providing workings for figures in their answers. This is a serious problem. If an answer is wrong it is unlikely that any marks can be awarded, as the marker will not be able to determine how the answer was arrived at.
If a numerical answer is wrong, markers can only give some merit if they are able to determine the approach taken by the candidate. This is impossible without legible workings.
The layout of answers by a number of candidates was poor, with workings being squashed into corners of pages and thus being difficult to follow.
…less well-organised candidates occasionally spread an answer to a particular question throughout their script. For example, a candidate might start answering Part (a) of Question 3 on one page, then start a different question on the next page, then later in the script return to the rest of Question 3. Such practice is contrary to examination advice and makes the script difficult to mark and appraise. ACCA also advises candidates to start each question at the top of a new page.
A worrying development reported by several markers was that a small number of candidates were giving as their answer the composition of the line items without cross-casting to give the required
answers. Such a technique is unwelcome and places an unfair burden on the marker, and is not strictly answering the question.
Some candidates, who are perhaps running low on time, give a blank proforma answer (for example, to the income statement and statement of financial position) (Balance Sheet). Such an answer would gain little (if any) marks and is therefore a waste of time. It would be far better to complete the numerical elements of only part of a required statement than to produce a complete statement with no figures.
The best answered sections of the paper were invariably the computational elements; sadly, the analysis and discursive areas of the paper were again generally much weaker. A significant number of candidates did not even attempt these sections; as they accounted for 32 marks, it must be stressed that it is highly unlikely that a candidate will pass this paper by relying entirely on their computational ability.
A small number of candidates wrote in their answer paper that they were short of time. Sensible time allocation and the avoidance of time wasting activities is an important part of exam technique.
Common Errors:
Incorrect use of proportional consolidation for the subsidiary. I seem to refer to this error each time I write a report.
A few calculated the minority interest based on the share capital and reserves. This is the basis of the minority interest in the balance sheet and completely inappropriate for the income statement (P&L). Some candidates calculated a minority interest for the associate thus showing a lack of understanding of equity accounting.
…candidates did not read the question properly and treated the ordinary shares at $1 (£1) each rather than 25 cents (pence) this also led to errors in the dividend calculations.
There were a limited number of overly detailed workings and unnecessary explanations of relatively obvious figures. While this practice is not penalised, it does disadvantage candidates because it wastes valuable time…
The above …may appear to give an overly pessimistic view of performance. This is not the intention, nor is it the case. There were many excellent papers, where it was apparent that candidates had done a great deal of studying, and these were rewarded appropriately.
F 7 (Int) FINANCIAL REPORTING: REVISION
PLATEAU
On 1 October 2006 Plateau acquired the following non-current investments:
– 3 million equity shares in Savannah by an exchange of one share in Plateau for every two shares in Savannah plus $1.25 per acquired Savannah share in cash. The market price of each Plateau share at the date of acquisition was $6 and the market price of each Savannah share at the date of acquisition was $3.25. – 30% of the equity shares of Axle at a cost of $7·50 per share in cash.
Only the cash consideration of the above investments has been recorded by Plateau. In addition$500,000 of professional costs relating to the acquisition of Savannah are also included in the cost of the investment.
The summarised draft statements of financial position of the three companies at 30 September 2007 are:
Plateau Savannah Axle
$’000 $’000 $’000
Assets
Non-current assets
Property, plant and equipment 18,400 10,400 18,000 Investments in Savannah and Axle 13,250 nil nil Available-for-sale investments 6,500 nil nil 38,150 10,400 18,000
Current assets
Inventory 6,900 6,200 3,600
Trade receivables 3,200 1,500 2,400
Total assets 48,250 18,100 24,000
Equity and liabilities
Equity shares of $1 each 10,000 4,000 4,000 Retained earnings
– at 30 September 2006 16,000 6,000 11,000 – for year ended 30 September 2007 9,250 2,900 5,000 35,250 12,900 20,000
7% Loan notes 5,000 1,000 1,000
Current liabilities 8,000 4,200 3,000
Total equity and liabilities 48,250 18,100 24,000
The following information is relevant:
(i) At the date of acquisition Savannah’s had five years remaining of an agreement to supply goods to one of its major customers. Savannah believes it is highly likely that the agreement will be renewed when it expires. The directors of Plateau estimate that the value of this customer based contract has a fair value of $1 million and an indefinite life and has not suffered any impairment.
(ii) On 1 October 2006, Plateau sold an item of plant to Savannah at its agreed fair value of $2·5 million. Its carrying amount prior to the sale was $2 million. The estimated remaining life of the plant at the date of sale was five years
(straight-line depreciation).
(iii) During the year ended 30 September 2007 Savannah sold goods to Plateau for $2·7 million. Savannah had marked up these goods by 50% on cost. Plateau had a third of the goods still in its inventory at 30 September 2007. There were no intra-group payables/receivables at 30 September 2007.
(iv) Impairment tests on 30 September 2007 concluded that neither consolidated goodwill nor the value of the investment in Axle were impaired.
(v) The available-for-sale investments are included in Plateau’s statement of financial position (above) at their fair value on 1 October 2006, but they have a fair value of $9 million at 30 September 2007.
(vi) No dividends were paid during the year by any of the companies.
(vii) It is the group policy to value non-controlling interest at acquisition at full (or fair) value. For this purpose the share price of Savannah at this date should be used.
Required
(a) Prepare the consolidated statement of financial position for Plateau as at 30 September 2007.
(20 marks) (b) A financial assistant has observed that the fair value exercise means that a
subsidiary’s net assets are included at acquisition at their fair (current) values in the consolidated statement of financial position. The assistant believes that it is inconsistent to aggregate the subsidiary’s net assets with those of the parent because most of the parent’s assets are carried at historical cost.
Required
(5 marks) (Total = 25 marks)
Kala
The following trial balance relates to Kala, a publicly listed company, at 31 March 2006:
$'000 $'000 Land and buildings at cost (note (i)) 270,000
Plant – at cost (note (i)) 156,000 Investment properties – valuation at 1 April 2005 (note
(i))
90,000
Purchases 78,200
Operating expenses 15,500
Loan interest paid 2,000
Rental of leased plant (note (ii)) 22,000
Dividends paid 15,000
Inventory at 1 April 2005 37,800
Trade receivables 53,200
Revenue 278,400
Income from investment property 4,500
Equity shares of $1 each fully paid 150,000 Retained earnings at 1 April 2005 119,500 8% (actual and effective) loan note (note (iii)) 50,000 Accumulated depreciation at 1 April 2005 – buildings 60,000
– plant 26,000
Later, the valuers informed Kala that investment properties of the type Kala owned had increased in value by 7% in the year to 31 March 2006.
Plant, other than leased plant (see below), is depreciated at 15% per annum using the reducing balance method. Depreciation of buildings and plant is charged to cost of sales.
(ii) On 1 April 2005 Kala entered into a lease for an item of plant which had an estimated life of five years. The lease period is also five years with annual rentals of $22 million payable in advance from 1 April 2005. The plant is expected to have a nil residual value at the end of its life. If purchased this plant would have a cost of $92 million and be depreciated on a straight-line basis. The lessor includes a finance cost of 10% per annum when calculating annual rentals. (Note: you are not required to calculate the present value of the minimum lease payments.)
(iii) The loan note was issued on 1 July 2005 with interest payable six monthly in arrears.
(iv) The provision for income tax for the year to 31 March 2006 has been estimated at $28.3 million. The deferred tax provision at 31 March 2006 is to be adjusted to a credit balance of $14.1 million.
(v) The inventory at 31 March 2006 was valued at $43.2 million.
Required, prepare for Kala:
(a) An income statement and statement of other comprehensive income for the year ended 31 March 2006. (10 marks) (b) A statement of changes in equity for the year ended 31 March 2006. (4
marks)
(c) A statement of financial position as at 31 March 2006. (11 marks)
Tabba
The following draft financial statements relate to Tabba, a private company.
Statements of financial position as at: 30 September 2005 30 September 2004
$'000 $'000 $'000 $'000 Property, plant and equipment (note (ii)) 10,600 15,800 Current assets
Inventories 2,550 1,850
Trade receivables 3,100 2,600
Insurance claim (note (iii)) 1,500 1,200 Cash and bank 850 nil
8,000 5,650
Total assets 18,600 21,450
Equity and liabilities
Share capital ($1 each) 6,000 6,000
Reserves:
Revaluation (note (ii)) nil 1,600
Retained earnings 2,550 850
2,550 2,450
8,550 8,450
Non–current liabilities
Finance lease obligations (note (ii)) 2,000 1,700
6% loan notes 800 nil
10% loan notes nil 4,000
Deferred tax 200 500
Government grants (note (ii)) 1,400 900
4,400 7,100
Current liabilities
Bank overdraft nil 550
Government grants (note (ii)) 600 400 Finance lease obligations (note (ii)) 900 800 Current tax payable 100
5,650
1,200
5,900 Total equity and liabilities 18,600 21,450
The following additional information is relevant:
(i) Income statement extract for the year ended 30 September 2005:
$’000 Operating profit before interest and tax 270
Interest expense (260)
Interest receivable 40
Profit before tax 50
Net income tax credit 50
Profit for the year 100
Note. The interest expense includes finance lease interest.
(ii) The details of the property, plant and equipment are:
Acc'd Carrying Cost depreciation value
$’000 $’000 $’000 At 30 September 2004 20,200 4,400 15,800 At 30 September 2005 16,000 5,400 10,600
During the year Tabba sold its factory for its fair value $12 million and agreed to rent it back, under an operating lease, for a period of five years at $1 million per annum. At the date of sale it had a carrying value of $7.4 million based on a previous revaluation of $8.6 million less depreciation of $1.2 million since the revaluation. The profit on the sale of the factory has been included in operating profit. The surplus on the revaluation reserve related entirely to the factory. No other disposals of non–current assets were made during the year.
Plant acquired under finance leases during the year was $1.5 million. Other purchases of plant during the year qualified for government grants of $950,000.
Amortisation of government grants has been credited to cost of sales. (iii) The insurance claim related to flood damage to the company’s inventories
during the year after negotiations with the insurance company. The claim is expected to be settled in the near future.
Required
(a) Prepare a statement of cash flows using the indirect method for Tabba in accordance with IAS 7 Statementof Cash Flows for the year ended 30
September 2005. (17 marks)
(b) Using the information in the question and your statement of cash flows, comment on the change in the financial position of Tabba during the year
ended 30 September 2005. (8 marks)
Note. You are not required to calculate any ratios. (Total = 25 marks)
Harper
You are a partner in a small audit and accounting practice. You have just completed the audit and finalised the financial statements of a small family owned company in discussion with its managing director Mrs Harper. After the meeting Mrs Harper has asked for your help. She has obtained the published financial statements of several quoted companies in which she is considering buying some shares as a personal investment. She presents you with the following information:
(a) In the year to 30 September 2008, two companies, Gamma and Toga, reported identical profits before tax of $100 million. Information in the Chairmen’s reports said both companies also expected profits from their core activities (to be interpreted as from continuing operations) to grow by 10% in the following year. Mrs Harper has extracted information from the income statements and made the following summary:
Gamma Toga
Operating profit: $ million $ million
Continuing activities 70 1,000
Acquisitions nil 50
Discontinued activities 30 (40 ) 100 100 A note to the financial statements of Toga said that both the discontinuation and acquisition occurred on 1 April 2008 and were part of an overall plan to focus on its traditional core activities after incurring large losses on a new foreign venture.
Required
(i) Briefly explain to Mrs Harper why information on discontinued operations
(ii) Calculate the expected operating profit for both companies for the year to 30 September 2009 (assuming the Chairmen’s growth forecasts are correct):
– in the absence of information of the discontinued operations; and
– based on the information provided above. (4 marks)
(b) Taylor is another company about which Mrs Harper has obtained the following information from its published financial statements:
Earnings per share:
Year to 30 September 2008 2007
Basic earnings per share 25 cents 20 cents The earnings per share is based on attributable earnings of $50 million ($30 million in 2007) and 200 million ordinary shares in issue throughout the year (150 million weighted average number of ordinary shares in 2007).
Statement of financial position extracts: $ million $ million
8% Convertible loan stock 200 200
The loan stock is convertible to ordinary shares in 2010 on the basis of 70 new shares for each $100 of loan stock.
Note to the financial statements:
There are directors’ share options (in issue since 2005) that allow Taylor’s directors to subscribe for a total of 50 million new ordinary shares at a price of $1·50 each.
(Assume the current rate of income tax for Taylor is 25% and the market price of its ordinary shares throughout the year has been $2·50)
Mrs Harper has read that the trend of the earnings per share is a reliable measure of a company’s profit trend. She cannot understand why the increase in profits is 67% ($30 million to $50 million), but the increase in the earnings per share is only 25% (20 cents to 25 cents). She is also confused by the company also quoting a diluted earnings per share figure, which is lower than the basic earnings per share.
(i) Explain why the trend of earnings per share may be different from the trend of the reported profit, and which is the more useful measure of
performance; (3 marks)
(ii) Calculate the diluted earnings per share for Taylor based on the effect of the convertible loan stock and the directors’ share options for the year to 30 September 2008 (ignore comparatives); and (5 marks) (iii) Explain the relevance of the diluted earnings per share measure. (4
marks)
(c) Mrs Harper has noticed that the tax charge for a company called Stepper is $5 million on profits before tax of $35 million. This is an effective rate of tax of 14·3%. Another company Jenni has an income tax charge of $10 million on profit before tax of $30 million. This is an effective rate of tax of 33·3% yet both companies state the rate of income tax applicable to them is 25%. Mrs Harper has also noticed that in the statements of cash flow each company has paid the same amount of tax of $8 million.
Required
Advise Mrs Harper of the possible reasons why the income tax charge in the financial statements as a percentage of the profit before tax may not be the same as the applicable income tax rate, and why the tax paid in the statement of cash flow may not be the same as the tax charge in the income statement.
(6 marks)
