Friday 10 December 2010

Relevant to F7 Financial Reporting

The Examiner for F7, Steve Scott has a different approach for this paper as compared to P2 examiner, Graham Holt. F7 paper contains more computational element and demands student to be more competent in the technical aspect whereas P2 requires students to be able to explain more rather than calculate.

Question 1
For F7 Malaysian variant paper, Full goodwill was tested for the first time in June 2010 sitting and shall be tested as such for subsequent sittings. F7 International stream paper has been testing full goodwill for a much longer period than the Malaysian variant paper. To calculate goodwill (full goodwill), the fair value of non controlling interest needs to be determined (share price of subsidiary X NCI’s shareholding of subsidiary) and shall be added together with the cost of investment by Parent.
$m
Cost of Investment (Parent’s shareholding, say 80% 160
FVNCI (20% X 100m (number of shares) X
$2.50 (share price of subsidiary at acquisition date) 50
Investment in S (100%) 210
Less: Fair value of net assets acquired
Equity shares 100
Retained Earnings 80
(180)
Purchased Goodwill (100%) 30

Although goodwill calculation is based on 100%, this doesn’t mean that the proportion of goodwill is based their respective shareholdings. However, where impairment loss on goodwill is concerned, the impairment loss is allocated based on their respective shareholdings which is Parent (80%) and NCI (20%) as per above example.
Student should not spend too much time on Question 1 and should be able to allocate appropriate time for all the questions. Maximum time available for Question 1 is 45 minutes.

Question 2
Again there seems to be too much time spent on this question as almost all students struggle to complete this question. It should be noted that some notes are more complicated than others and would take longer time to complete. It is alright for not completing all the five notes but students must complete the casting of all the items in the financial statements. A list of consistently tested notes includes the followings:

1. Depreciation adjustment – Both straight line and reducing balance method would
be tested and Revaluation model is normally examined for straight line method.

2. Interest adjustment – Distinction between the nominal and effective interest would be
examined.
3. Tax adjustment – This covers both current tax and deferred tax.
4. Revenue adjustment – There is always some adjustments on sale and repurchase, sale or
return, etc. that affects both the revenue and cost of sales.

Question 3
This is a combination of cash flows and ratio analysis. For cash flows, movements to the property, plant and equipment such as disposal, depreciation, revaluation gain, addition and finance lease needs to be accounted for first before presentation of the statement of cash flows.
As for ratio analysis, greater emphasis is placed on the comment rather than the calculation of ratio which only carries about 8 marks. Before commenting, jot down (next to the items affected) in the financial statements notes taken from the question. For example, the question may state that there are discounts given to customers, thus, write a short note next to the sales figure in the SOCI. From there, calculate the ratios affected i.e. Gross profit margin and comment based on the four guidelines given.

1. Gross profits reduced
2. This is viewed as being unfavourable
3. The reason behind the drop is due to the reduction in gross profits and increases in the
sales figure
4. Gross profits drop due to reduction in selling price per unit after the discount. The
discount also results in greater unit of goods sold thus, increasing the sales figure

Question 4
Part (a) is the only theoretical aspect of the paper which carries 5 marks. This covers mainly the Framework which includes definition of assets, liabilities and accounting concepts such as faithful representation, relevance, prudence, etc.
Part (b) relates to a mini case study concentrating on a particular accounting standard. The case may well be very complicated and almost impossible to finish on time. Most students are not aware that the question can be broken down into several parts and be attempted separately.

Question 5
This is similar to Question 4 (b).

Thursday 2 December 2010

Question & Answer for P2

Another SMS question:

May I noe how to treat the notes for accounting STD relate to the statement of cash flow..treat separate or put it in the statement..usually I dunno which one is the non cash item n willforget to put it..hv any way to remember



Answer:

For cashflows, ac std would be written separate. Focus on cash movements. If can add in conso cashflows better still.



Question:

Cash movement is actually inside SOCI item izzit..cos I duno how to differentiate it oh.

Answer:

Cash movements r adj in cash. SOCI items r non cash items. i.e. Depn add back.


Question:

Sir i add u le..XXXX..I not really noe ohh..n izzit necessary to draft the SOFP 1st before Do CF...Iduno which is cash items oh.

Answer:

Ok. Cash item like sales proceed from dispo, tax paid, etc.

Relevant to P2

Sir , I wish to ask regarding:



1. In a mixed group. All the while, I realise the that both of the parent (let say, A) and the subsidiary (let say, B) acquire another company C and achieve effective controlling interest at the same date, let say 1.1.2010 or either the example given in your revision under mixed group 2.


What if, A acquire C first at 1.1.2009 for 60% and achieve control. Later year, 1.1.2010, B acquire C another 20%. Then, how are we supposed to calculate the goodwill and also NCI??


2. Another question regarding employee benefits. As for, past service cost, it is the vested portion that will be included into income stmt while the non-vested will be calculated using straight-line method over the vesting period. Let say, an amount of 90 is vested, while 270 will be for next 3 years. So, total amount vested will be 90 + (270/3) = 180 right? Then, in my calculation of PV of obligation at beginning yr to year end to find the amount of acturial gain/loss, what is the amount of my past service cost taken into this calculation? and how about when i calculating the net liability at year end? so far, If i am not mistaken, exam kit only having question where past service cost is vested immediately. so, the same amount will appear at the income stmt and also in calculation in arriving acturial gain/loss.




I am sorry, Sir to trouble you at this time. But, I really hope to receive your reply.


Thank you so much.




Answer:

Then this would be a combination of mixed and piecemeal which won't be possibly asked in the exam because of time constraint. If the examiner ask on the two areas, they would be separate entity questions.In fact in one of the past year question, the past service cost would be expensed to SOCI and the related interest on PV obligation also expensed to SOCI, thus, resulting in the calculated PV of vested past service cost reflected at the Y/E carrying amount. As for the amortised past service costs, the amount has already been reflected at the Y/E figure. From thereon, any difference between the expected PV obligation (inclusive of Past Service Costs) and the Fair Value of PV obligation will result in actuarial gains or losses.

Tuesday 6 April 2010

Tips For P2


P2 Corporate Reporting paper has been a very demanding and challenging paper for most students with many complaining about the impossible time allocated to answer such a wide range of accounting issues and standards. A normal examination paper would test about eight to twelve accounting standards across all the questions.
Thus, this article is intended to provide advice on how to fully maximise the three hours allocated for answering the required 3 (three) questions in P2.
Paper P2 comprises two sections. Section A is a compulsory question worth 50 marks while Section B will consist of three 25-mark questions of which students must attempt any two.

Section A
This question deals with the preparation of consolidated financial statements, including group cash flow statements; embedded with several accounting standards treatments. It is perhaps unknown to many that the consolidation adjustments and the accounting standards treatments may be treated separately rather than together.
The accounting standards treatments are written separately (normally only affects the Parent company) and would not directly affect the consolidation answer of students. The examiner has expressed previously that marks are allocated separately for consolidation adjustment and accounting standards adjustments.



Students would be awarded full mark for the accounting standards adjustments if the answer provided shows good understanding of the required treatments although they are not presented in the final consolidated financial statements. This means that student should write a brief narrative on the accounting standards adjustments required and this shall gain considerable marks from the marker. Unlike in Section B, the marker only looks for the accounting treatments and the accounting principles are not very relevant here in question 1. Unless of course, where the student couldn’t figured out the accounting treatments, then explaining the accounting principles do help.


Normally, there are two styles being asked for accounting standards adjustments:


(i) The parent company has wrongly treated the transaction. Thus, the student is required the present a corrected accounting treatment after taking into consideration the accounting for reversal of the wrong treatment.


(ii) The parent company has not treated the transaction. This style is normally used for more difficult accounting standards such as employee benefits, foreign exchange translations and share based payments. Student only needs to show treatment of the relevant standards.
There is however a frequently tested standard (never once omitted from any P2 examination sittings since December 2007) i.e. FRS 21 The Effect of Changes in Foreign Exchange Rates. For example, this involved the acquisition of an investment property located in a foreign country. The parent company adopts fair value model and the said investment property is fair valued at each year end. Thus, the property needs to be retranslated from the foreign currency value to the local currency value at the year end. The gain or loss of which partially relates to exchange differences and the residual difference relates to revaluation gain shall be treated to the profit or loss.
The second part of Question 1 contains an element of ethics which usually carries about 5 marks. A quick glance through the notes in Question 1, student may be able to identify the paragraph relating to ethics. The paragraph usually discloses unethical behaviour of the group company and it is expected that the answer given should addressed the unethical behaviour in the context of not fulfilling the role and responsibilities of directors or accountants.
The third part however seems less predictable and would include principles relating to consolidation. This ranges from analysis of group cash flows, determination of functional currency, calculation of gain or loss on disposal, etc.


Consolidated financial statements may test students any of the following themes:-
(i) Mixed or Vertical groups
(ii) Piecemeal acquisitions
(iii) Disposals
(iv) Foreign operations:–
a. Translation from foreign currency to functional currency
b. Translation from functional currency to presentation currency (Closing rate method)
(v) Group statement of cash flows
It should be noted that the examiner has in the previous sitting (Dec 2009) tested both piecemeal acquisition and disposals together.
Besides the above, consolidation issues such as fair value adjustments; unrealised profits, etc. are frequently examined.


Section B
This section will normally comprise two questions based on a scenario or case study, and usually one essay-style question which now may involve some calculation. The questions in this section will deal with all aspects of the syllabus.
Remember the marker is looking for the underlying principle of the issue to be addressed rather than the calculated figures. Computation should be seen as a supporting element that complements the student’s answer rather than the actual answer for the questions.
The norms are that Question 2 may tests on either one or two accounting standards. This covers the element of computation as well as theory; which usually test students on their understanding of the concepts and issues involved on that particular standard. Students may have to identify the issues and deficiencies which have led to the proposed change to accounting standard.
There will be an increasing emphasis on the conceptual framework which underpins the standards, and the examiner's approach will be to examine several standards at each diet. The standards examined at each sitting ranged from eight to twelve thus, leaving very little room for student to spot topics.
The key standards includes revenue, impairment, provisioning, property plant and equipment, taxation, employee benefits, share based payments, leases, foreign exchange, intangibles, financial instruments, post reporting period and reporting financial performance (including discontinued operations).
Financial instruments will be dealt with at a relatively simple level of the syllabus. Hedged accounting now seems to be rarely tested, in fact was never tested when the paper changed to P2.
Question 3 is the most time consuming question in Section B as it tests several standards (at least 4) in one question; several mini case studies are written independently of each other and separated by paragraphs. Each mini case shall test on at least one particular standard. Student should be able to identify the standards being examined and discuss the accounting treatments advocated by each standard. The marks are allocated for both the underlying principle and the accounting treatment. Usually student merely stated the accounting treatments without mentioning the underlying principle i.e. why we treated it this way. Thereby, resulted in unnecessary marks being lost.
Question 4 formerly only required essay style answer but after the last two sittings also demands some computational element to support the answer. This question centred on current issues which resulted in issuance of Exposure Drafts and Discussion Papers. Exposure drafts will be examined but only in terms of the key areas of change, and there will not be a complete question on a single exposure draft. Discussion papers will be examined on a principles basis, and detailed knowledge of such will not be required.


Time management
Proper time management is essential given the breadth of standards tested. Each ONE mark is equivalent to 1.8 minutes to be exact. The following table shows the time management schedule which should be practised by each student:-



In order to be secured for a pass, there is an unwritten rule that the student must at least obtain a pass (at least or more than 25 marks) for the consolidated accounts question (Question 1). I do have students who passed by merely doing 2 questions i.e. Question 1 and one other question in Section B but this should best be avoided.
There is no other trick of passing P2, student should PRACTISE, PRACTISE, PRACTISE at least 10 sittings of past year questions before the final exam day itself.

( This article is also available at SAA-GE Singapore )