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).