F1 – Financial Operations Post Exam Guide November 2013

Examiner’s general comments The following provides guidance to candidates preparing for future examinations and has been prepared with that in mind. The guidance mentions the main errors that were commonly made by candidates, but by no means did all candidates make such errors, and there were many excellent scripts presented. There was evidence of a number of well prepared candidates with a wide range of knowledge, able to tackle most of the sub-questions in questions 1 and 2 and prepare a good answer to questions 3 and 4. However some candidates had not prepared for some of the topics on the paper. Questions that had a significant number of particularly poor answers were, question 1 (1.6 ethical code, 1.7 IFRS Foundation and 1.9 IAS 1); question 2e tax groups and question 4 statement of cash flows. Question spotting is not advised in this paper as most learning outcomes are covered in each examination. Question 1 seemed to have lower marks this time with many candidates scoring well below half marks. Most candidates seemed unprepared for some questions in this section. Questions 1.6; 1.7 and 1.9 seemed to cause the most problems. A number of candidates wrote very long answers to the narrative questions in this section, causing time constraints for later questions. Question 2 was answered better than in recent examinations, many candidates were able to score half marks on the question overall. Some candidates were obviously ill prepared for Q2e tax groups and their benefits. Question 3 produced some very good answers but there were very few candidates scoring full marks. Question 3a on the treatment of a change in accounting policy had very few good answers. Of those candidates that stated that a retrospective adjustment was required very few actually made the adjustment in 3b. A considerable number of candidates were unable to correctly calculate or treat some of the adjustments required. E.g. share repurchase, a bad debt and depreciation of non-current assets. Question 4a – The answer to part (a), the treatment of preference shares in the financial statements, was very poor with many candidates not attempting an answer and a large proportion of the other candidates explaining that the preference shares should be treated as equity. Of those candidates that stated the preference shares should be treated as debt very few were able to recalculate the profit to reflect the stated treatment. Question 4b – A very large number of candidates seemed to not understand what a statement of cash flow should look like, often including statement of profit or loss items and statement of financial position items. A significant number of candidates did not attempt question 4. It is essential that adequate, clear workings are shown for every question or marks could be lost.

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F1 – Financial Operations Post Exam Guide November 2013

SECTION A – 20 MARKS ANSWER ALL TEN SUB-QUESTIONS Rationale Question One consists of 10 objective test sub-questions. These are drawn from all sections of the syllabus. They are designed to examine breadth across the syllabus and thus cover many learning outcomes.

Question 1.1 Which ONE of the following is regarded as a direct tax? A B C D

Value added tax Capital gains tax Excise duties Property tax (2 marks)

Answer B

Question 1.2 In many countries employees’ earnings have tax deducted by their employers before being paid to them. This is sometimes referred to as “Pay-as-you-earn”. Identify TWO advantages of “Pay-as-you-earn” to employees. (2 marks) Answer: Advantages to employees: Will not get into trouble for late payment of tax Do not usually have to prepare a self assessment tax return Tax is collected gradually over the year, easier to bear than one large payment Any other relevant advantage to the employee Any two from the above

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F1 – Financial Operations Post Exam Guide November 2013

Question 1.3 UI has the following details: (i) (ii) (iii)

Incorporated in Country A. Senior management hold regular board meetings in Country B and exercise control from there, but there are no sales or purchases made in Country B. Carries out its main business activities in Country C.

Assume all three countries have double taxation treaties with each other, based on the OECD model tax convention. In which country/countries will UI be deemed to be resident for tax purposes? A B C D

Country A Country B Country C Countries B and C (2 marks)

Answer B

Question 1.4 DF, a small entity resident in Country X, purchased its only item of plant on 1 October 2011 for $200,000. DF charges depreciation on a straight line basis over 5 years. DF’s deferred tax balance as at 30 September 2013, in accordance with IAS 12 Income taxes is: A B C D

$3,750 $11,250 $18,750 $45,000 (2 marks)

Answer

Cost Acc depreciation First year allowance Depreciation Annual allowance Temporary difference Deferred tax

Accounting $ 200,000 40,000 160,000 40,000

Tax $ 200,000 100,000 100,000

25,000 120,000 75,000 120,000 – 75,000 = 45,000 45,000 x 25% = 11,250

Answer: B

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F1 – Financial Operations Post Exam Guide November 2013

Question 1.5 GH is registered for VAT in Country X and is partially exempt for VAT purposes. GH’s sales for the last VAT period, excluding VAT, were:

Goods at standard rate Goods exempt from VAT

$ 15,000 10,000

During the period GH purchased materials and services costing a total of $12,075, including VAT at standard rate. These materials and services were used to produce standard rated goods and exempt goods. Assume that GH had no other VAT related transactions in the period. Calculate the net VAT due to/from GH for the VAT period. (2 marks)

Answer Exempt as proportion of total outputs: 10/25 = 40% VAT on inputs = 12,075 x 15/115 = 1,575 Excluding exempt proportion: 1,575 x 60% = 945 VAT on outputs, 15,000 x 15% = 2,250 Amount payable = 2,250 – 945 = 1,305 Answer: $1,305

Question 1.6 Identify TWO advantages of having an ethical code for accountants. (2 marks)

Answer Advantages of an ethical code for accountants include: • • •

it identifies fundamental principles of professional ethics for professional accountants and provides a conceptual framework for applying those principles. it provides guidance on the fundamental principles. it helps members identify threats to compliance with fundamental principles and provides examples of safeguards that may be appropriate.

Any two from the above

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F1 – Financial Operations Post Exam Guide November 2013

Question 1.7

Identify any TWO responsibilities of the IFRS Foundation. (2 marks)

Answer The responsibilities of the IFRS Foundation include: • • • • •

Appoint members of the IASB, the IFRIC and the IFRS Advisory Council Review the strategy of the IASB and its effectiveness Approve the annual budget and determine the funding of the IASB Promoting the IASB and the application of IFRS/IAS Reviewing broad strategic issues affecting accounting standards

Any two from the above.

Question 1.8

The IASB’s Conceptual Framework for Financial Reporting (2010) (Framework) identifies faithful representation as a fundamental qualitative characteristic of financial information. Which ONE of the following is NOT a characteristic of faithful representation? A B C D

Free from error Verifiable Neutral Complete (2 marks)

Answer B

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F1 – Financial Operations Post Exam Guide November 2013

Question 1.9

Identify TWO actions required under IAS 1 (Revised) Presentation of Financial Statements to ensure that “Financial statements shall present fairly the financial position, financial performance and cash flows of an entity.” (2 marks) Answer In order to ensure that “Financial statements shall present fairly the financial position, financial performance and cash flows of an entity” as required by IAS 1 (Revised) Presentation of Financial Statements an entity should: • • • •

Show a faithful representation of the effects of transactions Select and apply accounting policies in accordance with IAS 8 Present information that is relevant, reliable, comparable and understandable Provide additional disclosures if the requirements of an IFRS are insufficient to enable users to understand the full effect of a transaction.

Any two from the above.

Question 1.10

The IASB’s Framework states that “materiality is an entity-specific aspect of relevance”. Describe the term “materiality” as used in the Framework. (2 marks) Answer Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.

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F1 – Financial Operations Post Exam Guide November 2013

SECTION B – 30 MARKS ANSWER ALL SIX QUESTIONS Question 2a

Required: Explain whether CD and/or EF should be classified as subsidiaries/a subsidiary of AB. You should refer to the provisions of IFRS 10 Consolidated Financial Statements in your answer. (Total for sub-question (a) = 5 marks)

Rationale To test candidates’ knowledge of the concept of control in the context of consolidated financial statements. Tests learning outcome C1b.

Suggested Approach Define the meaning of control according to IFRS 10 Consolidated financial statements. Explain the level of control AB has over CD and conclude CD is not a subsidiary of AB. Explain the level of control AB has over EF and conclude EF is a subsidiary of AB.

Marking Guide Define the meaning of control according to IFRS 10 Consolidated financial statements. Explain the level of control AB has over CD and conclude CD is not a subsidiary of AB. Explain the level of control AB has over EF and conclude EF is a subsidiary of AB. Maximum marks awarded

Marks 2 1.5 1.5 5

Examiner’s Comments Most candidates were able to achieve half marks, but few achieved full marks as they did not refer to IAS 10’s requirements as specified in the question.

Common Errors • • • •

Not discussing the IFRS 10 definition of control. Stating that CD was a subsidiary because the 40% equity plus 80% non-voting shares was more than 50%. Stating that EF was not a subsidiary as the equity shares held were only 40%. Not identifying that the power to appoint/remove directors gave effective control as recognised by IFRS 10.

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F1 – Financial Operations Post Exam Guide November 2013

Question 2b

Required: Prepare the journal entries to make the required adjustment in YZ’s consolidated financial statements for the year ended 30 September 2013 for the above. (Total for sub-question (b) = 5 marks)

Rationale To test the candidates’ understanding of the treatment in consolidated financial statements of unrealised profit arising from intra-group transactions. Tests learning outcome C1c.

Suggested Approach Calculate the value of the unrealised profit in inventory. Prepare the journal entries to remove the revenue, cost of sales and unrealised profit from the consolidated financial statements.

Marking Guide

Marks

Calculate the value of the unrealised profit in inventory. Prepare the journal entries to remove the revenue, cost of sales and unrealised profit from the consolidated financial statements.

2

Maximum marks awarded

5

3

Examiner’s Comments The majority of candidates were able to achieve half marks or more on this question. A disappointing number of candidates were unable to produce a recognisable journal entry.

Common Errors • • • • • •

Working out the unrealised profit using the mark up on cost as the margin. Correctly calculating the profit element but not adjusting the total profit to the unrealised portion relating to the unsold goods. Producing journal entries that were more like a list than a journal, often with no debits and credits indicated or the debits and credits were unequal. Not indicating whether adjustments were debit or credit. Reversing the debit and credit entries. Only preparing one or two of the three journal entries required.

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F1 – Financial Operations Post Exam Guide November 2013

Question 2c

Required: (i) Explain the purpose of “indexation” when used in the calculation of capital gains tax. (2 marks) (ii) Calculate the capital gains tax arising on the disposal of UV’s asset. (3 marks) (Total for sub-question (c) = 5 marks)

Rationale To test candidates’ understanding of a capital gain and their ability to calculate the gain in a given scenario, and the tax consequently due. Tests learning outcome A1e.

Suggested Approach Explain the purpose of indexation. Calculate the capital gains tax payable by UV, taking account of indexation of the asset.

Marking Guide

Marks

Explain the purpose of indexation. Calculate the capital gains tax payable by UV, taking account of indexation of the asset.

2 3

Maximum marks awarded

5

Examiner’s Comments This question was reasonably well answered.

Common Errors (a) •

Not stating that indexation reduces tax payable.

• • • •

Deducting depreciation and indexing the net figure. Applying indexation to the difference between net selling price and net cost. Not deducting selling costs from selling price or adding the selling costs to selling price. Deducting the buying costs from the cost of the asset.

(b)

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F1 – Financial Operations Post Exam Guide November 2013

Question 2d

Required: Calculate the tax payable by TY for the year ended 30 September 2013. (Total for sub-question (d) = 5 marks)

Rationale Test candidates’ understanding of corporate income tax calculations. Tests learning outcome A3a.

Suggested Approach Calculate TY’s annual accounting depreciation and tax depreciation. Use profit before tax and adjust it for taxes paid to other public bodies, entertaining, accounting depreciation and tax depreciation to calculate taxable profits. Calculate tax payable at 25%.

Marking Guide

Marks

Use profit before tax and adjust it for taxes paid to other public bodies, entertaining and accounting depreciation. Adjust for tax depreciation Adjust for loss brought forward and calculate tax.

2

Maximum marks awarded

5

2 1

Examiner’s Comments This question was well answered, with many candidates obtaining full marks.

Common Errors • • • • •

Calculating tax depreciation allowances as if the assets were all acquired in the year. Calculating tax depreciation allowance as first year allowance plus writing down allowance. Only working out one year’s writing down allowance instead of two. Calculating the writing down allowance using the previous year’s writing down allowance times the tax writing down allowance, rather than the tax carrying value. Not deducting the losses brought forward or deducting the loss from the tax payable rather than taxable profit.

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F1 – Financial Operations Post Exam Guide November 2013

Question 2e

Required: Prepare a short briefing note that answers the Chief Executive’s questions. (Total for sub-question (e) = 5 marks)

Rationale To test candidates’ understanding of a tax group and the benefits of group loss relief. Tests learning outcome A3a.

Suggested Approach Explain the concept of a tax group. Explain the benefits of being in a tax group.

Marking Guide

Marks

Explain the concept of a tax group. Explain the benefits of being in a tax group.

2 3

Maximum marks awarded

5

Examiner’s Comments This question was ignored by many candidates and others wrote a long answer that did not address the question asked. Very few candidates seemed to know anything about a tax group.

Common Errors • • • •

Stating that entities in the tax group no longer had to prepare tax returns or pay tax as a tax group paid one amount of tax based on the consolidated accounts. Most answers only mentioned losses and the possible transfer within the tax group, very few mentioned any other advantages such as cash flow and tax saving. Including a lot of words about avoiding withholding tax and underlying tax. Being too general, not giving enough detail in the answer.

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F1 – Financial Operations Post Exam Guide November 2013

Question 2f

Required: Explain the typical duties of an external auditor of an entity. (Total for sub-question (f) = 5 marks)

Rationale To test candidates’ knowledge of the duties of an external auditor. Tests learning outcome B1g.

Suggested Approach Explain the typical duties of an external auditor.

Marking Guide

Marks

Explain the typical duties of an external auditor.

5

Maximum marks awarded

5

Examiner’s Comments Most candidates seemed to have a reasonable idea of the duties of an external auditor and scored reasonable marks.

Common Errors • •

A large number of candidates wasted time listing detailed audit procedures. Not giving sufficient detail in the answer.

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F1 – Financial Operations Post Exam Guide November 2013

SECTION C – 50 MARKS ANSWER TWO QUESTIONS FROM THIS SECTION Question 3

Required: (a) Explain how the change in inventory accounting policy should be recorded in RDX’s financial statements for the year ended 30 September 2013, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. (3 marks)

(b) Prepare RDX’s statement of profit or loss and statement of changes in equity for the year to 30 September 2013 AND the statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a statement of accounting policies. (22 marks) (Total for Question Three = 25 marks)

Rationale To test candidates’ ability to prepare a set of financial statements for a single entity, including the application of a number of IFRS/IAS. Tests learning outcome C1a.

Suggested Approach Explain how a change in policy is dealt with according to IAS 8. Prepare the non-current asset depreciation calculations. Prepare workings for Cost of sales, administrative expenses and distribution costs. Prepare all other required workings. Prepare the statement of profit or loss. Prepare the statement of financial position. Prepare the statement of changes in equity.

Marking Guide

Marks

Explain how a change in policy is dealt with according to IAS 8. Prepare the statement of comprehensive income – to gross profit Prepare the statement of comprehensive income – expenses to net profit Prepare the statement of financial position – assets Prepare the statement of financial position – Equity and liabilities Prepare the statement of changes in equity Formats and presentation

3.0 3.5 4.5 3.5 3.5 4.5 2.5

Maximum marks for Question 3

25

Examiner’s Comments This question was reasonably well done with a few candidates getting full marks for part (b).

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F1 – Financial Operations Post Exam Guide November 2013

Common Errors 3(a) • • •

Not answering the question. Stating that the inventory valuation method change was a change in accounting estimate, therefore adjustment only required to be made within the current year. Stating that adjustments for the $148,000 and the $210,000 were both required in the current year.

3(b) • • • • • • • •

Not making retrospective adjustment for the inventory, even after stating that it was required in 3a. Not making any adjustment in the statement of changes in equity for the inventory retrospective adjustment. Not making any adjustment for the share repurchase. Treating the share repurchase as an increase in equity in the statement of changes in equity. Not identifying the restriction on the charge against share premium for the redemption of the shares, arising from the premium on the original share issue. Not identifying that a capital redemption reserve needed to be created. Not adjusting trade receivables for the bad debt. Adding expenses to the wrong expense heading, for example depreciation and bad debt.

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F1 – Financial Operations Post Exam Guide November 2013

Question 4

Required: (a) (i) Explain how AWX should treat its preference shares in its financial statements for the year ended 31 March 2013 according to IAS 32 Financial Instruments: Presentation AND, (ii) Calculate AWX’s revised profit before tax for the year ended 31 March 2013 in accordance with IAS 39 Financial Instruments: Recognition and Measurement. (6 marks)

(b)

Prepare AWX’s Statement of cash flows, using the indirect method, for the year ended 31 March 2013 in accordance with IAS 7 Statement of Cash Flows. (19 marks) Notes to the financial statements are not required, but all workings must be clearly shown. (Total for Question Four = 25 marks)

Rationale (a) (i) To test candidates’ knowledge of the required treatment of preference shares according to IAS 32 Financial Instruments: Presentation. Tests learning outcome C2b. (ii) To test candidate’s ability to apply their knowledge of the requirements of IAS 39. Tests learning outcome C2b. (b) To test candidates’ ability to prepare a statement of cash flows for a single entity. Tests learning outcome C1a.

Suggested Approach (a)(i) Explain the IAS 32 required treatment of preference shares. (a)(ii) Use the answer to part (i) to calculate a revised profit before tax for AWX. (b) Prepare workings for cash received/paid for all cash movements. Prepare statement of cash flows.

Marking Guide (a)(i) Explain the IAS 32 required treatment of preference shares. (a)(ii) Use the answer to part (i) to calculate a revised profit before tax for AWX.

Marks 3.0 3.0 6.5

(b) Prepare statement of cash flows to cash generated from operations Deduct tax and interest paid Cash flow from investing activities Cash flow from financing activities Presentation, format and cash/cash equivalents

5.0 3.5 2.0 2.0

Maximum marks for Question 4

25

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F1 – Financial Operations Post Exam Guide November 2013

Examiner’s Comments Very few candidates completed part (a)(ii) correctly. A large proportion of candidates did not seem to have studied statements of cash flow and were unable to produce a reasonable statement in the correct format. There were a small number of very good answers achieving near full marks for part (b).

Common Errors • • •

Not identifying the difference between cash accounting and accruals accounting. As a result noncash items were included in the cash flow. For example revenue, administrative expenses and gain on disposal treated as cash received on sale of the asset. Items were frequently included in the wrong section of the statement, e.g. impairment of intangible assets included under investing activities. Some candidates did not seem to know which items should be plus or minus in the cash flow.

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