General Comments

　　I am very disappointed to have to report a marked deterioration in candidate’s overall performance for this diet of the F7 Financial Reporting examination. Most commentators considered the paper to be no more complex or demanding than in recent previous diets. The majority of the paper’s topics had been examined before and candidates who had studied the full syllabus and revised using recent past questions should have had no difficulties obtaining a pass mark. It was particularly worryingly that so many candidates failed to gain enough marks to demonstrate any progression of understanding from that required at paper F3. Indeed some of the easier computations on this paper such as basic depreciation and accruals were not done correctly，in extreme cases some candidates made fundamental errors such as including non-current assets as income and conversely showing investment income as an asset.

　　This report has two main functions；firstly，it gives an assessment of the actual performance that candidates achieved and，secondly，to be of use to candidates attempting the paper in the near future to highlight areas of poor examination technique and some of the common errors made by previous candidates.

　　Other causes of the poor performance are familiar，but more prevalent than in the past. The most common of these was a failure to answer all the questions. A significant number of candidates gave answers to only half of the paper and thus had no hope of passing. One marker reported that she had lost count of the number of candidates that had scored 35-40 marks after completing the paper up to Q3 （a）（i）（which is 62 marks into the paper）and then failed to score more than another 5 marks on the rest of the questions （accounting for the remaining 38 marks）.Many answers to written questions did not address the specific points asked for indicating a lack of focus or simply not reading the requirement properly.

　　As on all recent sittings the written elements were answered much worse （if at all） than the computational elements. A number of candidates displayed evidence of poor time management by producing pages of unnecessarily detailed workings for even simple calculations. A consequence of this was running out of time on the later questions.

　　The structure of the paper is that of all compulsory questions，with questions 1，2 and 3 being for 25 marks each and questions 4 and 5 are for 15 and 10 marks respectively. The first three questions cover the ‘core’ topics of consolidated accounts，preparing single company financial statements （on this paper，from a trial balance）and performance appraisal/cash flows. Questions 4 and 5 cover the reminder of the syllabus.

　　Overall candidates’ performance can be summarised as good to very good on questions 1（a），question 2 and the statement of cash flows of 3（a）（i）；beyond this the rest of the answers were poor，very poor or non-existent. Candidates should be aware that markers may not be able to give credit to answers that displayed poor， sometimes illegible，handwriting. There were also many unreferenced or non-titled/labelled workings which can hinder the marking process.

　　The composition and topics of the questions was such that on this diet there was very little difference in substance between the International Paper （the primary paper） and all other adapted papers and therefore these comments generally apply to all streams of paper.

　　Specific Comments

　　Question One

　　This question required （in part （a））the preparation of a consolidated statement of financial position （balance sheet）for a parent，a subsidiary and an equity accounted associate. The question specifically required the calculation of consolidated goodwill （involving contingent consideration and two fair value adjustments），intra-group adjustments and an impairment of goodwill. Part （b）was a 4 mark written section.

　　The preparation of the consolidated statement of financial position was generally well answered，but answers to the written section were very mixed.

　　The main errors by candidates in the consolidation were：

　　·goodwill calculation：using an incorrect share price for the share issue and incorrectly revising the value of the contingent consideration as a goodwill adjustment （it should be to retained earnings）[Note：for UK-based papers it is correct to adjust the goodwill]. Incorrectly or not adjusting for software that had no recoverable value. Also a number of candidates failed to include the non-controlling interest at its fair value with the consequential effect on goodwill [not applicable to UK-based papers].

　　·the adjustment to the value of the software was also often written off the value of non-currents （even though the question said it had already been written off）and rarely was it accounted for as part of the subsidiary’s post acquisition profit calculation.

　　·the intra-group adjustments for goods-in-transit，URP（often calculated incorrectly）and current account balances were often wrong with no clear pattern of mistakes；just about every combination of error was reported

　　·the profit of the associate was often not time apportioned

　　·the impairment of goodwill was not apportioned between the parent and non-controlling interest [not applicable to UK-based papers]

　　·a lot of errors/omissions made in earlier calculations were carried through to the calculation of consolidated retained earnings

　　·some candidates accounted for the share exchange issue （effectively double counting it）even though the question said it had already been accounted for

　　·some answers used proportional consolidation for the associate （some even proportionally consolidated the subsidiary）；others consolidated the associate （rather than using equity accounting）-thankfully this is now only a tiny minority of candidates.

　　Despite the above this section was well answered.

　　Part （b）was a short （4 marks）written section testing candidate knowledge of the legal position of a subsidiary within the context of group financial statements. The subsidiary provided a copy of the group’s consolidated financial statements to support an application for credit. Answers to this were generally poor and even alarming. The majority of candidates thought that a parent （or other subsidiaries）was responsible for the debts of its subsidiary. This is not the case. Without a guarantee from the parent，a strong group statement of financial position does not give any assurance to a potential creditor of a subsidiary. It is essential to base any extension of credit on the individual （entity）financial statements of the subsidiary itself. Another misinterpretation of this section was that some candidates thought it was a question on ratio analysis and described the ratios they would calculate to determine the liquidity position of the group.

　　Question Two

　　This was a familiar question of preparing financial statements from a trial balance with various adjustments required. These involved the dealing with a sales ‘cut off’error，the use of the effective interest rate for a loan， a fair valued investment，an impairment of a leasehold property （including presenting it as ‘held for sale’-International variants only），a construction contract and accounting for taxation.

　　As with question 1，this question was competently answered by the majority of candidates showing good knowledge of the format and presentation of the two financial statements.

　　To help with future preparation，the most common errors were：

　　·‘cut off error’：generally dealt with quite well，but there were errors in grossing up the cost （or only adjusting by the profit element）to give the correct revenue/turnover figure

　　·loan：the issue costs were often ignored （they should have been deducted from the proceeds and also deducted from administrative expenses）and calculating the finance charge at the nominal rate of 5% instead of the effective rate of 10%. Omission of accrued interest from current liabilities or including it at the incorrect amount

　　·despite the investment being described as ‘fair value through profit and loss’，many candidates credited the gain directly to equity

　　·leasehold property：a failure to depreciate it up to the date it became ‘held for sale'；not calculating the subsequent impairment loss and most candidates continuing to show it as a non-current （rather than a current） asset [the latter point not applicable to UK based papers]

　　·construction contract： often completely ignored，incorrect calculation of cost （usually omitting the plant depreciation），incorrect （or non-existent）presentation in current assets （amount due from customers） or non-current assets （carrying amount of the plant）.A lot of candidates who prepared workings for the contract then made no attempt to include the relevant figures in their financial statements.

　　·there were many errors in the treatment of the taxation in both the income statement and the statement of financial position，these included：debiting （should be credited）the over provision of the previous year’s tax； treating the closing provision （rather than the movement）of deferred tax as the charge in the income statement； and confusion over which amounts of tax should appear as non-current and current liabilities.

　　·a number of candidates are still showing equity dividends in the income statement （as an expense）rather than as part of the calculation of retained earnings.