INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN EXAMINERS COMMENTS SUBJECT Advanced Accounting and Financial Reporting SESSION Final Examination

- Summer 2011

General: The performance was reasonable except question nos. 2 and 3 where the students were not well prepared. It seemed that most of them had resorted to selective studying which is one of the main causes of the failure in almost all subjects. Lack of practice was quite evident as many students carried out long calculations to arrive at amounts which could have been calculated easily in far less time. It is disappointing to note that most candidates who appear for this paper have many years of practical experience of audit of financial statements. Yet, the answers they produce do not reflect this fact as most of them show poor presentation, lack of knowledge of important principles and an unprofessional approach. Q.1 The overall performance in this question was better. However, despite the fact that the topic of consolidation is tested in almost every attempt, there were many students who were not able to get good marks in the question although it involved quite simple adjustments. Some of the common mistakes witnessed in the answers were as follows: Unrealized profit on inventory was not eliminated while computing post acquisition profit of RGL. Some students considered it while computing the post acquisition profit for retained earnings calculation but ignored it while computing the non-controlling interest. While calculating goodwill many students treated the amount paid to the consultant as part of purchase consideration. Many students ignored it altogether although it should have been charged off against retained earnings. Fair value reserve on deemed disposal and increase in fair value as of Oct 1 were ignored in the calculation of Retained Earnings. Some students used the proportionate share method for valuation of Non Controlling Interest whereas according to the question, fair value method was required to be used. Moreover, the fair value of non controlling interest on the date of acquisition, was given in the question. The only adjustment required was to incorporate the share of post acquisition profit. However, many students wasted time on long and mostly incorrect/incomplete workings.

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Examiners Comments on Advanced Accounting and Financial Reporting Summer 2011 examination Q.2 In this question concepts from various standards were tested although the main requirement was to prepare a statement of comprehensive income. Majority of the students performed poorly as they lacked in-depth understanding of the principles involved. The common mistakes were as follows: (i) Many students did not produce the appropriate format of the statement of comprehensive income. They used the same format as was given in the question although it was clearly mentioned in the question that these were the extracts of the statement. Consequently, such students lost all the marks that were assigned to the format of the statement. Among those who tried otherwise, majority showed lack of knowledge and failed to present various line items with their correct description and at the correct place. A large number of candidates were entirely unaware of the concept of, or the need to compute, the liability component of the TFCs and the revised interest charge. Some tried to compute these but did not know the correct procedure. Some students used the coupon rate of interest for discounting purposes instead of the market rate.

(ii)

(iii) The concept of sale and lease back was better understood and generally the students were able to deal with this adjustment correctly. However, many students failed to recognize that the disposal was effected in October and hence the gain on disposal was to be recognized in respect of 6 months only. (iv) Majority of the students correctly deducted the dividend received from the value of investment in associates. However, only few students were able to bifurcate the share of profit of the associate between profit for the year and other comprehensive income. Most candidates included the entire amount in the profit for the year. (v) Majority of the candidates calculated the impairment correctly but erred in calculating the depreciation for the year.

(vi) The worst performance was witnessed in the area of taxation. Conceptual understanding was lacking completely. Many students ignored tax calculations whereas those who did attempt, managed to get few marks only as very few of them proceeded in a well planned and appropriate manner. Q.3 In this question an accounting entry was required for booking unwinding of discount, incremental depreciation on plant and increase in site restoration liability. The question was not too difficult as many candidates were able to secure full marks also. However, the overall performance was far below expectations. Probably due to lack of practice, majority of the students faltered in the middle of the question. Following are the key observations: Present value of site restoration cost on 1st April 2005 and on 31 March 2009 was correctly calculated but subsequent unwinding of discount was miscalculated by many candidates.

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Examiners Comments on Advanced Accounting and Financial Reporting Summer 2011 examination The decrease in present value of site restoration costs on account of change in discount rate on March 31, 2009 resulted in a corresponding increase in revaluation surplus. Later, the increase in the PV of restoration costs on March 31, 2011 should have been adjusted against the balance in revaluation surplus. Very few students displayed correct understanding of this concept. Initial revaluation surplus of Rs. 2.916 million was correctly calculated but subsequently the incremental depreciation was either ignored or miscalculated. Moreover, there were many students who ignored the revaluation altogether. In the Journal entry incorrect descriptions were frequently observed. Many candidates produced entries for the year 2006 to 2010 also. Such students are advised to utilize the 15 minutes additional reading time which is now being allowed, to understand the exact requirement of the question. Those students who waste their time in carrying out procedures which are not required, face serious time constraints in solving the remaining questions.

Q.4

Despite the fact that the topic of earnings per share is examined regularly, the performance was just about average. The following errors were frequently observed: (i) Many students carried out the working but did not prepare the note to be presented in the financial statement. Comparative figures were either not given or were not restated as required under IAS-33.

(ii)

(iii) Total comprehensive income was taken as profit attributable to the ordinary shareholders, for calculating basic and diluted earnings per share, instead of using profit after tax. Moreover, some students did not deduct preference dividend for arriving at the profit attributable to ordinary shareholders. (iv) The share price at the announcement of issue of right share was used to calculate the theoretical ex-right price and the bonus adjustment factor instead of using the price prevailing on the last date of exercising the right. Simple arithmetical errors were quite frequently made. Many students ignored the bonus adjustment factor altogether. Q.5 It was a simple question in which most of the information had already been provided and the candidates were simply asked to make correct presentation and disclosures in accordance with the requirement of IFRS. This question was generally well attempted; however, virtually in all cases, contribution paid to the Fund was not considered in the calculation of Fair Value of Plan Assets. Consequently, actuarial loss on such plan assets could not be computed correctly. In this question also, lot of students did not present their answers in the form of notes to the financial statements and instead, presented calculations and workings only.

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Examiners Comments on Advanced Accounting and Financial Reporting Summer 2011 examination

Q.6

This was another very straightforward question. Candidates were provided with all relevant information and were only asked to prepare Statement of Movement in Unit Holders Fund, of an asset management company. However, most candidates did not seem to be well prepared. Answers were marred by poor presentations. Frequent errors were witnessed in the classification of the line items. For instance, Appreciation on Re-measurement of Investments Available for Sale, was not shown separately and included in net income.

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