The Essential Guide: Exam Advice and Guidance For Trainees

APRIL 2011
EXAM ADVICE AND GUIDANCE FOR TRAINEES INCLUDING EXAMINERS FEEDBACK AND EXAMINABLE DOCUMENTS
L. 11 20 LOBA RIL G AP CCA EGS 5 .A _R E1 IN WWWXAM DL EA LES ES/E L Y D RU TR AM S/RU EN X T M A E EN A C D EX AC TU /S ST TE COM LA
THE ESSENTIAL GUIDE
ALL YOU NEED TO KNOW FOR THE JUNE 2011 EXAMS
STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011
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EDITORS CHOICE
Welcome to the Student Accountant Essential Exam Guide. This issue is packed with over 51,000 words of advice and guidance from examiners, examinable documents, and essential information to help you prepare for the June 2011 exams, including how to enter, deadlines, and exam rules. We strongly recommend that you read the examiner feedback relevant to the papers you are planning on taking in June. Reading the examiner feedback together with the published questions and answers from the latest exam session can help you identify where students have gone wrong in the past, and how to develop your answers to achieve the best marks possible. In addition to the examiner feedback, this issue also includes the examinable documents relevant to A the International papers for nancial infor ccess t reporting and audit, and the tax h mati on o e latest rates for the UK tax papers. These n in are essential reading for the June www Accoun Foundati ons t .acc 2011 exams. aglo ancy at bal.c The Noticeboard section includes om/ the exam timetable for June 2011, a information on how to apply for exams by the deadline of 15 April 2011 and exam rules and regulations. We also include information on the key aspects of Foundations in Accountancy, ACCAs new suite of entry-level qualications, and explain how applying for membership might be easier than you think. I hope that you nd this essential guide useful in helping you prepare fully for the June 2011 exams. Email me at studentaccountant@accaglobal.com with your thoughts feedback on this issue. Victoria Morgan Editor, Student Accountant magazine
04 CONTENTS
KEY DATES FOR THE JUNE 2011 EXAM SESSION

Exam entry deadline 15 April 2011 Exams start 6 June 2011 For a full list of the latest ACCA exam rules, go to page 73 of this issue
CAT EXAM DOCUMENTS ONLINE

Examinable documents relevant to CAT Papers 3, 6, 8 and 9 are available at www.accaglobal.com/students/pass/ examinable_documents
INTERACTIVE
Email us studentaccountant@ accaglobal.com your details if you would like to be profiled in Student Accountant
Welcome to the STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011

Please email studentaccountant@accaglobal.com with your feedback on this issue
EXAMS
12 ACCA QUALIFICATION FEEDBACK Feedback for variant papers is available online at www.accaglobal.com/students 12 Paper F1 13 Paper F2 14 Paper F3 16 Paper F4 (Global) 18 Paper F5 20 Paper F6 (UK) 22 Paper F7 25 Paper F8 29 Paper F9 32 Paper P1 34 Paper P2 36 Paper P3 38 Paper P4 39 Paper P5 43 Paper P6 (UK) 47 Paper P7 51 CAT QUALIFICATION FEEDBACK 51 CAT Paper 3 53 CAT Paper 4 55 CAT Paper 5 57 CAT Paper 6 58 CAT Paper 7 60 CAT Paper 8 61 CAT Paper 9 (UK) 63 CAT Paper 10 EXAM TECHNIQUE 06 Command words and revision tips 08 How to approach multiple-choice questions 10 A close look at question verbs 65 EXAMINABLE DOCUMENTS Relevant to ACCA Qualification financial reporting, audit and tax papers for the June 2011 exam sitting STUDENT ACCOUNTANT TECHNICAL ARTICLE ARCHIVE All technical content from Student Accountant is on ACCAs website at www.accaglobal.com/students/student_accountant/archive Answers to frequently-asked questions about ACCAs qualifications can be found at www.accaglobal.com/learningproviders/tuition_provider/faq
EDITORIAL TEAM Victoria Morgan Editor Glen Patterson Deputy editor Jackie Dollar Art editor Richard Gooding Designer Rhian Lewis Editorial executive WWW.ACCAGLOBAL.COM Jamie Ambler Digital publishing editor 29 Lincolns Inn Fields London WC2A 3EE United Kingdom tel: +44 (0)20 7059 5700 email: info@accaglobal.com www.accaglobal.com PUBLISHING AND ADVERTISING Adam Williams Head of publishing Anthony Kay Production manager For all advertising-related matters please contact Lisa Peake: tel: +44 (0)20 7902 1224 email: lisa@educate-direct.com Published by the Certified Accountants Educational Trust in cooperation with ACCA. The Council of ACCA and the publishers do not guarantee the accuracy of statements made by contributors or advertisers, or accept any responsibility for any statement which they may make in this publication. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without prior written permission of the publishers. CAET 2011 ISSN 1473-0979
RESOURCES
69 NOTICEBOARD ESSENTIAL INFORMATION TO HELP WITH YOUR EXAM ADMINISTRATION 70 ACCA Connect contact details and the latest ACCA and CAT Qualification and Foundations in Accountancy fees 71 Detailed exam timetable for the June 2011 exam session to help with your diary planning 72 Answers to your frequently-asked questions about exams and myACCA 73 Essential advice and rules that you should be aware of before you take your June 2011 exams
FOUNDATIONS IN ACCOUNTANCY
ACCAs new suite of entry-level qualifications will be first examined in the December 2011 exam session. Find out more on page 73 of this issue
STUDENT ACCOUNTANT to a new In addition to this twice-yearly printed issue, we also email an alert
issue of Student Accountant every two weeks. Make sure youre keeping up to date with the latest issue at www.accaglobal.com/sa
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TECHNIQUE TIPS
EXAM TECHNIQUE
UNDERSTANDING COMMAND WORDS
Examiners frequently complain that students do not read exam questions properly, not just misunderstanding the requirement but also ignoring the question structure. As a result, students often lose marks because of poor exam technique even if their syllabus knowledge is faultless. Understanding command words is the key. Examiners choose these words with care, and use them to show how they want the question to be answered, and to indicate how they will be awarding marks. For example, in a discursive question you might be asked to explain or discuss. This means you have to demonstrate in-depth knowledge (so you can explain), or show your understanding of related issues (so you can discuss); if you simply provide a list of statements then you are unlikely to gain all the marks on offer. However, if you are asked to list key points, then extra explanation is unnecessary, wont gain extra marks and crucially will waste valuable exam time. Go through past papers and identify all the different command words used and ask for help if youre not sure what youre being asked to do, as command words are signposts to a successful answer.
IDENTIFY ALL THE DIFFERENT COMMAND WORDS
DEMONSTRATE IN-DEPTH KNOWLEDGE OR EXPLAIN
LIST KEY POINTS
SUCCESSFUL ANSWERS
See page 8 for a list of common question verbs
REVISION TIPS IMPROVE YOUR TECHNIQUE
JUNE 2011 MON
Its easy to feel overwhelmed when starting the revision phase so much work to get through and so little time. But by stepping back and planning strategically, revision can be easier, quicker and more effective. Start by drafting a revision timetable. This provides a perspective on what needs to be done, sets targets, and breaks down the workload into more manageable chunks. You can also use the timetable to prioritise those areas needing extra attention. Reading notes and study texts are all part of the process, but active revision is more engaging from simply highlighting key words, to
creating diagrams to help you understand and remember key concepts. Note cards are another useful device, especially as they are portable enabling revision wherever you go. Past paper practice is another must, helping you test both knowledge and exam technique. Schedule time for at least one mock exam before you take the real thing, so you can get a feel for the exam process, and practise your time management skills. And finally, make sure you take enough breaks, eat healthily and save some time for family and friends balance is important if you want to be in the best shape possible when you finally take your exam.
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TECHNIQUE TIPS
EXAM TECHNIQUE
MULTIPLE-CHOICE QUESTIONS THE GOLDEN RULES
Multiple-choice questions (MCQs) are not easy. Demanding both syllabus knowledge and the right technique, good MCQ performance can mean the difference between pass and fail. So what should you remember? First, prepare thoroughly, revising across the syllabus. Although some material is clearly more suitable for MCQs calculations for example, or definitions of terms dont try to predict which syllabus areas MCQs will cover. In the exam, think clearly and read carefully. Much time and effort goes into preparing MCQs, and especially into the distractors the wrong answers. These wrong choices replicate common mistakes and so will seem very plausible, especially under exam conditions. Always make a considered choice when choosing your answer. Good time management is crucial, although its better to allocate time to groups of MCQs rather than individual questions. Youll probably find some MCQs take less time to answer than others by completing these questions first youll know how much time is left to answer the more difficult MCQs. And finally answer all the questions. There are no penalties for wrong answers, but definitely no marks for an unanswered question. Try not to guess, but if youre running out of time or knowledge make an educated choice.
MULTIPLE-CHOICE QUESTIONS AND TOP TIPS ON STRESS MANAGMENT
STRESS MANAGEMENT
EXAM SUCCESS
Exam stress affects even the most experienced ACCA student, and although it can keep you focused and alert, it can also affect your exam performance. Keeping stress under control is, therefore, crucial. To combat stress, plan ahead as much as possible. Create a revision schedule and if you start to slip behind, then work out how to catch up before it becomes a real problem. Above all, avoid the panic that prompts last minute, late night cramming guaranteed to raise stress levels. And dont forget exam technique when you enter the exam hall you need to feel confident, knowing both the syllabus and the structure of the exam paper. Exercise and healthy eating can keep stress levels low. A 10-minute walk will help get things in perspective, and refresh you for more effective revision. Avoid too much caffeine, sugary drinks and junk food eaten at your desk these can affect your overall wellbeing, making things worse, not better. And practise some quick and easy relaxation techniques for the day of the exam, such as slow breathing, or tensing then relaxing muscles. See what works for you and use it to counter any stress that could build up while you wait for the exam to start.
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TECHNIQUE TIPS
EXAM TECHNIQUE
INTELLECTUAL LEVELS AND QUESTION VERBS
We take a look at the intellectual levels for the ACCA Qualification papers, which should help you know how to answer questions at different levels that you might be asked to do in an exam. It is particularly important to consider INTELLECTUAL LEVELS Knowledge and comprehension Papers F1F3 retention and recall of knowledge understanding of major accounting and business ideas, techniques and theories use of knowledge and techniques in new but familiar situations recognition of fundamental cause and effect in accounting. the question requirements carefully to make sure you understand exactly what is being asked, and whether each question part has to be answered in the context of the scenario or is more general. You also need to be sure that Application and analysis Papers F4F9 analysis of unfamiliar situations to prepare reports and solve problems using relevant concepts and theories recognition of subtle or hidden information patterns and trends within financial and other information, and the ability to interpret these the ability to infer from given information and draw conclusions. tips Clearly explain the resemblances or differences. Conclusion Intellectual level 2 ,3 Actual meaning The result or outcome of an act or process or event, final arrangement or settlement Key tips End your answer well, with a clear decision. Criticise Intellectual level 3 Actual meaning Present the weaknesses/ problems; evaluate comparative worth Dont explain the situation; instead analyse it Key tips Criticism often involves analysis. Define Intellectual level 1 Actual meaning Give the meaning; usually a meaning specific to the course or subject Key tips Also explain the exact meaning because usually definitions are short. Describe Intellectual level 1, 2 Actual meaning Give a detailed account or key features. List characteristics, qualities and parts Key tips Make a picture with words; identification is not sufficient. Discuss Intellectual level 3 Actual meaning Consider and debate/argue about the pros and cons of an issue. Examine in-detail by using arguments in favour or against Key tips Write about any conflict, compare and contrast. Evaluate Intellectual level 3 Actual meaning Determine the scenario in the light of the arguments for and against Key tips Mention evidence/case/point/ issue to support evaluation. Explain Intellectual level 1, 2 Actual meaning Make an idea clear. Show logically how a concept is developed. you understand all the tasks that the question is asking you to perform. The different levels of the ACCA Qualification each address different intellectual levels. See table below for further information. Evaluation and synthesis Papers P1P7 generalisation, comparison and discrimination using complex and unstructured information assessment and evaluation of complex information use of reasoned argument to infer and make judgments presentation and justification of valid recommendations. Give the reason for an event Key tips Dont just provide a list of points, add in some explanation of the points youre discussing. Illustrate Intellectual level 2 Actual meaning Give concrete examples. Explain clearly by using comparisons or examples Key tips Add in some description. Interpret Intellectual level 3 Actual meaning Comment on, give examples, describe relationships Key tips Include explanation and evaluation. List Intellectual level 1 Actual meaning List several ideas, aspects, events, things, qualities, reasons, etc Key tips Dont discuss; only make a list. Outline Intellectual level 2 Actual meaning Describe main ideas, characteristics, or events Key tips Briefly explain the highlighted points. Recommend Intellectual level 3 Actual meaning Advise the appropriate actions to pursue in terms the recipient will understand Key tips Give advice or counsel. Relate Intellectual level 2, 3 Actual meaning Show the connections between ideas or events Key tips Relate to real time examples. State Intellectual level 2 Actual meaning Explain precisely Key tips Focus on the exact point. Summarise Intellectual level 2 Actual meaning Give a brief, condensed account Include conclusions. Avoid unnecessary details Key tips Remember to conclude your explanation.
ACCA examiners have highlighted the lack of understanding of the requirements of question verbs as the most serious weakness in many candidates scripts. Given below are some common question verbs used in exams. QUESTION VERBS Analyse Intellectual level 2, 3 Actual meaning Break into separate parts and discuss, examine, or interpret each part Key tips Give reasons for the current situation or what has happened. Apply Intellectual level 2 Actual meaning To put into action pertinently and/or relevantly Key tips Properly apply the scenario/case. Assess Intellectual level 3 Actual meaning To judge the worth, importance, evaluate or estimate the nature, quality, ability, extent, or significance Key tips Determine the strengths/weaknesses/importance/ significance/ability to contribute. Calculate Intellectual level 2, 3 Actual meaning To ascertain by computation, to make an estimate of; evaluate, to perform a mathematical process Key tips Provide description along with numerical calculations. Comment Intellectual level 3 Actual meaning To remark or express an opinion Key tips Your answer should include an explanation, illustration or criticism. Compare Intellectual level 2 Actual meaning Examine two or more things to identify similarities and differences Key
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EXAMS
ACCA FEEDBACK
PAPER F1 ACCOUNTANT IN BUSINESS
The December 2010 exam saw a more even performance by candidates across all syllabus areas than in previous sessions. It appears that candidates are now preparing for questions on as many subject areas as possible, and this has resulted in few questions having very low pass rates. This is in contrast to earlier papers, when candidates scored higher pass rates on accounting and finance questions than those relating to organisations and human resources management. While pass rates on the latter were generally high, candidates also performed well on topics that have presented major difficulties in the past. The highest pass rates were on questions relating to the relative advantages of computerised systems and manual systems, the use of spreadsheets at work, time management, purchase ledger, organisational concepts (scalar chain and span of control) and the Blake and Mouton managerial grid. Lower pass rates were achieved on questions relating to control, International Accounting Standards, training assessment, the contribution of the accounting function to marketing activities, data protection, security and Belbins team roles theory. It should be noted that some of these questions were worth a single mark, confirming that such questions can still present as many problems to some candidates as those worth two marks. Over 70% of candidates answered questions on job description, selection, outsourcing and leadership styles successfully, which is encouraging given the historically lower pass rates on questions relating to human resources management. The majority of candidates also answered questions on leadership theory, organisational culture, Honey and Mumfords learning styles and multi-skilling successfully. Inevitably, some candidates guessed the answers to certain questions, witnessed by the choice of option D for questions with only A, B and C as available answers, and option C or D for questions with two choices of A or B. SAMPLE QUESTIONS Question 23 required an understanding of the contribution of the accounting function to the activities of the marketing department. Analysis of costs and revenues of different products would assist the marketing department in respect of which activity? A Differentiating the technical features of products from those of competitors B Calculating the maximum discounts that sales personnel are permitted to offer C Targeting sales efforts towards the most appropriate socio-economic groups D Determining production bonuses to be paid The correct answer is B. By analysing costs and revenues through the use of marginal costing or related techniques, the marketing department will know the extent to which discounts will erode profit margin or contribution. Analysis of costs and revenues cannot help the marketing department to differentiate the technical features of products from those of competitors, as the accounting information provided does not identify such information either for competitors or the company itself. Likewise, analysis of costs and revenues serves little purpose in relation to targeting socio-economic groups, as this requires qualitative assessment of customer needs and buyer motivation. Production bonuses are not ordinarily decided by the marketing department. Only 36% of candidates answered this question correctly. Question 24 related to data protection. Which of the following principles is usually recommended for inclusion in legislation on data protection? A The data user should provide the data subject with regular and detailed information on the data held B All personal data held by data users should be updated by checking this data with the subject at regular intervals C All personal data held by data users should be adequate for the purposes of the data user but not excessive D All personal data held by data users should be reviewed regularly and automatically deleted after a specified period of time The correct answer is C. It is a generally accepted principle that organisations should hold only data that is necessary for operational purposes, and should not store data that goes beyond such purposes. It is impractical for most organisations to provide regular detail updates on personal data held, and arguably of little importance to most data subjects, who in many jurisdictions have a statutory right of access if they wish to obtain such information from a data user. It is also impractical for data users to enter into regular dialogue with data subjects in order to check and update the data, though many organisations do so for the purpose of marketing. It is undesirable for organisations to automatically delete all data after a specified period of time, as it is usually appropriate that some data is held for long periods while other many be retained for just a single transaction. Only 36% of candidates answered this question correctly. Question 45 related to different types of control in relation to management of accounting information. DEF Co has decided to include in each customers account number a check digit which will have an arithmetical relationship to other digits in the account number. This is an example of which of the following types of control? A Input control B Back-up control C Output control D Contingency control The correct answer is A. Most candidates eliminated distractor C, but responses were evenly spread across the other three choices. In this context, a check digit is usually a number included in an account number that is calculated from the other numbers in it. For example, it could be digit 2 plus digit 5 divided by digit 3. If an operative makes a transcribing error, the check digit helps to identify the input error. Check digits are not used for the other three purposes. Only 36% of candidates answered this question correctly. CONCLUSIONS The ability of many candidates to answer questions across all areas of the syllabus confirms that prospects of success in Paper F1 are enhanced by a sound knowledge and good understanding across all areas of the syllabus. The questions ask candidates to demonstrate their knowledge and apply knowledge at a basic level. None of the learning objectives are examined in great depth, so it is unnecessary to spend many hours on each topic. There is no evidence to suggest that this paper is time pressured, so
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candidates will always benefit from reading the requirement carefully in order to arrive at the right answer. In order to maximise use of the time available, candidates should avoid selecting answers too quickly or spending too long persuading themselves that their choice is appropriate. It is especially important to give due consideration to all answer options, as the distractors are all usually quite plausible, but incorrect alternatives. Candidates may sometimes underestimate the amount of thought they should give to a question, and this seems to be backed up by performance on certain questions in December, where the pass rate was comparatively low on topics that previously caused little difficulty. Examples include Porters value chain, procurement and assessment of the effectiveness of training. Candidates are encouraged to answer every question on the paper. Even if the correct answer is not known, it may be possible to arrive at it by ruling out the distractors as incorrect. This process of deduction can be practised using the Pilot Paper and materials produced by learning providers.
was weak in each case less than 40% of the candidates selected the correct answer. Each of these questions carried two marks and each related to a mainstream topic in the Study Guide. SAMPLE QUESTIONS FOR DISCUSSION EXAMPLE 1 A company which operates a process costing system had workinprogress at the start of last month of 400 units (valued at $3,000) which were 40% complete in respect of all costs. Last month 1,500 units were completed and transferred to the finished goods warehouse. The cost per equivalent unit for output produced last month was $20. The company uses the FIFO method of cost allocation. What is the total cost of the 1,500 units transferred to the finished goods warehouse last month? A $26,800 B $28,200 C $29,800 D $30,000 The correct answer was C. This question tested Section D6(g) and (h) in the Study Guide. If 1,500 units were completed in the month then 1,100 units (1,500400) must have been started and finished in the month. These are valued at $22,000 (1,10020). The 400 units from opening workinprogress (WIP) were already 40% complete so last month would have had 60% of work done to complete them. The total value of the 400 units is, therefore, calculated as: $3,000+$(4000.620) = $7,800. The total value of the months output was $(22,000+7,800) = $29,800. Each of the three wrong answers was selected by at least 17% of the candidates. Candidates selecting answer A had simply failed to add in the $3,000 opening WIP value. Answer B could have been obtained by valuing the 400 units as follows: $3,000+$(4000.420) = $6,200. This had taken the percentage
to complete the WIP as 40% instead of 60%. Answer D was simply 1,500 units valued at $20 per unit and made no adjustment for WIP . EXAMPLE 2 A company uses standard marginal costing. Last month the budgeted contribution was $20,000 and the only variances that occurred were as follows: Sales price Sales volume contribution Fixed overhead expenditure $ 3,000 5,000 1,000 Adverse Favourable Adverse
What was the actual contribution last month? A $18,000 B $19,000 C $21,000 D $22,000 The correct answer was D. This question tested Section E5(b) of the Study Guide the reconciliation of budgeted and actual contribution under marginal costing. The fixed overhead expenditure variance is not relevant to a reconciliation of budgeted and actual contributions. Fixed costs are deducted afterwards from contribution to arrive at profit. Therefore, the correct calculation of actual contribution was: (20,0003,000 + 5,000) = $22,000. Answer A was obtained by adding the adverse sales price variance and subtracting the favourable sales volume contribution variance to the budgeted profit. Answer B could have been obtained in two (wrong) ways. First, by simply deducting the adverse fixed overhead expenditure variance from the budgeted contribution. Second, by netting the three variances listed in the question and then deducting this net figure from the budgeted contribution there were two errors made in this case. The most popular wrong answer was C (chosen by a third of the candidates) which added the net of all three variances listed to the budgeted contribution. EXAMPLE 3 Are the following statements, which refer to different types of budgets, true or false? STATEMENT 1 An annual budget that can be broken
PAPER F2 MANAGEMENT ACCOUNTING
This was the seventh exam under the current syllabus. The two-hour paper, as usual, contained 50 multiple-choice questions 40 carried two marks each and the other 10 carried one mark each. This mix continues to be exactly in line with the Pilot Paper. The overall general performance of candidates improved at this sitting compared with recent sittings. The performance on an individual question basis also improved on this occasion, on only a very few questions was the correct answer not selected by at least 40% of the candidates. The following questions taken from the December 2010 exam are ones where the performance of candidates
PAPER F1 CANDIDATES ARE ENCOURAGED TO ANSWER EVERY QUESTION ON THE PAPER. EVEN IF THE CORRECT ANSWER IS NOT KNOWN, IT MAY BE POSSIBLE TO ARRIVE AT IT BY RULING OUT THE DISTRACTORS AS INCORRECT. THIS PROCESS OF DEDUCTION CAN BE PRACTISED USING THE PILOT PAPER AND MATERIALS PRODUCED BY LEARNING PROVIDERS.
14 EXAMS
PAPER F2 CANDIDATES SHOULD READ PREVIOUS PAPER F2 EXAMINERS REPORTS THEY ARE ALL STILL VERY RELEVANT AND HELPFUL. EACH CONTAINS THREE MULTIPLE-CHOICE QUESTIONS. ACCESS THESE ON THE ACCA WEBSITE.
down into monthly budgets, which differ depending on the number of working days in each month, is called a flexible budget. STATEMENT 2 An annual budget set before the start of a year based on estimated sales and production volumes is called a fixed budget. A B C D Statement 1 Statement 2 True True False False True False False True Read previous Paper F2 examiners reports they are all still very relevant and helpful. Each contains three multiple-choice questions. Access these on the ACCA website.
Cash flows from financing: Issue of share capital (120+60)(80+40) Repayment of bank loan (100150) Net cash inflow from financing
$000 60 (50) 10
The most common answer selected was D which included retained earnings in the calculation which is incorrect. Candidates need to spend more time learning the format and technique for answering questions on this topic. 2 Smith and Jones commenced in partnership on 1 December 2009 sharing profits equally. Smith paid cash of $40,000 into the partnership. Jones paid in cash of $25,000 and brought in a motor vehicle, computer and furniture worth $15,000. The partners maintain both capital and current accounts. The partnership pays interest on capital at 4% per annum. What should the balance be on the capital accounts of Smith and Jones at 30 November 2010? A B C D Smith $41,600 $40,000 $40,000 $41,600 Jones $41,600 $40,000 $25,000 $26,000 (2 marks) The correct answer is B. Only 33% of candidates selected B, with the majority selecting option A. Partnership accounts is another area that seems to consistently show poor performance. It is a large part of the Paper F3 syllabus so it is surprising that candidates perform so badly. This question required knowledge of what should be included in the capital accounts of a partnership. There were no complicated calculations to perform, so this shouldnt have caused any problems. The correct answer of B shows both partners contributing an equal amount of capital the only difference being that Jones has paid cash and other assets into the partnership. Most candidates selected A which meant that they correctly identified the capital balance, but then added on the interest on capital, which should be included in the current account balance. 3 The statement of financial position of Cartwright, a limited liability company, shows closing retained earnings of $320,568. The income statement showed profit of $79,285. Cartwright paid last years final dividend of
PAPER F3 FINANCIAL ACCOUNTING
The correct answer was D. This question tested section E3(a) in the Study Guide the explanation of fixed, flexible and flexed budgets. A flexible budget is one which recognises different cost behaviour patterns and is designed to change to reflect different volumes of activity. Therefore, statement 1 is false. Statement 2 describes a fixed budget and is, therefore, true. All three incorrect answers were selected by significant numbers of candidates even the least popular choice (Answer C the exact opposite to the correct answer) was chosen by nearly 16% of the candidates. This seems to indicate that this part of the Study Guide is generally not well understood. Future candidates are advised to: Study the whole syllabus. The exam will always cover all sections of the Study Guide. Use the Pilot Paper questions for practice. The Pilot Paper is also a very good guide to the styles of questions that will continue to be set and to the coverage of the topics in the Study Guide. It is also gives a good indication of the approximate split between calculation and non-calculation questions that will continue in exams up to and including the June 2011 sitting. Practise as many multiple-choice questions as possible in preparing for the exam. Read questions carefully in the exam.
The following three questions have been taken from the International variant of the paper and were the three questions with the lowest pass rates on the paper. The aim of reviewing these questions is to give future candidates an indication of the types of questions asked and guidance on dealing with exam questions. SAMPLE QUESTIONS FOR DISCUSSION 1 The following extract is from the financial statements of Pompeii, a limited liability company at 31 October: Equity and liabilities Share capital Share premium Retained earnings Non-current liabilities Bank loan 2010 $000 120 60 85 265 100 365 2009 $000 80 40 68 188 150 338
What is the cash flow from financing activities to be disclosed in the statement of cash flows for the year ended 31 October 2010? A $60,000 inflow B $10,000 inflow C $110,000 inflow D $27,000 inflow (2 marks) The correct answer is B. Only 32% of candidates answered this correctly. In terms of difficulty this question was not particularly complicated, but statements of cash flows have been consistently answered badly in each sitting of the paper. In this question, the answer can be derived as follows:
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EXAMS
$12,200 during the current year and proposed a dividend of $13,500 at the year end. This had not been approved by the shareholders at the end of the year. What is the opening retained earnings balance? A $241,283 B $387,653 C $254,783 D $253,483 (2 marks) The correct answer is D and almost 36% of candidates selected this option. This question required knowledge of how dividends are treated in the financial statements and then working backwards to obtain the opening retained earnings balance. The solution is calculated as follows: Opening retained earnings + profit prior year final dividend = closing retained earnings Opening retained earnings = $79,285 $12,200$320,568 Opening retained earnings = $253,483 The most frequently selected incorrect answer was B. This distracter took closing retained earnings as the opening balance and then added profit less the final dividend ($320,568+$79,285 $12,200). This is a careless error from not reading the question carefully enough. CONCLUSION It has been surprising that these questions were the worst answered on the paper at this sitting. They cover key exam topics and all are relatively straightforward. Partnerships and statements of cash flows are consistently amongst the worst answered questions in the paper, which seems to highlight that candidates are not preparing sufficiently in these areas. At the risk of repeating the conclusion of previous reports, candidates must focus on the breadth of the syllabus as this exam will examine the whole range of the Study Guide and candidates need to prepare for this.
PAPER F4 (GLO) CORPORATE AND BUSINESS LAW
As usual, this paper was made up of 10 compulsory questions, each of 10 marks, although many of them were subdivided into distinct parts. I have previously stated that this format seems to have settled down
and to meet with candidates approval from way they tackle it. That seems still to be the case and some learning providers commented positively on the format. However, it should be said that a number of candidates did not follow the structure and provided general and obviously prepared answers to specific topics. This is a point I will return to on a number of occasions in my report. It has to be recognised that the performance of candidates was unsatisfactory. This paper should have been tackled much better than it was by the generality of candidates. As I have said many times the syllabus is wide and it has to be fully examined over time. While it is recognised that some aspects of the syllabus are less central than others and hence are examined less frequently, they nonetheless have to be examined at some time. However, when these areas are examined they are generally presented in the context of a paper that provides more than ample opportunity to reach a pass standard through an adequate treatment of more obvious, not to say easier topics. I strongly suggest that such is the case in the paper under consideration. I hope to demonstrate this when I consider the individual questions. Consider Question 5 on registers and accounting records. When this question was asked before, some time ago, I had assumed it would be an easy question for people doing an accountancy qualification. In the event I was wrong and it was done inadequately as it has been again. However, the subject is on the syllabus and has to be examined over time. Moreover, I still maintain it is not only relevant, but important for students to be aware of the interface between law and other more obviously accountancy-based modules. Even if Question 5 was not expected, it should equally be noted that both Questions 3 and 6 were extremely generous in the breadth of approach they allowed candidates. These questions could have been much narrower, but were deliberately written to afford candidates as much scope as possible to answer them. This paper was far more accountancy focused than previous papers and gave candidates the opportunity to use their core basic accountancy knowledge. Questions 4, 5 and 9 should have been answered extremely well but answers varied considerably. Candidates seemed to completely forget anything else and did not have the ability to draw on brought forward knowledge to answer
the questions. Candidates do not seem able to recognise how the various different topics from their studies fit together. It would appear that in preparing answers rather than topics, candidates fail to come to terms with the underlying law and struggle when a topic is examined in a way that they have not prepared for. I will return to this aspect in the detailed consideration below. This also relates to the issue of question spotting and the structure of the paper. For some time now the paper has adopted a fairly standard structure. Thus, Question 1 will always be on legal systems, Question 3 on the UN Convention on Contracts for the International Sale of Goods (CISG) with Questions 46 usually being on company law. The problem questions always start with a contract question, although the actual topic covered changes. Question 9 is usually a company question. While it is good that learning providers can give candidates an indication of the likely structure of the paper, it is becoming apparent that some candidates are no longer actually engaging with the question set, but are simply adopting the approach that says This is Question 8, it must be about contract here is everything I know about contract law, from offer to remedies. Question 10 is where insider dealing has turned up, so here is an answer on insider dealing. Some candidates clearly prepare answers to topics and deliver them, even if they are not relevant. Such action merely indicates that the candidates do not actually understand the underlying legal concepts or principles. It is apparent that some candidates prepare answers based on questions from the previous paper and submit them as answers to completely different questions. What follows is an analysis of the way in which question were attempted by candidates, although as usual, the emphasis tends to be on the negative aspects rather than focusing on the sound work that many candidates produced. SPECIFIC COMMENTS QUESTION 1 This question required candidates to answer a question on the separation of powers. It is pleasing to report that the question was dealt with well by the vast majority of candidates. Part (a) was generally done well with most candidates being able to
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WHILE IT IS RECOGNISED THAT SOME ASPECTS OF THE PAPER F4 SYLLABUS ARE LESS CENTRAL THAN OTHERS AND HENCE ARE EXAMINED LESS FREQUENTLY, THEY NONETHELESS HAVE TO BE EXAMINED AT SOME TIME. WHEN THESE AREAS ARE EXAMINED THEY ARE GENERALLY PRESENTED IN THE CONTEXT OF A PAPER THAT PROVIDES MORE THAN AMPLE OPPORTUNITY TO REACH A PASS STANDARD THROUGH AN ADEQUATE TREATMENT OF MORE OBVIOUS TOPICS.
explain the meaning and purpose of the doctrine. It was especially pleasing to see some candidates taking advantage of the possibility of considering their own political systems in their analysis of the concept. Part (b) was done fairly well, with some answers even considering the impact of the UKs membership of the European Union. QUESTION 2 This question referred to the possibility of setting aside arbitration decisions under the UN Convention. Given the fact that it has been examined on a number of times, it has to be said that it was not done as well as expected. This question was the first example of the prepared answer. Arbitration has been examined as Question 2 in many recent papers and candidates appeared to have prepared the generic arbitration answer. As such these generic answers considered everything relating to arbitration and some fortunately gained some marks by eventually stumbling on to the actual topic of the question. However, the relevant content tended to be too little too late, and time would have been much better spent focusing on the actual issue. In relation to the actual topic, although many candidates were able to deal with it very well indeed, a significant number confused setting aside with the right to appeal against an arbitral decision. QUESTION 3 This was a wide-ranging question on the remedies available for breach of contract, so it did not require answers about the formation of contracts, consideration or terms. However, those candidates who had prepared general answers provided such details, but got no marks for them. The standard of answers produced on this question varied in standard quite considerably. Often full marks were awarded to candidates who explained the definition of a breach of contract, addressed different types of breach and in particular fundamental breach, and fully explained the remedies available to the buyer with reference to the convention. However, a substantial number of candidates produced answers that were unstructured and lacking in focus, which was disappointing given the centrality of remedies in the syllabus. QUESTION 4 This question related to share issue and the rights of shareholders. Although it had never been examined before, it was deliberately worded in a way to afford candidates the possibility to use their wider business/accountancy knowledge within the context of specific legal provisions. On the whole it was done at least fairly well. Part (a): this should have been done very well. The types of share and the rights of shareholders are a basic concept for any candidate studying accountancy. However, answers to this were extremely confused. Pre-emption rights were confused with promoters of companies and companys first issue of shares, which was simply incorrect. Only a small number of candidates were able to describe pre-emption rights and where this was the case, full marks were often awarded. Part (b): this was generally well done with most candidates being able to define what a rights issue was. Answers scored full marks where candidates described that rights issues could be made at less than market value, rights did not have to be taken, and that the purpose was to raise more capital for the company. Part (c): again, this was generally well done but some candidates thought that a bonus issue was a payment to employees for good work.
QUESTION 5 This question related to company registers and charges and has already been referred to in the introduction to this report. Part (a) referred to registers. Answers were mixed. A high number of candidates approached the question from a company constitution angle and described the Memorandum of Association and Articles. Some candidates misinterpreted the question and described the role of the company secretary and the documents needed to form a company in the first place. No marks were awarded for these types of answers. The suspicion is that as these topics have been examined in the recent past candidates expected that they would not be examined again. Some were fortunate that registration documents and registers both refer to members and directors. Part (b) related to company accounts. Surprisingly, not many candidates scored full marks in this part. Sometimes candidates took an extremely complex view of the question and explained corporate governance procedure. Again, corporate governance must be examined somewhere so prepare and provide a general answer on that topic. But once again the generic prepared answer was not appropriate. Some answers focused on the actual records and documents which need to be kept. Answers were succinct and to the point and mentioned receipts and purchase invoices, records of cash, assets and liabilities. Credit was also awarded for discussion of the income statement, statement of financial position and cashflows. QUESTION 6 This question related to company directors duties. There can be no more central concept in company law and one that has been examined on many occasions and in many different ways. As has been said in the introduction, this formulation was deliberately chosen as the widest way of examining the topic. Candidates were either extremely knowledgeable in this area and were awarded full marks or answers were inadequate. Where candidates did not know the statutory duties, credit was given for relevant points which demonstrated a basic understanding. For example, promoting the success of the company was interpreted by some as making the company perform to the best of its ability and ensuring
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EXAMS
success. The benefit of the doubt was given to candidates and marks were awarded accordingly. Some candidates explained in great detail the different types of directors, and the process of appointment and removal and the concept of corporate governance. This type of answers received no marks. Directors duties are a common topic, so it was surprising to note that some candidates did so poorly, but once again it is symptomatic of the prepared answer syndrome, built on no real underpinning of understanding. Corporate governance is an important part of the syllabus, it has been examined in a particular way in the past, so any question on directors must relate to corporate governance and of course the Directors Disqualification Act 1986, which must always be mentioned together with fraudulent and wrongful trading, because there is a really good chance that they will turn up except when they dont. QUESTION 7 This question related to the UNCITRAL model law on credit transfers, and it was inadequately answered. This was clearly a topic for which candidates had not prepared any standard answers and such lack of preparation clearly caused confusion amongst those attempting the question, and many did not even attempt to do this question. As a result the best that some candidates could do was to repeat the question in their answer. Part (b) was done even less well. QUESTION 8 This first scenario question, as usual referred to contractual issues under the UN CISG, specifically the requirement as to quality under Article 35. As a topic that is central to the syllabus and one that has been examined on a number of times previously, if in different forms, it might have been thought that this was a question that could have been answered fairly well. However, although some candidates were well prepared on the specifics, a significant number of
candidates prepared generic answers on CISG, starting from offer and ending with remedies, which is not the same thing at all, and merely evidences a lack legal knowledge and analytical skill. QUESTION 9 This question related to the rules governing the payment of company dividends, particularly in relation to a plc. The topic has been examined on numerous occasions previously, but this was the first time that it had appeared in the form of a problem scenario. The way in which candidates dealt with this question perfectly encapsulates the main point of this report, that those who understand the underlying legal principles can deal with the questions no matter how they are presented, but that those who are simply learning rote answers get lost quickly and too easily. Part (a): answers varied in standard quite dramatically. Some candidates were able to discuss that a dividend can only be paid out of accumulated realised profits less accumulated realised losses. They also recognised that a public company may only make a distribution if, following the distribution, the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves. This was extremely encouraging and showed a good understanding of the subject. Answers concluded that the dividend was illegal as the revaluation reserve is undistributable. At the other end of the scale, other candidates thought that the revaluation was distributable and that the dividend was legal. Others did not even approach the legality of the dividend at all and instead went down the route of resolutions and procedures needed for the declaration of dividends. Furthermore, some candidates concluded that all shareholders were entitled to a dividend and if one had been declared, and then one should be paid. Part (b): some sound answers in relation to the liability of directors,
shareholders and auditors also were produced. Some candidates ignored this part of the question altogether or concluded that Dee and Eff had done nothing wrong and as the shareholders had approved the dividend, it should be paid. This conveyed a complete lack of understanding of the principles and indeed of the question as a whole. QUESTION 10 This question required candidates to compute the amounts for distribution between the partners. Answers were mixed. Some answers understood that partners had unlimited liability, that the partnership could be wound up at the wish of the partners, that external creditors needed to be paid before partners and that, as the partnership agreement outweighs the Partnership Act 1890, the remainder was to be spilt in accordance with the CSR. A lot of marks were available for merely calculating the final distributions, so this question gave the opportunity for lots of marks to be awarded. Where the approach to the question was correct as outlined above, seven marks were often awarded. The point of the question was once again to place accountancy practice in a legal context and vice versa. Some candidates believed that the question related to voluntary winding of a company and wrote at length about preferential creditors. Whilst some similarities can be drawn, this was an incorrect approach and demonstrated a fundamental lack of basic understanding between how a company operates compared to a partnership. Others wrote everything they knew about partnerships and the different ways in which a partnership could be dissolved including death of a partner, etc. This was not relevant and further displayed a general lack of application skills.
PAPER F5 PERFORMANCE MANAGEMENT
This was my first paper as the new examiner for Paper F5 but the syllabus remained
SOME PAPER F4 CANDIDATES CLEARLY PREPARE ANSWERS TO TOPICS AND DELIVER THEM, EVEN IF THEY ARE NOT RELEVANT. SUCH ACTION MERELY INDICATES THAT THE CANDIDATES DO NOT ACTUALLY UNDERSTAND THE UNDERLYING LEGAL CONCEPTS OR PRINCIPLES. IT IS APPARENT THAT SOME CANDIDATES PREPARE ANSWERS BASED ON QUESTIONS FROM THE PREVIOUS PAPER AND SUBMIT THEM AS ANSWERS TO COMPLETELY DIFFERENT QUESTIONS.
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exactly the same as in previous sittings. The structure of the paper also remained the same five questions worth 20 marks each although, in this paper, there was a 20-mark discussion question. The purpose of this was to balance the paper; there was quite a lot of information to absorb in Question 2 and there were quite a few calculations to perform in Question 3, albeit basic ones. By the time candidates got to Question 5, it was felt that they would benefit from a chance to display their understanding of budgeting without having to absorb much information. As accountants, we often have to write reports that include little or no numerical analysis. This need for clarity of expression is explicitly required at the Professional level papers, so it seems a good idea to start preparing candidates more for this now. The pass rate on this paper saw a drop from previous recent sessions. I believe that the reason for this is primarily that candidates tried to question spot. So, for example, because linear programming came up in June 2010, the belief was that it would not come up again in December 2010. The lesson to be learnt is that you cant question spot in these exams. You have to make sure that you are comfortable with every area of the syllabus; otherwise you may be caught out. Anyone who watched the Examiners Special Student Engage event in September should have got this message This is still availlable on ACCA.TV. The paper was 54% computational and 46% narrative, since within Question 2 there were a certain number of marks available for the calculations. On the whole, Question 4 was the best answered, although there were still a surprising number of candidates uncomfortable with the area of activitybased costing (ABC). In every question, candidates had the opportunity to earn some easy marks quickly, and wellprepared candidates attempted these parts first. SPECIFIC COMMENTS QUESTION 1 This question covered the fundamental area of variance analysis. Part (a) started off with some basic calculations for sales variances and materials variances, followed by some more tricky calculations on labour variances. There were plenty of easy marks in this question, but if anyone didnt understand variances properly, they would have struggled with the labour variances, which required a little bit of thought. The sales and materials
variance calculations were thankfully well performed by candidates, but the attempts at the labour variances were poor. The question clearly stated that the labour variance related solely to the temporary workers. This meant that it was necessary to work out exactly how many hours the temporary workers had worked for. The calculation was not particularly difficult, but it did require an understanding of the scenario. Since permanent workers only had the capacity to work 2,200 hours and a total of 2,475 hours was needed for production, the initial calculation required was that there was a shortfall of 275 hours. However, the question stated that temporary workers took twice as long as permanent workers and, therefore, the temporary workers would be needed for 550 hours. Approximately 20% of candidates worked this out and went on to calculate the variances correctly. Part (b) was the written part of the question, asking for an explanation of the reasons why Carad Co would be interested in the material price planning and the material price operational variance. The most common error was that candidates didnt read the requirement properly. They expected it to be asking them how the manager had performed and this was what they wrote about. Every exam sitting, this proves a problem candidates preempting the question and not reading it properly. It should not be assumed that every single variance question will give you some variances, maybe ask you to calculate some more, and then ask for a discussion of managements performance. Exam papers cannot be allowed to become that predictable as candidates would then start to only partly prepare for them, on the basis that they know what will be examined, more or less. Candidates who did read the question, however, tended to make a reasonable attempt at this part. QUESTION 2 This was a typical performance measurement question. There was quite a lot of information to absorb but I strongly believe that, unless you are given plenty of information to work with, it is only possible to make very generalised, insipid comments. This is not what Paper F5 is all about. I want candidates to be able to handle information and make some quality analysis about it. It requires common
sense and ability to link information. This should not be too much to ask of a partqualified accountant, who would have to exhibit these qualities in the workplace. Needless to say, answers were poor. Anyone who had read my technical article on this area, or indeed my predecessors article on this area, would know that comments such as turnover decreased by 8.3%, which is poor will score only a calculation mark, for working out the 8.3%. Is this decrease in turnover poor? Well, it depends on the market in which the company is operating. You have to read the scenario. When you take into account the fact that there has been a 20% decline in the demand for accountancy training, AT Cos 8.3% looks relatively good. You must link information; this is an essential skill for any accountant. Nothing is ever what it seems. Let me also take the opportunity to distinguish between an acceptable comment, which might earn one mark, compared to a good point, which might earn two marks. Cost of sales fell by $10.014m in the year. Part of this reduction was down to a fall in freelance lecture costs. A good candidate would have commented that, whilst the company requested that freelance lecturers reduce their fees by 10%, the actual fee reduction gained was 15%, a strong performance. A comment such as this would have earned two marks. A less observant comment, earning one mark, would have been that the reduction in cost of sales was partly due to the fact that the company requested freelance lecturers to reduce their fees by 10%. I hope that this question will serve as a good revision question to future Paper F5 candidates. The information given is there to help you make worthwhile comments. It is not there to trip you up. When planning the question, you should annotate it carefully, crossreferencing different parts of the question, linking financial and nonfinancial information etc. QUESTION 3 It was this question that probably made students fall down on Paper F5 in December 2010. Why? Was it difficult? No. Was it time pressured? Perhaps a little, but the calculations were routine. Was it expected? No! It was obvious that many candidates hadnt even looked at this area at all. They took a gamble and it didnt pay off.
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EXAMS
Much of this question could have been examined in Paper F2. Why then, was it in a Paper F5 exam? It is becoming more and more apparent that the assumed Paper F2 knowledge for Paper F5 simply isnt there and it is necessary to make candidates realise that it is examinable under Paper F5 and that, if they dont know the subject matter, they need to go away and study it! Would it be possible to turn round to your manager and tell him/her that you cant do a particular piece of work for them because it is on an area you studied last year, not this year? I dont think so. In accountancy, you have to carry knowledge forward with you to use at later stages. You cant simply think that the exam is over, so you can forget it all now. If you have got an exemption from Paper F2 but cant remember the subject, youve got to do some revision before attempting Paper F5. Those candidates who had revised this area made a decent attempt at this question, with many of them scoring full marks in Part (a) at least. This is because the numbers involved were not particularly complicated. It is important, when answering a linear programming question like this, to set out your workings clearly, with a logical progression in steps from defining the variables and constraints, through to drawing the graph and finding the solution. This makes it easier to mark. The recommended approach is to use the iso-contribution line to find the optimum solution; it is the quickest way to do it. Candidates werent penalised if they used the simultaneous equations method, because they were not told which method to use, but they penalised themselves because it took them longer to do it. It is essential to show all of your workings. So, for example, the iso-contribution line needs to be worked out and then drawn on to the graph. If you didnt show how you worked it out, you stood to lose some marks. Where you are asked to work to two decimal places, you should do it. In this question, it was necessary in order to keep a level of accuracy required to answer Part (b) as well. While follow-on marks were available for Part (b) wherever possible, if fundamental mistakes had been made in Part (a) so that, for example, there was no slack for amino acids, it was hard to award marks.
QUESTION 4 This was the best-answered question on the paper, with a significant number of candidates earning the full five marks available in Part (a) for calculating the cost of each product using traditional absorption costing. Part (b), which required a costing of the products under activity-based costing (ABC), produced more mixed results. Perhaps the most surprising outcome was that nearly all candidates mixed up the driver for machine set ups (which should have been the 36 machine set ups) with the driver for machine running costs (which should have been 32,100 machine hours). We certainly saw far more of these answers than correct answers. Im not quite sure why there was such an incidence of error here, but fortunately most candidates went on to complete the calculations correctly and earn the appropriate follow-on marks. In Part (c), the requirement asked candidates to explain how ABC could help the company improve profitability, using the calculations performed in Parts (a) and (b). Answers were very poor. The requirement was very specific about what should be talked about ABC in relation to improving the profitability of this company, not in general. Candidates were expected to say that because, for example, product A required more set ups than products B and C, the set up costs were higher, meaning that As profitability was far lower under ABC. The company could use this to identify how cost savings could then be made, by reducing the number of set ups. Alternatively, the company could consider whether it could charge a higher price for product A, thus improving profit by pushing up revenues. The biggest problem with answers to Part (c) was that candidates did not read it properly and simply started taking about the benefits of ABC in general. They scored poorly for this. QUESTION 5 This question may have been unexpected in that it was a pure discussion question but this should have helped candidates who were feeling bit pressed for time. Again, anyone who reads Student Accountant would have seen an article in this over the past year and a half on incremental vs zero-based budgeting. Technical articles are never meant as an indicator of what is going to be examined in a forthcoming session but should be seen as a useful resource, there to supplement the study materials
being used. They are there to help broaden your knowledge; if you fail to prepare you prepare to fail. Part (a) of Question 5 asked candidates to discuss the difficulties encountered in budgeting in the public sector compared to the private sector, drawing comparisons between the two organisations. There were some reasonable attempts at this, although too many candidates simply compared the two types of organisation without relating it to budgeting. Similarly, a significant number of candidates were clearly confused about the difference between public sector organisations as opposed to publicly listed companies, and answered the question entirely incorrectly. Part (b) asked for an explanation of the terms incremental budgeting and zero-based budgeting. These were the easy marks in the question and most candidates got them. Part (c) asked for the key steps in zero-based budgeting. These were also easy marks for those who had revised well; answers here were again quite good, with only a minority of candidates making no attempt. Finally, Part (d) asked for a consideration of the statement that there is no longer a place for incremental budgeting, particularly in the public sector. There were some reasonable attempts at this, although, as with Part (a), some answers focused purely on the benefits and drawbacks of both methods without relating it back to the statement. In summary, a mixed set of comments on the different questions. Question 2 was poor, with much improvement still needed in this area; Question 3 was really disappointing, showing a lack of revision; and the other three questions were a mix of good and bad, but for many not good enough to make up for the difficulties encountered with the other two questions.
PAPER F6 (UK) TAXATION
This paper continued in the same style as that of the June 2010 paper, with the aim of being less predictable and required candidates to think a bit more in order to achieve a pass mark. Although the overall result was satisfactory, the performance was not quite as good as expected. The main problems were that candidates were obviously not expecting a question on PAYE, and Question 4, although not being particularly difficult, required some careful planning before doing the computations.
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QUESTION 1 In Part (a) candidates were required to calculate a taxpayers taxable income. The taxpayer had resigned from one employment, and then commenced employment with a second employer. During the tax year he received various benefits including a beneficial loan, a place at a workplace nursery, the payment of gym membership fees, the use and then acquisition of an asset, the use of living accommodation, childcare vouchers, and the use of a company gym. In Part (b) candidates were required to (i) explain the basis of calculating the taxpayers PAYE tax code and the codes purpose, and (ii) describe the circumstances in which the PAYE forms P45, P60 and P11D form would have been completed, state who would have provided them, the information that would have been included, and the dates by which they should have been provided to the taxpayer. Part (a) of this question was reasonably well answered, but Part (b) caused problems for virtually all candidates. In Part (a) there were no areas that consistently caused difficulty, although a surprising number of candidates did not appreciate that a bonus would have been assessed in the previous tax year as the taxpayer was entitled to it in that year. When calculating the beneficial loan using the average method, many candidates used a nil figure rather than the balance at the date of repayment. Candidates should try not to repeat their answers. For example, exempt benefits were often shown as such in the computation of taxable income, but were then shown again in subsequent notes. There is no need to do this. It was surprising in Part (b) that very few candidates knew anything about the PAYE tax code, and not much more about the PAYE forms. This just seems to be an area of the syllabus that was not revised. As regards the PAYE forms, a bit of commonsense, together with the knowledge that form P45 is given when employment ceases, form P60 is given at the end of the tax year, and form P11D is in respect of the benefits provided to a taxpayer, would have meant that most of the marks were easily obtainable. QUESTION 2 In Part (a) candidates had to (i) state which companies a company would be treated as being associated with, (ii) calculate the companys corporation tax liability (this involved the computation of a deduction for a lease premium,
ALTHOUGH THE OVERALL PAPER F6 (UK) RESULT WAS SATISFACTORY, THE PERFORMANCE WAS NOT AS GOOD AS EXPECTED. THE MAIN PROBLEMS WERE THAT CANDIDATES WERE OBVIOUSLY NOT EXPECTING A QUESTION ON PAYE, AND QUESTION 4, ALTHOUGH NOT BEING PARTICULARLY DIFFICULT, REQUIRED CAREFUL PLANNING BEFORE DOING THE COMPUTATIONS.
the computation of capital allowances, the treatment of overseas branch income, and the calculation of franked investment income), and (iii) advise the company of the taxation disadvantages of converting its overseas branches into 100% overseas subsidiary companies. In Part (b) candidates had to (i) calculate the amount of output VAT payable by the company, (ii) advise the company of the default surcharge implications if it was late in submitting its VAT return and in paying the related VAT liability, and (iii) state the circumstances in which the company would be, and not be, required to issue a VAT invoice, and the period during which such an invoice should be issued. This question was generally well answered, and there were many very good answers. In Part (a)(i), candidates should realise that when given a list of four companies, it is good exam technique to explain for each company whether it is or is not treated as being associated. In Part (a)(ii), the only aspect which consistently caused problems was the asset that was integral to a building. Although candidates correctly claimed the annual investment allowance against this expenditure, many candidates then claimed the 40% first-year allowance on the balance of expenditure, rather than adding it into the special rate pool. Several candidates treated the lease premium as income rather than as a deduction. Candidates should try to use a new page for large capital allowances computations. In Part (a)(iii), most candidates correctly stated that the conversion of the overseas branches into subsidiaries would increase the number of associated companies, but only a few were aware that UK loss relief and UK capital allowances would not then be available. Part (b)(i) was well answered, although a number of candidates did not appreciate that the tax point for services supplied was when the invoice was issued, as this was before the basic tax point or the date of payment. Some candidates showed (an incorrect) input VAT figure for the cost of fuel despite the question only requiring a calculation of the output VAT. Part (b)(ii) was not as well answered as would have been expected, and too many candidates simply explained the default surcharge rules without applying them to the companys situation. Part (b)(iii) was also often not well answered, with far too many candidates stating that a VAT invoice would not have to be issued if the company was not registered for VAT, when quite clearly it was registered. QUESTION 3 This question was concerned with a taxpayer who was the controlling shareholder and managing director of an unquoted trading company. In Part (a) candidates were required to explain why the taxpayers disposal of ordinary shares in the company qualified for entrepreneurs relief. Part (b) required a calculation of the taxpayers capital gains tax liability (the gains involved were (1) the disposal of land to the company, (2) the gift of quoted ordinary shares following a takeover, and (3) the disposal of ordinary shares in the company from a share pool). Part (c) required a calculation of the companys corporation tax liability (the gain involved was a part disposal of the land bought from the taxpayer). The relevant due dates were required for both Parts (a) and (b). This question was very well answered, with many perfect answers. It was often the question that made the difference between a pass mark and a fail. In Part (a) the fact that the company was a trading company was often not mentioned. There were few problems in Part (b), although for the disposal of land it was not always appreciated that the relevant cost was that when it was inherited by the taxpayer. Part (c) generally caused a few more problems. Even when the part disposal rules were correctly applied to the cost of the land, many candidates did not appreciate that the same principle applied to the enhancement expenditure. It was
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EXAMS
disappointing that the annual exempt amount was often deducted when calculating the corporation tax liability. QUESTION 4 This question was concerned with a director who was given the choice of being provided with a leased company motor car or alternatively being paid additional directors remuneration and then privately leasing the same motor car herself. In Part (a) candidates had to advise the director of the income tax and National Insurance contribution (NIC) implications of (1) being provided with the company motor car, and (2) receiving the additional directors remuneration. In Part (b) candidates had to advise the company of the corporation tax and NIC implications of (1) providing the company motor car, and (2) paying the additional directors remuneration. This question was generally answered quite badly, with the main problem being that candidates simply did not spend enough time thinking and planning their answers, but just plunged straight in performing every calculation that they could think of. In Part (a) the answer was in fact very straightforward, with a fairly simple car benefit calculation and then income tax and NIC calculations at the directors marginal rates of 40% and 1% respectively. Far too many candidates calculated a fuel benefit despite being told that fuel was not provided for private journeys. In Part (b) many candidates stated that capital allowances would be available despite the motor car being leased. Candidates often stated that the companys corporation tax liability would be increased rather than reduced as a result of the additional expenditure, and very few candidates appreciated that NIC was a deductible expense. Part (c) was more difficult, although credit was given for any sensible approach such as comparing the tax liabilities under each alternative. QUESTION 5 In Part (a) candidates had to calculate a taxpayers taxable income and taxable gains for each of the tax years from 200506 to 200910. The taxpayer had made a trading loss in the tax year 200910, and the requirement was that this be relieved as early as possible, but without unnecessarily wasting personal allowances. Then in Part (b) candidates had to explain why it was beneficial to carry loss relief forward against future trading profits rather than
making a current year claim against a chargeable gain. This question was reasonably well answered. In Part (a) many candidates did not appreciate that loss relief could be claimed against the chargeable gain, and it was disappointing that so many candidates included the chargeable gain as part of their taxable income computation. Another common error was to restrict the loss relief claims so as to preserve personal allowances, which of course is not possible. Part (b) was not so well answered since few candidates appreciated that carrying the loss forward would preserve the annual exempt amount as well as saving income tax at the rate of 20% and Class 4 NIC at the rate of 8%, rather than at 18% if relief was claimed against the chargeable gain.
PAPER F7 FINANCIAL REPORTING
There were some exam technique issues that caused problems for some candidates. Answers with no or unreferenced workings to support them were common. Markers cannot allocate any marks to an incorrect figure unless they can see how the figure has been arrived at. Poor handwriting was a particular problem on the interpretation section of Question 3 with markers reporting difficulty reading (and therefore awarding marks to) several scripts. There was also evidence of candidates not answering the question that was asked, which I refer to in the individual question commentary below. The composition and topics of the questions was such that on this diet there was very little difference between the International paper (the primary paper) and all other variant papers, so these comments generally apply to all streams. SPECIFIC COMMENTS QUESTION 1 This required the preparation of consolidated statements of comprehensive income and financial position. It included a fair value adjustment for a downward valuation of the subsidiarys property and the related reduction in the post-acquisition depreciation. Further adjustments required the elimination of current account balances and intra-group trading, including unrealised profit (URP), and an increase in the value of available-forsale investments. The majority of candidates clearly have a good working knowledge of consolidation techniques which showed through in good marks for this question. As usual it was the more complex aspects where errors occurred: CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Intra-group sales should only be eliminated for the post-acquisition period (four months), many deducted $12m (being for 12 months) or $2m
I am delighted to say that the overall performance of candidates on this diet was much improved from the disappointing results of recent diets. Most commentators believed this to be a fair paper for which a well-prepared candidate could readily attain a pass mark within the time constraints of the exam. As with past papers, the best-answered questions were the consolidation in Question 1 and financial statements preparation in Question 2. An important difference in this diet was that there were many good answers to the performance appraisal in Question 3. Even the normally low-scoring Questions 4 and 5 that related to the wider syllabus areas provided many reasonable attempts. Despite the above, there are still a significant number of candidates who did not answer Question 4 or 5 and sometimes both, but not on as large a scale as previously reported. I am pleased to report that as a reflection of the above, there were many strong marks in the 70s and even higher from some truly impressive candidates.
THERE WERE SOME PAPER F7 EXAM TECHNIQUE ISSUES THAT CAUSED PROBLEMS FOR SOME CANDIDATES. ANSWERS WITH NO OR UNREFERENCED WORKINGS TO SUPPORT THEM WERE COMMON. MARKERS CANNOT ALLOCATE MARKS TO AN INCORRECT FIGURE UNLESS THEY CAN SEE HOW THE FIGURE HAS BEEN ARRIVED AT.
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(being the amount remaining in closing inventory). Several candidates calculated the URP as $500,000 ($2m25%), but the 25% was a stated as a mark-up on cost which gave $400,000 ($2m25/125). The fair value reduction in the depreciation charge was often added rather than deducted from cost of sales. One or both other comprehensive income gains were often shown in the income statement rather than under other comprehensive income Most candidates understood the principle of calculating the non-controlling interest (NCI); however, the adjustments to the subsidiarys post-acquisition profit for the URP and/ or reduced depreciation were frequently omitted from the calculation. CONSOLIDATED STATEMENT OF FINANCIAL POSITION As with the income statement most candidates scored well, however the problem areas were: Treating the fair value reduction of the property as an increase Some candidates used the subsidiarys share value (of $3.50) to value the consideration paid by the parent (Premier) ($5 should have been used) and several did not include the consideration (fair value) of the NCI, effectively only calculating the parents share of the goodwill (note this does not apply to UK-based answers). A surprising number did not correctly calculate the subsidiarys net assets at the date of acquisition due to either an incorrect pre- and post-acquisition apportionment of the profit for the year and/or including the post-acquisition depreciation adjustment (and sometimes the URP in inventory) as pre acquisition. The majority of candidates did not eliminate the loan notes given as part of the purchase consideration from the carrying amount of the available-for-sale investments. Many did not attempt to record the increase in the parents share capital and premium as a result of the share exchange. A considerable number of candidates added the increase in the value of the parents property to the land revaluation reserve, not realising it had already been included (note this does not apply to the UK paper). As already stated, despite these errors, there were many good scores on this question. However, it should be
said that there were a small minority of candidates that appeared to have done very little study or preparation and made fundamental errors. These included using proportional consolidation and/ or not time apportioning the relevant income statement items, whilst some candidates even time apportioned the statement of financial position balances, revealing a complete misunderstanding of the subject. QUESTION 2 This question was a traditional preparation of financial statements from a trial balance combined with several adjustments including: a rights issue of shares and the accompanying dividend calculation, the issue of loan note in a prior year, revaluation of land and buildings, accounting for an environmental provision as part of the cost of a non-current asset and accounting for taxation. As with Question 1, this was attempted by nearly all candidates and was well answered by most with many high scores. Most of the problems were with the adjustments and even where candidates did not get them fully correct, they often picked up some of the marks. The frequent problems areas were: Statement of comprehensive income Many candidates got the dividend calculations wrong mainly because the first dividend was paid before the rights issue and therefore based them on a different number of shares to those in issue at the year end. Weaker candidates added the dividends to the administrative expenses which shows a serious lack of understanding and some candidates deducted the dividends in the income statement rather than in their answer to Part (b). A high number of candidates did not capitalise the future decontamination (environmental) costs related to the acquisition of some new plant, this had a knock on effect with depreciation, the creation of the related provision and the unwinding of the first years discount (see below). Some candidates treated the revaluation of the land and building as being at the beginning of the year rather than at the end of the year and some did not account for depreciation before calculating the revaluation gain (effectively combining the two). This is an issue I have reported on repeatedly. Very few candidates got the finance costs totally correct, many did not use
the effective interest rate (they instead used the nominal rate) on the loan note, and even fewer included the unwinding of the environmental provision as a finance cost and some even omitted the bank interest. Most scored well on the tax, but there was the usual error with deferred tax of charging the closing provision to the income statement rather than the movement in the provision, a number also got the sign of the various components wrong (ie adding rather than deducting or vice versa). Many candidates misclassified one or both items of other comprehensive income by including them in the income statement. Statement of changes in equity This was generally very well done. I should mention that although many of the figures (profit for year dividends paid, share issue, etc) were incorrect as a result of earlier errors they were not penalised in this statement and marked as correct under the principles of method marking. The most common problem was treating the share issue as being in addition to the $50m shown in the trial balance, in fact this figure already included the new issue and candidates should have worked back to calculate the opening share capital. There were also many errors in the actual calculation of the share capital and share premium. Statement of financial position This was again generally well done with most errors being due to the knock on effect of errors made in the statement of comprehensive income which, as noted above, were not generally penalised. The omission of the environmental provision (and its accumulated finance cost) was the most common error and many candidates still have difficulty with calculating and correctly classifying taxation (current and deferred) balances in this statement. Weaker candidates showed the bank overdraft as a current asset and/or the available-for-sale investments at their trial balance (rather than their fair value). QUESTION 3 This question was a full 25-mark performance appraisal question. The question required candidates to calculate ratios (of their choice) for up to 10 marks in order to assess the performance of a company against the background of a global recession.
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EXAMS
Important information in the scenario, in addition to the challenging market conditions, included mention of losses sustained by the company due to falls in property prices, the reduced carrying amounts of investments, redundancy costs and some cost savings in advertising and administrative costs. A good answer should have considered the effects of this information and look to see beyond the reported figures at what the underlying performance would have been but for the economic problems. A number of candidates did try to calculate some underlying ratios (ie assuming the one-off costs had not occurred) and comment on these comparing performance with 2009, but most did not attempt this analysis. I am pleased to report that the average mark on this question was much higher than the equivalent in many recent diets; this is especially so as normally I expect weaker marks on interpretation when compared to the alternative equivalent cash flow question. Most candidates scored well on the calculation of ratios, although unpractised candidates showed a distinct lack of understanding of the definitions and meaning of some ratios, particularly return on capital employed and gearing (for example, using just the share capital as equity is not acceptable). Markers did allow some flexibility within the definitions of some ratios. Overall, many candidates did make intelligent comments about the change in the ratios and what might have caused them. However, there were too many candidates who that thought that saying a ratio had gone up or down amounted to interpretation it does not. There were also answers that did not refer the events in the scenario at all. A small, but significant number of candidates produced a statement of cash flows as their answer to this question. This was a pointless exercise; it is not what was asked and gained no marks (even if it was correct). Clearly these candidates had gambled on statements of cash flows coming up question spotting is not recommended at all. QUESTION 4 The introductory section (Part (a)) of this question required candidates to explain the basis on which accounting policies must be selected and to distinguish between (with an example) changes in accounting policies and changes in accounting estimates. Those candidates who had studied this area did well, with the opposite being true
for those that had not; thus answers were rather polarised into good and weak. A common area where many candidates went off topic was that they spent considerable time explaining the circumstances where an entity should change its accounting policy and the procedures to be followed if it did. A question like this had been asked in a previous diet, but it was not what this question asked. I believe this illustrates well the point that while it is important to study and practise past questions, do not to expect them to be repeated in exactly the same format. Although there were many good marks on this section, a very common point of misunderstanding is that many candidates thought that changing from straight-line to reducing balance depreciation was a change of policy; this would be an example of a change of an accounting estimate. A few candidates chose to discuss the correction of errors aspects which was not relevant to the question asked. Part (b) contained two examples related to Part (a), the first was a proposal to increase the life over which an asset should be depreciated (from an original five years to eight years in total) and the second was a change in the basis for valuing inventory (from FIFO to average cost). Answers to both were very mixed. In Part (i) some candidates stated that companies could not change the depreciation life of their assets (and left the answer at that) this is clearly wrong. There is an annual requirement for companies to review the remaining lives of their assets and if they are believed to be incorrect, they must be changed and depreciation charged accordingly. The accounting for the change suggested by the assistant accountant resulting in a credit for depreciation in the income statement for the current period was incorrect, but many thought it was acceptable. Another common error was for candidates to recalculate the depreciation over the total new life of eight years, whereas the correct calculation was to depreciate the carrying amount at the beginning of the period over the remaining new life (which was six years). Many candidates incorrectly treated the example given as an asset revaluation and hence discussed the need for all plant to be subject to a revaluation exercise again this was not what the question was about. Answers to Part (ii) (the inventory change) were weaker than to Part (i).
Often the only mark some candidates got was for realising that it was a change of accounting policy. Weaker candidates thought this was a question about inventory being valued at the lower of cost or net realisable value it wasnt. Many did not attempt to quantify the effect of the change in policy (despite the question specifically asking for it and giving all the relevant information) and some of those that did again agreed with the assistant accountant that the change would improve profit by $2m (the difference in value between FIFO and average cost of the closing inventory). In fact, the change in profit would be the movement in the difference between the opening and closing inventory values ($400,000) and this would reduce rather than increase the profit for 2010. QUESTION 5 This question examined the area of provisions, in particular a provision for closure costs and the related area of discontinued operations. This was not a well-answered question, although many candidates did pick up a few marks. The question contained information on the redundancy and retraining costs, future trading losses and the expected sale price of the assets of a furniture making operation that was to be closed down four months after the current year end. The information in the question pointed to the closure being irrevocable and from this most candidates correctly concluded that a provision was required. What caused most problems was which losses should be provided for and, more importantly, in which period the provisions should be made. The closure would create an expected profit on the disposal of a factory and a loss on the sale of the plant. Many candidates offset these providing for a net amount in the year to 30 September 2010, however, only the loss (an impairment) should have been provided for (the profit should be reported only when it arose: in the year ended 30 September 2011).The related costs were for redundancy and retraining, again often both were provided for together, but only the redundancy should have been provided for in the year to 30 September 2010 with the retraining costs charged as they were incurred (the following year). The final item was trading losses: $600,000 up to the year ending 30 September 2010 and a further $1m in the following period. Again many candidates wanted
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to provide for all the losses in the year to 30 September 2010. IFRS rules say entities cannot provide for future trading losses (unless as a result of an onerous contract). The most disappointing aspect of this question was that most candidates did not attempt to allocate the reporting of the losses between the two accounting periods, despite the question specifically asking for this. Indeed most of the marks were for knowing the period in which the items should be reported, whereas most candidates seemed to think that listing and quantifying the losses/expenses was all that was required. The last aspect of the question was to consider whether the closure qualified as (and if so when) a discontinued operation. Most candidates wanted to treat it as discontinued in the year to 30 September 2010, whereas it would (probably) be treated as such in the following year. CONCLUSION Overall this was a much improved performance. Candidates scored better on the wider topic areas of Questions of 4 and 5 than in recent diets. I hope that this means more effort is being made to cover the full range of syllabus topics. Many of the above comments on the individual questions focus on where candidates made errors. This is intended to guide candidates future studies and to highlight poor techniques with a view to improving future performance. This may appear to give an overly pessimistic view of candidates performance. This is not the intention, nor is it the case. There were many excellent papers where it was apparent that candidates had done a great deal of studying and were rewarded appropriately.
The majority of candidates completed all five questions; however, there was some evidence of time pressure as a significant minority of candidates did not attempt all questions. This seemed to mainly occur for Question 5 or for the questions candidates found challenging, which are listed below. In addition a significant minority answered Question 1 last and their answers were often incomplete. As Question 1 is the case study and represents 30 of the available marks, leaving this question until last can be a risky strategy, as many answers presented were incomplete or appeared rushed. Candidates performed particularly well on Questions 1b, 2c, 3ci and 4bi. The questions candidates found most challenging were Questions 1a, 2b, 3a, 3cii and 5b. This was mainly due to a combination of failing to read the question requirement carefully and insufficient knowledge. A number of these areas were new to the Paper F8 Study Guide in 2010 and, as new topic areas, should have been prioritised by candidates. A number of common issues arose in some candidates answers: Failing to read the question requirement clearly and, therefore, providing irrelevant answers which scored few if any marks. Providing more than the required number of points. Illegible handwriting and poor layout of answers. SPECIFIC COMMENTS QUESTION 1 This 30-mark question was based on a retailer of ladies clothing and accessories, Greystone Co, and tested candidates knowledge of internal control deficiencies, trade payables and internal audit. Part (a) for five marks required candidates to explain examples of matters that the auditor should consider in determining whether an internal control deficiency was significant. This part of the question was unrelated to the Greystone Co scenario and hence tested candidates knowledge as opposed to application
PAPER F8 AUDIT AND ASSURANCE
The paper consisted of five compulsory questions. Section A contained Question 1 for 30 marks and Question 2 for 10 marks. Section B comprised three further questions of 20 marks each.
skills. This question related to ISA 265 Communicating Deficiencies in Internal Control to those Charged with Governance and Management, which is a new ISA and new to the Paper F8 Study Guide for 2010. Most candidates performed inadequately on this part of the question. The main reason for this is that candidates failed to read the question properly or did not understand what the requirement entailed. The question asked for matters which would mean internal control deficiencies were significant enough to warrant reporting to those charged with governance. The question was not asking for examples of significant internal control deficiencies, however, this is what a majority of candidates gave. Many answers included a long list of control deficiencies such as inadequate segregation of duties this failed to score marks as it was not answering the question. It was apparent that many candidates had not studied the area of significant control deficiencies, and as there is now an ISA dedicated to this area, this was unsatisfactory. Part (b) for 14 marks required a report to management which identified and explained four deficiencies, implications and recommendations for the purchasing system of Greystone Co. A covering letter was required and there were two presentation marks available. This part of the question was answered well by the vast majority of candidates with some scoring full marks. The scenario was quite detailed and hence there were many possible deficiencies which could gain credit. Where candidates did not score well this was mainly due to a failure to explain the deficiency and/or the implication in sufficient detail. Some candidates simply listed the information from the scenario such as purchase invoices are manually matched to GRNs and then failed to explain the implication of this for Greystone Co. A significant minority also failed to score marks because they provided deficiencies that were unrelated to the purchasing system, such as internal audits only role is to perform inventory
A SIGNIFICANT MINORITY OF PAPER F8 CANDIDATES ANSWERED QUESTION 1 LAST AND THEIR ANSWERS WERE OFTEN INCOMPLETE. AS QUESTION 1 IS THE CASE STUDY AND REPRESENTS 30 OF THE AVAILABLE MARKS, LEAVING THIS QUESTION UNTIL LAST CAN BE A RISKY STRATEGY, AS MANY ANSWERS PRESENTED WERE INCOMPLETE OR APPEARED RUSHED.
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EXAMS
MANY PAPER F8 CANDIDATES FAILED TO SCORE THE FULL TWO MARKS AVAILABLE FOR PRESENTATION WHEN ANSWERING QUESTION 1 PART (B) AS THEY DID NOT PRODUCE A COVERING LETTER. A SIGNIFICANT MINORITY JUST GAVE THE DEFICIENCIES, IMPLICATIONS AND RECOMMENDATIONS WITHOUT ANY LETTER AT ALL; THIS MAY BE DUE TO A FAILURE TO READ THE QUESTION PROPERLY.
counts. This was outside the scope of the question requirement and hence did not gain credit. Candidates are once again reminded that they must read the question requirements carefully. Many candidates failed to score the full two marks available for presentation as they did not produce a covering letter. A significant minority just gave the deficiencies, implications and recommendations without any letter at all; this may be due to a failure to read the question properly. Also even when a letter was produced this was often not completed. Candidates would provide the letterhead and introductory paragraph, the detail of the deficiencies, implications and recommendations, but then they would fail to include a concluding paragraph and letter sign off which would have earned a further one mark. In addition some candidates produced a memo rather than a letter. In general, where candidates adopted a columnar approach to their answer they tended to score well. The question asked for four deficiencies, implications and recommendations. However, many candidates provided more than the required four points. It was not uncommon to see answers with had six or seven points. Whilst it is understandable that candidates wish to ensure that they gain credit for four relevant points, this approach can lead to time pressure and subsequent questions can suffer. Part (c), for five marks, required substantive procedures the auditor should perform on year-end trade payables. This was answered satisfactorily by many candidates. The most common mistake made by some candidates was to confuse payables and purchases and hence provide substantive tests for purchases such as agree purchase invoices to goods received notes. As there was no reference to year-end payables then this test would not have scored any marks. A minority provided tests of controls as well as substantive procedures and again these would not have scored any marks. The requirement verb was to describe and, therefore, sufficient detail was required to score the one mark available per test. Candidates are reminded that substantive procedures is a core topic area and they must be able to produce relevant detailed procedures. Answers such as discuss with management to confirm ownership of payables is far too vague to gain credit as there is no explanation of what would be discussed and also how such a discussion could even confirm ownership. Part (d), for five marks, required additional procedures the internal auditors of Greystone Co could perform; this was in addition to their current role of performing regular inventory counts. This required candidates to use their knowledge of internal audit assignments and apply it to a retailer scenario. On the whole candidates performed satisfactorily on this question. Many were able to identify assignments such as value for money audits, reviewing internal controls, assisting the external auditors and other operational internal audits. However, some candidates restricted their answers to assignments the auditors would perform in light of the control deficiencies identified in Part (b) of their answer. This meant that their answers lacked the sufficient breadth of points required to score well. QUESTION 2 This 10-mark question covered the topics of true and fair concept, International Standards on Auditing (ISAs) and audit documentation. Part (a), for four marks, required candidates to explain the true and fair concept. Candidates performance was mixed on this question. Candidates clearly are aware of the concept but struggled to explain it with sufficient
clarity. Also many candidates failed to score full marks as they did not make a sufficient number of points for four marks. A common answer was to describe true as being truthful and to explain fair in relation to fairness. This does not answer the question. In addition a minority also confused their explanations between true and fair, for example, stating true means unbiased. Also a significant minority, having gained credit for stating that true and fair means that there are no material misstatements in the financial statements, then went on to a detailed description of materiality which was not required. Part (b), for two marks, required an explanation of the status of ISAs. Candidates performed inadequately on this question. Many candidates did not seem to understand what was required and were confused by the word status. However, this requirement is taken from the Study Guide and relates to the authority of ISAs, what types of assignments they apply to, their content and also how they interact with other legislation. Part (c), for four marks, required four benefits of documenting audit work. This question was answered well by most candidates. In addition the verb of state was addressed by most candidates and answers were generally succinct. Where candidates did not score full marks this tended to be because they repeated points or because they gave points which related to the benefits of audit planning rather than the benefits of documenting audit work. QUESTION 3 This 20-mark question was based on Redsmith Co which produced printers. The question tested the areas of risk identification, planning and acceptance of new audit engagements. Part (a), for three marks, required the process an auditor would undertake for an assessment of whether the preconditions for an audit were present. This is a new topic from the revised ISA 210, Agreeing the Terms of Audit Engagements. A large number of candidates did not attempt this question, and where it was attempted it was inadequately answered. Most candidates who provided an answer clearly did not know what the preconditions were and proceeded to write down anything they knew about new audit engagements.
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EXAMS
Most provided answers which covered ethical considerations for new engagements such as contacting the outgoing auditors, or ensuring that they had an adequately trained audit team and other client screening procedures, also many covered the contents of an engagement letter. It was fairly apparent from the answers provided that many candidates had simply not studied the new syllabus area of preconditions and hence were unable to score any marks at all. In addition many candidates wrote at considerable length for a three-mark requirement. This put them under significant time pressure for later questions. Candidates must note the total number of available marks and provide an answer in line with this. Part (b), for two marks, required four matters the auditor should consider in obtaining an understanding of the entity. This was unrelated to the scenario and was a knowledge-based question. In general, candidates performed satisfactorily. Where candidates did not score full marks this was because they focused on such areas as people they would speak to, or procedures to obtain information such as reviewing the companys website. They should instead have focused on the areas/matters of the company that the auditor wished to gain an understanding on, such as its industry, regulatory framework or customer base. Part (c), for 15 marks, required a calculation of five ratios each for two years and an explanation of the related audit risks and responses. The ratios requirement was answered well by the majority of candidates. However, there were a significant minority who did not have a calculator in the exam and hence were unable to calculate any ratios, they failed to score any of the available five marks. Also some candidates were unable to calculate any relevant ratios, instead just calculating percentage increases or producing duplicating ratios such as gross margin as well as cost of sales as percentage of revenue. In addition, a significant minority confused the calculation of inventory days using inventory divided by revenue rather than cost of sales. Candidates are reminded that as part of an analytical review, going concern or audit risk question they must be able to calculate and then evaluate relevant ratios. The question then required audit risks and responses for 10 of the 15 marks. Many candidates performed inadequately on this part of the question.
As stated in previous examiners reports, audit risk is a key element of the Paper F8 syllabus and candidates must understand it. The main area where candidates lost marks is that they did not actually understand what audit risk relates to. Hence they provided answers which considered the risks the business would face or business risks, which are outside the scope of the syllabus. Audit risks must be related to the risk arising in the audit of the financial statements. If candidates did not do this then they would have struggled to pass this part of the question as there were no marks available for business risks. In addition, many candidates chose to provide an interpretation of accounts and the ratios calculated rather than an assessment of audit risk. Comments such as revenue has increased by 28% this could be as a result of the bonus scheme introduced would not have scored any marks as there was no identification of the audit risk, which is overstatement of revenue. Even if the audit risks were explained many candidates then failed to provide a relevant response to the audit risk, most chose to give a response that management would adopt rather than the auditor. For example, in relation to the risk of valuation of receivables, as Redsmith Co had extended their credit terms to customers, many candidates suggested that customers should not be accepted without better credit checks, or offering an early settlement discount to encourage customers to pay quicker. These are not responses that the auditor would adopt, as they would be focused on testing valuation through after date cash receipts or reviewing the aged receivables ledger. Also some responses were too vague such as increase substantive testing without making it clear how, or in what area, this would be addressed. Future candidates must take note; audit risk is and will continue to be an important element of the syllabus and must be understood. QUESTION 4 This 20-mark question was based on Bluesberry hospital and tested candidates knowledge of value for money, strengths of an operating environment and substantive procedures for property, plant and equipment. Part (a), for four marks, required an explanation of the purpose of a value for money audit. Candidates performed satisfactorily on this part
of the question. Many candidates were able to score three of the available four marks by defining the 3Es of economy, efficiency and effectiveness. However, some confused their explanations giving an explanation of effectiveness for efficiency. The final mark for a general explanation of what a value for money audit actually means was often not considered by candidates. In addition, a significant minority of candidates misunderstood the question and referred to ensuring value for money for an external audit. Part (b), for 10 marks, required identification and explanation of four strengths within the hospitals operating environment and a description of an improvement to provide best value for money for the hospital. Candidates performed well in the explanations of the strengths within Bluesberry with many scoring full marks. The scenario contained a number of strengths and hence it was relatively straightforward for candidates to identify four. Where candidates failed to score well this was due to a failure to explain their strengths. The requirement was to identify and explain, where a strength was identified then half a mark was available, another mark was available for a clear explanation of each strength. In addition, a significant minority misread the question requirement and identified weaknesses rather than strengths. The second part of this question required improvements to the strengths identified. Performance on this question was adequate. The majority of candidates attempted this part of the question, and were able to identify a few relevant points. However, answers were often too vague or unrealistic. A significant number of candidates presented their answers to Part (b)(i) and (ii) in a columnar format and this seemed to help them to produce concise and relevant answers. Part (c), for six marks, required two substantive procedures each to confirm the valuation, completeness, and rights and obligations of property, plant and equipment of Bluesberry. Candidates performance was mixed, with many confusing their assertions. It was common to have existence tests provided for completeness. In addition, too many answers were vague, candidates are still giving substantive procedures such as check the invoices. This does not score any marks as there is no explanation of what we are checking the invoices for. Also a common response was to check the
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FUTURE PAPER F8 CANDIDATES ARE REMINDED THAT AUDIT REPORTS ARE THE ONLY OUTPUT OF A STATUTORY AUDIT AND HENCE AN UNDERSTANDING OF HOW AN AUDIT REPORT CAN BE MODIFIED AND IN WHICH CIRCUMSTANCES, IS CONSIDERED IMPORTANT FOR THIS EXAM.
title deeds with no explanation of what in the deeds we were checking or why. QUESTION 5 This 20-mark question was based on a manufacturing company, Greenfields Co, and tested candidates knowledge of accounting estimates, written representations and audit reports. Part (a), for five marks, required audit procedures for accounting estimates. This question was answered satisfactorily. The question was not specifically related to the two issues in the scenario and so candidates who considered general procedures relevant for any estimate such as legal provisions or depreciation scored well. Many also gave examples of different estimates when providing their procedures. Those candidates who only considered the two issues of the receivable balance and the warranty provision often failed to generate a sufficient number of points. Part (b), for 10 marks, required a discussion of the appropriateness of written representations and additional procedures to be performed at the final review stage for the two issues of the receivable balance and the warranty provision. A significant minority did not attempt this question, and where it was attempted candidates performance was unsatisfactory. In the first part of the question on written representations many candidates wrote at length about written representations in general and whether they were an acceptable form of audit evidence, these answers did gain credit as they were too general. The question asked specifically about two situations and these needed to be addressed. In addition, many candidates did not seem to understand the difference between the two situations in that for the receivable balance alternative evidence should exist, for example, through a receivables circularisation, but because of the nature of the warranty provision alternative evidence was not generally available. Also many candidates seemed to believe that a written representation was necessary as the balances were material. This displays a lack of understanding of why written representations are used. The second part of the question considered additional procedures that should now be performed for these two issues. Again performance was unsatisfactory, it was clear from the scenario that the audit fieldwork had already been performed as it was stated that the manager was performing a final review of the audit. Therefore, procedures needed to reflect that the main work on testing receivables and provisions had already been undertaken and at this stage it was just a case of updating this knowledge. For receivables, many candidates provided tests such as agree the receivable balance to sales invoices and goods dispatch notes. This did not gain any marks as it is not a procedure undertaken as part of a final review. In addition, the scenario clearly stated that management would not allow the auditors to circularise the receivable balance owing from Yellowmix. However many candidates ignored this and still stated as a procedure that the balance should be circularised. It is not possible to send a circularisation without managements permission. This demonstrated either a failure to read the question properly or a lack of understanding of a circularisation. For the warranty provision candidates performed marginally better at producing additional procedures. However, it was still common to see answers that recommended that the auditor recalculate the warranty provision and test the assumptions, this was despite the fact that the scenario stated that this had already been undertaken. Part (c), for five marks, required the steps the auditor should now undertake and the impact on the audit report in relation to the warranty provision. Candidates performance was satisfactory with many scoring well for the audit report impact. However, many candidates provided a scatter gun approach of suggesting every possible
audit report implication. Many used terms such as except for, modified or qualified but the accompanying sentences demonstrated that candidates did not actually understand what these terms meant. Also, an emphasis of matter paragraph was suggested by a significant proportion of candidates; this demonstrates a fundamental lack of understanding of emphasis of matter paragraphs and audit reports Future candidates are reminded that audit reports are the only output of a statutory audit and hence an understanding of how an audit report can be modified and in which circumstances, is considered important for this exam.
PAPER F9 FINANCIAL MANAGEMENT
Successful candidates demonstrated their wide understanding of the Paper F9 syllabus, since the exam paper covered many aspects of the syllabus. As in previous diets, some very high marks were awarded. I hope that unsuccessful candidates have learned from their experience and will be successful at their next attempt. SPECIFIC COMMENTS QUESTION 1 Most candidates gained good marks in Parts (a) and (c), while Part (b) was rarely answered well. Part (a) asked candidates to calculate the net present value (NPV) of Project A, allowing for inflation and taxation. Most candidates inflated correctly selling price, selling cost and variable cost in order to find the before-tax cash flows over the four-year appraisal period required by the directors of the company. Some candidates did not defer tax liability by one year, although the question required this. Some candidates calculated correctly the tax benefit arising from capital allowances (tax-allowable depreciation), but did not provide a balancing allowance in the final year, as the directors required. The directors also required that scrap value be excluded from the evaluation. The treatment of working capital was a problem for some candidates. Three elements of working capital can be relevant in investment appraisal, namely initial investment, incremental investment and recovery at the end of the investment project. The first two elements were needed here, with incremental investment arising from general inflation. Working capital recovery was excluded by the directors
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EXAMS
views on investment appraisal. Even though working capital investment was specified in the question as an initial investment, some candidates inflated the initial investment and placed it at the end of year one. The inflated after-tax cash flows were nominal (money-terms) cash flows and the question provided a nominal weighted average after-tax cost of capital. This was the discount rate needed for Project A, although some candidates calculated another incorrect discount rate by either inflating or deflating the discount rate provided. The calculated NPV of Project A was negative and so the investment project was not financially acceptable. In Part (b), candidates were asked to critically discuss the directors views on investment appraisal. These views were requirements to use either payback period or return on capital employed (ROCE), to evaluate over a four-year planning period, to ignore any scrap value or working capital recovery, and to claim a balancing allowance at the end of the four-year evaluation period. Although Part (b) asked for a critical discussion, a significant number of candidates calculated and commented on the payback period and the ROCE of Project A. This was not what the question asked for and gained no credit. Many candidates limited their discussion to payback and ROCE, and, therefore, lost marks because they did not discuss the four-year planning period, ignoring any scrap value or working capital recovery, and claiming a balancing allowance at the end of four years. The directors views were not consistent with a theoretically sound evaluation of Project A using relevant cash flows. A critical discussion should have focused on this. Part (c) required candidates to calculate a project-specific cost of equity for Project B, which was a diversification into a new business area, and to explain the stages of their calculation. Answers that calculated a project-specific weighted average cost of capital (WACC) in addition to a project-specific cost of equity did not gain any additional credit, since this was not required. In fact, the WACC could not be calculated, since the question did not include a cost of debt. Better answers ungeared the equity beta of the proxy company to give an asset beta, regeared the asset beta to give a project-specific equity beta,
and then used this equity beta and the capital asset pricing model (CAPM) to calculate a project-specific cost of equity, explaining the stages of the calculation in terms of systematic risk, business risk and financial risk. QUESTION 2 Many students gained good marks on Parts (b) and (c) of this question, while not doing very well on Part (a). In Part (a) of this question, candidates were provided with financial information for a company and asked to evaluate suitable methods for it to raise $200m, using both analysis and critical discussion. Many answers struggled to gain good marks for reasons such as poor understanding of sources of finance, a lack of analysis or errors in analysis, misunderstanding of the financial position and performance of the company, and a shortage of discussion. The question said that the current assets of the company did not include any cash, but many answers suggested that $121m of the $200m needed could be provided from $121m of retained earnings in the balance sheet. As the company had no cash, this was of course not possible and shows a misunderstanding of the nature of retained earnings. Some answers suggested asking the bank to increase the $160m overdraft to $360m in order to provide the finance for the $200m acquisition. Since the acquisition was a long-term investment, short-term finance could not be used under the matching principle. Suggestions of using lease finance were also not appropriate, although discussion of the sale and leaseback of the companys non-current assets was relevant. Some answers discussed business angels, government grants and venture capital, but these sources of finance are not relevant to a $200m acquisition. Analysis of the financial information given in the question was needed to support any critical discussion of ways
of raising the $200m required. Some answers gave no analysis or very little analysis and so were quite general in nature, outlining for example the differences between equity finance and debt finance. Errors in ratio calculations were common, highlighting the need for candidates to understand accounting ratio definitions. Four years of profitability information was provided, allowing trends and growth rates to be calculated, although some answers considered only information from the first year and the last year. The information, when analysed, gave a very gloomy picture and indicated that the company would have difficulty raising the cash it needed, whether from debt finance or equity finance. Taking on more debt would cause gearing, interest cover and financial risk to rise to dangerous levels, while existing and potential shareholders would not look favourably on a company that had not paid dividends for four years, especially one whose growth in profitability was on a downward trend. Part (b) asked candidates to briefly explain the factors that influence the interest rate charged on a new issue of bonds, ie traded debt. Good answers discussed such factors as the period to redemption, the risk of the issuing company, the general level of interest rates in the economy, expectations of future inflation, redemption value and so on, and easily gained full marks. Poorer answers did not show understanding of the relationship for a bond between market value, interest rate, period to redemption, redemption value and cost of debt. Part (c) asked candidates to identify and describe the three forms of efficiency that can be found in a capital market and many answers correctly identified and described weak form efficiency, semi-strong form efficiency and strong form efficiency. Some answers incorrectly stated that capital market efficiency was about the information available in the market, when in fact capital market efficiency is
A NUMBER OF PAPER F9 QUESTION 3 PART (A) ANSWERS FAILED TO GAIN FULL MARKS BECAUSE THEY DID NOT CALCULATE THE CHANGE IN INVENTORY MANAGEMENT COSTS, EVEN AFTER CORRECTLY CALCULATING THESE COSTS UNDER THE CURRENT ORDERING POLICY AND AFTER APPLYING THE EOQ MODEL.
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concerned with pricing efficiency, ie the nature of the information reflected in the market prices of traded securities, something which is investigated by carrying out empirical tests. From this point of view, it is theoretically possible for a capital market to be simultaneously weak form, semi-strong form and strong form efficient. QUESTION 3 Many candidates gained full marks in answering part (a), picked up reasonable marks on Parts (b) and (d), but in many cases gave poor answers to Part (c). Part (a) required candidates to calculate the cost of a current inventory ordering policy, and the change in inventory management costs when the economic ordering quantity (EOQ) model was used to find the optimum order size. A number of answers failed to gain full marks because they did not calculate the change in inventory management costs, even after correctly calculating these costs under the current ordering policy and after applying the EOQ model. Poorer answers showed a lack of understanding of the relationship between ordering costs and holding costs, and an inability to calculate these costs. In Part (b), candidates were required to describe briefly the benefits of a just-in-time (JIT) procurement policy. No credit was given for discussing the disadvantages of such a policy, as these were not required. Many answers gave a short list of benefits, rather a description of the benefits, and so were not able to gain full marks. Part (c) asked candidates to calculate and comment on whether a proposed change in receivables management (offering an early settlement discount) was acceptable, and to calculate the maximum discount that could be offered. Some candidates gained full marks for calculating correctly the reduction in financing cost, the cost of the discount and the net benefit of offering the discount. The reduction in financing cost and the cost of the discount were both based on credit sales for the year of $87.6m. Poorer answers based their calculations on current trade receivables of $18m, even though the question stated that the early settlement discount would be offered to 25% of credit customers. Comparing current trade receivables and current credit
sales showed that current receivables paid on average after 75 days, a credit period that would be reduced to 60 days through improved operational procedures. Some candidates assumed incorrectly that the current trade receivables period was 60 days and made incorrect calculations as a result. The maximum discount that could be offered would be equal to the benefit gained from the discount, ie the saving in administration and operating costs added to the reduction in financing cost Feedback from markers indicated that some answers to this part of Question 3 were disorganised, with unlabelled calculations and a lack of explanation. It is important to help the marking process by labelling calculations, explaining workings and using correct notation, eg $ per year, $m, days and so on. Part (d) required candidates to discuss the factors that should be considered in formulating working capital policy on the management of trade receivables. Poorer answers offered a list of actions that could be met in trade receivables management, such as send out letters to trade receivables, call customers on the telephone, produce an aged receivables analysis regularly. Working capital policy on trade receivables management should consider what period of credit to offer, how to determine the amount of credit offered, when creditworthiness needs to be assessed and to what extent, and so on, and it is often informed by the trade receivables management policies of competitors. The policy should provide the framework within which the actions referred to above would be undertaken. QUESTION 4 Many candidates did well in Parts (a)(i), (b) and (c), while doing poorly in Part (a)(ii) and struggling to remain focused on the question asked in Part (d). In Part (a) candidates were required to calculate the equity value of a company using the dividend growth model (DGM) and then the net asset value. Many candidates calculated correctly the share price of the company using the DGM, although some candidates failed to multiply this share price by the number of shares to give the equity value of the company. Poorer answers re-arranged the DGM in order to calculate a cost of equity using the current share price, but this was unnecessary, as the cost of equity was given in the question.
The net asset value calculated by many candidates showed that they were uncertain as to the meaning of net asset value. Some candidates gave a net asset value of $94m, a figure which fails to treat preference share capital as prior charge capital and hence include it with long-term liabilities. Part (b) asked candidates to calculate the after-tax cost of debt of a company. Many candidates gained full marks by calculating the after-tax interest payment, using two discount rates to calculate two net present values for investing in the bond, and using linear interpolation to calculate the after-tax cost of debt. Answers that did not gain full marks contained errors such as using the wrong tax rate (it was 25%), addition or multiplication errors, using the before-tax interest payment, or putting incorrect values to variables in the linear interpolation calculation. Some answers calculated the cost of capital of preference shares in addition to calculating the after-tax cost of debt, and then attempted to average the two costs of capital. While preference shares are classed as prior charge capital, they pay a dividend, not interest, and preference shares are not debt. In Part (c), candidates were required to calculate the weighted average cost of capital (WACC) of a company. Candidates therefore needed to calculate the market values of ordinary shares, preference shares and bonds, and the preference share cost of capital, having already calculated the after-tax cost of debt and being given the cost of equity by the question. The most common reason for not gaining full marks was calculating incorrectly the cost of capital of the preference shares. This can be found by dividing the preference dividend by the market price of the preference share, but many candidates used the dividend rate of the preference shares (8% per year) as the dividend, instead of calculating the preference dividend from the nominal value (par value), ie 8% of 50 cents giving a dividend of 4 cents per share. Other reasons for losing marks included aggregating the market values of ordinary shares and preference shares, before applying the cost of equity to both: omitting the preference share capital from the WACC calculation; multiplying the after-tax cost of debt by (1 t) (one minus the tax rate); and calculating a new cost of equity, even though the cost of equity was given in the question.
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EXAMS
Part (d) asked for a discussion of the factors to be considered in formulating the dividend policy of a stock exchange listed company. The requirement was worded carefully to encourage candidates to consider the dividend policy of a company faced by the demanding business environment of the real world. Little credit was therefore given to discussions of the dividend irrelevance theory of Miller and Modigliani, which is based on the assumption of a perfect capital market, since capital markets in the real world are no more than semi-strong form efficient. While a discussion of dividend relevance theory compared to dividend irrelevance theory was not asked for, some credit was given to answers that discussed dividend relevance theory where points were made that had real world relevance. These points included the signalling effect of dividends, shareholder preference for certain dividends rather uncertain capital gains, and the importance of the clientele effect in imperfect capital markets. Better answers focused on some of the factors covered in the suggested answer, including the need to consider liquidity, the importance of relating dividend decisions to investment and financing decisions, and the need to consider financial risk.
THERE IS STILL EVIDENCE THAT PAPER P1 CANDIDATES ARE NOT CORRECTLY OR FULLY READING THE QUESTIONS. I WILL DISCUSS THE SPECIFICS BUT IN, FOR EXAMPLE, QUESTION 1(C)(I) AND ALSO QUESTION 3(C), MANY CANDIDATES SEEMED NOT TO REALISE WHAT THE QUESTION WAS ACTUALLY ASKING.
Second, it was frustrating to see that many candidates were unable to bring the content of one of my technical articles into their answers when it was appropriate to do so. The content on environmental auditing for Question 2(b) was covered in a technical article in Student Accountant that I wrote in March 2009. The answer to this question (the stages in an environmental audit) was clearly discussed in the technical article. Perhaps the fact that the article was published some time ago made some candidates think the content would not be covered. This should be salutary to future Paper P1 candidates. Technical articles should be studied carefully by all Paper P1 candidates including those written by the examiner and by other authors. Third, there is ample scope for improvement in the development of level 3 intellectual outcomes like construct and criticise (such as in Question 1(c) (ii), Question 2(a) and Question 4(d)). Being able to operate at level 3 is important at the Professional level in ACCA exams (and in professional life) and there was evidence that some candidates lacked an insight into what these verbs meant. There was an approximately even distribution of Section B questions in terms of popularity. All Section B questions were done very well by some and very poorly by others. I will explain some of the common errors in the comments below. SPECIFIC COMMENTS QUESTION 1 The case in Section A (Question 1) was about ZPT, an internet communications company, which was involved in a number of false accounting and fraudulent activities. The auditor, JJC, was complicit in the situation. A similar situation happened in real life some years ago and so some candidates may have been familiar with some of the issues already. This does show the value of studying current cases from the business news in preparing for Paper P1 exams as real life themes are sometimes borrowed in framing exam case studies. Part (a) contained two components, Parts (i) and (ii). The first was a bookwork task to explain the factors that might lead institutional investors to seek to intervene directly in a company they hold shares in. This was not a requirement to define institutional shareholders as some candidates did (scoring nothing for their efforts in doing so). The content should have been well known to any well-prepared candidate. Many were able to gain some marks for Part (a) even if they couldnt get all six marks. For Part (a)(ii), candidates had to study the case to see which factors applied to ZPT. There were three such factors mentioned in the case and candidates had to use these to construct the case which means to produce arguments in favour of investor intervention because of the identified weaknesses. Part (b) asked about absolutist and relativist ethics. I often put a substantive ethics requirement from Section E of the Study Guide into Question 1 and this paper was no exception. Shazia Lo was an accountant at ZPT who accepted a bribe to keep quiet about the companys fraudulent accounting. The question asked candidates to distinguish between absolutism and relativism and then to critically evaluate Shazia Los behaviour from these two perspectives for a total of 10 marks. This means that both perspectives had to be discussed in considering Shazia Los behaviour. From an absolutist perspective, it is obvious that no accountant should ever be complicit in bribery, fraud or mis-statement. From a relativist perspective and this is where the case raises an interesting ethical conundrum, it may be right in some circumstances to show compassion and to carefully consider the consequences of actions, not merely their legality. Shazia used the money not to enrich herself but to pay for medical treatment for her mother. This in no way excuses her actions but it does raise the issue of trading one ethical good (upholding her
PAPER P1 GOVERNANCE, RISK AND ETHICS (FORMERLY PROFESSIONAL ACCOUNTANT)
December 2010 was another successful diet for Paper P1 with many candidates passing and with some exceptional performances by individual candidates. As always, I would like to convey my congratulations to all successful Paper P1 candidates and their tutors. The December 2010 Paper P1 paper was similar in level and feel to all the previous Paper P1 exams and it is my hope that candidates and tutors know what to expect in terms of approach even if they dont know what will be on the paper in terms of content. There is still evidence that candidates are not correctly or fully reading the questions. I will discuss the specifics below but in, for example, Question 1(c)(i) and also Question 3(c), many candidates seemed not to realise what the question was actually asking. Perhaps some candidates answered the question they wish had been asked rather than the actual question set.
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professional and legal duties) against another (assisting in the medical care of her mother). There were three requirements in Part (c) and all parts were done poorly overall. What surprised me about this is that all parts are clearly core areas in the Paper P1 Study Guide and while some candidates addressed the questions correctly and scored highly, many did not. Just to clarify what the questions meant, (a) was about the consequences of bad governance, (b) was about the case in favour of mandatory (rather than voluntary) IC reporting, and (c) was about the contents of an internal control report. None of these should have been a struggle for a well-prepared Paper P1 candidate. In Part (c)(i), it seems that many candidates saw the first part of the requirement but ignored the second part. So they described the nature of sound corporate governance whilst neglecting the second part which was to do this by assessing the consequences of the corporate governance failures ay ZPT. This question is essentially probing the main purpose of corporate governance: without sound corporate governance, companies go bust, employees lose their jobs, investors lose their investments and can be financially ruined, and a number of other terrible outcomes. So the consequences of CG failure was often overlooked by candidates, which meant that they failed to gain those marks. Part (c)(ii) was concerned with the debate over the mandating of internal control reporting. Some candidates correctly identified that this debate had taken place in the US some years ago over Section 404 of SarbanesOxley (although it wasnt necessary to know this to gain the marks). The point of having this requirement in the question was to highlight that poor internal controls were in part responsible for the situation at ZPT and that mandatory reporting to an agreed reporting framework would have made it much more difficult for the IC failures to have occurred. The accountability created by having to report on internal controls could have made it much more difficult for the ZPT management to have got away with the bad practice that they did. Part (c)(iii) was about the contents of such a report. The marking team allowed some latitude here but the essential components should have included, in all cases, an acknowledgement statement (whose job
is it?), a description of the processes (how is IC done?), it should be accurate and reliable, and, specifically, it should explain any particular IC weaknesses. The professional marks were awarded for framing the answer to the three components of Part (c) in the form of a speech by a legislator. There was some evidence of improvement in candidates taking this seriously and setting out their answer accordingly, but others made errors like setting it out as a memo or letter, or else by using bullet points (in a speech?) or unlinked statements. I would again reinforce the importance of being prepared to answer in a variety of ways because these four marks really can make a difference between a pass and a fail. QUESTION 2 This question was mainly concerned with sustainability and environmental themes although Part (c) introduced some content on risk. Many candidates did well on Part (a) which was pleasing to see. Explaining what sustainability meant was straightforward for well-prepared Paper P1 candidates although some could not see the way in which the finance director had misunderstood the term. He thought it meant going concern and so equated sustainability with the business being financially sustained rather than the environmental sustainability of the company. Part (b) was about environmental auditing. I addressed this topic in detail in a technical article for Student Accountant in March 2009 so was surprised that this question was not answered well by the majority of candidates. Environmental auditing is an important element of environmental management and in reassuring investors and other stakeholders concerned with an organisations environmental risk. It is important that candidates and tutors carefully study technical articles they may contain content relevant to exams. Part (c) was done better overall. The strategic/operational risk distinction has appeared before and there was a technical article on this by Nick Weller in September 2008. The final task, to explain why the environmental risks at JGP are strategic, was less well done although a careful analysis of the facts of the case should have enabled an answer to be arrived at if the candidate knew what strategic risks are. QUESTION 3 This was a question focusing on issues of non-executive directors but,
in Part (c), asking about corporate governance reporting and its importance in investor information provision. The case was about KK Company and its need to fill a vacant non-executive directorship. Issues were raised because the nominee was less than ideal because of a number of conflicts of interest. Part (a) asked candidates to explain what a conflict of interest was and then to discuss the conflicts of interest that would arise if John Soria, the nominee for the position, became the NED of KK Company. This was done well overall, with many candidates scoring well on both tasks. In Part (b) there was a difference between candidates who attempted to analyse the case and carefully consider what the question was actually asking, and those who seemed to think that questions asking about the non-executives should be answered in terms of the four general roles (people, risk, strategy, scrutiny). The question asked specifically about how NEDs would benefit the KK board during a period of growth and this required candidates to carefully consider the particular circumstances in question. Those candidates that carefully considered the case and the particular advantages that NEDs could bring during a period of rapid growth achieved the highest marks on this question. Part (c) was actually asking something quite straightforward: what would a good corporate governance section of an annual report contain. In many countries, a substantive CG section is either mandatory or prescribed under listing rules. Reports in the UK and other developed and developing economies, for example, often have several pages of content called corporate governance or similar. These are intended to allow the company to report on each of the measures that are important for ensuring the sound stewardship of company value. This underlines the importance of candidates being aware of a range of reporting issues. Inspecting the annual reports of most large companies would be a way of becoming familiar with corporate governance reports. One common error was to answer as if the question was asking about the contents of an annual report (chairmans statement, income statement, etc). It was asking about the corporate governance section in an annual report and not about the annual report in its entirety.
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QUESTION 4 Question 4 was mainly about risk with Part (d), for five marks, asking about social responsibility. The case was about a manufacturer (this was important for answering Part (a)) with a voluntary supplier payment policy and a number of internal pressures on working capital serving to increase liquidity risk. Most candidates were able to define liquidity risk in Part (a) but fewer were able to explain its particular significance to UU (the company in the case). A careful reading of the case would have alerted a well-prepared candidate to the reasons for UUs particular vulnerability to liquidity risk. Included in this was the fact that it was manufacturer with inventory levels not present in service industry companies. Part (b) raised the issue of embedding risk into systems and culture, a subject that has been examined before in a Paper P1 exam. This part was done quite well by many candidates, whereas Part (c) was less well done. Part (c) involved a careful analysis of the case to bring out the various factors that would make it difficult to embed liquidity risk management at UU. It was specifically about liquidity risk management and not risk management in general. The obstacles were relatively straightforward to find in the case and the highest marks were gained by those most able to show how the different attitudes of the companys managers put pressure on the different aspects of the companys working capital. For five marks, Part (d) asked candidates to criticise the voluntary supplier payment policy as a means of demonstrating CSR. This means candidates had to point out why it wasnt a very good means of demonstrating CSR. The case contained a number of issues associated with the policy which the better-prepared candidates picked up on. Poor answers receiving few or no marks were those that simply defined CSR or used a textbook framework (such as Carrols framework) in an attempt to answer the question.
PAPER P2 CORPORATE REPORTING
As usual, the paper dealt with a wide range of issues and accounting standards. The paper was demanding but candidates responded well resulting in a good pass rate. Candidates seem to have a good basic knowledge of accounting standards,
and where the question requires this type of knowledge, no issue arises. However, there are few questions that require simply rote knowledge. Cash flow statements are well done for the most part, although any complexity and application seems to create a problem. Topical issues of a discursive nature are quite well done, indicating a good awareness of current issues. However, the computational parts are often poorly completed which again seems to indicate that application of knowledge is a problem. Additionally, some candidates do not write in sufficient detail on the discursive parts of the paper, and do not answer the question set. A general discussion of the relevant standard, however, is not normally required, although detailed discussion of the relevant section of the standard is required. A significant part of the paper comprises discursive elements and candidates need to develop skills in this area. Candidates should, where possible, make sure that they show all workings and start each question on a new page. Time management issues seem to have been less prevalent in recent diets. There is some evidence that candidates spend disproportionate time on single question parts and hence not answer all the parts of the question. Time management is critical in passing the paper. When the time allocated to a question is over, candidates should move on and start a new question, leaving sufficient space to come back and finish the question if time allows. Candidates seem to have difficulty applying standards to the scenarios given in the questions. It is often obvious that candidates have the knowledge, but they are unable to use this knowledge in answering the question. The scenario can often give candidates help in answering the question. There are several key principles in each standard. Sometimes these are lost in the detail of the standard. These principles are the basis of most of the exam questions and candidates should concentrate on these principles. Candidates need to understand the standards, and not just learn their content. Understanding will lead to better application in the exam. There may be a misconception that the knowledge required to pass this paper can be gained in a short period just before the exam. This is not the case. The knowledge should be built up over a period of time and continuously consolidated. Candidates need to remember that the knowledge and application skills acquired from Paper
F7 (or the equivalent if exemptions are claimed) are prerequisite to Paper P2. SPECIFIC COMMENTS QUESTION 1 This question required candidates to prepare a consolidated statement of cash flows for a group using the indirect method. The question required candidates to calculate goodwill on the acquisition of an entity where the group already held an investment in the entity. The goodwill needed to be calculated in order to ascertain the impairment of goodwill which was an adjustment to the operating activities of the group. Candidates performed well on this part of the question but often failed to take account of the deferred taxation adjustment. The question also required candidates to deal with the acquisition of the subsidiary in preparing the cash flow statement and to calculate the cash flows relating to an associate, PPE, non-controlling interest, deferred taxation, a defined benefit scheme, investment property, intangible assets and available for sale investments. This part of the question was well answered. There are some elements of a cash flow question which are relatively easy to answer and candidates generally obtained the marks in these areas. The main areas where candidates had difficulties were: Ensuring that the purchase of the subsidiary was dealt with in calculating cash flows across the range of assets and liabilities. The treatment of the past service costs relating to the defined benefit scheme. The calculation of the cash flow on taxation, although many candidates made a good attempt at this calculation. Part (b) of the question required candidates to comment on the directors view that the indirect method of preparing statements of cash flows is more useful and informative to users than the direct method and to discuss the reasons why the directors may wish to report the loan proceeds as an operating cash flow rather than a financing cash flow commenting on whether there are any ethical implications of adopting this treatment. The first part of this element of the question was often poorly answered. In fact often it was not attempted. Currently, there is a debate over whether the direct method should be used in preference to the indirect method and
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thus candidates should be aware of the advantages and disadvantages of the methods. It shows that candidates are not reading widely enough and are focusing on a narrow range of topical issues. The ethical part of the question was quite well answered although many candidates did not read the question fully enough as it stated that the directors were to receive extra income if the operating cash flow exceeded a predetermined target for the year. Part of the answer to the question was therefore contained in the scenario. This further exemplifies the points raised in the introduction to this report. QUESTION 2 This question was a case study type question based around share based transactions. The question was not totally related to IFRS 2 but also to other standards where shares are exchanged in a transaction. The first scenario dealt with a contract to purchase a commodity with shares. The purchase price was to be settled in cash at an amount equal to the value of an amount of the entitys shares. The entity wished to treat the transaction as a share based payment transaction under IFRS 2, Share-based Payment. Many candidates did not recognise the fact that the transaction should be dealt with under IAS 39. This type of transaction has been examined recently but candidates did not seem to recognise the nature of the transaction In Part (b) the entity acquired 100% of the share capital of another entity in a business combination and this entity had previously granted a share-based payment to its employees. A replacement award was issued a replacement award that did not require post-combination services. Candidates had to understand the interaction of IFRS 2 and IFRS 3 in order to answer the question. The question was not well answered although candidates did seem to realise that there was a post-combination expense to be taken into account In Part (c), the entity issued shares during the financial year which were subscribed for by employees who were existing shareholders, and some were issued to an entity for the purchase of a building. Candidates often felt that the first transaction was within the scope of IFRS 2 and the second was not. Unfortunately this assumption was incorrect with the correct answer being that the first transaction was outside the scope and the second was within the scope.
In Part (d) the entity granted share options to each of its employees with the options vesting in the future provided the employee has remained in the companys service until that time. The terms and conditions of the options had a market condition. Candidates generally seemed to understand the effect of a market condition and answered this part of the question very well. Overall this question was not as well answered as the other questions on the paper QUESTION 3 This question dealt with real world scenarios taken from corporate financial statements. It is important that the exam paper reflects actual issues in financial statements and those candidates can apply their knowledge to these scenarios. A public limited company which developed and operated airports was involved in litigation over an accident at one of the airports and the issues was whether a provision or contingent liability should be provided for. In this case it was important for candidates to justify their conclusion by discussing the nature of a provision and contingency. This part of the question was well answered although many candidates came to the incorrect conclusion. In Part (b), candidates had to determine the relationship between an entity and a company that it had invested in. There was a need to discuss the relationship between the two entities in order to determine what the relationship constituted. Many candidates did not again use the scenario and in this question it was critical to discuss the facts in the question. However, the question was well answered. In Part (c), the entity issued shares for the acquisition of franchise rights at a local airport and showed irredeemable preference shares as equity instruments in its statement of financial position. Candidates had to determine the correct accounting treatment for these items. This part of the question was not well answered with candidates not understanding how to account for the irredeemable preference shares. Understanding the nature of equity and liability is a key element of the syllabus. Overall the question was well answered. QUESTION 4 In Part (a), candidates had to comment
on the different approaches which could have been taken by the International Accounting Standards Board in developing the IFRS for Small and Medium-sized Entities explaining the approach finally taken by the IASB. Additionally candidates had to discuss the main differences and modifications to IFRS which the IASB made to reduce the burden of reporting for SMEs. Specific examples had to be given and also a discussion of how the IASB had dealt with the problem of defining an SME. This part of the question was very well answered. The subject had been very topical and been the subject of articles in the accountancy press. In Part (b) candidates had to discuss how the certain transactions should be dealt with in the financial statements of an entity with reference to the IFRS for Small and Medium-sized Entities. The answers to this part of the question were quite variable. The three topic areas chosen were defined benefit, the purchase of an entity and research and development expenditure. Candidates were generally unclear about how to account for the transactions and many used full IFRS. The main issue was that candidates automatically assumed that the corridor approach would be used for defined benefit schemes which was incorrect. This question was generally well answered.
PAPER P3 BUSINESS ANALYSIS
This exam paper was not quite as well answered as previous Paper P3 sessions. It appears to have exposed certain areas of weakness, where perhaps candidates have elected to not learn or revise specific objectives in the Study Guide. The areas of weakness relate to Explaining three corporate rationales for adding value portfolio managers, synergy managers and parental developers. This is learning objective B1e (in original Study Guide) and this was specifically examined in Question 1c. Exploring (through Mintzbergs organisational configurations) the design of structure, processes and relationships. This was specifically examined in Question 3b. It relates directly to learning objective C1e in the original Study Guide. Question 4b, concerned the need to establish a business case as part of project initiation (learning objective
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THERE WAS LITTLE EVIDENCE OF TIME MANAGEMENT PROBLEMS FOR PAPER P3 CANDIDATES AND MOST OF THE SCRIPTS WERE WELL PRESENTED AND WELL WRITTEN, ALTHOUGH SOME MARKERS AGAIN COMMENTED ON POOR HANDWRITING OF SOME SCRIPTS. CANDIDATES MUST REMEMBER THAT WHAT CANNOT BE READ, CANNOT BE MARKED.
G1d), to monitor benefits (learning objective G3a) and to undertake benefits realisation (learning objective G3d) was also poorly answered. In contrast, Question 1a (on portfolio analysis) and Question 4a (on costs and benefits) were answered very well. Question 2, the most popular optional question, on e-marketing was also answered very well by most candidates. Question 3a (on organisational culture) was reasonably well answered by candidates who used the cultural web (or a similar framework) in structuring their answer. Question 1b, on the context and implementation of strategic change, proved to be a difficult question for many candidates. However, those who used appropriate frameworks; such as Balogun and Hope Hailey, the cultural web, the structured turnaround process and Lewins unfreeze transition freeze approach scored reasonably well. There was a lot of material in the case study to support this part of the question. There was little evidence of time management problems and most of the scripts were well presented and well written, although some markers again commented on poor handwriting of some scripts. Candidates must remember that what cannot be read, cannot be marked. However, the main problem appears to have been lack of knowledge of certain areas of the syllabus. SPECIFIC COMMENTS SECTION A QUESTION Section A consists of one compulsory question based around a case study scenario. This scenario described three companies in a portfolio of 14 companies owned by an organisation called Shoal plc. These companies were ShoalFish (a fishing fleet), ShoalPro (a fish processing company) and ShoalFarm (a fish farming company). The first part of the question asked candidates to assess the contribution and performance of these three companies within the Shoal plc portfolio. Most candidates answered this question well, correctly interpreting the textual and financial information given in the scenario. However, surprisingly few candidates actually used portfolio analysis, despite the fact that the financial information was aligned to the data needed to classify the companies within the Boston Box. Furthermore, some candidates analysed the data as if these three companies were the only companies in the portfolio. In reality, there are 11 more companies for which data is not given. It is important to carefully read the scenario. However, overall, this was a popular and well-answered part of the question. The second part of the question began by asking candidates to analyse the contextual factors affecting how strategic change should be managed by Shoal plc at a company (Captain Haddock) it is about to acquire. The question suggested that candidates should use an appropriate model, but no specific model was mandated. Performance was very patchy in this part of the question. Some candidates wrote very little, others described the change process (required in Part (b)(ii)), while others did identify an appropriate model (the Balogun and Hope Hailey kaleidoscope or the cultural web) but failed to us it in the context of the case study scenario. The best answers used an appropriate model and provided relevant cross-reference to the case study scenario for each facet of their selected model. Part (b)(ii) of this question asked candidates to identify and analyse the main elements of strategic change required to turnaround Captain Haddock and return it to profitability. This part of the question was reasonably well answered with some candidates being aware of an approach specifically geared to a turnaround situation. However, even those who were not familiar with this approach, were able to give a sensible answer gaining pass marks, often using Lewins unfreeze transition (change) freeze framework as an overall structure to their answer. The final part of this question was relatively theoretical. It asked candidates to explain three corporate rationales; portfolio managers, synergy managers and parental developers and to assess their relevance to the overall corporate rationale of Shoal plc. As mentioned in the introduction, this was very poorly attempted with many candidates scoring three marks or less. This appears to have been due to a lack of knowledge in this area of the syllabus. SECTION B QUESTIONS Candidates have to answer two of the three questions presented in this section of the exam. Question 2 concerned a specialist business book publisher considering investment in e-business. The first part of the question (worth five marks) asked candidates to determine the main drivers for the adoption of e-business and to identify potential barriers to its adoption. The case study scenario provided a wealth of information and many candidates gained full marks for this part of the question. Indeed, some answers were too long and elaborate for the marks on offer and strayed too far into the answer to the second part of the question. Candidates are reminded of the need for effective time management and the need to answer the specific requirement of the question. The second part of the question asked candidates to evaluate how certain elements of the marketing mix (price, promotion, product, physical evidence and place) might be exploited through the adoption of e-business. Again, this was relatively well answered with many candidates giving relevant examples from their own studies, from appropriate websites (such as Amazon) and from contemporary technology, such as Kindle Readers and iPads. Candidates who marginally failed this question just did not make sufficient points to gain the marks on offer. Very few candidates who elected to answer this question were completely unaware of the marketing mix, although some did introduce the other two elements of the mix (process and people) despite these not being explicitly required in the question. Question 3 described a small
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electrical component importer owned and managed by a dominant, autocratic manager. Candidates were asked, for 15 marks, to analyse this company using the cultural web or any other appropriate framework. Clearly candidates had to know the constituent parts of the cultural web (or an appropriate alternative) to successfully answer this question. Candidates who had such knowledge usually gained a pass mark on this part of the question. The second part of Question 3 asked candidates to explain how an understanding of organisation configuration could have helped predict the failure of the company accountants proposal to formalise structure, controls and processes. The question also specifically referenced Henry Mintzbergs configuration stereotypes, in the belief that this would help candidates identify which part of the Study Guide was appropriate to this part of the question. As mentioned in the introduction, very few candidates answered this well, with perhaps less than 10% familiar with the work of Mintzberg, despite its explicit reference in the Study Guide. However, even without this specific knowledge, candidates failed to pick up on the key words of structure, controls and processes. Candidates could have focused their answer on these, recognising that the proposals of the company accountant, based on her experience in a large tax authority, were a very poor match for the centrally controlled, flexible, informal environment of a small organisation. Taking such an approach could have gained five or six marks, which would have changed many marginal fail answers into marginal passes. Most candidates who failed this question did so because of their very poor performance in the second part of the question. Question 4 considered a professional qualifications body considering the implementation of e-assessment. The first part of the question, worth 15 marks, asked candidates to evaluate the perceived benefits and costs of
adopting e-assessment. In general, this was answered well by most candidates. Some scored very high marks, showing excellent analysis given the time constraints and pressure of the examination situation. Candidates who marginally failed this question usually did not provide sufficient discrete points to gain the marks on offer. There was often too much repetition of the reduces costs benefit. The second part of this question asked candidates to explain why establishing a business case, managing benefits and undertaking benefits realisation are essential, despite the claimed self-evident justification of adopting e-assessment. As mentioned in the introduction, this part of the question was poorly answered. Candidates failed to focus on the three elements; business case, managing benefits and benefits realisation. Even rudimentary parts of the business case, for example, the need to undertake formal investment appraisal, was rarely raised by candidates. Many candidates marginally failed this question because they did not answer the second part of the question or only offered two or three sentences that largely reflected the information given in their answer to the first part of the question.
PAPER P4 ADVANCED FINANCIAL MANAGEMENT
The structure of the paper was similar to past papers with two compulsory questions in Section A, consisting of 60 marks in total, and three 20-mark questions in Section B, of which candidates had to do two, for the remaining 40 marks. The overall performance of the candidates was satisfactory. In Section A, Question 1 consisted of 35 marks and Question 2 consisted of 25 marks. Four professional marks were allocated to Question 1. Both questions required candidates to undertake computations and discussion.
PAPER P4 CANDIDATES NEED TO BEAR IN MIND THAT IT IS EASIER TO OBTAIN MARKS AT THE START OF A QUESTION RATHER THAN TOWARDS THE END OF A QUESTION. IT IS IMPERATIVE THAT CANDIDATES LEARN TO MANAGE THEIR TIME EFFECTIVELY THROUGH PRACTISING PAST EXAM QUESTIONS UNDER TIMED AND EXAM-STYLE CONDITIONS.
In Section B, question five was wholly discursive, while Questions 3 and 4 consisted of a mixture of computational and discursive elements. Excellent answers were obtained from candidates who applied their knowledge to the scenario given in the question. The presentation of such answers was good, with clear labelling and structure and workings. In Question 1 especially, a clear structure and effective use of appendices enabled such answers to gain the maximum professional marks. In Section B, perhaps more than other questions, Question 4 required a well-structured and systematic approach as well. Most successful candidates attempted all the parts of the questions and managed their time well between questions. There was more evidence in this sitting compared to previous sittings of some candidates not employing good time management techniques and not answering all the parts of a question, or in a minority of cases not answering a question at all. A number of such candidates failed marginally even though the questions they had answered fully were of a pass standard. It is important to make a reasonable attempt at each question. Candidates need to bear in mind that it is easier to obtain marks at the start of a question rather than towards the end of a question. It is imperative that candidates learn to manage their time effectively through practising past exam questions under timed and exam-style conditions. Some candidates were poorly prepared for the exam in terms of their knowledge. This was especially evident in Questions 1 and 3, and in the discursive parts of Questions 2 and 4. Candidates need to be aware that for Paper P4 it is expected that they develop their knowledge and the ability to apply that knowledge. In a number of cases candidates failed to achieve a pass mark due to lack of knowledge and not being able to apply that knowledge to the scenario in the question. Paper P4 has a large syllabus and numerous technical areas. Candidates need to know the syllabus well in order to apply it to the question scenario. Poor performance was also evident where candidates did not read the content and requirements of questions fully. Answers need to be directed at the scenario in the question, general answers did not gain many marks.
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SPECIFIC COMMENTS QUESTION 1 This question required candidates to assess three proposals for a company facing financial difficulties and discussing the impact of the proposals on the main stakeholders. Part (i) asked candidates to estimate the return the debt holders and the shareholders would receive if the company ceased trading and closed down. Part (ii) asked candidates to estimate the income position and the value of the company in the event of a financial restructure. Part (iii) asked candidates to estimate the additional finance required and the value of the company in the event of a management buy-out. Part (iv) asked the candidates to discuss the impact of each of these proposals on the companys main stakeholder groups. Corporate restructuring and reorganisation, from which the key elements of this question were drawn, is a key area of the syllabus. Parts (i) and (iv) were generally done well, with many candidates achieving high marks for both parts. In Part (iv) a number of marks were available for discussion of the impact on the stakeholders where it was not necessary to have access to the answers from Parts (ii) and (iii), and many answers handled this part well. In Part (i), most candidates looked at the funds available to the debt holders after redundancy payments. However, a surprising number of candidates ranked the debt holders and shareholders at the same level for any residual repayments, which is not correct. Parts (ii) and (iii) were done less well. In Part (ii) many candidates did assess the income position but could not then translate that into cash flows and determine an estimate of the value. In Part (iii) there was confusion about how to calculate the additional finance needed and the value of the company, and many answers could not determine the likely size of the reduced operation. A sizable minority of candidates did not attempt Parts (ii) or (iii) or both at all. QUESTION 2 This question, in Part (a), required candidates to evaluate the value of a project using a base case net present value (NPV) and then consider the impact of financial side effects using adjusted present value (APV). It was also possible to address the question using NPV by making substantial changes to the weighted average cost of capital and discounting the cash flows using this.
However, this was a more complex and less transparent approach compared to APV, which was the preferred method. Part (b) required a discussion of the method used and an explanation of the assumptions made. Overall the computational aspects of Part (a) were done well with many candidates gaining a high proportion of marks. Common errors occurred in calculating the working capital requirement where many answers got the timing wrong and when calculating the tax shield and value of the subsidy for the APV. In a number of answers candidates thought the tax shield was the discounted interest rate and this is incorrect. Many candidates derived the cost of equity using geared and ungeared betas, whereas using the Modigliani and Miller (MM) formula would have been less time consuming. The answers which achieved high marks in Part (b) gave a detailed discussion of the method used and explanation of the assumptions made. Weaker answers tried to answer this part in brief note form and these did not gain many marks. Many answers did not discuss the link between APV and MM, which was surprising. Generally this part was not done as well as Part (a). QUESTION 3 This question was a popular question but performance varied between good and quite poor. In Part (a) this question required candidates to calculate the number of put options needed to hedge an underlying position, by calculating the hedge ratio using N(-d1). Part (a) also asked candidates to explain the numerical answer. Part (a) was either done well with candidates calculating the delta and then applying it correctly; or it was done poorly where candidates went onto calculating the value of a call and a put option for the given variables, and these were not required. Very few candidates explained the numerical answer. Candidates need to be aware that some question parts may have more than a single requirement and all the requirements need to be addressed correctly in order to achieve full marks. Part (b) asked candidates to discuss the position held by each manager with respect to risk and the implications of this. Some reasonable points were made but in many cases these lacked depth or substance. An article appeared in Student Accountant recently, which looked at why risk should or should not be managed.
QUESTION 4 Part (a) asked candidates to calculate the dividend capacity of a company which received dividends from its international subsidiaries. A proposal was put forward which would change the level of dividends received due to a change in the tax payable (in fact the dividends reduced because more profits were being made by the subsidiary in a high tax country and the higher taxes resulted in lower dividends). Part (b) asked for a comment on the result and the actions the company would need to take if the dividend capacity was not sufficient to pay the desired amount of dividends. This question was the least popular of the optional Section B questions. It required a logical and systematic approach because a lot was being asked from the candidates especially in answering Part (a) of the question. Good attempts at Part (a) achieved high marks but sometimes the answers were not appropriately structured and this resulted in mixed-up or jumbled answers. Few appropriate answers were received for Part (b) and mostly these reflected the disorganised approach to Part (a). QUESTION 5 This question was the most popular and probably the best answered of all the questions on the paper with many candidates gaining a high proportion of the marks for their answers. It asked candidates to consider whether or not a joint venture was the viable option, how the drawbacks of a joint venture could be mitigated and additional information required. Answers that gained fewer marks did not give many points or lacked adequate discussion because they were in note form. Sometimes points were repeated in various formats and these did not get additional marks. Overall though, many answers gained over half marks and some cases over 70% of the total marks for this question.
PAPER P5 ADVANCED PERFORMANCE MANAGEMENT
I would like to offer my congratulations to all of those candidates who achieved a pass at this diet and my commiserations to those who did not. The exam paper comprised two sections, A and B. Section A consisted of two compulsory questions for 60 marks in total. Section B consisted of
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three optional questions for 20 marks each from which candidates were required to answer two questions. It was pleasing to see a large number of candidates providing good answers to every question they attempted and consequently achieving high marks. Sadly, the exam revealed a large number of candidates who were either inadequately prepared or failed to read the question requirements carefully. The performance in this diet was poorer compared to previous diets partly to be due to an inability of some candidates to be flexible in their approach to the exam. As a Professional level paper, candidates cannot expect there to be one standard answer to all questions on a given topic. The exam is intended to make the candidate apply their knowledge to a given scenario and that scenario will always present new challenges. As in previous diets, in general, candidates are demonstrating good skill at description but are weaker on analysis. This is a lesson that has gone unlearned from previous diets. An example of this was in Question 4(b) where an analysis of a given table of data was required. This is a core skill for any commercially valuable accountant much like being able to read a set of accounts. Therefore, these should be straightforward marks as this skill is building on those tested at previous levels in the ACCA Qualification. It is apparent that many candidates believe that because the basic application of this skill has been tested at a lower level, it is thus excluded from later diets. This is wrong. At the Professional level, you can expect skills and knowledge obtained at previous levels to be tested but in a more complex and realistic scenario. Candidates should remember that the exam is intended to be a test of their ability to add value in their work. They can demonstrate that ability by doing things that those they are reporting to cannot picking out the nuggets of gold from the pile of dirt. Thus, good characteristics to develop in the interpretation of questions are the strength of will to maintain focus on the overall objectives, the keensight to identify the driving factors of performance and the breadth of knowledge to be able to suggest methods of performance improvement. Presentation of answers continues to show improvement and more candidates are obtaining higher professional marks as a result. One area that could still be improved is the use of subheadings to
break up long answers and in particular, making sure that question subparts are all clearly indicated. Candidates should also note that bullet point answers often do not give sufficient detail to earn good marks. As usual, the exam presented a challenge in the efficient use of candidates time. However, wellprepared candidates found this no issue in providing good, complete answers to all questions. It was noticeable that those candidates who failed to complete all of the questions were ones who did not have a clear grasp of the question requirements and the basic knowledge required. As a result they spent considerable time writing irrelevant or vague answers that gained few marks. SPECIFIC COMMENTS QUESTION 1 The question requested sections of a report on the identification and linking of critical success factors (CSFs) to key performance indicators (KPIs) and the subsequent impact of these choices on the information systems of a film production company (FP). In general, answers to requirement (a) were weak with few of candidates gaining maximum marks by ensuring that their example metrics were relevant to FP The problems were due to a . lack of knowledge of the definition of monitoring and building CSFs and a lack of familiarity in using CSFs. This became more apparent in responses to requirement (b) which was poorly attempted. This part asked for the information used in setting CSFs and then, using their reading of the scenario and general business knowledge, suggestions of suitable CSFs. Many candidates were unable to address this part of the question due to lack of knowledge of the definition of a CSF and devoted their answer purely to KPIs, as a result scoring no marks. Those candidates who read the question requirement and responded to it were quickly rewarded. Requirement (c) was generally well answered with many candidates getting seven or eight marks out of 10. The best answers were those that used the question requirement to give a methodical structure to their answer. Those candidates who did not score well tended to provide bullet point lists of many KPIs when the question asked for four. Candidates should look at the total marks available for the question part and realise that they are expected
to develop points about each KPI suggested, not simply identify them. Requirement (d) was generally adequately attempted. The better answers clearly linked the KPIs to changes that would be required in the design and use of the information systems mentioned. Thus, they could demonstrate knowledge of how such systems operate and the use to which the information produced is subsequently put. There were two professional marks available for this question and these were given under the headings: use of subheadings, professional language and clarity. Candidates should note that they were asked for sections and not the full report. Therefore, the standard report header, introductions and conclusions were not required except as appropriate to each section itself. (No harm was done if these were produced but mostly they wasted time.) QUESTION 2 This question presented data on a manufacturer (RL) that provided laptops for use in dangerous environments. In Part (a), candidates were asked to evaluate a traditional costing method with an activitybased costing (ABC) one. Calculations of the result of using both these methods were possible and expected. There were significant variations in the overall quality of answers to this question. Those candidates who could correctly calculate the relevant costs scored well as they could then provide specific evidence for their recommendations about the two methods. Indeed, a good number scored 12 or more marks out of 15. Those who then continued the calculations to consider the main commercial implications of the two methods on the pricing at RL often scored full marks. Sadly, a number of candidates did not appear to know how to use the ABC method which should be considered a basic technique for a management accountant. In Part (b), candidates were asked to explain a beyond budgeting approach and evaluate its use at RL. This part was generally well attempted although candidates often were sketchy on the details of implementation of this approach. It was pleasing to see many candidates analysing the environment for RL as competitive and innovative and applying these as criteria for judgment about whether the beyond budgeting approach suited the company. This is a good example of making the answer specific to the scenario.
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QUESTION 3 This question requested a discussion and evaluation of the use of valuebased approaches to performance management at a chain of gift shops (LOL). Requirement (a) requested an explanation of valuebased management (VBM) and how it aids management focus. Candidates often scored a pass but not full marks on this part. There were often lengthy and irrelevant discussions about nonfinancial factors which suggest incomplete knowledge of VBM. Requirement (b) asked for an evaluation of LOLs performance using EVA, EPS growth and the share price. It was also typically passed but few candidates scored nine marks or more out of 12. The assessment of the numerical work was often lacking. Candidates infrequently compared the change in share price of LOL to the market and sector performance which demonstrated that the company was doing well in a falling market. Some candidates could not perform the EVA computation which was surprising as this is a key performance measure and the scenario offered few of the possible technical adjustments. Having performed the calculation of EVA, a significant minority then failed to note that it was positive choosing to focus on the fact that it had fallen from the previous year. This again showed weak understanding of such a key concept. Requirement (c) was the most difficult part of the question and was generally poorly done, probably as a result of the failure to explain VBM which was illustrated in Part (a). QUESTION 4 Question 4 is set in a telecommunications company which has set targets for the reduction of its environmental footprint. The question asks for the factors in the business environment that will affect this strategy, an evaluation of its current performance in reaching the target and suggestions
for further data which could measure the effectiveness of certain initiatives mentioned in the question. Part (a) was generally well done although a number of good candidates ignored the request for illustrative performance indicators. Part (b) was an analysis of a table of raw data which showed up basic weaknesses in some candidates skill set. It was well answered by only a minority of candidates. Many candidates wasted their time by limiting their comments to only writing out lists of statements such as Commercial Fleet Diesel use has fallen from 105.4 to 70.1 or even Commercial Fleet Diesel use has gone down. First, this is stating the obvious to anyone who read the table but also, this is far too detailed for most reporting purposes. An appropriate plan of attack for this part might have been: consider the big picture whether the overall target for emission reduction be met break down the data into smaller but meaningful (and manageable) chunks road, rail and air transport, and discuss the individual lines of the data table focusing on the data that explains the overall picture of emission changes, for example, the switch from petrol to diesel powered motor vehicles is complete in commercial vehicles and has lead to large reductions in emissions but such a change may be more difficult in company cars as employees may resist such a change. Good candidates analysed the numerical data given in the scenario. They created information from the data given and provided the reader of their answer with new insight into the key factors driving the reduction in emissions. Part (c) was often poorly done as a result of the failure to address the requirement which asked for the data to be related to the reduction initiatives mentioned in the scenario. Many
candidates got a mark for general suggestions of further useful data but few related this to the reduction initiatives. QUESTION 5 The question was about using different models for predicting corporate failure related to a manufacturer of battery packs (RMB). Part (a) required a general discussion of the strengths and weaknesses of both qualitative and quantitative models. This was generally done well although some candidates tried to structure their answer as the strengths and weaknesses of models in general which would not be a helpful method in real life, where a comparison of the models is likely to be more useful. Part (b) asked for comments on an analysts spreadsheet which provided the data and results of a Zscore calculation. Answers to this part were generally good although many candidates restricted their comment on the Zscore to repeating the comment given in the question (RMB is at risk of failure within two years) when the data given was requiring a more analytical answer about which factors within the model were driving the score down and so leading to this prediction. A minority of candidates restricted their comments to the companys statements of income and financial position when the question required comment about the spreadsheet data and consequently their answers lacked relevance. Part (c) asked for the application of qualitativetype models to failure prediction at RMB. This was generally well done with many candidates making good use of the Argenti model and the factors mentioned in the scenario. Unfortunately, some candidates ignored the word qualitative in the requirement and wasted time writing about quantitative factors. Part (d) was poorly answered with many candidates ignoring the requirement to assess the results of previous answers and only picking up marks for suggesting additional data to gather.
IT WAS NOTICEABLE THAT THOSE PAPER P5 CANDIDATES WHO FAILED TO COMPLETE ALL OF THE QUESTIONS WERE ONES WHO DID NOT HAVE A CLEAR GRASP OF THE QUESTION REQUIREMENTS AND THE BASIC KNOWLEDGE REQUIRED. AS A RESULT THEY SPENT CONSIDERABLE TIME WRITING IRRELEVANT OR VAGUE ANSWERS THAT GAINED FEW MARKS.
PAPER P6 (UK) ADVANCED TAXATION
There were many very good scripts and it was pleasing to note that the vast majority of candidates attempted all of the parts of four questions. In addition, there was a good amount of answers that were brief and to the point. The most significant issue
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ON THE WHOLE, THE PERFORMANCE OF CANDIDATES KNOWLEDGE OF PROFESSIONAL SKILLS FOR QUESTIONS 1 AND 2 WAS GOOD WITH THE MAJORITY OF CANDIDATES PRODUCING CORRECTLY FORMATTED DOCUMENTS IN A STYLE THAT WAS EASY TO FOLLOW. HOWEVER, MANY CANDIDATES FAILED TO MAINTAIN THE CORRECT STYLE OF A DOCUMENT THROUGHOUT THEIR ANSWER.
for weaker candidates was a tendency to address issues that were not asked for, thus wasting valuable time. Many candidates would benefit from thinking more and writing less. GENERAL PAPER COMMENTS The exam was divided into Section A and Section B. Section A consisted of two compulsory questions for a total of 66 marks. In Section B candidates were required to answer two of the three questions worth 17 marks each. In Section B, Questions 3 and 4 were equally popular; Question 5 was the least popular. Candidates should pay particular attention to the following in order to maximise their chances of success in the exam in the future: 1 Know your stuff Successful candidates are able to demonstrate sufficient, precise knowledge of the UK tax system. For example, it was clear that many weaker candidates did not know the conditions that needed to be satisfied in order for capital gains tax reliefs to be available in Question 4 or the precise rules regarding the remittance basis in Question 2. This knowledge must be up to date. Candidates sitting the exam in 2011 must familiarise themselves with the changes introduced by the recent Finance Acts as summarised in the Finance Act articles published in Student Accountant and on the ACCA website. 2 Practise questions from past exams with the aim of adopting the style of the model answers 3 Address the requirement Read the requirement carefully in the Section A questions the detailed tasks that you are to perform will be set out in one of the documents. It may be helpful to tick off the tasks as you address them. Marks are awarded for satisfying the requirements and not for other information even if it is technically correct. The requirements of each question are carefully worded in order to provide you with guidance as regards the style and content of your answers. You should note the command words (calculate, explain, etc), any matters which are not to be covered, and the precise issues you have been asked to address. You should also note any guidance given in the question regarding the approach you should take when answering the question. Pay attention to the number of marks available this provides you with a clear indication of the amount of time you should spend on each question part. 4 Dont provide general explanations or long introductions If you are asked to calculate, there is no need to explain what you are going to do before you do it; only provide explanations when you are asked to. Think before you write. Then write whatever is necessary to satisfy the requirement. Apply your knowledge to the facts by reference to the requirement. 5 Think before you start and manage your time Ensure that you allow the correct amount of time for each question. Think about the issues before you start and identify a strategy to solve the problem set. If you are preparing to resit the exam, think about the number of additional marks you need and identify a strategy to earn them. For example: Identify those areas of the syllabus where you are weakest and work to improve your knowledge in those areas. Ask yourself whether you could improve the way you manage your time in the exam and whether you address all of the parts of all four questions or whether you waste time addressing issues which have not been asked for. Make sure that you earn the professional skills marks and that you are prepared to address the ethical issues that may be examined. MARKS AVAILABLE IN RESPECT OF PROFESSIONAL SKILLS Marks were available for professional skills in Questions 1 and 2. In order to earn these marks candidates first had to satisfy the requirement in relation to the format of the document requested. Further marks were then available for providing clear explanations and coherent calculations. On the whole, the performance of candidates in this area was good with the majority of candidates producing correctly formatted documents in a style that was easy to follow. However, many candidates failed to maintain the correct style of a document throughout their answer such that, for example, the letters written in response to Question 2 often referred to the client correctly as you to begin with but then reverted to using the clients name later in the answer. SPECIFIC COMMENTS QUESTION 1 Question 1 was a substantial question in two parts. Part (a) required candidates to write a report concerning a number of issues relating to a group of companies. Part (b) required a summary of the information to be obtained and the action that needs to be taken before becoming tax advisers to a new client. Part (a) was in three parts and, on the whole, was done well by many candidates. The vast majority of candidates prepared their answer in the correct report format although a minority wasted time producing a long and unnecessary introduction. Part (i) required candidates to explain the alternative reliefs available in respect of a companys trading losses, the tax treatment of a loss arising on the sale of a company and the upper and lower limits for all of the companies for the purposes of calculating the rate of corporation tax. Candidates knowledge of the reliefs available in respect of trading losses was often very good but many let themselves down by addressing the issue in the abstract rather than in relation to the companies in the question. This resulted in detailed
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explanations of reliefs that were simply not applicable (in particular the offset of losses against current and previous years profits) such that candidates than had too little time to explain the relevant points properly. As always, candidates benefited if they paused to allow themselves to identify the issues within the question. There was to be a change of ownership of the loss making company and an apparent major change in the manner in which it would carry on its activities going forward. Accordingly, it is likely that it would be unable to carry forward its losses beyond the date of the change of ownership. There were also arrangements in force for the company to be sold such that it would leave the group relief group prior to the legal transfer of the shares. Many candidates spotted both of these points but those that did not need to think about how they would do things differently such that they would spot them in the future. Finally, a surprising number of candidates thought, incorrectly, that Knuckle Ltd was a member of the group relief group. The capital loss on the sale of the company was not available for offset due to the substantial shareholding exemption. Somewhat surprisingly, many candidates missed this and, of those that spotted the point, many thought that whilst a gain would not be subject to tax, a loss would still be allowable. For the final element of this part of the question candidates were asked to explain the upper and lower limits of the companies. Many candidates simply stated the number of associates and the consequent limits; but that was not an explanation. What was needed were the reasons for the limits being what they were including references to the companies being controlled by the same person and the effect of companies joining and leaving the group. The limits were not the same for each of the companies. Candidates needed to consider each of the companies and apply their knowledge of the rules to that companys particular circumstances. Part (ii) concerned the planned disposal of a number of buildings. The capital gains were reasonably straightforward with just an added complication of a gain rolled over into the cost of one of the buildings. However, many candidates missed the fact that one of the buildings would be transferred at no gain, no loss as
the vendor and the purchaser were in a capital gains group. Others made errors in connection with the indexation allowance (increasing a capital loss with indexation or applying the indexation factor to the unindexed gain rather than the cost) and the treatment of the held over gain. There was a sense here that some candidates had switched off in that some of the errors were very basic and were perhaps an indication of not paying sufficient attention as opposed to a lack of knowledge. Candidates were told in the question that there was a pre-entry element to the capital loss arising on the sale of one of the buildings. The calculation of the pre-entry element was done reasonably well by many candidates but only a small minority had a clear understanding of the manner in which the pre-entry element could be used. A minority of candidates wasted time on this part of the question explaining, often in some detail, how the gains and losses should be offset. This was not part of the requirements and there was insufficient information in the question to arrive at sensible conclusions. Candidates will always benefit from taking the time to read each requirement carefully and then taking care not to deviate from the tasks set. The VAT and stamp duty land tax elements were handled well by many candidates. Those who did not do so well need to apply their knowledge to the facts as opposed to simply writing what they know. For example, the prices at which the buildings were to be sold meant that, where duty was payable, the rate would be 3%. Yet some candidates answered in the abstract and gave the various rates of duty for all possible prices that could be charged. Only a small number of candidates considered the possibility of there being a VAT group; slightly more identified that there would be no stamp duty land tax on the property transferred within the group. Part (iii) concerned the VAT implications of selling goods overseas. There were many excellent answers to this part that, whilst being brief, often scored almost full marks. Weaker candidates either had not learned the rules or confused their terminology using the phrase no VAT will be charged as opposed to zero rated; the two terms do not mean the same thing. The majority of candidates scored well in Part (b). Many took the sensible approach of starting the question with this part in order to ensure that they had sufficient time available to prepare
an appropriate answer. A minority had not taken the time to learn this area of the syllabus with the result that they were unable to obtain some very straightforward marks. QUESTION 2 Question 2 concerned the taxation of individuals and was in two parts. Part (i) concerned inheritance tax and, in particular, the relevance of domicile to an individuals tax position. The level of knowledge here was good with some very strong, thorough answers. However, many candidates who scored well for this part of the question often did so in an inefficient manner which may have left them short of time for the remainder of the exam. As always, there was a need to pause; this time in order to determine the best way to say what needed to be said. Weaker candidates simply kept writing, often repeating themselves, until they finally got to where they wanted to be. Stronger candidates wrote short, precise phrases which earned all of the marks despite using very few words. Candidates should practise explaining areas of taxation making sure that their explanations are concise and clear. There was a need to address the position of both the mother and the daughter but many candidates simply addressed inheritance tax rather than the situation of the individuals. Candidates will be more successful in the exam if they think in terms of providing advice to individuals and companies rather than addressing technical issues as this will help them to stick to the point and to satisfy the questions requirements. A substantial minority of candidates produced muddled explanations confusing the importance of domicile with residence and ordinary residence. This confusion was also evident in answers to Part (ii). The three factors of residence, ordinary residence and domicile all have various implications depending on the taxes concerned and candidates need to know where to start such that they can then avoid writing about all of the factors at once. A somewhat surprising error, made by a significant minority of candidates, was to state that the inheritance tax position on the death of Sushis mother depended on the domicile status of Sushi as opposed to that of her mother. It is, of course, the status of the person whose estate has fallen in value that is relevant. A final comment on this part of the
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question is that many candidates wasted time calculating inheritance tax, despite not having sufficient information, whilst others provided a considerable amount of detail regarding the taxation implications of making a potentially exempt transfer, despite being specifically told not to in the question. Part (ii) concerned overseas income and the remittance basis. The performance of candidates for this part was mixed. To begin with there was much confusion regarding the conditions that must be satisfied in order for the remittance basis to be available with candidates mixing up domicile, residence and ordinary residence with the seven out of nine years rule (and the 17 out of 20 years rule in respect of inheritance tax deemed domicile). The application of the 2,000 rule was also misunderstood by many. There is no doubt that there is plenty to be confused about in this area but that is why candidates need to learn it rather than acquire a hopeful understanding of it. Candidates were asked to explain the meaning of remittance and the remittance basis. Most candidates attempted to do this, which was very encouraging, but few had much knowledge beyond the absolute basics. Similarly, most candidates were aware of the 30,000 remittance basis charge but a significant number were confused as to the situation in which the charge would be levied. On the plus side, the vast majority of candidates provided a conclusion (as requested) and many produced neat and reasonably accurate calculations. QUESTION 3 This question concerned the purchase by a company of its own shares and the provision of a benefit to a shareholder in a close company. It was in three parts. Part (a) required candidates to explain whether two of the conditions necessary to enable the amount received to be treated as capital were satisfied. Many candidates answered this part well but others, with similar knowledge levels, did not perform well because they failed to answer the question. Rather than addressing the two particular conditions set out in the question, this latter group attempted to address all of the conditions despite the majority of them being irrelevant. Candidates had a good knowledge of the five-year rule and the 30% rule but were much less comfortable with the condition relating to the shareholders interest in the company following
the purchase. The rules require the shareholders interest to be no more than 75% of the interest prior to the purchase this is not the same as the shareholder selling 25% of his shares because the shares sold are cancelled thus reducing the number of issued shares. Only a minority of candidates were aware that the ownership period of the husband could be added to that of the wife. Even fewer knew that the usual five-year ownership period is reduced to three where the shares are inherited. Part (b) required calculations of the after tax proceeds depending on the tax treatment of the sum received. This part was answered well by the vast majority of candidates. The only point that many candidates missed was the availability of entrepreneurs relief. It was particularly pleasing to see the majority of candidates correctly identify the after tax proceeds as the amount received less the tax liability (as opposed to the taxable amount less the tax liability). The final part of the question was more difficult and, unsurprisingly, caused more problems. The question concerned the loan of a motorcycle to a shareholder in a close company who was not an employee. Candidates had no problem recognising that the company was a close company but many then decided that this was a loan to a participator as opposed to the loan of an asset. Another relatively common error was to state, correctly, that the benefit would be treated as a distribution but to then give an incorrect tax rate of 40%. Candidates would benefit from slowing down and ensuring that they apply their basic tax knowledge correctly in the exam. QUESTION 4 This question concerned the capital gains tax and inheritance tax implications of the destruction of an asset and the exchange of assets between two individuals together with the penalties that may be charged in respect of an error in a tax return. The question was in three parts. Part (a) required candidates to consider both the capital gains tax and inheritance tax implications of the destruction of an asset and the exchange of one asset for another. This required some clear thinking as to who was disposing of what together with the ability not to confuse the two capital taxes. This part of the question was answered reasonably well by many
candidates. However, some candidates would have benefited from addressing each of the taxes separately under clear headings as this would have helped them to organise their thoughts and prevent confusion. The calculations of the capital gains were done well as were the implications of the potentially exempt transfer. However, the deferral of the gain on the asset destroyed was usually dealt with, incorrectly, by reference to business asset rollover relief. The reliefs available in respect of capital gains involve a fairly tricky bunch of rules and definitions. Candidates would be well advised to learn the conditions that must be satisfied in order for each of the reliefs to be available. Part (b) was very small but still required thought; it involved the disposal of a boat. For one of the two available marks candidates simply had to state that a boat is an exempt asset for the purposes of capital gains tax. However, the vast majority did not pause for thought and instead talked about the capital loss that would occur on disposal. The final part of the question tested candidates knowledge of the penalties that may be charged in respect of an error in a tax return. This is a current issue as the rules have changed recently but a minority of candidates were not aware of the new rules. Candidates should ensure that they keep up to date with the changes to the tax system and that they read the Finance Act articles published in Student Accountant. QUESTION 5 This question concerned VAT, and in particular partial exemption, together with the rules relating to personal service companies. It was in three parts. Part (a) required candidates to determine the cost of buying in services from three possible suppliers. Candidates were told that the purchasing company was partially exempt for the purposes of VAT and the vast majority realised that the key to the question was the impact of irrecoverable VAT on the cost. There were minor errors in determining the percentage of input tax that could be recovered involving the need to include the zero rated supplies on the top and bottom of the fraction and also the requirement to round up the fraction to the nearest whole percentage; more care here could have earned some candidates an extra mark.
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A more common error was a failure to realise that the purchasing company would need to account for output tax on the purchase of the services from overseas thus increasing the cost by the amount of irrecoverable VAT. Having said that, this was a tricky point and it was very pleasing that a large number of candidates identified this issue. The calculation of the maximum salary that could be paid such that the total cost would be no more than the cheapest service provider was done well with the majority of candidates identifying the need to include employers National Insurance contributions in their calculations. Part (b) required three examples of specific contractual arrangements that would indicate an employer/employee relationship. This was a simple test of knowledge and was done well by most candidates. Having said that, candidates were asked to give examples that related to the facts of this particular question as opposed to the first three that they thought of; the question made it clear that a fixed fee would be paid for the work so it was not appropriate to write about the payment of holiday pay or sick pay. The final part of the question was more difficult. It required candidates to recognise that the personal service company rules would apply and to explain the implications for the various parties. Candidates performance here was mixed. Many candidates identified that the issue related to personal service companies but got confused as to which of the companies would be regarded as making the deemed salary payment. Weaker candidates assumed that the question was still about VAT and repeated matters already covered in Part (a).
The exam comprised two compulsory questions in Section A, and three questions in Section B of which two should be attempted. Both Section A questions were based on detailed scenarios, and contained several requirements covering different syllabus areas. Each optional 20-mark question in Section B included a short scenario, and several requirements. Of the Section B questions, Question 4 was by far the most popular, and Question 5 the least popular. The same factors as detailed in previous examiners reports continue to contribute to the disappointing pass rate: failing to answer the specific question requirements not applying knowledge to question scenarios making too few comments given the mark allocation of a requirement lack of knowledge on certain syllabus areas illegible handwriting. The rest of this report contains a discussion of each question, highlighting the requirements that were answered well, and the areas that need improvement. SPECIFIC COMMENTS QUESTION 1 This question was for 32 marks, and involved a new audit engagement, with the candidate placed in the position of the audit manager. Requirements involved a business risk evaluation, identification and explanation of relevant financial statement risks, and audit procedures relating to a brand name. On the whole, candidates seemed to like this question, especially the business risk evaluation. However, many candidates failed to answer the specific question requirements, thereby denying themselves of marks.
Requirement (a) asked for an evaluation of business risks, for 15 marks. The audit client operated in the retail industry and had recently initiated several strategies aimed at expansion, including e-commerce. It was clear that most candidates were prepared for this type of requirement, and on the whole performed well. Answers tended to display reasonable application skills, with some candidates prioritising the risks identified, and reaching an overall conclusion. There was much less evidence here of knowledge-dumping than in answers to other requirements. Some answers worked through the scenario, and for each risk identified explained the potential impact on the business. Some answers also made connections between different aspects of the clients business, for example, that joining the Fair Trade Initiative would have cost repercussions at a time when profit margins were reducing. However, answers still left a lot of room for improvement. Common weaknesses in answers to the requirement included: Repeating large chunks of text from the scenario with no explanation provided. Not actually explaining or evaluating a risk identified just saying this is a risk. Providing detailed definitions of business risk, which was not asked for. Providing audit procedures for risks, again not asked for. Providing recommendations for mitigating the risk, not asked for. There was far too much emphasis on going concern risk, often raised indiscriminately for every risk area identified. In addition, it is worth noting that very few candidates used the figures provided in the scenario to identify risk exposure. The clients revenue and profit had fallen from the previous year, and some simple financial analysis
PAPER P7 ADVANCED AUDIT AND ASSURANCE
The December 2010 Paper P7 exam covered many important syllabus areas, most of which had been tested in some capacity at previous sittings. It was, therefore, unsatisfactory to see very little improvement in candidates performance as a whole. Of course, some candidates did very well, and there were some scripts displaying first-rate analytical and application skills. But the majority of scripts unfortunately failed to demonstrate sufficient knowledge or higher professional skills to achieve a pass mark.
PAPER P7 CANDIDATES ARE REMINDED THAT THEY MUST ANSWER THE SPECIFIC QUESTION REQUIREMENT, AND NOT THE REQUIREMENT THEY WOULD LIKE TO HAVE BEEN ASKED. A MINORITY OF CANDIDATES PROVIDED MANY PAGES OF DETAILED ANSWER WHICH DESCRIBED HOW YOU WOULD PLAN AN AUDIT IN GENERAL. ALL OF THIS WAS TOTALLY IRRELEVANT, AND FAILED TO GENERATE ANY MARKS.
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PAPER P7 QUESTION 1 CANDIDATES ARE REMINDED THAT AUDIT PROCEDURES MUST BE TAILORED TO THE FACTS OF THE SCENARIO PROVIDED AND MUST BE SUFFICIENTLY DETAILED TO MAKE SENSE. GET MANAGEMENT REP, DISCUSS WITH MANAGEMENT AND REVIEW COST ARE EXAMPLES OF MEANINGLESS PROCEDURES WHICH EARN NO CREDIT WITHOUT FURTHER DEVELOPMENT.
could have revealed falling profit margins and worsening interest cover. This type of analysis is not difficult or time consuming, and is something that demonstrates markgenerating application skills. Finally, some candidates simply failed to answer the question requirement. A minority of candidates took the opportunity to provide many pages of answer which just described how you would plan an audit in general, including descriptions of contacting the previous auditor, determining materiality levels, and meeting the client to discuss the engagement. All of this was totally irrelevant, and failed to generate any marks. Candidates are reminded that they must answer the specific question requirement, and not the requirement they would like to have been asked. There were two professional marks available in connection with requirement (a). Most candidates attempted the briefing notes format by including an appropriate heading and introduction. It seemed that by the end of their answer however, candidates had forgotten about the professional marks, as it was rare to see a conclusion provided on the business risk evaluation. Candidates are reminded that resources are available on ACCAs website providing guidance on the importance of professional marks. Requirement (b) was for 10 marks, and asked candidates to identify and explain five financial statement risks from the scenario. The quality of answers to this requirement was unsatisfactory. The minority of candidates who scored well on this requirement provided a succinct explanation of the financial statement risk, clearly stating the potential impact of the risk identified on the financial statements. Some answers, which were by far the majority, tended to just outline an accounting treatment with no mention of the actual risk itself. Another common weakness was to discuss the detection risk which may arise with a new audit client, which is not a financial statement risk. Given that financial statement risks have featured in several previous exams it was somewhat surprising that the majority of candidates could not provide a satisfactory answer, especially when requirement (a) had asked for a business risk evaluation, which should then lead into the identification of financial statement risks as part of audit methodology. Some candidates used the financial information provided to identify financial statement risks, rarely with any success. Common statements of this type were along the lines of revenue is reduced, so there is a risk of understatement. Finally, there was a tendency for candidates to provide more than the required number of financial statement risks, which is clearly a waste of time. Requirement (c) asked candidates to recommend principal audit procedures in relation to the valuation of a purchased brand name, which was recognised at cost in the financial statements. Some candidates scored well here, providing wellwritten procedures specific to the valuation of an intangible asset. Some answers recognised that procedures should focus on determining whether or not the brand was impaired and whether the nonamortisation policy was appropriate. The most common errors here included: Misreading the scenario and thinking the brand was internally generated (the scenario clearly stated that the brand had been purchased several years ago). Misreading the scenario and thinking the brand was amortised (the scenario clearly states it is not amortised). Providing detailed explanations of the requirements of IAS 38 Intangible Assets (not asked for). Misreading the scenario or requirement and discussing procedures or accounting treatments for goodwill arising on a business combination.
There were a lot of standard tests provided which did not fit the scenario, like checking management calculations on amortisation, and checking the qualifications of the valuer. Candidates are reminded that audit procedures must be tailored to the facts of the scenario provided and must be sufficiently detailed to make sense. Get management rep, discuss with management and review cost are examples of meaningless procedures which earn no credit without further development. In addition, there were many instances where candidates were obviously trying to generate procedures using a list of words as a prompt. For example observe the asset or inquire about the asset. Candidates must think carefully and not just use words as a prompt if they make no sense. Candidates are encouraged to read the examiners article on exam technique in answering questions on audit procedures, published in September 2009 and available on ACCAs website. Overall, Question 1 and requirement (a) in particular was reasonably answered by a large proportion of candidates. However, answers to requirement (b) were unsatisfactory. QUESTION 2 Question 2 was for 28 marks, and featured an assurance engagement for an existing audit client. Both the audit firm and the client were global enterprises, and the client was listed on several stock exchanges. Candidates responded reasonably well to parts of this question, though many answers did not reach their full potential by not being applied to the question scenario. Requirement (a), for 12 marks, asked candidates to identify and explain the matters that should be considered in evaluating whether the audit firm should perform an assurance engagement on the clients Sustainability Report. It was clear that most candidates knew the matters that should be considered (ethical constraints, resources, knowledge, timescale, fees etc), and most candidates took the right approach to the question, by working through the various matters and applying them to the question. The fact that this was not an audit engagement did not seem to faze candidates, and there were many sound answers to this requirement. Some answers evaluated the many ethical problems with taking on the assurance engagement as well as providing the audit for a major client, and appreciated that with only four
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weeks to complete the work, it would probably be impossible to ensure quality work could be performed on a global scale to such a tight deadline by an inexperienced team. Some answers also picked up on the fact that the clients listed status would probably prevent the audit firm from conducting the assurance engagement, and certainly the situation would need to be discussed with, and approved by the audit committee. However, some answers were much too brief for the 12 marks available, amounting to little more than a bullet point list of matters to be considered but with no application to the scenario. Without application it was not possible to pass this requirement. Other common mistakes included: Ignoring the fact that the client was already an existing audit client, so discussing the need to contact its auditors for information. Not reading the question and thinking that you had been approached to perform the audit. Only discussing the potential problems and not identifying the benefits of providing the service (eg it would provide experience for the newly established assurance team). Ignoring information given in the question (eg saying that the firm would need to ask about the use of the assurance report when the question clearly states that it would be published in the annual report with the financial statements). Requirement (b) asked for procedures that could be used to verify two key performance indicators (KPIs) the number of serious accidents in the workplace, and the average annual spend on training per employee. A fair proportion of answers were sound, with precise procedures recommended. But, many recommended procedures relied too much on observation and enquiry, and ignored the fact that the client was a global company with 300,000 employees which led to some bizarre and meaningless procedures being given, such as observe a serious accident, inspect the location of a serious accident, ask how much is spent on training, and look at the training room to see how many chairs are there. None of these could verify the KPIs and are pointless. Requirement (c) focused on other information published with financial statements. In the scenario an inconsistency had been discovered
between a figure relating to charitable donations which had been stated at $9m in a note to the financial statements, and $10.5m in the Chairmans Statement and Sustainability Report. The requirement, for eight marks, was to explain the auditors responsibility, and to recommend actions to be taken. This requirement was inadequately attempted overall. Answers were usually extremely brief, and it was clear that most candidates did not know the requirements of ISA 720, The Auditors Responsibilities in Relation to Other Information in Documents Containing Audited Financial Statements. Most answers took a guess that the matter would need to be discussed with management, and that if unresolved there would be some kind of impact on the auditors report (an except for opinion was the usual recommendation). But few could say more than this about the issue. Some candidates assumed that some kind of money laundering was taking place, leading to irrelevant discussions of reporting the situation to outside authorities. Very few candidates recognised that if uncorrected, the issue should be included in an Other Matter paragraph, as required by ISA 720. This could imply a lack of knowledge, or that some candidates are studying from out of date learning materials. Finally, there were two professional marks available for requirement (c). The majority of candidates attempted to achieve these marks by using an appropriate format. However, a significant minority incorrectly thought that the professional marks were attached to requirement (a). QUESTION 3 This was a traditional question asking candidates for the matters that they would consider, and the evidence they should expect to find when reviewing working papers in relation to three separate issues relating to the same audit client. The client was a leading leisure travel provider with 10 million customers a year. It was pleasing to see many candidates perform well on this question, with requirement (a) producing a number of sound answers. On the whole, candidates performed better on the evidence part of the question than seen in previous sittings, which is obviously encouraging. Requirement (a), for eight marks, described a legal claim which had been made against the client by a group of customers. No provision had been made, and the clients management justified
this on the grounds that the amount would be covered by insurance. Almost all candidates were able to generate marks by calculating the materiality of the amount, and describing the basic accounting treatment for provisions. Fewer went on to discuss the potential impact of the insurance cover, and some answers drifted into a discussion of going concern and other business risks. Some candidates mistakenly thought that the event happened after the yearend, and others thought that the airline belonged to the client. Surprisingly, only a minority of candidates picked up on the fact that management would not want to recognise the provision due to a bonus being based on profit before tax of the company. Audit procedures were often inadequately focused, with no regard to the scale of the issue. Although most suggested looking at legal documents, candidates rarely mentioned looking at the group claim document. Some candidates proposed lots of very detailed tests on the validity of individual claims, such as checking hotel bills and airline tickets. Requirement (b), for seven marks, dealt with a business segment which had seen significant reductions in revenue and profit. This part of the question was not dealt with well. Very few candidates recognised that the business segment represented a cash generating unit that required an impairment test. Most picked up a mark by calculating materiality, but then could only discuss the fact that the internally generated brand name was correctly not recognised in the financial statements. Even those candidates that did pick up on the impairment issue could rarely provide evidence points other than check the value of the assets (too vague) or inspect the assets (irrelevant, and ignoring the fact that the assets in question are cruise liners in operation so very unlikely to be conveniently located near the auditor). Many candidates could only provide evidence points on the brand name, even though was not recognised in the financial statements at all, leading to pointless procedures such as inspect the brand name in the register, observe the operation of the brand name and check the value of the brand name. Requirement (c), for five marks, concerned a post yearend acquisition, which should have been disclosed in the notes to the financial statements. Many candidates correctly discussed the issue, and provided sensible evidence
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points concerning the verification of the date that control of the new subsidiary passed to the client, and the scale of its operations. Unfortunately, many candidates wanted to see the new subsidiary consolidated, even though it had clearly been purchased after the end of the reporting period. At the other end of the spectrum, some candidates suggested that as the event happened after the year end, the auditor need not perform any procedures at all. Both of these approaches totally missed the point of the scenario, and indicate that candidates must take time to think about the information that has been presented to them before rushing to write their answer. QUESTION 4 This was the most popular of the optional questions, and focused on ethics and practice management. It was very pleasing to see many candidates achieve a clear pass on both (a) and (b). Requirement (ai) asked candidates to critically evaluate a proposed advertisement to be placed in a national newspaper, for eight marks. This was probably the best answered requirement of the whole paper, with many achieving a clear pass, and quite a few maximum marks were awarded. The few unsatisfactory answers tended to simply repeat extracts from the advertisement and say this is unprofessional. Requirement (aii) asked candidates to evaluate whether a corporate finance service could be offered to clients, for five marks. This was not well answered. While most candidates could state obvious issues, like whether one person would be enough to provide the service, unfortunately very few clearly distinguished between audit and nonaudit clients, which was a key issue, as the scenario clearly stated that only one third of the audit firms clients were audit clients. Few dealt with the issue of the contingent fee in enough detail, with answers usually saying that it was unprofessional but not elaborating further. Requirement (b) dealt with the ethical problems raised by long association of audit firms and their clients. For seven marks, candidates were asked to explain the ethical threats, and to evaluate
the advantages and disadvantages of compulsory firm rotation. On the whole, this was well answered. Most candidates could identify and explain to some extent the various ethical threats posed by long association, with the familiarity threat being the most common to be discussed. The advantages and disadvantages were often dealt with reasonably well, though a lot of answers were just bullet point lists with no real evaluation provided at all. For many candidates this was the last requirement attempted, so the brevity of answers was probably linked to time management in the exam. QUESTION 5 This was by far the least popular of the optional questions, focusing on audit reports, and reporting on internal control deficiencies. Requirement (ai), for 10 marks, asked for a critical appraisal of a draft audit report, in which a disclaimer of opinion had been given, following a management imposed limitation in scope resulting in a lack of evidence with regard to research and development costs. Some answers were sound, and worked through the audit report, explaining its deficiencies in a logical manner. Some answers appreciated that the disclaimer of opinion may be an overreaction, and that a qualification may be more suitable. Other points raised in some answers concerned the inappropriate wording of the audit report, the reference to management lack of integrity, and the fact that the matter had not been quantified, making it difficult for users of the report to gauge the significance of the matter. Almost all candidates correctly determined the materiality of the matter. Unsatisfactory answers, which were by far the majority, tended not to appraise the audit report at all, and instead provided lengthy explanations of the accounting treatment for research and development, but completely missed the point that the auditor was unable to verify if the correct accounting treatment had been applied. Some blamed the audit team, rather than the client, for the lack of evidence, and suggested that the whole audit be reperformed. Requirement (aii) continued the
theme of (ai), asking for matters that should be considered and further actions that should be taken by the auditor, in light of the limitation in scope. Most candidates suggested that the limitation in scope and its potential impact on the audit report be taken to audit committee or those charged with governance for discussion, and many also raised management integrity as an issue. Some candidates tended to repeat what they had written for (ai) without further development. Requirement (b) focused on the new requirements of the Clarified ISAs in relation to reporting internal control deficiencies to management and those charged with governance. A brief scenario was provided, outlining internal control deficiencies discovered during the audit of trade payables, and candidates were asked the further actions they would take, and to outline any reporting requirements. This was reasonably well attempted, with most answers referring to management letter points, and making recommendations for improving controls to the client. However, there were very few references to ISA 265, and only a handful of answers discussed the importance of determining whether a deficiency is significant or not. Overall, answers to Question 5 were unsatisfactory, given that audit reports is a regularly examined syllabus area. CONCLUSION As seen in previous sittings, what makes the difference between a pass and a fail script is usually the level of application skills which have been demonstrated. Candidates who answer the specific question requirement, and tailor their answers to the scenarios provided are likely to do well. A significant proportion of candidates continue to produce answers that are simply too vague or too brief, do not actually answer the question requirements, and display inadequate technical knowledge of the Clarified ISAs. These candidates are encouraged to improve their exam technique as well as knowledge of the syllabus by practising as many past exam questions as possible, using uptodate study materials, and by taking on board the comments made in examiners articles and reports.
IT SHOULD BE NOTED THAT PAPER P7 CANDIDATES WHO ANSWER THE SPECIFIC QUESTION REQUIREMENT, AND TAILOR THEIR ANSWERS TO THE SCENARIOS PROVIDED ARE LIKELY TO DO WELL.
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CAT FEEDBACK
PAPER 3 MAINTAINING FINANCIAL RECORDS
The exam comprised two sections: 20 compulsory multiple-choice questions of two marks each in Section A, and four compulsory questions of 15 marks each in Section B. Around 2/3 of the marks were for computation and 1/3 of the marks required a discursive response. There were few candidates who did not attempt all 24 questions, which suggests that the advice to prepare across the whole syllabus, which has been regularly repeated in previous reports, has been heeded by many candidates. In Section B, a number of very good answers were provided. In each of the four questions in this section, there were candidates who obtained full marks. Some candidates presented extremely good scripts, scoring marks of 90% or more and a small number of candidates scored 100%. Such performance is commendable, and these candidates have a very strong foundation for their further studies. It is disappointing to note that some candidates continue to struggle with the sections of the syllabus which focus on theoretical topics as tested in Question 1 of Section B of the paper. However, there was a further reduction in the number of such candidates. This reinforces the evidence referred to above that preparation across the whole syllabus is undertaken by a growing number of candidates. Candidates in future sittings should take note of this point. The most prevalent reasons for some candidates obtaining low marks remains as in previous sittings, ie studying only a few selected topics, not reading the question carefully enough, or a lack of structure in the approach to answering questions. Although no marks are awarded for calculations and workings in Section A, the correlation between a careful and structured approach (which the existence of calculations and workings indicates) and high marks has been noted at previous sittings. Therefore, it remains a surprise that a considerable number of scripts contain no calculations or workings. It is often that case that such scripts do not obtain good marks. The importance of this approach is even greater in Section B, where it is almost impossible to score good marks unless calculations are carefully laid out and clearly annotated. This was particularly the case in Question 4. Furthermore, a structured, annotated script allows the marker to see clearly if the candidates approach to calculations is correct, allowing marks to be awarded for process, even if some errors have been made. SPECIFIC COMMENTS QUESTION 1 There were five subparts to this question, worth between two and four marks. Overall, answers were of varying quality. Some very good answers were presented to all parts, but fewer of these related to Parts (d) and (e). There were two main reasons that some answers did not score good marks. The first was that the material presented was, quite simply, incorrect. The second was that, although the material was correct, it was not valid, given the specific requirement of the question. These issues are discussed in more detail below. PART (A) All that was required to obtain the marks in this part of the question was simple statements of two reasons for the creation of a suspense account. Many candidates were able to identify valid reasons. However, some answers were not sufficiently clear to be awarded marks. Perhaps the most common example of this was a statement that a suspense account was used to correct errors in posting. As not all errors will require the use of a suspense account, marks could only be awarded to answers which demonstrated awareness that errors leading to an imbalance in the trial balance gave rise to the need for a suspense account. A common example of an answer that is correct, but is not valid as it does not answer the question was for an answer to note that a suspense account was a temporary account which should be cleared before final accounts are prepared. PART (B) This part of the question was answered very well by a number of candidates, but it also provided a further example of material that is correct, but cannot be awarded marks as it does not answer the question. Such answers noted that the most common methods of calculating depreciation are straight line and reducing balance. In some cases, answers then went on to describe these methods. Often these were good descriptions, but they simply did not answer the question. The most common inaccuracy was included in answers which argued that depreciation is a means of reflecting the value of non-current assets, and that land is not depreciated as it increases in value. PART (C) This part sought to test the ability of candidates to apply the accounting equation. However, to answer it correctly the question needed to be read carefully. A disappointing number of candidates ignored the fact that the goods were sold on credit and that the sale generated a profit. The fact that a profit was generated should have clearly indicated that capital would increase. Furthermore, as nothing relating to the transaction affected liabilities, it should have been apparent that there would be no change to that value. Therefore, a basic knowledge of the accounting equation would lead to the conclusion that assets must have increased in line with capital. This could be confirmed by noting that the goods were sold on credit thus inventory was reduced and receivables increased. If the sale had been made at cost, these changes would have cancelled each other out, but as the sale generated a profit, the selling price (the increase in receivables) exceeded cost (the reduction in inventory), meaning that assets increased. PART (D) The fact that this part of the question related to one of the principles of accounting meant that it was probably the most technical aspect of the entire paper. The fact that many candidates do not seem to have acquired a basic knowledge of such theoretical aspects meant that it was probably the most difficult. However, those candidates who understood a few basic points were able to score good marks. The technical nature of the question and the related difficulty were offset by the fact that, by simply describing the principle of prudence, it was possible to adequately explain the affect on the preparation of financial statements. PART (E) The basis of inventory valuation is an important part of the syllabus and is tested frequently. Indeed, different aspects of this topic were tested in this paper (here and in Question 4). It is
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disappointing to note that a number of candidates do not appear to understand the key issues. In particular, the difference between periodic weighted average (unit value is calculated once at the end of the period) and continuous weighted average (unit value is continually re-calculated each time inventory is purchased) is often overlooked by candidates. Perhaps the fact that candidates do not always read the question carefully was a further influence on answers which did not score marks in this part. Whatever the reason, a disappointing number of candidates scored poorly, or not at all, on this part as their answers were either confused or described continuous weighted average. QUESTION 2 The key to scoring good marks in a question on reconciliations is to read the question carefully, and to adopt a logical approach. Careful reading will help in understanding the nature of each item referred to in the question. One logical approach is to clarify, on an item by item basis, if: an entry is required in the ledger account an adjustment is required on the reconciliation statement or both of these. The next step is to clarify the value of each entry or adjustment. The final step is to decide if each entry is a debit or a credit, and if each adjustment is an addition or a deduction. Those candidates who adopted such an approach were invariably rewarded with good marks in some cases full marks. The main reasons that other candidates did not fare so well were a lack of care in reading the question and/or a lack of logic in their approach to the problem. One particular example was item (vii), a cheque returned by a supplier. Most candidates recognised that this required an entry in the ledger account. However, a number of candidates made a credit entry, thus recording the issue of a cheque. In a number of such cases, the error was compounded by the fact that the value was that of the original cheque. By noting carefully that the question stated: a cheque had been returned a replacement has been issued the replacement has been correctly recorded the original cheque has not been cancelled.
It was possible to note that the action required was to record the cancellation of the original cheque. As the value of the original cheque was $640, this is the value of the required entry. By going back to basic double entry and noting that cheques issued are recorded by a credit entry in the bank account, the conclusion is that a debit entry was now required to cancel the cheque. Perhaps the most disappointing aspect of some answers was that candidates had mixed up the two balances given in the question, and used the ledger balance as the starting point for the reconciliation and the bank statement balance as the starting point for the ledger account. This can only be explained by the fact that such candidates had been careless in reading the question. The final part of the question tested if candidates understood how bank balances should be reported. There were several aspects to answering this correctly. The first is that the adjusted balance on the ledger account should be reported. The second is that where more than one bank account is maintained, the (credit) balance on an account which is overdrawn should not be deducted from debit balances, but should be reported separately. Finally, the fact that a debit balance represents an asset and a credit balance represents a liability indicates that the balances should be reported on the statement of financial position. Those candidates who had prepared thoroughly and understood these points, read the question carefully and answered accordingly invariably picked up all three marks in this part of the question. QUESTION 3 The key issues involved in accounting for partnerships were tested in Question 3. There were a number of extremely good answers to this question, indicating that some candidates have developed the knowledge and skills which are the objective of this paper. The question was divided into three parts, each intended to test particular aspects of the required knowledge and skills. Part (a) required the preparation of an appropriation account while Part (b) required the closing current account balances to be calculated. In Part (c) candidates were invited to think carefully, as the wording of requirement meant that it was necessary to
recognise that the value of a partners total investment is the total of the balance on that partners current and capital accounts. In some answers to Part (a), it was apparent that the candidates did not understand that an appropriation account is used to deal with the various adjustments to net profit which have been agreed between the partners in order to calculate the residual profit and that it is the residual profit which is shared in the profit and loss sharing ratio. In some cases, candidates simply shared the net profit (ie before any appropriations) in the profit and loss sharing ratio. In other answers, candidates appeared to understand the purpose of an appropriation account, but they were unable to deal with the various adjustments correctly. In most of these cases the main problem was that entries which should have been debited to the account were credited and vice versa. The most disappointing errors arose from a simple lack of care in reading the question. There were two aspects to this. The first was that, although the requirement asked for each partners total share some candidates, having completed the appropriation account, did not provide a total for each partner. It is extremely hard to understand why candidates would choose to avoid picking up marks by such an omission. The second was that the question noted that additional capital had been introduced. Therefore, it should have been obvious that this needed to be taken into account when calculating partners interest on capital. Unfortunately, some candidates did not read the question carefully and simply calculated interest on capital based on either the opening or closing capital balance. In Part (b), the main reason that some candidates did not score good marks was that they did not recognise that the total share of profit attributable to each partner should be recorded in the current account. The easiest way to do this was to enter the total calculated in Part (a) in the current account. For those candidates who had not read the question carefully when completing Part (a), answers to Part (b) required more time than necessary as each of the adjustments in the appropriation required a separate entry in the current account.
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QUESTION 4 This question was perhaps the most involved question on the paper as it tested candidates ability to deal with a number of the post trial balance adjustments which are typically required when final accounts are prepared. As has already been noted in this report, careful reading of the question and a logical approach were essential if good marks were to be obtained. A good number of candidates took this approach. In Part (a) this required each item to be dealt with in turn, by calculating the value of the adjustment required and then deciding whether the adjustment increased or decreased profit. The most successful approach was to prepare a working for the calculation of the adjustment and a separate schedule of the resulting adjustments to the profit. The most common reasons why some candidates did not achieve this level of success were: not calculating the time apportionment of the insurance prepayment correctly not reading the question carefully and treating the prepayment as an accrual a lack of awareness of how to calculate the net realisable value of inventory items confusion about how to deal with the write down in value of inventory calculating depreciation on the straight-line basis, even though the question clearly stated that the policy was to use the reducing balance method. In Parts (b) and (c), there were three main reasons that some candidates did not obtain marks. The first was not recognising that, as the bank balance was a credit balance, it represented an overdraft, and thus a current liability. The second was failing to include the prepayment calculated in Part (a) in the value of current assets. Finally, some candidates included the incorrect value for inventory. In most of these cases the unadjusted value was included.
maximum marks. At the same time, many others were very poorly prepared and scored low marks. Too often, candidates answers displayed: Poor presentation and lack of clarity. The consequence was that it was frequently difficult to follow what was being presented as the candidates final answer which was, as a result, difficult to mark. This was especially the case with Questions 1(a), 2(a) and 3(a) (see detailed comments below). Failure to read each question carefully to determine what was required of candidates. The consequence was that time was wasted on unnecessary calculations which almost certainly prevented some candidates from making a reasonable attempt at all of the questions. This was especially the case in Questions 1(b), 3(a) and 4(b) (see detailed comments below). Adequate workings were generally provided, enabling appropriate marks to be awarded, although occasionally it was not clear where figures had come from, especially in the answers to Questions 1(a) and 4(a). Candidates were generally able to make a reasonable attempt at all four Section B questions. Where only three questions were attempted, it was invariably Question 3 that was not attempted. The comments that follow relate to each of the longer-form questions in Section B of the paper. SPECIFIC COMMENTS QUESTION 1 This question required candidates to demonstrate their ability to calculate both batch costs (Part (a)) and process costs (Part (b)). Both parts were reasonably well answered. Part (a) focused on cost behaviour in a batch production setting, requiring candidates to flex the costs, where appropriate, according to batch size. While many candidates gained full marks many others had difficulty with the batch costs. These latter candidates
frequently failed to appreciate that the preparation costs, where the same amount was incurred irrespective of batch size, were fixed costs per batch and/or that the batch manufacturing costs varied in total in proportion to the batch size. As a consequence it was frequently assumed either that all of the costs were fixed in total regardless of the batch size or that all of the costs were proportionately variable with batch size. Other common errors in the answers to Part (a) were demonstrated by candidates who assumed that: the costs given in the question were for a single leaflet rather than for a batch of 10,000 leaflets; the general fixed overheads were variable per unit or fixed per batch rather than charged per labour hour. In the calculation of the cost per leaflet in Part (a)(ii), a very surprising number of candidates divided the number of leaflets in the batch by the total batch costs rather than vice versa. Others added the fixed costs per batch to the variable costs per leaflet. It was at times difficult to establish what was being presented as the candidates final answers with both costs per leaflet and total cost figures scattered over the page. Workings were not always clear. Part (b) was on the subject of process costing. Candidates needed to understand and apply the concept of equivalent units. Many candidates gained full marks. However, some other candidates, having separately calculated the unit cost of materials and the unit cost of conversion costs correctly, then calculated a different total unit cost based on the total process costs divided either by the units of materials or by the equivalent units of conversion costs. Some candidates calculated the unit cost of materials correctly but failed to deal with the conversion costs. Common errors in trying to adjust for the stage of completion of the work-in-progress, in the calculation of the conversion costs per unit, were:
PAPER 4 ACCOUNTING FOR COSTS
This two-hour paper consisted of 20 multiple-choice questions for a total of 40 marks (Section A) and four longer-form questions worth a total of 60 marks (Section B). A large number of candidates were well prepared for the exam and gained high marks. Several candidates gained
TOO OFTEN, PAPER 4 CANDIDATES ANSWERS DISPLAYED POOR PRESENTATION AND LACK OF CLARITY AND A FAILURE TO READ EACH QUESTION TO DETERMINE WHAT WAS REQUIRED. WHERE ONLY THREE QUESTIONS WERE ATTEMPTED, IT WAS INVARIABLY QUESTION 3 THAT WAS NOT ATTEMPTED.
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IN ANSWER TO PAPER 4 QUESTION 3 PART (B), MANY CANDIDATES KNEW THAT SUNK COSTS WERE PAST COSTS ALREADY INCURRED BUT THEY OFTEN FAILED TO MAKE IT CLEAR THAT SUCH COSTS ARE IRRELEVANT FOR DECISION MAKING.
multiplying the total cost incurred on conversion costs in the period by 75% multiplying the total units of 27,800 by 75%. Other candidates simply divided the total process costs by the total units of 27,800, or even by the completed units of 24,600, without any attempt to split the materials and conversion costs. These had to be calculated separately because a different number of units applied to each. Another error was to deduct the work-in-progress units from the completed units. Finally, a large number of candidates failed to look sufficiently carefully at the requirements of Part (b) of the question. The calculation of production costs per unit only was required yet many went on to apportion the total process costs for the period between the completed output and the work-in-progress remaining. This was a significant amount of extra, but unnecessary, work and much time was wasted. QUESTION 2 This question, on the subject of overhead absorption, was very well answered by the majority of candidates. They were required to calculate predetermined absorption rates using budgeted data for both costs and activity, apply the rates to absorb overhead on actual activity and finally to determine whether overheads had been over or under absorbed in the period and by how much. It was, however, sometimes difficult with candidates answers to know which part was being attempted. Although the question stated clearly that predetermined rates were to be calculated in answer to Part (a), ie using budgeted data, some candidates calculated actual rates, or divided budgeted costs by actual activity or divided actual costs by budgeted activity. Some even hedged their bets by calculating both budgeted and actual absorption rates. At times the correct answer to Part (a) only appeared in the answer to Part (b) with different rates being presented as the answer to (a). A similar variety of calculations, for the absorption of overhead, were presented in candidates answers to Part (b), where budget activity as well as actual activity was applied to a variety of absorption rates. Some candidates had no understanding of what overhead absorbed means. At times the correct answer to Part (b) only appeared in the answer to Part (c). The most common error in answer to Part (c) was the comparison of the actual costs with the budgeted costs, rather than with the overheads absorbed from the answer to Part (b). Some candidates did use their overhead absorbed figures but they compared them with the budgeted costs, rather than the actual costs. Some candidates even ended up comparing actual costs with actual costs or budgeted costs with budgeted costs because of the way that they had calculated absorption rates and/or applied them in overhead absorption. Own figure marks were given where they were merited. Finally a number of candidates were confused as to what constitutes over absorption and under absorption respectively, or failed to make clear whether their answers represented over or under absorption. It is not sufficient simply to use brackets because there is no consensus as to what it means in this context. QUESTION 3 The application of the relevant cost concept in short-term decision making was tested in this question. As with all other questions, a reasonable number of candidates gained maximum marks although it was the question most frequently not attempted by those who only answered three questions in Section B. Overall, most candidates were able to accumulate reasonable marks on this question. Nevertheless, candidates also at times demonstrated confusion concerning the analysis required in answer to Part (a). A significant number of candidates seemed to think that a decision was required and tried to make one. Often this comprised a comparison between
the total relevant costs, and the normal accounting costs, for the special order. This was despite only being asked for a calculation of the relevant costs in the question and not being provided with any information about revenue in order to be able to reach a decision. It was also not clear at times what was being presented as the final answer. Common errors in determining the relevant costs were: failing to use the replacement price for material M6 or including only the additional $0.50 per kg compared with the cost of the existing inventory deducting, rather than adding, the $1,960 opportunity cost of labour not including the 430 hours of labour at $11 per hour including the absorbed general fixed overheads as well as the incremental overheads. Candidates need to understand that the relevant costs relating to a particular decision are those costs yet to be incurred that will be affected by the decision. Costs already incurred, or future costs that will be incurred anyway regardless of the decision, are irrelevant. In answer to Part (b), many candidates knew that sunk costs were past costs already incurred but they often failed to make it clear that such costs are irrelevant for decision making. A variety of definitions were provided for avoidable costs with many candidates believing that they could not be avoided and/or would be incurred regardless of the course of action. Several others simply stated that avoidable costs are avoidable. QUESTION 4 This question required candidates to prepare a marginal costing profit statement (Part (a)) and to calculate, and explain, the profit difference compared with absorption costing (Part (b)). Frequently, reasonable attempts were made at Part (a) but candidates were invariably less successful with Part (b) and often did a lot of unnecessary calculations in the process. Nevertheless, as with all the other questions, a reasonable number of candidates gained full marks. In answer to Part (a), the concept of contribution was broadly understood with the result that most candidates attempted to calculate the total contribution within their marginal costing profit statement but with
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varying degrees of success. Common errors in the calculation of contribution in the marginal costing profit statement were: not including variable administration overheads in the costs deducted, thus believing that contribution is sales less variable production costs only including closing inventory at 500 units, calculated as sales less production and ignoring the opening inventory. This was impossible anyway because the sales units exceeded the production units in the period matching the variable costs for 11,800 units of actual production, or for 12,000 units of budgeted production, against the sales of 12,300 units. Some candidates used the term gross profit to refer to the contribution. The vast majority of candidates correctly treated the total fixed overheads (both production and administration) as period costs and deducted the total from the contribution. The question requirement for Part (b) clearly indicated that a profit statement using absorption costing was not required, Most candidates, however, prepared such a statement often with costs listed by element and thus with unnecessarily lengthy, and thus time consuming, workings. This may have been because candidates did not know how else to calculate the difference in profit between marginal and absorption costing. The absorption costing calculations and statements were invariably incorrect. Candidates need to realise that the difference in profit is due to inventory valuation and that the difference can be calculated, and explained, as the change in inventory over a period multiplied by the fixed production overhead absorption rate (which is applied to the inventory in absorption costing but treated as a period cost in marginal costing). While some candidates could explain the reason for the profit difference clearly, many others simply indicated that it was something to do with inventory and/or fixed overheads. Some stated that absorption costing will always show a lower profit because of the inclusion of fixed overheads which they seemed to believe were not required in marginal costing. Several believed, wrongly, that profit differences are due to overhead over/ under absorption.
PAPER 5 MANAGING PEOPLE AND SYSTEMS

This paper is in two sections: Section A has 12 multiple-choice questions (MCQs), each worth two marks and Section B has a total of five questions, four of which are worth 14 marks each and one final question is worth 20 marks. Section A is worth 24 marks, and Section B is worth 76 marks. The paper remains a two-hour exam and all questions in both sections are compulsory and should be attempted. Regardless of the change in format to this paper from June 2009, as with previous papers, each individual question focused on a different and distinct syllabus area and all of the five key syllabus areas were examined. SPECIFIC COMMENTS SECTION B Many of the issues arising from Section B of this paper were similar to the last exam session and despite the recent change in format of the paper, the same issues have continued to emerge. Therefore, many of the comments that follow have also been made in my previous reports. It was very pleasing to observe that many candidates were able to produce very sound and wellwritten papers, which attempted every question and displayed a clear understanding of the parts of the syllabus being examined. Some candidates did not attempt all questions and thereby missed opportunities to access any marks at all for some questions. This appeared to be largely due to poor exam preparation. Candidates should have recognised that there were a total of 76 marks available for Section B and should, therefore, ensure that they allocate their time appropriately between Section A and Section B of the paper. In addition, within Section B, four of the questions were worth 14 marks and one question (the last one) was worth 20 marks and again, time should be allocated accordingly. Candidates are reminded of the importance of developing a sound exam technique as well as being familiar with the syllabus content this can be particularly helpful in terms of managing the time available for answering the questions. Candidates are still wasting valuable time by writing out all parts of the question at the beginning of their answers. This is not necessary and should be avoided; marks cannot be awarded for it.
Candidates also continue to waste valuable time creating unnecessarily elaborate headings to parts of their answers (different styles and sizes of text). Headings can be very useful in organising and presenting your work but simple underlining will suffice. This continues to be a discursive paper with questions generally requiring explanation and some discussion and some candidates did not articulate and communicate their answers as clearly as they might have done. Simple statements in a list, without any explanation, will rarely be adequate to achieve full marks unless this is specifically asked for in the requirement. It is always important to take care with presentation, use of language and the general structure of the answers even for the shorter answers now required for the four questions in Section B. Candidates are reminded of the importance of adhering to the instructions provided on the exam paper. In particular, candidates should ensure that they clearly identify the question number that they are attempting. Some candidates numbered the questions in the order in which they did them, rather than in the order in which they appeared on the actual paper. This should be avoided as it can lead to confusion. In all cases, the question number within the answer book should match the number of the question on the exam paper. QUESTION 1 Question 1 always examines syllabus area one, the business and accounting environment and in this case the focus was on Section 1b (iii), the nature of policies and procedures. The relevant study session was 4b, explain the purpose of systems, policies and procedures in a general business context. The question was in two parts: Part (a) focusing on the purposes of policies in organisations and Part (b) focusing on procedures. Part (a) was worth eight marks and Part (b) six marks. Both parts of the question asked for the explanation to include examples. Answers to this question were quite disappointing, primarily because candidates did not adequately explain the purposes of policies and procedures. Quite a number of candidates explained the importance of organisations having policies and procedures and this was not required
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and marks could not be awarded for it. Some candidates displayed a distinct lack of knowledge and failed to differentiate between procedures and policies. Far too many candidates simply listed types of policies and procedures and although some marks could be awarded for these (because they could be considered as examples), it was not possible to award full marks however extensive the list as the key part of the question was about purposes and this was not dealt with. Quite a number of answers failed to include any examples at all and this was a clear requirement of the question. Where a question asked for examples (plural) there is an expectation that the answer will include more than one and at least two examples. The key learning point from this question is the importance of reading the question carefully and dealing very clearly with the specific requirement of the question. Despite the above general observations, there were some sound answers to this question and some candidates scored full marks. QUESTION 2 Question 2 always examines syllabus area two, the effective management of business and accounting systems, and in this case the focus was on Section (d), internal controls. The relevant study session was 6a, explain the importance of internal controls in an organisation. This question was answered very well by the majority of candidates, many of whom had clearly used the mnemonic SPAMSOAP to help them to remember the eight types of internal controls. From this they were able to select five to explain in more detail. Some candidates explained all eight in detail although only five were in fact required; no additional marks could be awarded for the three additional controls which were explained. Good answers clearly identified the internal control, for example segregation of duties, or arithmetical and accounting controls, explained it fully and often included an example. Many candidates achieved full marks for their answers to this question. Where candidates scored less well, it was because they discussed control in a very general sense, for example the control of inventory. Other examples of poor answers which scored very few, if any marks at all, were those which explained in detail what was meant by the word control. Some candidates were clearly confused and discussed
control in the context of Fayols five functions of management and no marks could be awarded for this. QUESTION 3 As in previous exam sessions, Question 3 required candidates to demonstrate some knowledge of a particular theoretical area, in this case the work of Blake and Mouton and the different management styles that they identified on a managerial grid. The relevant part of the syllabus was 3 (ii) differing styles of management and the study session was 10 (b) describe the skills, traits and characteristics of a leader, with reference to Blake and Mouton.... The first part of the question was worth five marks and required candidates to identify the five management styles that appeared on the managerial grid. Many candidates correctly listed the five styles. Quite a number of candidates included a diagram of the grid with the five styles correctly positioned on the grid. A diagram can be a useful way of presenting the information, but unless it is explicitly asked for in the question, additional marks cannot be awarded for it. Some candidates wasted valuable time by producing very accurate and clearly labelled diagrams and while these were quite correct, additional marks could not be awarded because it was not a requirement of the question. Part (b) of this question required candidates to describe any three of the five styles that they had identified in Part (a). Three marks were available for each style described. There were some very good answers here with many candidates displaying a good knowledge of the work of Blake and Mouton. However, it was very unfortunate that some candidates had no knowledge of this work at all; with some making no attempt to answer the question whatsoever. This is very disappointing and candidates are reminded that all parts of the syllabus will always be examined on every paper and as such candidates need to be familiar with all sections of the Syllabus and the Study Guide. Study session 10b refers very specifically to Blake and Mouton. As is often the case with Question 3, candidates assume than any question on management theory must refer to Fayol and on this particular paper, some candidates produced very good answers on the five functions of management as identified by Fayol. This was clearly incorrect and marks could not be awarded for it. The key issue with this question, as
ever, centres on knowledge of a very distinct syllabus area, rather than anything to do with misinterpreting the requirement in any way. The question was very specific and there was no scope for very vague or general answers. My examiner reports usually comment on the poor answers to Question 3 and to theoretical questions in general and therefore it is especially pleasing to observe that on this occasion, far more candidates produced sound answers which displayed a good understanding of this syllabus area. QUESTION 4 Question 4 examined syllabus area four: individual effectiveness at work and the relevant study session was 15a recognise the importance of good communication, both formal and informal, in the workplace. This was a very straightforward question requiring candidates to explain what was meant by formal and informal communication and to describe how they operated. Unfortunately, some candidates offered very broad answers about the communication cycle generally and did not deal with formal or informal communication in any meaningful way. Reference to the communication cycle was only appropriate if it was in the context of formal and informal communication, if it wasnt, then it was not possible to award marks for it. Far too many candidates explained in detail the various methods of communication, again without any reference as to whether they were formal or informal. Some candidates compared written and verbal communication with non-verbal communication and did not deal with the requirements of the question at all. Some candidates incorrectly stated that formal communication always has feedback whereas informal communication does not. Again incorrectly, some candidates stated that formal communication was always written and informal communication was always verbal. They then went on to list types of written communication and types of verbal communication but unless these were identified correctly as formal or informal, it was not possible to award marks. Answers tended to deal with formal communication more effectively than informal communication, missing opportunities to explain about rumour, gossip and the grapevine. Candidates should avoid making statements such as Formal communication is communication which is formal as this does not show any understanding
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THE KEY ISSUE WITH PAPER 5 QUESTION 3, AS EVER, CENTRES ON KNOWLEDGE OF A VERY DISTINCT SYLLABUS AREA, RATHER THAN ANYTHING TO DO WITH MISINTERPRETING THE REQUIREMENT IN ANY WAY. THE QUESTION WAS VERY SPECIFIC AND THERE WAS NO SCOPE FOR VERY VAGUE OR GENERAL ANSWERS.
of what formal communication is. Good answers were clear about the differences between formal and informal communication channels and explained how they both operated in some detail and often providing excellent examples to illustrate points made. QUESTION 5 Question 5 on the paper was worth 20 marks and not 14 as is the case with the other four questions in Section B. It is important that candidates bear this mark allocation in mind when planning their time. A limited number of candidates appeared to run out of time when answering Question 1 and the main reason for this appeared to be the very lengthy answers they had included for Questions 1 to 4, which were often disproportionate to the marks available for these questions. Question 5 examined syllabus area 5 (ii), common hazards and how to deal with them. The relevant study sessions were 19b and 19c, Identify possible sources of danger to health and safety of individuals in the work place and Suggest appropriate preventative and protective measures. The question was in two parts and examined the causes of fire in Part (a) and preventative measures in Part (b). The first part of the question asked candidates to identify five potential causes of fire in the workplace. This was very straightforward and many candidates achieved full marks for this section. Unfortunately, some answers repeated points and achieved limited marks. Part (b) of Question 5 required candidates to explain five types of precautionary and safety measures which could be taken by an organisation to reduce the risk and impact of fire. There were some very good answers to this section, with five clear types being identified, such as storage, building maintenance or staff training. Within each of these types or categories candidates then went on to explain them further and in some cases gave useful examples to illustrate the points made. Some candidates did not really identify five discrete types of measures and simply presented a list of all the things that might be done to minimise the risk of fire and while it was possible to award some marks for this, candidates were not able to achieve the maximum marks available. There was scope for most answers to deal more effectively with the potential impact of fire as well as fire prevention measures. Key learning points: The main observation from the December 2010 exam, which I would like to emphasise here, is the importance of reading the questions carefully and then dealing with the precise requirements of the question. This means reading the question in its entirely in order to distinguish between the differing requirements of the different sections. All five parts of the syllabus will always be examined and all parts are equally weighted. This means that it is important for candidates to revise all areas of the syllabus. Far too many candidates do not give themselves the opportunity to access all of the marks available by not answering one or more questions on the paper. In particular, I would continue to encourage candidates to prepare adequately for Question 3. Despite some better answers for Question 3 this time, some candidates still appear to have difficulty in answering theorybased questions and this has been a recurring feature of this exam and of my examiner reports. Once again, I would like to direct candidates to the August 2007 issue of Student Accountant; this contains a three-page article entitled Good in theory?, which offers advice and guidance on answering theory-based questions and explains in detail how to approach these types of questions. It also offers guidance on how to study theories using the study texts and in addition it includes a useful summary of the key syllabus areas and study sessions which lend themselves to this type of question.
PAPER 6 DRAFTING FINANCIAL STATEMENTS
There were two sections to the paper, with all questions being compulsory. Section A consisted of 10 multiple-choice questions of two marks, each covering a broad range of topics on the syllabus and Section B, which had three longer questions worth 80 marks, testing the candidates in-depth understanding and application of key skills in the syllabus. Overall, candidates performed well on this exam. The majority of candidates made a good attempt at all the questions with some candidates scoring very high marks. The presentation of answers was generally good and, once again, well-prepared candidates produced comprehensive workings that supported the figures in the financial statements. SPECIFIC COMMENTS SECTION B QUESTION 1 This question was worth 40% of the marks. Candidates were presented with the incomplete records of a partnership for the year ended 31 October 2010 and some additional information about transactions during the year. Most candidates made a good attempt at this question and scored well. Those candidates who presented the wrong figures on the face of the financial statements but supported the figures with workings were awarded marks as appropriate. In Part (a) of the question candidates were required to prepare the income statement (profit and loss account) and appropriation account. Most candidates made a good attempt at this part of the question. The most common errors were: incorrectly calculating the sales and the purchases figures incorrectly adjusting the accrual for energy and the prepayment of rent adding interest on capital instead of deducting it not showing the underpinning workings. In Part (b) candidates were asked to prepare the partners current accounts. Candidates own figures for each partners profit were given credit provided they were the same as those calculated in the income statement (profit and loss account). Weaker candidates tended to either get the figures on the wrong side of the accounts or missed out either interest on drawing or interest on capital from the accounts.
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In Part (c) candidates had to prepare the statement of financial position (balance sheet) for the partnership; again this was reasonably well done. The main areas of difficulty for candidates were correctly calculating the bank and the accrual figures. QUESTION 2 This question was worth 20% of the marks. Candidates were provided with the summarised income statements (profit and loss accounts) of Big Co (Ltd) and Small Co (Ltd) for the year ended 31 October 2010. Small Co was a subsidiary of Big Co and candidates were given information pertaining its acquisition and for transactions during the year between the two companies. Overall this question was not as well answered as Question 1. Many candidates were unable to correctly calculate the goodwill arising on the acquisition of Small Co (Ltd) that was required in part (a) of the question. In Part (b) candidates were required to prepare the consolidated income statement (consolidate profit and loss account) for Big Co (Ltd). Candidates made a good attempt at this part of the question. The majority of candidates were able to correctly adjust the revenue (sales) figure and cost of sales figure for the internal sales. However, many candidates omitted to adjust cost of sales for the goods remaining unsold at the year end. Also, a number of candidates did not show the profit attributable to the parent company and the non-controlling interest. In Part (c) candidates were asked to define an associate relationship and to give examples that might demonstrate such a relationship. The weaker candidates described partnerships or subsidiary companies as associates, which was incorrect. Those candidates who had revised well had no trouble with giving the correct definition of an associate and provided the examiner with examples of how a minority investor might exert significant influence, eg the appointment of representatives to the board of directors, or the interchange of management personnel between the two companies.
QUESTION 3 This question was worth 20% of the marks. Candidates were given the financial statements of Fazak Co (Ltd) for the year ended 31 October 2010, together with comparator ratios for the previous year and industry average ratios. In Part (a) candidates were asked to calculate stated ratios and give the formula they had used. This part of the paper was reasonably well answered. Most candidates calculated some, if not all, of the ratios correctly and clearly showed the ratio formulas and calculations. In Part (b) candidates were asked to comment on the ratios. As with previous sessions, too many candidates merely repeated the ratio figures they had calculated or were given in the question, without offering any real comments or possible explanations for the changes or differences in the ratios between years or the industry average. Some candidates tried to hide their lack of understanding by presenting long winded paragraphs, often restating the same point more than once. Those candidates who presented structured answers commenting/ interpreting each of the ratios in turn scored well. In Part (c) of this question, candidates were asked to briefly explain five limitations of ratio analysis. This was an opportunity for candidates to pick up easy marks. Strong candidates correctly suggested limitations such as: different accounting policies applied by comparator companies, price inflation distorting comparisons over time and issues around the timeliness/availability of information for preparing ratios.
The distribution of marks across the paper was as in previous sittings. Candidates attempting Paper 7 should expect it to: Focus on the key syllabus areas as specified in the published Syllabus. On this occasion 74% of the available marks were based on key syllabus areas. In the long term, I aim for key syllabus areas to make up about 80% of the paper. Test numeric and written skills, on this paper 42% of the marks were for discussion and 58% were for calculation. In the long term I aim for a split of marks of approximately 40% for words and 60% for numbers. Test application more than knowledge. The December 2010 paper contained 32% knowledge-based marks. Overall the standard of answers on Section B was disappointing. Three of the four questions covered key syllabus areas that I have examined several times before. Despite this some very poor answers were received. The December 2010 paper was the 14th paper of this syllabus. By this stage the questions I have set have covered the full syllabus. Although I will not repeat entire questions, many of the questions I will set will be made up of similar blocks of knowledge and techniques to those used on past papers. There are only so many ways that I can ask questions, for example, on the calculation of standard cost variances. Candidates who practise past exam questions will be very well placed to answer future questions. Past papers, together with answers and marking guides are available on the ACCA website and I urge candidates to use them in their exam preparations. The quality of exam technique was mixed. Many candidates failed to show workings to numeric answers. This becomes a problem when a candidates final answer is incorrect. If workings are not shown markers are unable to award method marks as the method is not apparent to them. A large minority of candidates made no attempt at the narrative sections of the paper. As these sections accounted
PAPER 7 PLANNING CONTROL AND PERFORMANCE MANAGEMENT
The paper followed what is now the usual CAT Paper 7 format. Section A contained 10 compulsory multiple-choice questions worth two marks each. Section B contained four compulsory written test questions worth 20 marks each.
FOR PAPER 7, THE QUALITY OF EXAM TECHNIQUE WAS MIXED. MANY CANDIDATES FAILED TO SHOW WORKINGS TO NUMERIC ANSWERS. THIS BECOMES A PROBLEM WHEN A CANDIDATES FINAL ANSWER IS INCORRECT. IF WORKINGS ARE NOT SHOWN MARKERS ARE UNABLE TO AWARD METHOD MARKS AS THE METHOD IS NOT APPARENT TO THEM.
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for 42% of the marks this made it very difficult for these candidates to pass. Time management was, in the main, good and there was little evidence of candidates running out of time. Presentation of answers was variable. Some scripts were beautifully presented and were a joy to mark. On others the handwriting is so bad it is almost impossible to follow. Although the average standard of scripts submitted was disappointing some excellent scripts were submitted. A significant number of candidates scored in the 70% to 90% range. Congratulations to these well-prepared candidates and their teachers. I will now consider performance on a question-by-question basis. These sections will inevitably focus on candidate weaknesses, but it is worth remembering that many good scripts were received. SPECIFIC COMMENTS QUESTION 1 This question covered standard costing and variance analysis. These areas are covered by syllabus headings 5 and Study Guide sections 20, 21 and 23. Standard costing and variance analysis is a key syllabus area. Part (a) required candidates to calculate direct labour and fixed overhead standard cost variances. Answers to Part (a) tended to be either very good or very bad. Common errors were to express variances in hours rather than $, or per unit rather than in total. Not surprisingly, the fixed overhead variances were calculated less accurately than the direct labour variances. Part (b) required candidates to reconcile budgeted and actual cost. This area was the subject of a recent Student Accountant article by the examiner. This was generally very badly done with hardly any candidates submitting a complete reconciliation. A good answer would have calculated a cost volume variance to reconcile original budgeted cost with flexed budgeted cost, going on to reconcile flexed budgeted cost with actual cost with the cost variances from Part (a). Common errors included a failure to calculate a cost volume variance and a failure to reconcile to original budgeted cost. This resulted in many candidates starting their statement with the flexed budget cost. Some candidates simply recalculated the variances from Part (a), and scored no marks. Others misinterpreted the question and responded to the word
statement by providing a written commentary on the Part (a) variances. QUESTION 2 This question covered performance measurement. Part (a) required candidates to calculate a variety of financial and non-financial performance measures. Part (b) required an explanation of the factors that would make the comparison of two organisations performance difficult. Part (c) required a brief explanation of differences between measuring managerial and organisational performance. These areas are covered under syllabus headings 7a and 8a and Study Guide headings 16b, 17d, 24b, and 25a. Performance measurement is a key syllabus area Part (a) prompted a mixed quality of answers. Good answers usually started with a statement of the formula to be used to calculate the performance measure and went on to calculate the required figures. This allowed own figure marks to be awarded if the final answer was incorrect. The calculation of residual income (Part (a)(i)) caused many problems. Common errors included a total lack of knowledge of the concept, expressing residual income as a percentage of capital investment, using ZPSs cost of capital to calculate Carbones cost of capital and stating ZPSs residual income as zero (presumably due to a mistaken belief that residual income cannot be negative). Return on sales was generally well calculated. However, many candidates failed to appreciate that a decimal fraction of 0.0003 equates to a percentage of 0.03% not 3%. A surprising number of candidates failed to calculate answers to (a)(iii) and (a)(iv), despite their everyday nature. Of those who did many failed to include both letters and parcels as items delivered by ZPS. Part (a)(v) was probably the most difficult figure to calculate, presumably due to its unfamiliar nature. Taking an approach similar to that in working out an inventory holding period would yield the required figure. In Part (a) overall there was much confusion over units of measurement in part a, commonly candidates confused % with $. Others struggled with the arithmetic of dividing by millions. More calculator practice is recommended here. We live in an age of very large numbers and would-be accountants must get used to dealing in millions and billions.
Finally for Part (a) it was obvious that few candidates were checking the reasonableness of their answers one student gave an answer for delivery time of 77,395,000 days while another calculated it as 0.00000365 days. Nearly all markers commented to me on the average weight per parcel calculated in some answers to Part (a)(iv), a figure of 8m tons per parcel being a common, but obviously, incorrect answer. Part (b) required candidates to explain differences between the two organisations that would make it difficult to compare their performance. This was generally quite well done. A common error was to include too much identification of differences but very few explanations of why those differences cause problems with comparison of the two companies. The requirement explain literally means to make plain. Many candidates appear to confuse this with list. For example the comment: One is listed, one is state owned is not an explained point and would only earn one mark. An explained point that would earn two marks could be: One is listed, one is state owned, therefore, they will be working towards different objectives. A number of candidates misinterpreted the question and provided a commentary on the relative performance of the two organisations. Part (c) required an explanation (in general terms) of the differences involved in assessing the performance of a manager and the performance of an organisation. Many candidates successfully identified controllability of costs and revenues as the crucial concept. Common errors included relating answers to ZPS and Carbone and trying to compare the performance of the two companys managers. Others simply provided a list of performance indicators to use QUESTION 3 This question was based around rolling budgeting and also tested the techniques involved in budget construction. These areas are covered under syllabus headings 6a and 6d and Study Guide sections 7, 11 and 12. Budgeting is a key syllabus area. Part (a) required candidates to analyse costs into fixed and variable elements. This was well done. Of the errors that were made the most common were ignoring the semi-variable nature of direct labour cost, expressing quarterly fixed cost as a cost per annum
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and expressing fixed costs as a cost per unit. Some candidates presented very confused answers, which mixed up revenue figures with cost figures. Part (b) required candidates to use their analysis from Part (b) to flex the budget for the fourth quarter and then to use these figures to update the annual budget. When errors were made in the earlier parts of the question own figure marks were awarded if the candidates method could be understood. This section was generally very well done with many candidates scoring full marks (nine marks). Common errors were to forget to flex the budget to the new output level and to forget to update figures for inflation. A surprising number of candidates failed to produce the annual budget required and failed to gain four easy marks. Part (c) required an explanation of three advantages of rolling budgeting. This was generally well done. Where errors were made, they usually involved candidates explaining the benefits of budgeting rather than rolling budgeting specifically. A large minority of candidates attempted to make the same point in three different ways. Only one set of marks will be awarded in this case. QUESTION 4 This question was based around fixed price tendering and also tested knowledge of cost plus pricing and activity based costing. These areas are covered under syllabus headings 1c and 8e, and Study Guide sections 4c, 4d, 27b, 27c and 27d. Part (a) involved the calculation of a price using ABC principles and a cost plus pricing formula. It was, on the whole, well done with a large number of candidates achieving full marks. When errors were made, the most common were the incorrect use of calculated cost drivers, in particular mixing up rates per driver unit and rates per desk. The price was sometimes calculated incorrectly with candidates calculating a 20% margin rather than mark up. Some candidates decided that that as there was spare capacity labour was not a relevant cost, and, therefore, missed it out altogether. This could possibly be true, although it was not mentioned in the pricing approach suggested by the finance director. If it was clear that this is what candidates were doing credit was given. Part (b) required an explanation of the limitations of cost plus pricing. The quality of answers was very mixed,
presumably because this is not a key syllabus area. Weaker answers tended to give advantages rather than limitations or to explain the limitations of ABC rather than of cost plus. Two common misconceptions were the belief that cost does not include overheads or fixed costs and that cost plus is a very complex pricing system. As in many of the written sections candidates often simply stated limitations without explaining them; this restricted them to one mark per point rather than two. Finally, Part (c) required a definition of fixed price tendering and the procedures underlying the preparation of cost estimates. Generally this was poorly done. Many candidates were clearly unfamiliar with fixed price tenders and produced answers that were simply a rearrangement of the words in the question (eg a fixed price tender is a tender whos price is fixed). These types of answers scored no marks. Most candidates appeared to be unaware of the competitive nature of tendering. Definitions of opportunity cost were also often weak, with candidates confusing benefits forgone with costs forgone. Finally procedures for calculating minimum prices often solicited a long list of potential costs, without mention of the key concepts of incremental or relevant cost.
Most candidates attempted all questions on the paper. While, there was no discernible pattern to answers submitted to the MCQs, given the range and frequency of incorrect answers submitted, it is again evident that a significant minority of candidates were simply not properly prepared for a test of this nature. At Section B a relatively high proportion of candidates appeared to have only a fleeting knowledge of most of the parts of the syllabus examined. This is particularly disappointing given the consistency of the syllabus areas covered in recent CAT Paper 8 exams. The primary reason for a candidate achieving a low mark for this paper is lack of preparation. The key to success is to set about the course of study with a timely and structured approach, ensuring that sufficient emphasis is placed on revision, question practice and examination technique. SPECIFIC COMMENTS SECTION A A relatively high number of candidates answered this section to a pass standard. However, a significant minority submitted correct answers to only four of the questions or less. This seems to reflect inadequate in-depth learning of many important topics included in the syllabus for this paper. SECTION B QUESTION 1 This question focused on various aspects of internal control in a company. There was a total of 25 marks available over five parts. At Part (a) candidates were required explain the terms Application controls and General IT controls, for two marks each. A relatively high number of candidates struggled to properly define the former, with many demonstrating very muddled thinking. Most candidates were able to define general IT controls to a pass standard but many that could not, gave the impression that general controls were password controls. Part (b), requiring identification and description of four application controls that would help ensure accuracy of input into a purchases and trade payables system, was in general answered to an inadequate standard, with few candidates being awarded more than three of the six marks. A significant number of candidates submitted nonsensical points, others included control activities such as ensuring that invoices are checked to purchase orders
PAPER 8 IMPLEMENTING AUDIT PROCEDURES
The paper comprised two sections. Section A (20 marks) contained 10 multiplechoice questions (MCQs), each worth two marks, on topical areas from across the CAT Paper 8 syllabus. Section B (80 marks) contained four compulsory questions, two of which were worth 25 marks each and the other two were worth 15 marks each. A significant number of candidates performed to a satisfactory standard; however, a relatively high number performed to an inadequate standard. Most candidates answered Section A to a satisfactory standard (although a significant minority did not), but the range of answers submitted to Section B questions were mixed. It was encouraging to note the number falling into the former category. However, the number of inadequate answers submitted was of concern. These were often too brief, muddled, partially irrelevant or totally incorrect and reflected the fact that a very significant number of candidates were not properly prepared for the exam.
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THE MAJORITY OF PAPER 9 CANDIDATES ATTEMPTED ALL FOUR QUESTIONS BUT MANY STRUGGLED WITH QUESTION 2, QUESTION 3(A) AND QUESTION 4(A)(II). IT WAS DISAPPOINTING TO SEE SUCH POOR ATTEMPTS IN THESE AREAS.
in their answer, while some did identify application controls but not those that would help ensure accuracy over input. Part (c) requested an explanation of the term segregation of duties for one mark, and then (for six marks) identification of six responsibilities in a purchases and trade payables system that should be segregated. A high number of candidates could not properly explain the meaning of the term, although most did answer to a satisfactory standard. Whilst it was pleasing to note the significant number of candidates who demonstrated good knowledge of the responsibilities that should be segregated; of concern was the relatively high number of candidates who had very little understanding in this regard. Candidates knowledge of the use of computer-assisted audit techniques was tested by the requirement at Part (d) for six marks, to identify matters for consideration when deciding on when to use them. While a minority of candidates displayed sound knowledge, in the main the requirement was answered to an inadequate standard, with a large number of candidates submitting irrelevant points. Part (e) of the question tested candidates understanding of the audit risk model and in particular the effect on detection risk when control risk and the risk of material misstatement is high. There were two marks available for this part, and from answers submitted it seems apparent that the majority of candidates have insufficient comprehension of the model. QUESTION 2 This question was on audit planning and offered 25 marks over four parts. Planning is a key part to any audit engagement and candidates understanding of why this is so was tested at Part (a), with a requirement, worth five marks, to state five ways in which adequate audit planning should benefit an audit. Many candidates were able to state three benefits and a significant number stated at least four. However, of the remainder, a large number appeared to have very little appreciation of planning issues and so scored inadequately. Part (b) of the question, offered candidates the opportunity to score 16 marks, by explaining how five aspects of a companys operations as described, would affect the strategy for the audit of the companys financial statements. Again there were a significant number of answers which were satisfactory. However, in line with Part (a) above, a high number of candidates answers were inadequate, being extremely brief, displaying muddled thinking and containing irrelevant points. Part (c) of the question, required candidates to explain how analytical procedures should have assisted in the planning of the audit of the financial statements of the subject company. While there was a range of answers submitted demonstrating a sound or reasonable knowledge of the issues, there were many others that indicated a lack of understanding. Relatively few answers were awarded more than two of the four marks available for this part of the question. QUESTION 3 This question on audit evidence offered 15 marks over two parts. In Part (a), there were nine marks available for explaining three different forms that financial statement assertions may take, and for confirming what is being asserted in each instance, with regard to the following: classes of transactions and events for the period under audit account balances at the period end presentation and disclosure. A number of candidates scored all nine marks with many others scoring at least six. In contrast to this however, a very significant number of candidates scored inadequately with some displaying very little or no knowledge about financial statement assertions. There were six marks available in Part (b) for listing four audit procedures or tests that should be carried out to substantiate a bank loan. This was not a difficult requirement, as well-prepared candidates demonstrated by submitting answers that secured all or most of the
six marks. It was though, of concern to note the relatively high number of candidates that obtained a very low mark for this requirement, with answers that demonstrated a very low level of understanding of the topic. QUESTION 4 The question focused on various aspects of the auditors report and the auditors responsibility in this respect. There were 15 marks allocated over two parts to the question. A question about the elements of the auditors report has not been previously set at the CAT Paper 8 level. Part (a) (i), for six marks, tested knowledge of this topic by requiring candidates to identify and describe four such elements. The standard of answers submitted were mixed. Part (a)(ii) offered a further six marks for describing four differing circumstances in which it is appropriate for an auditor to modify their audit opinion. A relatively large proportion of candidates answered correctly and succinctly and gained most of the marks available, but many others did not obtain any marks or scored inadequately by demonstrating very sparse knowledge of the topic. A lot of the inadequate answers submitted are best described as rambling containing incorrect, confused and irrelevant points. Candidates who referred to emphasis of matter issues in their answer were not given credit for this as, the inclusion of these in an auditors report, should not have any influence on the opinion expressed by the auditor. At Part (b), candidates were required to identify two situations arising, which could result in the auditor concluding that the scope of the audit was limited. An encouraging proportion of candidates scored at least two of the three marks available, but, again, there was a very noticeable difference in the knowledge levels of those candidates and the significant number of others who obtained one or less of the three marks.
PAPER 9 (UK) PREPARING TAXATION COMPUTATIONS
This exam followed the usual format of 10 multiple-choice questions of two marks each and four long-form questions for the remaining 80% of the marks. This report is based on Section B of the exam only. Section B consisted of four compulsory questions (Question 1 for 25 marks, Question 2 for 22 marks,
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Question 3 for 18 marks and Question 4 for the remaining 15 marks). The majority of candidates attempted all four questions but many struggled with Question 2, Question 3(a) and Question 4(a)(ii). It was disappointing to see such poor attempts in these areas; further comment on this will be made below. Once again it was the common areas of capital allowances and corporation tax that seem to cause the greatest problem. Candidates are again reminded that Question 2 of the paper is always a corporation tax question, usually including capital allowances, and that they must learn this area and examine past exam papers for an overview of the type and standard of question that will be set. SPECIFIC COMMENTS QUESTION 1 This question was in two parts and tested benefits, a basic income tax calculation, National Insurance contributions and furnished holiday accommodation. The three benefits examined were generally well answered. The only real problem here was failing to note that the car and fuel benefits were only available for six months and, therefore, the benefit should have been reduced by 6/12. Conversely many candidates reduced the computer benefit because they misread the question the computer was first provided in 2008, not 2009 as many seemed to think. The income tax assessment was very well done, however, the usual common errors were made. The majority of candidates had not mastered the treatment of pension contributions. If the contributions are to an occupational pension scheme then the amount should not be grossed up and the amount paid is deducted from employment income. If paid to a private pension plan then contributions should be grossed up by 100/80 and then the gross figure is used to extend the basic rate band. These two treatments were often done incorrectly. Other common mistakes were either exempting national savings interest or grossing the amount up when in fact the amount received is the gross interest due and is fully taxable, and ignoring the professional fee this is an allowable expenses against employment income. The National Insurance calculations were either well done or not well at all. Candidates must read the question. In this case candidates were asked
TOO MANY PAPER 9 SCRIPTS SHOWED CANDIDATES HAD LITTLE OR NO IDEA OF THE AREAS BEING EXAMINED. CANDIDATES ARE REMINDED TO STUDY THE ENTIRE SYLLABUS, AND TO READ QUESTIONS CAREFULLY.
to calculate the National Insurance contributions (NIC) for Suzanne and her employer with a specific instruction NOT to calculate the contributions for Benjamin despite this many candidates wasted valuable time calculating the NIC due from Benjamin and his employer. The NICs for an employee are class 1 primary NICs and these are calculated on the cash earnings this does not include benefits, savings income or dividends. For the employer class 1 secondary contributions are due on the same cash earnings figure, and in addition, class 1B contributions are due on the non-cash benefits given to the employee. Many candidates used incorrect earnings figures and several calculated contributions based on class 2 and class 4 these later classes are for the self-employed not for employees. Finally in Question 1, Part (b) involved the tax advantages of furnished holiday accommodation. Once again candidates should read the question there was a specific statement telling candidates not to give the qualifying conditions but still many candidates gave these as their answer. Few candidates knew all the advantages and many simply stated points such as they must be near the sea or must be of a high standard which have nothing to do with tax. The advantages are capital allowances can be claimed, the income qualifies as earned income for pension purposes, the accommodation is classed as a business and, therefore, relief for trade losses are available and capital gains tax business reliefs may be available on sale. QUESTION 2 This was a three-part question involving adjusting of profits, capital allowances and corporation tax for a 15-month accounting period. Most candidates found this question a real problem. Part (a) of the question caused several problems. Once again reading the question carefully would help candidates score marks. The requirement clearly stated that candidates must start with the net profit and must list every item, stating what action is required. A suggested layout was given; this was not compulsory but was given as an aid to help candidates. The standard of answers given seemed to show that very few candidates really understand what the adjustment process is about and how this is done. Most answers just seem to list every item and a guess whether they should be added or deducted from the profit given. The adjustment process is necessary to turn an accounting net profit figure into a figure that is taxable many items of expense are deductible for accounting but not for tax and similarly some income items may be included in the accounting profit but are either not taxable or are taxable under a different category to trading income. The accounting profit must be fully analysed and expenses not allowed for tax must be added back and the income not taxable as trading income must be deducted. This adjustment process is necessary for all businesses including sole traders, partnerships and companies and as such is an important aspect of tax law which will be tested on a regular basis. Part (b) of the question examined two common areas of corporation tax capital allowances and tax for a long period of account. The first problem was to understand that companies can never be assessed to tax on a period of more than 12 months therefore both the capital allowances and corporation tax had to be calculated in two periods, the first for the first 12 months and the second for the remaining three months. For capital allowances (CAs) candidates had to know that annual investment allowance of 50,000 was available and first-year allowance of 40% was due on the remaining 10,000 of the new purchase. For the second three-month period the writing down allowance had to be reduced to 3/12. When calculating the corporation tax income and deductions had to be allocated to the correct period, either the first 12 months or the second three-month period. The adjusted profit (before CAs) had to be time apportioned and the CAs calculated in Part (i)
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had to be deducted from the relevant period. Property income is then time apportioned on the accruals basis ie 1,000 per month in this question, the capital gain and Gift Aid are allocated based on the date of the gain or payment. A common mistake was to tax the dividend income however this should be grossed up by 100/90 and then treated as franked investment income which effects the rate of tax to be used but is not actually taxed. There are then two separate tax calculations, one for each period. Some marks were given where candidates did a 15-month tax calculation, however it should be noted that the tax thresholds of 1,500,000 and 300,000 can never be extrapolated to give higher amounts. QUESTION 3 This was a three-part question and involved the calculation of gains for four common disposals, the calculation of gains on the gift of quoted shares and finally the calculation of rollover relief. Four separate disposals were involved in Part (a), the biggest problem was once again not doing what the question asked candidates did not seem to read the question. The requirement clearly stated that candidates must state why any gain or loss is not included this was ignored by most. The first disposal was a chattel and required the calculation of marginal relief, this was well done by the majority of candidates. The only small technical point to note here is that the gross proceeds and not the net proceeds has to be used in the 5/3rds formula. The second disposal was a qualifying corporate bond this is exempt from capital gains tax. Candidates were required to state this (as per the question) to get the mark available simply leaving the calculation out did not earn a mark. The third calculation was the sale of plant and machinery. Any loss on the sale is covered by capital allowances and therefore no capital loss can be claimed. Many candidates did not know this and those that may have did not state the rule as required by the question. The final disposal was the sale of a workshop, which involved the purchase of an extension, which had been destroyed before the sale and never replaced. On occasions such as this the cost of the extension is not allowed in the calculation of the gain because the cost is not reflected in what is being sold. Once again, as required by the
question, candidates had to explain this to get full marks. Part (b) required candidates to calculate the value of quoted shares given away in order to calculate the gain occurring. Two calculations are required, the average method which adds the highest and lowest daily bargains and divides them by two and the up method which adds a of the difference in the two closing prices to the lower of the two figures. The lower of the two calculations is then deemed to be the sale price of each of the shares given away. Many candidates got full marks for this part and some had a rough idea of the requirement and calculated a variation of values these candidates got credit for their efforts. Part (c) involved an understanding of rollover relief. The technical points here involved calculating a basic gain (proceeds less cost) and rolling over the gain against the cost of any qualifying replacement business asset purchased during the period of one year before the disposal and three years after the disposal. However, full rollover relief is only available if the full proceeds are reinvested, if they are not as per this question then a gain equal to the proceeds retained is chargeable immediately and only the balance of the full gain can be rolled over. Once again as required by the question requirement full marks were only given if candidates stated the full original gain, the chargeable gain and the amount rolled over. QUESTION 4 This was a two-part question involving the allocation of partnership profits including the assessable figures for a departing partner and the calculation of value added tax (VAT) payable. The allocation of partnership profits was generally well done, however, candidates are reminded that salaries and interest on capital should be allocated to relevant partners first and the balance of the profits allocated last. The salaries and interest on capital are deemed to be fixed allocations of profit not actual salaries (employment income) or interest (savings income). The calculation of the assessable amounts for a departing partner was very poorly attempted. Most candidates had no idea and simply listed the amounts calculated in the partnership split this did not earn marks. When asked to calculate assessable profits for tax years candidates
must do this, ie they must state tax years and not accounting periods. If a partner leaves, candidates must treat the partner as a sole trader closing his business and therefore calculate assessable profits for relevant tax years (using the figures allocated) based on the closing year rules. Unfortunately, many candidates incorrectly did a version of the opening years rules and finished up with extra overlap profit. Part (b) of the question required the calculation of VAT payable it is pleasing to note that this was done very well. The technical points that candidates had to be aware of were that supplies to overseas customers are zero rated and that VAT payable on cars in not normally recoverable. Other points to note were that if a figure is given exclusive of VAT then the VAT is calculated by using the relevant VAT percentage (15% in this case) but if the figure is quoted inclusive of VAT then the relevant fraction (3/23rds in this case) should be used. CONCLUSION There were some extremely good sets of answers but as usual far too many scripts showed candidates had little or no idea of the areas being examined. Candidates are reminded to study the entire syllabus, not just selected areas, and to read the questions carefully. Full marks will only be awarded if the full requirement is answered, if told to do something you must do it, this is the only way the examiner can tell if you fully understand an area or have simply ignored an item because you dont know what to do. Finally, read the requirements carefully.
PAPER 10 MANAGING FINANCES
Section A consisted of 10 objective testing questions, worth 20 marks overall, and Section B comprised four 20-mark questions. The calculation/written split in Section A was 50:50, and the split in Section B was 46:54. The majority of candidates attempted all of the questions in Section B, suggesting that candidates did not appear to suffer from time pressure in this exam. Presentation varied from script to script, but generally legibility and layout were acceptable. Many candidates provided adequate workings for the numerical parts of Section B. It is imperative that candidates show clear workings in their answers, otherwise if the final answer
64
EXAMS
is incorrect, it is impossible to award method marks. Overall the technical knowledge shown by candidates at this sitting was poor. In many instances, it was obvious that candidates are not studying the whole syllabus, and could not attempt every part of each question in Section B. SECTION A The majority of candidates attempted this section, but overall performance was poor. SPECIFIC COMMENTS SECTION B QUESTION 1 This question examined investment appraisal. The calculation in Part (a) was a net present value calculation worth 12 marks, and candidates seemed well prepared for this type of calculation. Candidates often struggled to calculate the correct income from the diners, but if workings were clearly shown, many method marks were gained, with many candidates gaining two of the three marks available. The cost of the chefs was dependant on the number of diners. If the number of diners was incorrectly calculated within the income calculation, but the incorrect figure consistently used in the chef cost calculation, then method marks were awarded. Candidates must recognise, as has been the case in previous exams, the importance of clearly showing all workings so that method marks can be awarded. Candidates need to ensure that they incorporate incremental costs only within net present value calculations. Many candidates included a cash flow of $32,400 for the overheads, being the current overheads of $30,000 as well as the increase of $2,400, when only the incremental amount of $2,400 should have been considered within the calculation. Similarly, with the reduction in current annual net income, it should only be the reduction that is included within the calculation, not the original amount and the reduction, ie $20,000 in year one, not $180,000. Candidates must read the scenario carefully to ensure that they pick up the correct timings for cash flows. For example, the scenario clearly stated that the second payment for the building work would take place one year after the first payment. The first payment was usually correctly put at T0, but the second payment was frequently put in year two or year five. The requirement in Part (a) specifically asked for a conclusion. This was missed by many candidates and an easy mark was lost.
Part (b) was written for five marks, asking candidates to explain what a relevant cash flow is and illustrate their points with examples from Part (a). Here candidates were required to explain the principles (future, incremental, cash flow etc) and link the principle to an example from Part (a). Candidates who just repeated what they had done in Part (a) in narrative form (eg chefs wages are relevant) and did not explain why the cash flow was relevant gained few marks. However, in the main, this part of the question was well answered with many candidates scoring full marks. Part (c) was very badly answered, with many candidates scoring zero. A lack of knowledge of this part of the syllabus was shown with candidates either ignoring Part (c) altogether, or for example starting a discussion about the effect of inflation on imports and exports, or explaining the internal rate of return, neither of which answers the requirement set. QUESTION 2 This question concentrated on inventory management. Overall, performance on this question was very disappointing. This topic is a core part of the syllabus and I wrote a technical article on this topic published in March 2010. Part (a)(i) and (ii) were generally the best answered parts of this question candidates showed an awareness of the concepts and made a good attempt at the requirements for JIT to operate. Part (a)(iii) was, however, badly answered. Candidates often stated that JIT would be ideal for Expand Co, so ignoring the clues in the scenario (inefficiencies, too many different suppliers) and ignoring their own criteria for JIT Other candidates . ignored the part of the requirement in the circumstances outlined above, and tried to explain what Expand Co needed to do to make JIT work in the future this was not the focus of the question. Answers to Part (b) were on the whole very poor. Calculating the EOQ should have been easy marks to gain the formula was given but the majority of candidates still got this wrong. The main errors were to not calculate demand for the raw material component correctly at 100,000 units (annual demand of 50,000 was for finished goods, and each unit of finished goods required two units of the raw material component) and not calculate the holding cost correctly at 20% of the purchase price. If errors had been made in the EOQ calculation, but workings had been clearly shown, it should have been possible to gain many marks in the following part of
the calculation dealing with the discounts. However, the majority of candidates were unable to deal with the discount, and either did not attempt this part of the calculation, or did so very badly. Part (c) asked for factors other than price but many candidates included price in their list. Other than this, candidates generally wrote down reasonable factors and many gained at least two of the three marks available. QUESTION 3 Question 3 examined financing, and for the five methods of financing listed, asked candidates to first explain the method of financing, and then relate the method to the situation given in the scenario. Both aspects of the requirement needed to be answered for full marks to be awarded. The quality of answers varied greatly in this question. Some candidates showed a good understanding of the types of financing, applied their knowledge to the scenario well, and gained high marks. Many candidates however, showed a lack of knowledge, stating for example that venture capital was a joint venture, or that trade credit was bulk buy discounts. In addition, many candidates did not relate their answers to the scenario, for example not picking up the size of the investment required, or the fact that this is a family owned company. Accordingly, such answers did not gain many marks. QUESTION 4 This question examined short-term decisions, a topic with which candidates should now be familiar. Candidates tended to get Parts (a)(i) and (ii) either completely correct or score zero. This could indicate that some candidates are not studying the whole syllabus. Part (a)(iii) asked candidates to comment on their calculations. When asked to comment, it is not enough just to restate the figures calculated. In Part (b), many candidates misread the requirement, with the vast majority drawing a breakeven chart rather than a profit-volume chart. The answers to Part (c) were also very weak. In Part (i), candidates either did not attempt this part of the question at all, or vaguely stated that the profit-volume line would be affected, but not how. Part (ii) was often not attempted, however, a few candidates who had not drawn the chart in Part (b), did show good exam technique, and calculated the new breakeven point in Part (c)(ii), and credit was given for this.
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EXAM NOTES: JUNE 2011 FINANCIAL REPORTING

FINANCIAL REPORTING INTERNATIONAL AND UK
PAPER F3, FINANCIAL ACCOUNTING; PAPER F7, FINANCIAL REPORTING; AND PAPER P2, CORPORATE REPORTING Knowledge of new examinable regulations issued by 30 September will be required in exam sessions being held in the following calendar year. Documents may be examinable even if the effective date is in the future. The documents listed as being examinable are the latest that were issued prior to 30 September 2009 and will be examinable at the December 2010 exam session. The Study Guide offers more detailed guidance on the depth and level at which the examinable documents will be examined. The Study Guide should be read in conjunction with the examinable documents list. There are other additional areas examinable for UK and Irish papers and these are available at www.accaglobal.com/ stduents/pass/examinable_documents International Accounting Standards (IASs)/International Financial Reporting Standards (IFRSs) F3 F7 P2 IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events After the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations (revised) IFRS 5 IFRS 7 IFRS 8 IFRS 9 IFRS for Non-current Assets Held for Sale and Discontinued Operations Financial Instruments: Disclosures Operating Segments Financial Instruments Small and Medium-Sized Entities F3 F7 P2
Other Statements Framework for the Preparation and Presentation of Financial Statements*
F3 F7 P2
Exposure Drafts, Discussion Papers and Other Documents ED2009/6 ED 2009/5 ED F3 F7 P2 Management Commentary Fair Value Measurements An Improved Conceptual Framework for Financial Reporting Chapters 1 and 2* ED 2009/12 Financial Instruments: Amortised Cost and Impairment ED 2010/09 Leases ED 2010/06 Revenue from contracts with customers * Note: The Conceptual Framework was issued on 28 September 2010. Given the proximity to the cut off, ACCA has made the decision that in the interests of all stakeholders this revised document will not be examined and any questions relating to the framework will be based on the documents listed above.
AUDIT INTERNATIONAL
Knowledge of new examinable regulations issued by 30 September will be examinable in exam sessions being held in the following calendar year. Documents may be examinable even if the effective date is in the future. This means that all regulations issued by 30 September 2010 will be examinable at the June 2011 session. The Study Guide offers more detailed guidance on the depth and level at which the examinable documents will be examined. The Study Guide should therefore be read in conjunction with the examinable documents list. PAPER F8, AUDIT AND ASSURANCE (INT) The accounting knowledge that is assumed for Paper F8, Audit and Assurance is the same as that examined in Paper F3, Financial Accounting. Therefore, candidates studying for Paper F8 should refer to the accounting standards listed as relevant to Paper F3. PAPER P7, ADVANCED AUDIT AND ASSURANCE (INT) The accounting knowledge that is assumed for Paper P7, Advanced Audit and Assurance is the same as that examined in Paper P2, Corporate Reporting. Therefore, candidates studying for Paper P7 should refer to the accounting standards listed as relevant to Paper P2. Paper P7 will only expect knowledge of accounting standards and financial reporting standards from Paper P2. Knowledge of Exposure Drafts and Discussion Papers will not be expected.
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EXAM NOTES
AUDIT
International Standards on Auditing (ISAs) F8 Glossary of Terms International Framework for Assurance Assignments Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services ISA 200 Overall Objectives of the Independent Auditor and the Conduct of the Audit in Accordance with ISAs ISA 210 Agreeing the Terms of Audit Engagements ISA 220 Quality Control for an Audit of Financial Statements ISA 230 Audit Documentation ISA 240 The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements ISA 260 Communication with Those Charged with Governance ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management ISA 300 Planning an Audit of Financial Statements ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment ISA 320 Materiality in Planning and Performing an Audit ISA 330 The Auditors Responses to Assessed Risks ISA 402 Audit Considerations Relating to an Entity Using a Service Organisation ISA 450 Evaluation of Misstatements Identified During the Audit ISA 500 Audit Evidence ISA 501 Audit Evidence Specific Considerations for Selected Items ISA 505 External Confirmations ISA 510 Initial Audit Engagements Opening Balances ISA 520 Analytical Procedures ISA 530 Audit Sampling ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures ISA 550 Related Parties ISA 560 Subsequent Events ISA 570 Going Concern ISA 580 Written Representation ISA 600 Special Considerations Audits of Group Financial Statements (Including the Work of Component Auditors) ISA 610 Using the Work of Internal Auditors ISA 620 Using the Work of an Auditors Expert ISA 700 Forming an Opinion and Reporting on Financial Statements ISA 705 Modifications to the Opinion in the Independent Auditors Report P7 International Standards on Assurance Engagements (ISAEs) ISAE 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information ISAE 3400 The Examination of Prospective Financial Information ISAE 3402 Assurance Reports on Controls at a Service Organisation International Standards on Quality Control (ISQCs) ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Statements and Other Assurance and Related Services Engagements International Standards on Related Services (ISRSs) ISR 4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information F8 P7 F8 P7 ISA 706 ISA 710 ISA 720 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors Report Comparative Information Corresponding Figures and Comparative Financial Statements The Auditors Responsibilities Relating to Other Information in Documents Contained in Audited Financial Statements F8 P7
International Auditing Practice Statements (IAPSs) IAPS 1000 Inter-bank Confirmation Procedures IAPS 1010 The Consideration of Environmental Matters in the Audit of Financial Statements IAPS 1013 Electronic Commerce: Effect on the Audit of Financial Statements
F8 P7
F8 P7
International Standards on Review Engagements (ISREs) F8 P7 ISRE 2400 Engagements to Review Financial Statements ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity Exposure Drafts (ED) Auditing Complex Financial Statements Proposed ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment Proposed ISA 610 (Revised) Using the Work of Internal Auditors F8 P7

For examinable documents relating to variant and adapted papers, including UK financial reporting and audit and CAT Papers 3, 6, 8 and 9 www.accaglobal.com/students/pass/examinable_documents
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TAX
Other Documents F8 ACCAs Code of Ethics and Conduct IFACs Code of Ethics for Professional Accountants (Revised July 2009) ACCAs Technical Fact sheet 94 Anti Money Laundering (Proceeds of Crime and Terrorism) The UK Corporate Governance Code as an example of a code of best practice The UK Corporate Governance Code as an example of a code of best practice in relation to audit committees IAASB Practice Alert Challenges in Auditing Fair Value Accounting Estimates in the Current Market Environment (October 2008) IAASB Practice Alert Audit Considerations in Respect of Going Concern in the Current Economic Environment (January 2009) IAASB Applying ISAs Proportionately with the Size and Complexity of an Entity (August 2009) IAASB Practice Alert Emerging Practice Issues Regarding the Use of External Confirmations in an Audit of Financial Statements (November 2009) IAASB XRBL: The Emerging Landscape (January 2010) IAASB Auditor Considerations Regarding Significant Unusual or Highly Complex Transactions (September 2010) Note: Topics of Exposure Drafts are examinable to the extent that relevant articles about them are published in StudentAccountant. P7 Adjustment of profit questions November 2009 Examiners approach to Paper F6 (UK) January 2007 Capital gains tax (Parts 1 and 2) March 2011 Value added tax January and March 2011 Paper P6 (UK) Finance Act 2010 September 2010 Examiners approach to Paper P6 (UK) June/July 2007 Examiners approach to Section A questions March 2011 The following articles are updated each year for changes in the Finance Act Trusts and tax for Paper P6 (UK) Corporation tax for Paper P6 (UK Capital gains tax and inheritance tax for Paper P6 (UK) International travellers for Paper P6 (UK) Corporation tax for groups for Paper P6 (UK) SUPPLEMENTARY INSTRUCTIONS AND TAX RATE ALLOWANCES The following supplementary instructions and tax rates and allowances will be reproduced in the exam paper in the June and December 2011 exams. The symbol () indicates whether it is examinable in either paper. In addition, other specific information necessary for candidates to answer individual questions will be given as part of the question. For Paper P6 (UK), you should assume that the tax rates and allowances for the tax year 2010/11 and for the financial year to 31 March 2011 will continue to apply for the foreseeable future unless you are instructed otherwise. Calculations and workings need only be made to the nearest . All apportionments should be made to the nearest month. All workings should be shown. Income tax Basic rate Higher rate Additional rate F6 P6
TAX
PAPER F6, TAXATION (UK) AND PAPER P6, ADVANCED TAXATION (UK) The following notes refer to Papers F6 (UK) and P6 (UK) only. Guidance for other variant papers where available is published on the ACCA website. Legislation which received Royal Assent on or before 30 September annually will be assessed in the exam sessions being held in the following calendar year. Therefore, exam in June 2011 and December 2011 will be assessed on legislation which received Royal Assent on or before 30 September 2010. FINANCE ACT The latest Finance Acts which will be examined in Papers F6 (UK) and P6 (UK) at the June and December 2011 sessions are the Finance (No 1) Act 2010 and the Finance (No 2) Act 2010. With regard to prospective legislation when, for example, provisions included in the Finance Act will only take effect at some date in the future, such legislation will not normally be examined until such time as it actually takes effect. The same rule applies to the effective date of the provisions of an Act introduced by statutory instrument. ARTICLES The following relevant articles have been published in Student Accountant and are also available on the ACCA website: Paper F6 (UK) Finance Act 2010 September 2010 Inheritance tax (Parts 1 and 2) October 2010
137,400 37,401 150,000 150,001 and over
Normal rates % 20 40 50
Dividend rates % 10 32.5 42.5
A starting rate of 10% applies to savings income where it falls within the first 2,440 of taxable income. Personal allowances Personal allowance Standard 6,475 6574 9,490 75 and over 9,640 Income limit for age-related allowances 22,900 Income limit for standard personal allowance 100,000 F6 P6
Car benefit percentage F6 P6 The base level of CO2 emissions is 130 grams per kilometre. % Petrol cars with CO2 emissions of 75 grams per kilometre or less 5
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EXAM NOTES
Petrol cars with CO2 emissions between 76 and 120 grams per kilometre

% 10
Car fuel benefit F6 P6 The base figure for calculating the car fuel benefit is 18,000. Pension scheme limits Annual allowance 255,000 Lifetime allowance 1,800,000 The maximum contribution that can qualify for tax relief without evidence of earnings 3,600 Authorised mileage allowances: cars Up to 10,000 miles 40p Over 10,000 miles 25p Capital allowances: rates of allowance Plant and machinery % Main pool 20 Special rate pool 10 F6 P6
Inheritance tax: tax rates 1325,000 Excess Death rate Lifetime rate
% Nil 40 20
F6 P6
Inheritance tax: taper relief Years before death Percentage reduction More than 3 but less than 4 years 20 More than 4 but less than 5 years 40 More than 5 but less than 6 years 60 More than 6 but less than 7 years 80 Capital gains tax Rate of tax Lower rate 18% Higher rate 28% Annual exemption 10,100 Entrepreneurs relief Lifetime limit 5,000,000 Rate of tax 10% National Insurance contributions (not contracted out rates) Class 1 Employee 15,715 per year 5,71643,875 per year 43,876 and above per year Class 1 Employer 15,715 per year 5,716 and above per year Class 1A Class 2 2.40 per week Small earnings exception limit 5,075 Class 4 15,715 per year 5,71643,875 per year 43,876 and above per year Rates of interest (assumed) Official rate of interest Rate of interest on underpaid tax Rate of interest on overpaid tax Stamp Duty Land Tax 150,000 or less1 150,001250,0002 250,001500,000 500,001 or more
1
F6 P6
F6 P6
F6 P6
F6 P6
Motor cars (purchases since 6 April 2009 (1 April 2009 for limited companies)) CO2 emissions up to 110 grams per kilometre 100 CO2 emissions between 111 and 160 grams per kilometre 20 CO2 emissions over 160 grams per kilometre 10 Annual investment allowance First 100,000 of expenditure Industrial buildings allowance Writing-down allowance Corporation tax Financial year Small companies rate Main rate Lower limit () Upper limit () Standard fraction 100 1
F6 P6 % Nil 11.0 1.0 Nil 12.8 12.8
F6 P6 2008 2009 2010 21% 21% 21% 28% 28% 28% 300,000 300,000 300,000 1,500,000 1,500,000 1,500,000 7/400 7/400 7/400 F6 P6 F6 P6
Nil 8.0 1.0 F6 P6
4% 3% 0.5% Rate % Nil 1 3 4
Marginal relief Standard fraction x (UA) x N/A
F6 P6
Value added tax Standard rate up to 3 January 2011 17.5% Standard rate from 4 January 2011 onwards 20% Registration limit 70,000 Deregistration limit 68,000
For residential property, the nil rate is restricted to 125,000. 2 From 25 March 2010 to 24 March 2012 there is an exemption for first-time buyers purchasing residential properties for no more than 250,000. Stamp duty Shares 0.5% F6 P6
RESOURCES
The Resources section contains all the information you need to enter for your June exams, and also includes answers to your frequentlyasked questions and contact details for ACCA Connect 70 ACCA CONNECT For all enquiries, contact ACCA Connect, our global customer service centre 70 FEES Exam fees for ACCA and CAT Qualification, and Foundations in Accountancy papers and ways to pay 71 EXAM TIMETABLES Detailed exam timetable for the June 2011 exam session to help with your diary planning 72 FAQs Answers to your frequentlyasked questions about exam entry, myACCA services and certicates of achievement 73 EXAM RULES Essential advice and rules that you should be aware of before you take your June 2011 exams 73 FOUNDATIONS IN ACCOUNTANCY Find out more about ACCAs new entrylevel suite of qualifications
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RESOURCES
ACCA CONNECT
FEES
ANNUAL SUBSCRIPTION 2011 Please note as a student you are required to pay an annual subscription for each year you are registered with ACCA. This is a separate fee to your initial registration fee. Your annual subscription is due on 1 January irrespective of the month you registered. For example, if you registered in December, you will still be required to pay an annual subscription by 1 January. The payment enables ACCA to provide you with services and support to assist you with your studies and training as you work towards gaining your qualification. Students who fail to pay fees when due (including exam/ exemption fees), will have their names removed from the ACCA register. Students wishing to re-register are required to submit any amounts unpaid at the time of their removal in addition to the re-registration fee. No penalty fee will be charged. Confirmation of your unpaid fees can be obtained from your national ACCA office or ACCA Connect. The following fees and subscriptions apply (exam fees are valid for the June 2011 session): CAT students Initial subscription Re-registration Annual subscription Introductory Level exam Intermediate Level exam Advanced Level exam/exemption ACCA Qualification students Initial subscription Re-registration Annual subscription Knowledge exam/exemption Skills exam/exemption Professional exam *plus unpaid fee(s) Foundations in Accountancy students Initial registration Subscription 72 *72 62 40 40 53 72 *72 72 57 72 84
students@ accaglobal.com +44 (0)141 582 2000
For all enquiries, simply contact ACCA Connect our global customer service centre. However you want to contact us, by phone, fax, email or post, one of our expert advisers will be happy to assist you. MONDAY TO THURSDAY Open 21 hours (closed 20.00 to 23.00) FRIDAY Open 20 hours (closed 20.00 to midnight) SATURDAY Closed SUNDAY Open 09.00 to 17.00 and 23.00 to midnight (all times based on GMT/BST as appropriate) ACCA Connect 2 Central Quay 89 Hydepark Street Glasgow G3 8BW United Kingdom tel: +44 (0)141 582 2000 fax: +44 (0)141 582 2222 email: students@accaglobal.com website: www.accaglobal.com
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Dont forget to pay your fees on time. Dates by which fees and subscriptions must be paid and arrangements for payment are included in your ACCA welcome pack. Update your contact details online through myACCA, or let us know your new details by writing to ACCA Connect, or email students@accaglobal.com
CHANGE OF ADDRESS
ACHIEVING ACCA MEMBERSHIP

ACCA will now invite you to transfer to membership as soon as your records indicate that you are ready. For more information visit www. accaglobal.com/students/acca/ membership/. However, if, after the next set of results in August 2011, you think
you are ready, you can download and complete the application form available at www.accaglobal.com/students/acca/ membership/ and return it to: ACCA Customer Services, 2 Central Quay, 89 Hydepark Street, Glasgow United Kingdom, G3 8BW It will take approximately four to six weeks to process your application for membership.

Are your contact details up to date? https://www.acca-business.org
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JUNE 2011 S T W T F S M 3 4 0 31 1 2 29 3 11 7 8 9 10 6 5 7 18 14 15 16 1 12 13 4 25 21 22 23 2 19 20 0 1 2 27 28 29 3 26
JUNE 2011 EXAM SESSION
The following dates have been confirmed for the next exam session: June 2011 Week 1 6 to 10 June Week 2 13 to 15 June Exams will take place over an eight-day period with one session of exams each day. The exams will be held concurrently in five different time zones. The base starting times in each of these time zones will be: Zone 1 (Caribbean) 08.00hrs Zone 2 (UK) 10.00hrs Zone 3 (Pakistan and South Asia) 14.00hrs Zone 4 (Asia Pacific) 15.00hrs Zone 5 (Australasia) 17.00hrs. Local starting times will be set falling out from these base start times for every centre. Details of local start times can be found against each centre on the Examination Centre List accompanying your Examination Entry Form. Papers F1 to F3 are two-hour exams, and Papers F4 to F9 and P1 to P7 are three-hour exams. Monday 6 June 1* Recording Financial Transactions 6* Drafting Financial Statements F6 Taxation P6 Advanced Taxation Tuesday 7 June 2* Information for Management Control 7* Planning, Control and Performance Management F4 Corporate and Business Law P7 Advanced Audit and Assurance Wednesday 8 June 3* Maintaining Financial Records
F3 Financial Accounting MFA Financial Accounting F8 Audit and Assurance Thursday 9 June 4* Accounting for Costs F9 Financial Management P4 Advanced Financial Management Friday 10 June 5* Managing People and Systems F2 Management Accounting MMA Management Accounting P5 Advanced Performance Management Monday 13 June 8* Implementing Audit Procedures F5 Performance Management P1 Governance, Risk and Ethics Tuesday 14 June 9* Preparing Taxation Computations F7 Financial Reporting P2 Corporate Reporting Wednesday 15 June 10* Managing Finances F1 Accountant in Business P3 Business Analysis *CAT exams The latest ACCA exam rules can be found at www.accaglobal.com/ students/rules/exam_regs
LOCAL START TIMES CAN BE FOUND BY EACH CENTRE OF THE EXAMINATION CENTRE LIST.
EXAM ENTRY
The quickest and simplest way to register for your exams is to register online at myACCA (https://portal.accaglobal.com/). Registering for your exams online means: you get immediate confirmation of receipt/processing of your exam entry you get immediate validation of exam entry information
you can go back and change the exam centre youve selected you can change your law/tax variant and standards or stream should you change your mind about which exams you feel ready to take then you can amend your exam selection. You can amend your exam selection at no extra cost up until the standard exam
entry closing date of 15 April 2011 for June exams and 15 October 2011 for December exams. If youre completing a paper Examination Entry Form sent to you in February this must be received at ACCAs exam department in the UK by 15 April 2011. Please note that due to the volume of entries, you should confirm whether your exam entry has been received by viewing your status on myACCA or contacting ACCA Connect.
EXAM TIMETABLE
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RESOURCES
FREQUENTLY-ASKED QUESTIONS
I have forgotten my password. How can I request a new one? If you have forgotten your password, you can request a new one through the myACCA homepage by clicking on the forgotten your password link. You will be asked to enter your registration number and confirm some personal details. A new password will be emailed to you within 24 hours. When are results issued? Results are issued approximately nine weeks after exams are completed. All students receive a postal notification, dispatched on the same day from the UK. However, if you want to receive your results as quickly as possible, you can register to receive your results by email too. Log on to myACCA and choose the option to receive your exam results by email. Can I obtain a letter conrming I am a registered student? As soon as your registration application has been processed successfully you will receive a student information pack. As part of the information pack you will receive a welcome letter and registration card confirming your status as a student of ACCA. If you require further confirmation of your status then please contact ACCA Connect who will be able to assist you by issuing the appropriate letter. How can I order a replacement student card? In order that you may be issued with a replacement card please contact ACCA Connect. A fee of 10 is charged if you: lose your registration card change your name by deed poll. No fee is charged if you change your name by marriage. What services are offered through myACCA? There are a host of services and information available through myACCA, myACCA including: chart your progress towards achieving the ACCA Qualification enter for exams amend an existing exam entry view exam timetables and results submit your PER return record your experience by accessing and updating the trainee development matrix (TDM) access the Professional Ethics module update your personal and/or employment details make a payment change your password career services view your Oxford Brookes status. What exam certicates are awarded for the ACCA Qualication? Certificate of Achievement Students are awarded a Certificate of Achievement if they achieve a pass mark of 85% or above for individual passes in Papers F1, F2 and F3. Fundamentals Level Certificate Students are awarded a Fundamentals Level Certificate when they have successfully completed all of the exams in the Fundamentals level of the ACCA Qualification (Papers F1F9). Professional Level Certificate Students are awarded a Professional Level Certificate when they have successfully completed all of the exams in the Professional level of the ACCA Qualification (P1P3 and any two of the Options papers from P4, P5, P6 and P7).
OXFORD BROOKES BSC (HONS)

Students completing certain papers of the ACCA Qualification are eligible to apply for a BSc (Hons) in Applied Accounting from Oxford Brookes University. The degree must be completed within 10 years of your initial registration on to ACCAs professional qualification; otherwise, your eligibility will be withdrawn. Check your eligibility status at www.accaglobal.com/students/bsc/. The dates tabled below outline the forthcoming deadlines for completing the qualifying exams and the last opportunity to submit your Research and Analysis Project (RAP): First session (1) June 2000 December 2000 Final session for completing the qualifying exams (2) December 2010 June 2011 Final date for submission of RAP May 2011 November 2011
TRANSFER FROM CAT TO ACCA QUALIFICATION

Students completing the exam element of the Certified Accounting Technician Scheme are eligible to transfer to the ACCA Qualification with exemption from Papers F1, F2 and F3. This transfer is automatic for all students who stated on their initial Technician Registration Form that they wished this to take place. Such students are eligible to take the next session of the ACCA Qualification exams. If you indicated on your application that you did not wish this transfer to take place, a separate application will be required should you subsequently decide to attempt the ACCA Qualification exams.
Notes 1 First applicable exam session as confirmed at the time of your initial registration with ACCA. 2 Completion of Fundamentals level exams. Professional Ethics module Students wishing to submit their Research and Analysis Project (RAP) must complete the Professional Ethics module. For more information visit www.accaglobal.com/students/bsc/
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EXAM RULES
1 You are required to comply in all respects with any instructions issued by the registrar, exam supervisor, and invigilators before and during an exam. 2 You may not attempt to deceive the registrar or the exam supervisor by giving false or misleading information. 3 You are not allowed to take to your exam desk, possess, use, or intend to use while at that desk, any books, notes or other materials except those authorised by the registrar. If you are found to have taken to your desk, or possessed while at that desk, unauthorised materials which are relevant to the syllabus being examined, it will be assumed that you intended to use them to gain an unfair advantage in the exam. In any subsequent disciplinary proceedings, it shall be for you to prove that you did not intend to use the materials to gain an unfair advantage in the exam. 4 You may not assist, attempt to assist, obtain, or attempt to obtain assistance by improper means from any other person during your exams. 5 You are required to adhere at all times to the Instructions to Candidates, which you receive with your Examination Attendance Docket. 6 You are required to comply with the exam supervisors ruling. Supervisors are obliged to report any cases of irregularity or improper conduct to the registrar. The supervisor is empowered to discontinue your exam if you are suspected of misconduct and to exclude you from the exam hall.
Important information for ACCA students intending to take exams at the June 2011 exam session
THESE RULES ARE REPRODUCED ON YOUR EXAMINATION ATTENDANCE DOCKET YOU SHOULD TAKE TIME BEFORE THE EXAMS TO FAMILIARISE YOURSELF WITH THEM. IN ORDER TO BE ELIGIBLE TO SIT YOUR EXAMS YOU MUST SIGN YOUR DOCKET CONFIRMING YOUR AGREEMENT TO COMPLY WITH THESE RULES.
7 You may not engage in any other unprofessional conduct designed to assist you in your exam attempt. 8 You are not permitted to remove either your script booklet or your question paper from the exam hall. All exam scripts remain the property of ACCA. 9 Once the exam has started, you are not allowed to leave the exam hall permanently until the end of the session, and then only when instructed by the supervisor. These regulations are reproduced on your Examination Attendance Docket you should take time to familiarise yourself with them. In order to be eligible to sit your exams, you must sign your docket confirming your agreement to comply with these regulations. Important examination rules Mobile phones and pagers should be switched off at all times in the exam hall, and are not permitted to be taken to your desk under any circumstances. Mobile phones are not permitted on your desk even if they remain switched off. Calculators taken into the exam must comply with the regulations stated on your Examination Attendance Docket, ie they should be noiseless, pocket-sized, and they must not have a print-out facility or graphic word display facility in any language. For security reasons, the exams are held concurrently in five different time zones. Students are therefore not permitted to leave the hall permanently until the end of the exam session. Any student in breach of this regulation will be reported. In the exam hall Every effort is made to ensure that you sit your exams in the best conditions. However, if you have a complaint regarding the centre operation, you should make this known to the exam supervisor in the first instance. The supervisor will do everything within their power to resolve the matter to your satisfaction there and then. If the complaint is of a fundamental nature, ACCA will take whatever further remedial action it considers appropriate in the circumstances.
Foundations in Accountancy consists of a suite of awards, including certificates, diplomas and a revised Certified Accounting Technician (CAT) Qualification, which will first be examined in December 2011. These flexible awards focus on the core skills of financial accounting and management accounting; and the wider role of the accountant in business at higher levels. The range of awards means employers can pick the level of qualification that most appropriately meets their business needs. For students, it provides flexible entry points with certification awarded at each level, allowing students to develop their education and skills, making them an attractive and relevant choice for employers. Foundations in Accountancy awards focus on the core skills of financial accounting and management accounting; and the wider role of the accountant in business at higher levels. The range of awards means employers can pick the level of qualification which most appropriately meets their business needs. In addition, it provides students with flexible entry points with certification awarded at each level, allowing students to tailor the awards, making them an attractive and relevant choice for employers. Foundations in Accountancy contains the following qualifications: Introductory Certificate in Financial and Management Accounting awarded on the completion of exams FA1 and MA1; and Foundations in Professionalism Intermediate Certificate in Financial and Management Accounting awarded on the completion of exams FA2 and MA2; and Foundations in Professionalism Diploma in Accounting and Business awarded on the completion of exams FAB, FMA and FFA; and Foundations in Professionalism Certified Accounting Technician (CAT) Qualification. Access more information and download relevant resources at www.accaglobal. com/fia
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Learn more about ACCAs new suite of entry-level qualifications Foundations in Accountancy at www.accaglobal.com/fia
ACCA has introduced a new suite of entry-level awards collectively referred to as Foundations in Accountancy designed to act as great preparation for those who wish to progress their career to professional level, or provide recognition and reward for individuals working in accounting-support roles.

The Essential Guide: Exam Advice and Guidance For Trainees

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The Essential Guide: Exam Advice and Guidance For Trainees

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APRIL 2011

L. 11 20 LOBA RIL G AP CCA EGS 5 .A _R E1 IN WWWXAM DL EA LES ES/E L Y D RU TR AM S/RU EN X T M A E EN A C D EX AC TU /S ST TE COM LA

THE ESSENTIAL GUIDE

ALL YOU NEED TO KNOW FOR THE JUNE 2011 EXAMS

STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011

KEY DATES FOR THE JUNE 2011 EXAM SESSION

CAT EXAM DOCUMENTS ONLINE

Welcome to the STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011

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DEMONSTRATE IN-DEPTH KNOWLEDGE OR EXPLAIN

LIST KEY POINTS

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REVISION TIPS IMPROVE YOUR TECHNIQUE

JUNE 2011 MON

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PAPER F6 (UK) TAXATION

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PAPER F7 FINANCIAL REPORTING

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PAPER F8 AUDIT AND ASSURANCE

STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011

PAPER F9 FINANCIAL MANAGEMENT

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PAPER P1 GOVERNANCE, RISK AND ETHICS (FORMERLY PROFESSIONAL ACCOUNTANT)

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PAPER P2 CORPORATE REPORTING

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