Financial Accounting

INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN EXAMINERS’ COMMENTS SUBJECT Financial Accounting

SESSION Intermediate Examinations - Spring 2009

OVERALL FEEDBACK Overall performance of the candidates was below average. Inadequate practice and selective study were evident in most of the scripts. It was also noted in many scripts that students did not show the necessary working even in the case of question number 3 although it was clearly mentioned in the question. QUESTION-WISE COMMENTS Q.1

(a) It was an easy question from IAS-38 “Intangible Assets” and well attempted by majority of the candidates. However, few candidates tried to explain the determination of residual value and review of useful life of intangible assets, which was not required. (b) An average response was seen in this question which required preparation of ledger accounts of “Goodwill” and “Brand”. The common mistakes were as follows:

Q.2

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Instead of preparing the ledger accounts, journal entries were prepared, which were not required.

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It was clearly mentioned in the question that fair value of assets did not include intangible asset i.e. Brand. Most of the students ignored this fact while computing the goodwill.

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Many students recorded the reversal of impairment of goodwill whereas IAS-36 ‘Impairment of Assets’ clearly prohibits such reversal, in subsequent periods.

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Most students calculated the revised amortization of Brand (after impairment) for the year ended December 31, 2008 on the basis of 10 years instead of remaining 9 years.

A very disappointing performance was witnessed in this question, which tested students’ knowledge of IAS-37 “Provisions, Contingent Liabilities and Contingent Assets”. Many candidates whose conclusions as regards the recognition or non-recognition of provision were correct, did not provide any justification to support their point of view. It should be noted that proper justification in support of the conclusion drawn is more important than the conclusion itself.

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Examiners’ Comments on Financial Accounting – Spring 2009 Examinations The other common mistakes were as follows: (a) A large number of candidates incorrectly concluded that it was an adjusting event because the tanker fell into the canal before the year end. In this situation, since the company had no legal or constructive obligation at year end, no provision was required to be made. The obligation arose when the Board of Directors decided to clean the canal i.e. on July 26, 2008. Hence the provision was required to be made after year end. (b) It was a non-adjusting event because indication of decline in NRV was observed after the year end. However, most of the students ignored this fact and concluded that the company should record the inventory at NRV. Many students who correctly concluded that it was a non-adjusting event, failed to point out that disclosure should be given in the financial statements for the year ended June 30, 2008, if the amount was material. (c) Two issues were involved in this question i.e. the accounting treatment of claim lodged by the customer and the treatment of company’s claim of damages from the supplier. Many candidates correctly concluded that full provision should be recognized for the claim lodged by the customer but failed to provide any/proper justification to support their conclusion. As regards the amount recoverable from the vendors, two types of opinions were expressed. Some students suggested that since the company is sure about the recovery, the amount may be recognized as a receivable whereas the others pleaded that the company is anticipating recovery but is not sure about it and hence the amount should not be recognized as receivable. Both the justifications were considered correct. However, those who were in favour of recognizing the amount as receivable, made the following mistakes:

Q.3

(i)

Many of them recommended that the amount receivable should be netted off against the amount payable to customer which is not allowed under IAS-37. It must be noted that the IAS allows netting off the expenses and the reimbursable amount in the Statement of Comprehensive Income but not in the Statement of Financial Position.

(ii)

The majority could not specify that the amount to be recognized as receivable should be limited to Rs. 2.0 million i.e. the amount payable to the customer.

An average performance was seen in this simple question which required preparation of Statement of Cash Flow, in accordance with IAS-7. Most of the time the presentation was poor. Use of incomplete headings and incorrect head of accounts were evident in majority of the scripts. Some of the common examples are as follows: • •

Instead of writing “Cash flow from Operating / Investing / Financing Activities”, many students just wrote “Operating / Investing / Financing” Cash and cash equivalents at the beginning of the year was written as opening balance. Page 2 of 4

Examiners’ Comments on Financial Accounting – Spring 2009 Examinations •

Proceeds from issue of shares were disclosed as Share Premium Account.

The other common errors were as follows:

Q.4

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Many students did not adjust the impact of advance tax and accrued financial charges while computing the increase/decrease in “Advances and Other Receivable” and “Creditors, Accrued and Other Liabilities”, respectively.

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Many students included deferred tax expense in the calculation of tax paid.

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Most of the students ignored the fact that the closing balance of deferred liabilities included deferred tax liability of Rs. 2.20 million. They treated the whole of it as provision for gratuity and therefore erred in calculating the amount of gratuity paid during the year.

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Quiet often, Gratuity payment was classified as a part of financing activity instead of operating activity.

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While calculating the amount of dividend paid during the year, many students used the amount of dividend declared for the year 2008, instead of using the dividend for the year 2007, which was actually paid.

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Majority of the candidates did not adjust the bonus shares issued during the year, while computing the proceeds from issue of shares.

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A large number of students showed the payments related to current and longterm portions of long term loan separately. Some of them showed the former as part of Operating Activities and the latter as part of Financing Activities.

Part (a) of this question required the candidates to calculate the amount of cash to be contributed by the partners on the merger of two partnerships. An average performance was observed. The common mistakes were as under: •

Goodwill was computed as 10% of the total assets instead of total net assets.

•

Surprisingly, few students merged the realization accounts of both the firms and computed the combined profit and loss on revaluation of both the firms, for the purpose of allocation between the partners. These types of mistakes show the pathetic standard of some of the students.

•

Gain or loss on realization was allocated equally between the partners instead of their old profit and loss sharing ratio.

•

The additional contribution of Rs. 1,000,000 of Mr. Ghalib should have been allocated to the existing partners only. Instead, it was allocated to all the partners including Mr. Ghalib.

Part (b) of the question was well attempted. The only significant mistake was that the amount of goodwill was not disclosed in the opening statement of financial position.

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Examiners’ Comments on Financial Accounting – Spring 2009 Examinations Q.5

Q.6

Overall performance of the candidates was satisfactory in this question on Current and Deferred Taxation. The common errors were as follows: •

Financial charges which were capitalized were not deducted as an admissible expenditure.

•

Brought forward losses were ignored while computing the amount chargeable to tax, for the year.

•

Most of the students did not compute the timing differences on account of leased assets, borrowing cost capitalized, provision for gratuity and obligation against assets subject to finance lease.

•

Some students showed the obligation against assets subject to finance lease as tax base corresponding to the amount of carrying value of leased assets. Both the items were independent of each other and should have been shown separately. This was principally incorrect although there was no impact on the final answer.

•

The brought forward losses at the beginning of the year were fully set off against the current year’s profit. Some students could not assess the situation properly and added the deferred tax related to the opening balance of the brought forward losses, in the closing balance of the deferred tax liability.

This question required preparation of relevant extracts from the statement of changes in equity, which was to be prepared after incorporating the effect of prior year errors and changes in accounting policy. The candidates were mostly successful in calculating the effect of adjustment because of error and change in accounting policy. However, very few of them managed to make proper disclosures of the effect of adjustments, in the statement of changes in equity. Some of the commonly observed mistakes were as follows: •

A large number of students did not have any idea of a statement of changes in equity. They are advised to consult the financial statements of any reputed listed company.

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Many students showed the opening balances related to 2006 and 2007 without incorporating any adjustments.

•

Few candidates adjusted the profit for each year by incorporating the effect of change in accounting policy only on closing inventory and ignored the corresponding effect on each year’s opening inventory.

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Most of the candidates failed to mention the word “restated”. It is an important disclosure and was required to be mentioned at three different places in the statement of changes in equity.

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Many candidates incorrectly considered the change in accounting policy for the valuation of inventories as a change in accounting estimate and therefore ignored its effect on the previous years’ retained earnings. (THE END)

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