Financial Reporting

(FR)
Mar / June 2021
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.

Contents
General comments .............................................................. 2
Section A ............................................................................. 3
Question 1 ........................................................................ 3
Question 2 ........................................................................ 4
Question 3 ........................................................................ 5
Question 4 ........................................................................ 7
Section B ............................................................................. 9
Question 1 ...................................................................... 10
Question 2 ...................................................................... 11
Question 3 ...................................................................... 12
Question 4 ...................................................................... 13
Question 5 ...................................................................... 14
Section C ........................................................................... 16
Pastry Co ....................................................................... 16
Requirement (a) – 6 marks ........................................ 16
Requirement (b) – 14
Examiner’s report marks
– FR ......................................
March/June 2021 17 1
Gold Co .......................................................................... 19
Requirement (a) – 6 marks ........................................ 20
Requirement (b) – 14 marks ...................................... 21
General comments

This examiner’s report should be used in conjunction with the published March/June
2021 sample exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.

The Financial Reporting (FR) exam is offered as a computer-based exam (CBE). The
model of delivery for the CBE exam means that candidates do not all receive the same
set of questions.

• Section A objective test questions – we focus on four specific questions that

caused difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at one specific question
that was challenging for candidates.
• Section C constructed response questions – here we provide detailed
commentary around two constructed response questions and identify some of
the main issue that have affected candidates’ performance in this section of the
exam, identifying common knowledge gaps and offering guidance on where
exam technique could be improved, including in the use of the CBE functionality
in answering this question.

Examiner’s report – FR March/June 2021 2

Section A

Here we look at FOUR Section A questions which proved to be challenging for

candidates.

Question 1

Which of the following is NOT included in the International Accounting

Standards Board’s (IASB) definition of an asset in the Conceptual Framework
for Financial Reporting?

Options:

A. The asset is controlled by the entity

B. The asset is a present economic resource
C. The economic resource can be reliably measured
D. The asset exists as a result of past events

What does this test?

This question tests learning outcome A2(b) where candidates must be able
to define the various elements of the financial statements and apply the
recognition criteria in accordance with the Conceptual Framework for
Financial Reporting (the Conceptual Framework).

Candidates must appreciate that all areas of the syllabus can be tested in
the exam. Highly narrative parts of the FR syllabus are often ignored by
candidates in favour of focussing on other areas, but candidates must ensure
they have a breadth of knowledge covering all syllabus areas.

What is the correct answer?

The correct answer is C – The economic resource can be reliably measured.
The Conceptual Framework defines an asset as follows:
‘An asset is a present economic resource controlled by the entity as a result
of past events.’
Therefore, the only statement that is NOT included in the definition of an
asset is C.

Where did candidates go wrong?

The most common options selected were either B or D. This implies that many
candidates are not familiar with the terminology from the Conceptual Framework
regarding the definitions of the elements of financial statements.

Although individual IFRS Standards may require an entity to be able to reliably

measure an asset before recognising it, this is not part of the definition of an asset.

Examiner’s report – FR March/June 2021 3

Question 2

Platinum Co acquired 80% of the ordinary share capital of Palladium Co on 1

April 20X0 by means of cash and contingent consideration. At this date,
Platinum Co assessed the fair value of contingent consideration at $250,000.

Platinum Co calculates non-controlling interest, using the fair value at the

date of acquisition, which was estimated to be $100,000 and the goodwill
arising on acquisition was $300,000.

The following figures for Palladium Co are relevant:

$'000
Ordinary shares of $1 each at
acquisition 500
Retained earnings at 1 January 20X0 (300)
Profit for the year ended 31
December 20X0 120

The profits for Palladium Co have accrued evenly throughout the year.

What was the cash consideration paid by Platinum Co for the

investment in Palladium Co?

$ ____________

What does this test?

This question tests learning outcome D2(a) which is related to preparing
consolidated financial statements. Although accounts preparation will be tested in
some form as part of the constructed response questions in Section C of the exam,
both section A questions and the questions in section B can cover any area of the
syllabus, including accounts preparation.

In this particular question, candidates must use their knowledge of how to calculate
goodwill in order to identify the missing cash figure.

What is the correct answer?

The correct answer is $180,000. Some workings have been provided below which
could have been adopted in the exam. They take the form of preparing a goodwill
calculation using the figures provided in the question and then establishing the cash
consideration as a balancing figure:

Examiner’s report – FR March/June 2021 4

 $'000 $'000
Fair value of consideration transferred:
Cash consideration ?
Contingent consideration 250
Plus fair value of NCI at acquisition 100

Less fair value of net assets acquired:

Shares 500
Retained earnings/(losses) at acquisition (W1) (270) (230)
Goodwill at acquisition 300

Therefore $180,000 is the balancing figure related to the cash consideration

W1 – Retained earnings at acquisition $'000

Retained earnings/(losses) at 1 January 20X0 (300)
Profit to the date of acquisition (120 x 3/12 months) 30
Retained earnings/(losses) at acquisition (270)

Where did candidates go wrong?

Many candidates answered with $150,000 instead of $180,000. This comes from
only including the $500,000 shares in the list of net assets acquired and ignoring the
retained losses brought forward and profit to the date of acquisition.

Although candidates may be more used to seeing a positive value for retained
earnings, they would be expected to recognise that retained losses should be
included as part of the net assets acquired and to calculate this appropriately.

Question 3

Indicate, by clicking on the relevant boxes in the table, whether the

following statements are true or false in relation to accounting for the
acquisition of a subsidiary.

Examiner’s report – FR March/June 2021 5

What does this test?
As with the previous question, this question also tests candidates’ accounts
preparation knowledge, this time through learning outcome D2(g). The focus here is
on accounting for goodwill and bargain purchases.

What is the correct answer?

Statement 1 – True
Statement 2 – True

A gain on bargain purchase will be credited to the consolidated statement of profit or

loss immediately. It is not recognised in the consolidated statement of financial
position.

If liabilities are overstated, then the net assets would be understated. This would
cause any goodwill recognised to be overstated.

For example, the calculations below illustrate the impact of preparing a goodwill
calculation for acquiring 100% of the share capital of a subsidiary for $100,000 cash.
For the purposes of this illustration, we will assume that the correct fair value of the
net assets acquired were $75,000. In one calculation, the liabilities have been
overstated by $30,000, causing the net assets to be incorrectly included in the
calculation at $45,000 ($75,000 - $30,000). In the second calculation, the liabilities
are not overstated, and the net assets are included at their correct fair value of
$75,000:

Liabilities
Liabilities NOT
overstated overstated
$'000 $'000
Fair value of consideration transferred 100 100
Less net assets acquired (45) (75)
Goodwill at acquisition 55 25

As you can see, overstating the liabilities causes the goodwill to be overstated.

Where did candidates go wrong?

Many candidates knew that statement 1 was true but thought that statement 2 was
false. Although not necessary, approaching this question by using some invented
numbers in a basic goodwill calculation may have helped candidates to visualise the
fact that overstating liabilities reduces net assets and consequently will overstate
goodwill.

Examiner’s report – FR March/June 2021 6

Question 4

What does this test?

This question tests learning outcome B11(a) where candidates should be able to
apply the provisions of relevant IFRS Standards in relation to accounting for
government grants.

In this question, Pootle Co has recognised the full government grant as income in the
statement of profit or loss for the year ended 31 December 20X4. Candidates must
realise that some of the grant should have been recorded as deferred income and an
appropriate correcting journal entry is required.

What is the correct answer?

$60,000 / (5 years x 12 months) = $1,000 per month

So, Pootle Co should have only recognised $4,000 ($1,000 x 4 months) of income
in the statement of profit or loss for the year ended 31 December 20X4, with the
remaining $56,000 recognised as deferred income in the statement of financial
position.

The correcting journal entry required is therefore:

Dr Other Income $56,000

Cr Total deferred income $56,000
Examiner’s report – FR March/June 2021 7
Where did candidates go wrong?
Although the most common answer selected was the correct one, there were a
variety of other choices made by candidates which indicate some difficulty with the
concept and approach required.

There are effectively three elements that candidates must do correctly here:
1. Select the correct accounts to adjust;
2. Identify which account should be debited and which should be credited; and
3. Calculate the amount required for the correcting journal

Other income must be adjusted as too much income has been recognised in the
statement of profit or loss. To reduce a credit account such as other income, it must
be debited.

Candidates should realise that no adjustment is required to bank as this has

already been accounted for correctly on receipt of the cash. Therefore, they must
establish that it is deferred income (liability) that should be adjusted by crediting
total deferred income rather than adjusting total accrued income (asset).

The value to be included in the journal will be the same for both debit and credit.

The values available to be selected were:

1. $4,000 – this is the amount of income that should have been recognised,
rather than the $56,000 adjustment required to correct the error
2. $48,000 – this figure meant that a full year’s worth of income was recognised,
rather than just four months
3. $56,000 – this is the correct response and means that only four months of
income are recognised
4. $57,000 – this figure recognised three months of income rather than four
months

Examiner’s report – FR March/June 2021 8

Section B

Section B tests candidates’ knowledge on a number of IFRS Standards in more depth

than section A, with three case questions containing five two-mark objective test
questions.
We have selected one of the cases that examined IAS 38 Intangible Assets. You
should note a case will be a mixture of narrative and calculation questions and can
also include different styles of OT questions similar to those used in section A.
Candidates should also read the case scenario and its requirements carefully. As
these questions score either 2 marks or zero marks, it is important that candidates do
not misread or miss any information in the scenario. Close reading of the
requirements is also important to identify any specific instructions such as rounding.
Section B – Scenario
Wilrob Co has the following research projects at 31 March 20X7:

Project 324 – The project commenced on 1 April 20X6 and incurred total costs
of $15m during the period to 31 December 20X6 on a pro-rata basis. On 30 June
20X6, the directors were confident that the project met the capitalisation criteria
of IAS 38 Intangible Assets. The project was completed and began to generate
revenue from 1 January 20X7. It is estimated that the project will generate
revenue for five years.

Project 325 – The project commenced on 1 September 20X6. Costs of $20,000

per month were incurred until 31 January 20X7 when the project was
abandoned. The specialist equipment that had been purchased for Project 325
was transferred for use in another of Wilrob Co's research projects.

Project 326 – The project commenced on 1 January 20X7. Costs of $40,000 per
month were incurred until 31 August 20X7 when the directors increased the
spend to $60,000 to complete the project quickly as a potential buyer had been
identified on 20 July 20X7. The directors had not been confident of the success
of the project until this point.

Examiner’s report – FR March/June 2021 9

Question 1

Which TWO of the following are required by IAS 38 Intangible Assets in

relation to the amortisation of intangible assets (excluding goodwill)?
Options:
A. Intangible assets should be amortised over the expected useful life or not
at all if the useful life is deemed to be indefinite
B. Intangible assets should not be amortised but instead reviewed for
impairment losses only
C. Intangible assets should be amortised on the basis of the expected
pattern of consumption of the expected future economic benefits
D. Intangible assets should not be amortised or impaired and instead simply
carried forward at their original cost until sold or scrapped
What is the correct answer?
The correct responses are:

A – Intangible assets should be amortised over the expected useful life or not
at all if the useful life is deemed to be indefinite
C – Intangible assets should be amortised on the basis of the expected
pattern of consumption of the expected future economic benefits

Amortisation is the systematic allocation of the depreciable amount of an intangible

asset over its useful life. It serves the same function as depreciation for a tangible
non-current asset.

Where the intangible asset has a finite useful life, it should be amortised. A variety of
amortisation methods can be used (e.g. straight-line or reducing balance method).
The method used should be selected on the basis of the expected pattern of
consumption of the future economic benefits.

Some intangible assets may have an indefinite useful life (i.e. there is no foreseeable
limit to the period over which the asset is expected to generate net cash inflows for
the entity) – this includes goodwill. In such cases, these intangible assets are not
amortised but are instead tested for impairment annually and whenever there is an
indication that the intangible asset may be impaired.

Option B is not correct as this would only apply to intangible assets with an indefinite
useful life (such as goodwill). It does not apply to intangible assets as a whole and
the question specifically excluded goodwill.

Option D is not correct and would lead to intangible assets being overstated in the
accounts.

Where did candidates go wrong?

Most candidates got this question right and, in particular, candidates tended to know
that option A was correct, even if they did not also select option C.

The second most common answer was to select options A and B together. This
implies that some candidates were rushing or did not read the question carefully
enough, perhaps not examining each option available or whether their selections
Examiner’s report – FR March/June 2021 10
make sense together. It is important to read each question carefully and to realise
that option B could not be the correct response as IAS 38 does not apply this rule to
all intangible assets and option A already identifies that intangible assets with an
indefinite useful life should not be amortised.

Question 2

Which TWO of the following statements are true in relation to IAS 38

Intangible Assets?
Options:

A. IAS 38 requires the revaluation of intangible assets where a company has

chosen to revalue its tangible non-current assets
B. IAS 38 does not permit the revaluation of any intangible assets in any
circumstances
C. IAS 38 permits the revaluation of intangible assets only if there is an active
market for such assets
D. IAS 38 requires that the initial recognition of intangibles must be at cost

What is the correct answer?

The correct responses are:

C – IAS 38 permits the revaluation of intangible assets only if there is an

active market for such assets

D – IAS 38 requires that the initial recognition of intangibles must be at cost

An entity’s accounting policy for intangible assets is separate to its accounting policy
for tangible non-current assets. Intangible assets must be measured initially at cost,
but subsequently it is possible to measure certain intangible assets under the
revaluation model where, after initial recognition, intangible assets will be carried at a
revalued amount. However, it is only possible to hold intangible assets under the
revaluation model where an active market exists for such assets.

In practice, this means that most intangible assets will not be measured under the
revaluation model. IAS 38 states that it is uncommon for an active market to exist for
an intangible asset, although it may happen (e.g. for freely transferable intangible
assets such as taxi licences, fishing licenses or production quotas). An active market
cannot exist for intangible assets such as brands, patents or trademarks because
each asset is unique and the price paid for one asset may not provide sufficient
evidence of the fair value of another. Such prices are also often not available to the
public.

Where did candidates go wrong?

Selecting option A was a common mistake. Candidates should take care to realise
that tangible non-current assets and intangible assets are entirely different. Different
IFRS Standards apply to each and revaluing intangible assets is actually quite

Examiner’s report – FR March/June 2021 11

uncommon. There is certainly no requirement to revalue intangible assets simply
because tangible non-current assets are revalued.

Question 3

In accordance with IAS 38 Intangible Assets, what is charged to the

statement of profit or loss for the year ended 31 March 20X7 in respect of
project 324?
Options:

A. $5.5m
B. $6.5m
C. $7m
D. $10m

What is the correct answer?

The correct answer is A – $5.5m.

The $15m of project costs incurred between 1 April 20X6 and 31 December 20X6
cover a nine-month period.

As the project did not meet the capitalisation criteria of IAS 38 until 30 June 20X6,
this means that any costs related to the first three months of the year (1 April 20X6 –
30 June 20X6) were research expenditure which should be charged to the statement
of profit or loss:

$15m x 3/9 months = $5m

Therefore, the remaining $10m ($15m x 6/9 months) would be capitalised as

development expenditure. As the project was completed and began to generate
revenue from 1 January 20X7, the capitalised development expenditure should then
be amortised from that date over its useful life of five years. This requires an
amortisation expense for three months (1 January 20X7 – 31 March 20X7) which
should be charged to the statement of profit or loss:

$10m / 5 years x 3/12 months = $0.5m

Therefore, the total charge to the statement of profit or loss in respect of project 324
for the year ended 31 March 20X7 consists of:

Research expense $5m

Amortisation expense $0.5m
Total charge to statement of profit or loss $5.5m

Where did candidates go wrong?

Candidates who selected $6.5m charged nine months of amortisation to the
statement of profit or loss rather than three months (i.e. charged $1.5m of
Examiner’s report – FR March/June 2021 12
amortisation from the date that the development expenditure criteria was met rather
than from when the asset was available for use on 1 January 20X7).

Candidates who selected $7m charged a full year of amortisation with no pro-rating
at all.

Candidates who selected $10m ignored the initial research expense which should
have been charged to the statement of profit or loss and wrote off the entire $10m of
development expenditure.

Question 4

In accordance with IAS 38 Intangible Assets, which of the following is/are true
or false in respect of the accounting treatment of projects 325 and 326?

accounting treatment of projects 325 and 326?

What is the correct answer?

Statement 1 – True
Statement 2 – False
Statement 3 – False

Examiner’s report – FR March/June 2021 13

 Where did candidates go wrong?
Candidates needed to select the correct option for all three statements to be
awarded credit.

Most candidates knew that statement 1 was true – if the cost were not expensed to
the statement of profit or loss it would be capitalised on the statement of financial
position as an asset, which would not be appropriate for an abandoned research
project.

Although most candidates selected the correct response for each of the three
statements, the second most common response was to select statement 2 as being
true which is incorrect. IAS 16 Property, Plant and Equipment would apply to the
specialist equipment used in project 325. In accordance with IAS 16, depreciation of
the asset would begin when it was available for use. As it was being used for this
project, then it should be depreciated and it makes no difference that the project was
abandoned.

Statement 3 tested how well candidates know the requirements for the development
phase of an internally generated intangible asset (i.e. when it meets the criteria to be
capitalised as an asset on the statement of financial position). The requirements for
this are quite strict and prescriptive, including being able to demonstrate how the
intangible asset will generate probable future economic benefits. Since the directors
were not confident of the success of the project at the year end, it would not have
been possible to recognise this project as an intangible asset and any costs incurred
should instead be expensed to the statement of profit or loss.

Question 5

During the year ended 31 March 20X8, Wilrob Co incurred the following costs:
(1) $400,000 in staff costs incurred in updating a computerised record of potential
customers
(2) $800,000 for the purchase of a domain name for the website of a company
making substantial online sales
(3) $4m for a patent purchased to improve the production process, with an
expected useful life of three years

Which of the above costs would be capitalised as intangible assets in

accordance with IAS 38 Intangible Assets?

Options:
A. 1 only
B. 3 only
C. 2 and 3 only
D. 1, 2 and 3

Examiner’s report – FR March/June 2021 14

What is the correct answer?
The correct answer is C – 2 and 3 only.

An intangible asset can be recognised when it meets:

1. the definition of an intangible asset; and
2. the recognition criteria.

An intangible asset is an identifiable non-monetary asset without physical substance.

An intangible asset can only be recognised if it is probable that the expected future
economic benefits that are attributable to the asset will flow to the entity and the cost
of the asset can be measured reliably.

Both the domain name and the patent meet the definition of being intangible assets
and the cost of each can clearly be measured reliably. Based on the information
available, it appears that economic benefits will flow to the entity through revenue
from online sales (domain name) and production cost savings (patent).

Internally generated customer lists are specifically excluded by IAS 38 from being
recognised as intangible assets (along with other items such as internally generated
brands). This is because any expenditure incurred on such items cannot be
distinguished from the cost of developing the business as a whole.

Where did candidates go wrong?

The most common error was to select that only the patent should be capitalised.
Therefore, while most candidates recognised that the costs relating to the customer
list should not be capitalised, many also thought that the website domain name
should also not be capitalised.

The costs incurred on developing this website would be subject to the requirements
of IAS 38, which would include the $800,000 spent to purchase the domain name.
Although certain costs relating to web design may be expensed to the statement of
profit or loss in accordance with IAS 38, any costs incurred in purchasing a domain
name should be capitalised as an intangible asset.

Examiner’s report – FR March/June 2021 15

Section C

We have selected two constructed response questions, Pastry Co and Gold Co,
that are available on the ACCA Practice Platform. Pastry Co is a financial
statements analysis and interpretation question for a single entity, while Gold Co is
a consolidated financial statements preparation question. When using the following
detailed commentary, it would be helpful to consult the questions and answers
available to you here.

Pastry Co
Pastry Co shares similarities with recent questions examined on the syllabus area
of analysis and interpretation of the financial statements (syllabus section C). The
question contained both numerical information and additional information relating
to two companies, Cook Co and Dough Co, that are potential acquisition targets for
Pastry Co.

Analysis and interpretation is an important area of the syllabus and will continue to
be examined. As in previous examination sessions, most candidates failed to score
high marks on this question. The reason for this seemed to be poor exam technique
by not addressing the requirements or not adequately using the information in the
scenario. The focus for this detailed commentary will be on getting the most out of
the question, rather than simply recreating the suggested solution and will highlight
the importance of using the scenario when constructing an answer to an interpretation
question.

Requirement (a) – 6 marks

Requirement (a) involved some restating of financial statements to make them

comparable. In a single entity interpretation question, it is not uncommon for
candidates to be asked to make some adjustments to figures before calculating ratios.
These adjustments could be to alter financial statements for an accounting policy (e.g.
to remove a revaluation, as in this question) or to correct errors in order to make
Examiner’s report – FR March/June 2021 16
financial statements more comparable. This is done to test a candidate’s knowledge of
double-entry and IFRS Standards, in addition to providing the analysis required.
The adjustments in (a) had mixed results. Some candidates applied another
revaluation, rather than removing the revaluation to prepare the results as if Dough Co
had used the cost model. Other candidates omitted the adjustments completely,
scoring no marks on the section.

A trickier area that candidates struggled with was to adjust for the extra depreciation
that would no longer be incurred if the cost model had been used. Also, only a minority
of candidates remembered that any adjustment they made to the statement of profit or
loss would also be reflected within the retained earnings.

Candidates were then required to recalculate ratios based on their adjustments in (a).
As always, the ‘own figure’ rule was applied here. This means that if candidates had
made errors on the earlier adjustments of their financial statements they were given
the marks for using their own adjusted figures, even if they were incorrect.

As an example, a candidate may have added $30 million to the revaluation surplus,
rather than deducting it as they should have done. As long as they showed their
working in their return on capital employed (ROCE) calculation, they would get the full
follow through marks, even though their capital employed figure was $60m higher than
it should have been.

The use of the ‘own figure’ rule means that the only candidates who would not score
full marks on the ratio calculations were those who either did not know the formulae for
those ratios or those who did not provide workings. If a candidate made an error in
adjusting their figures and then did not provide a working for their adjusted ratio, it was
difficult to see how they had arrived at the calculations. Markers will not try to guess or
assume what the candidate has done, so it is essential that detailed workings are
shown.

Requirement (b) – 14 marks

The FR examinations team have mentioned this in most of the examiners’ reports
which have been written, but it is absolutely essential that candidates use the
information in the scenario in answering the question. Far too many candidates are still
trying to answer analysis questions with explanations rote learned from a textbook.
This means that answers are often generic and bear no relevance to the scenario in
front of them. It is important that candidates understand possible reasons for the
movements in ratios but then use the scenario to fully explain the performance of the
entities.

Candidates can approach this in any way they see fit, although candidates working
their way from top to bottom generally seem to score higher. These candidates discuss
movements in revenue, gross profit margin, operating profit margin and then go on to
ROCE.

Examiner’s report – FR March/June 2021 17

Weaker candidates start with ROCE, explaining how ROCE is made up. This is not
needed in the exam, as we are looking for candidates to explain the reasons for
movements rather than explaining the definitions of ratios.

From the Pastry Co scenario, the following facts can be established from information
provided in the narrative:

• Both companies are in the catering industry

• Dough Co sells to the public, whereas Cook Co is a wholesaler selling to coffee
shops
• Dough Co has expensive city-centre premises, whereas Cook Co has a low-
cost production facility
• Dough Co revalues its property, whereas Cook Co uses the cost model
• Dough Co charges amortisation of research and development (R&D) to
operating expenses, whereas Cook Co charges it to cost of sales.
• Dough Co had $2.5m R&D expense, whereas Cook Co had $1.2m.
• Dough Co pays its directors a salary of $560,000, whereas Cook Co pays its
directors $110,000.
The above information is all we know about the two businesses. All of the comments
or suggestions made by candidates should be based around that information. Any
answer that does not incorporate the above information will not score highly as the
reasons given for differences would be based on guesswork rather than the given
scenario.

A good answer discussed the differing customers that the two companies sold to,
comparing the margins made as a retailer to that as a wholesaler in assessing the
gross profit margin. This could then be developed further by talking about the differing
levels of R&D expense in the two companies, which affects the margins but also
highlights the potential future benefits that may arise.

It would then be hoped that candidates would go on to explain the impact of the
property costs and salary costs on the ratios, discussing how that may fit into the
strategy of each company. Only the very best candidates considered that Cook Co’s
directors may be taking a smaller salary to ensure profits remain high to possibly sell
the company on.

When discussing ROCE, the candidates should have been comparing the vastly
different retained earnings figure, coupled with the difference in loan notes balances.
Some candidates were able to do that and to attempt to explain why this may be, but
other candidates simply stated which company was the most efficient based on which
had the highest ratio.

Candidates who tended to score the highest marks were able to discuss how the
results looked dramatically different when Dough Co’s accounting policies were
brought in line with Cook Co, showing how the choice of accounting policy from a
company can significantly affect its results.

Overall, the standard of narrative was disappointing in responses to this question.

Answers were either too brief or too generic. The golden rules for candidates to think
about to produce a good answer are:

Examiner’s report – FR March/June 2021 18

• Use the scenario – any answer not based on this will not score well
• One mark per well explained point
• Talk about all key areas (revenue in particular), even if it’s not in a ratio
calculation
• Always say WHY ratios or figures have changed or are different
If a candidate follows these rules, they will be able to score well in this type of question.
Unfortunately, far too many candidates seem to be content with learning ratio
definitions and trying to repeat these in the exam.

Gold Co
Gold Co is a fairly straightforward consolidated financial statements question from
syllabus area D2. In this type of question, you may be asked to prepare a consolidated
statement of profit or loss or a consolidated statement of financial position for a simple
group (parent and subsidiary). This type of question may also require you to account
for an associate company.

Overall, this question is worth 20 marks, giving you 36 minutes of your exam time to
answer the entire question (180 minutes/100 marks = 1.8 minutes per mark x 20
marks). It is suggested that you break this down further into the component
requirements of the question. For example, requirement (a) is worth 6 marks overall
and therefore you should allocate 11 minutes of your exam time to this (10.8 minutes
to be precise) and the remaining 25.2 minutes would be allocated to requirement (b).
Please note, you are not expected to answer the requirements in chronological order
so if you wish to complete (b) first that is acceptable. However, this may not be possible
for some questions, depending on the nature of the requirements.

In this type of question, it is absolutely vital that you present your workings clearly for
the marking team. These can either be shown separately or can be included within a
cell in the spreadsheet. If you calculate an amount on the calculator tool incorrectly
and do not show the working, the marking team will not be able to award any own
figure marks.

Examiner’s report – FR March/June 2021 19

Requirement (a) – 6 marks

The calculation of goodwill is a standard adjustment in consolidated financial

statements. When candidates are asked to prepare a consolidated statement of
financial position, the calculation of goodwill is generally dealt with very well. When it
is part of a standalone requirement, some candidates appear to struggle with its
preparation. It is important to note that you could be asked to prepare any of the
adjustments typically associated with a consolidated statement of financial position as
a standalone requirement (e.g. goodwill, non-controlling interest (NCI), consolidated
retained earnings and the investment in associate). It is therefore important that you
understand the make-up of these workings rather than rote-learning an approach to a
consolidated statement of financial position.

Goodwill on acquisition is typically calculated as follows:

$’000
Cost of investment X
NCI at acquisition X
Fair value of net assets at acquisition (X)
Goodwill on acquisition X

The cost of investment in this question is comprised of two elements – a share

exchange and a deferred cash payment, due one year after acquisition.

While many candidates calculated the share exchange correctly, there were common
errors made by some. These errors typically arose where candidates used the incorrect
number of shares in their calculation or, more commonly, the incorrect share price. You
are told in the question that Gold Co acquired 90% of Silver Co’s 16 million $1 equity
shares, therefore they have purchased 14.4 million equity shares. It is this number of
shares that should be used in the share exchange calculation. Some candidates
incorrectly used the full 16 million equity shares in the exchange calculation.

Gold Co issued 8.64 million shares in the exchange (14.4 million shares x 3/5) and
these must be measured at fair value. Many candidates incorrectly used the share
price of $3.50 relating to the value of Silver Co’s shares at acquisition. As Gold Co
issues the shares as part of the acquisition, these shares must be valued using Gold
Co’s share price at acquisition of $8.00.

The deferred cash payment was generally dealt with very well. There were some
surprising calculations though that made use of both the discount factor of 0.9091 that
was given in the question followed by a further application of the discounting formula.
This part of the calculation should have been straightforward and candidates simply
needed to multiply $34.848 million (14.4 million shares x $2.42) by 0.9091 to get the
fair value of the deferred consideration at the acquisition date of $31.680 million. Some
candidates used the discounting formula instead which was also acceptable ($34.848
million x 1/1.11) and marks were awarded accordingly by the marking team.

The NCI at acquisition is to be measured at fair value in the Gold group. Often
candidates will be given this fair value, however in this question, NCI needed to be
Examiner’s report – FR March/June 2021 20
calculated. There were numerous mistakes made by candidates when arriving at this
amount. Remember, the fair value of NCI at acquisition is found by taking the number
of shares the NCI still own, multiplied by the subsidiary share price at acquisition. In
this question this was found as 1.6 million shares (16 million shares x 10%) x $3.50.

Finally, the fair value of net assets at acquisition can be prepared. These should initially
comprise the share capital of Silver Co and its retained earnings at 1 January 20X2.
The retained earnings at acquisition are often incorrectly calculated. In note (1) you
are told the retained earnings of Silver Co at 1 October 20X1 only. So the retained
earnings at acquisition should be $56 million + (3/12 x Silver Co’s profit for the year
($9.920 million)) this would reflect the opening retained earnings, plus the profit made
before Gold Co took control of Silver Co.
There were two net asset fair value adjustments in this question, and details for these
were outlined in note (2). The adjustment to plant was generally dealt with well,
although some candidates incorrectly tried to adjust fair value depreciation within the
calculation of goodwill. Again, this would not be necessary as you are using the fair
values that exist at the date Gold Co takes control. Surprisingly, despite being tested
before, many candidates omitted the fair value adjustment in respect of the contingent
liability entirely. In accordance with IFRS 3 Business Combinations, the contingent
liability was part of net assets acquired and should be included at fair value in the
consolidated financial statements.

Requirement (b) – 14 marks

This requirement is fairly lengthy and would take up the majority of the time for this
question. Candidate performance on a consolidated statement of profit or loss is
usually weaker than when a consolidated statement of financial position is examined,
and this question was no exception.

From an exam technique point of view, you may find it useful to layout the consolidated
statement of profit or loss (and other comprehensive income if there is any)
immediately. In doing this, it is highly recommended that you also head up the split
between the profit that is attributable to the parent and that of the NCI (you will also
need a split for total comprehensive income (TCI) if there is any other comprehensive
income in the question) at the bottom of the consolidation.

Examiner’s report – FR March/June 2021 21

For example:
$’000

Profit for the period X

Other comprehensive income

Revaluation gain etc. X

Total comprehensive income X

Profit for the period attributable to:

Shareholders of P X

NCI X

TCI for the period attributable to:

Shareholders of P X

NCI X

The split of profit and total comprehensive income between the parent company and
NCI should be calculated in a separate working. You should spend time practicing and
revising this.

In Gold Co, many candidates failed to complete the split of profit for the period, with
many omitting it altogether. By not completing the split, candidates immediately lost
marks. If you spend a small amount of time laying out the split in the early part of your
answer, this will act as a reminder to attempt to complete this later on and in doing so
score valuable marks.

When completing the consolidated statement of profit or loss, ensure you get the ‘easy’
marks out of the question early on. These marks are earned in the initial consolidation
process. You should add together all income and expenses (and other comprehensive
income if there is any) for the parent and subsidiary. Be careful though, if control of the
subsidiary was acquired mid-way through the period it will be necessary to time
apportion the subsidiary’s income and expenses. This will almost always be the case
in the FR exam and in Gold Co the post-acquisition period is nine months. This is vital
in a consolidated profit or loss question and is an area that many candidates often
forget.

It is disappointing to note that despite guidance in previous reports from the examining
team, many candidates attempted to take 90% of the subsidiary results in their
answers. This is fundamentally incorrect and the basic consolidation marks will be lost
so please DO NOT proportionately consolidate the results of the subsidiary.

Examiner’s report – FR March/June 2021 22

Having completed the initial consolidation process, candidates should turn their
attention to the consolidation adjustments that may be required. In this question there
is an intra-group sale and purchase that needs to be eliminated, with a further
adjustment for unrealised profit on the goods that remain in inventory at the reporting
date. There is also an additional group expense in respect of fair value depreciation
and an associate company. These are standard consolidation adjustments for the FR
exam and on the whole were well attempted, although there were some common errors
or omissions noted by the marking team.

Note (4) of the question informs candidates that sales made between Gold Co and
Silver Co in the post-acquisition period had consistently been $600,000 per month.
These are internal sales and purchases within the group and will need to be removed
from both revenue and cost of sales (purchases). Often candidates removed $5.4
million ($600,000 x 9 months) from revenue but a different amount from cost of sales.
This is an error. The adjustment to cost of sales should be the same as the adjustment
to revenue, in this case, $5.4 million. Once you have eliminated this internal
transaction, you will then need to consider any unrealised profit that remains on the
transaction. Where unrealised profit in inventory exists, the adjustment should be made
to cost of sales.

The fair value adjustment for plant will require an additional consolidation expense in
respect of fair value depreciation. This was generally done well by the majority of
candidates. However, some candidates omitted this adjustment all together, while
others failed to time apportion the depreciation charge for the post acquisition period
(9 months).

Gold Co’s investment income currently includes a dividend from an investment in a

40% owned associate company. This dividend should be removed and replaced with
a 40% share of the associates profit for the year of $1.2 million ($3 million x 40%). This
is in accordance with IAS 28 Investments in Associates and Joint Ventures. Many
candidates successfully adjusted for the share of profit but failed to remove the
dividend income. In this instance, only partial marks were available.

The unwinding of the discount on the deferred consideration was an adjustment often
overlooked by candidates. In part (a) the deferred consideration was discounted to a
present value of $31.680 million using a cost of capital of 10%. This is another example
of where ‘own figure’ marks will be awarded. Most candidates who attempted to unwind
the discount correctly applied 10% to the deferred consideration calculated in part (a)
and added this on to finance costs. To score full marks however, candidates need to
time apportion this adjustment (nine months) and many candidates did not do this.

Finally, note (6) contained an accounting adjustment in respect of a convertible loan

note that was issued by Gold Co on 1 October 20X1. The marking team noted that this
adjustment caused confusion for some candidates. This appeared to be because this
was an individual company adjustment rather than a traditional group accounting
adjustment. You must be prepared for adjustments such as this to be contained within
a group accounting question. In this situation, think about the appropriate accounting
treatment, show your workings accordingly and most importantly make the adjustment
in the parent company’s accounts. Those candidates who attempted to deal with this
adjustment generally earned some marks but relatively few got the full marks available
for this transaction. The most common error when the liability was calculated correctly
was where the full finance costs for the year at 8% were added onto the consolidated
finance costs. Candidates needed to adjust finance costs for the difference between
Examiner’s report – FR March/June 2021 23
interest at the effective rate and the nominal rate of interest that had already been
included in Gold Co’s accounts.

Overall, consolidations are an integral part of the FR syllabus. Candidates spend most
of their time, it would appear, preparing for a consolidated statement of financial
position. There is an equal likelihood that a consolidated statement of profit or loss and
other comprehensive income may be tested and therefore it is vital that you prepare
for all aspects of the syllabus.

Examiner’s report – FR March/June 2021 24