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DipIFR - December 2007

The examination consisted of one compulsory question for 25 marks and four optional questions for 25 marks each. Candidates were required to attempt three of the optional questions.
In general performance in this examination was very satisfactory, with an increased pass rate and average mark compared to recent sittings. This was because the average mark in (compulsory) question 1 and (optional) question 2 was higher than in previous sittings. As usual the performance of candidates in computational aspects of questions was superior to that in written aspects.
Whilst I was very pleased in general with the standard of the scripts presented there remains a notable minority of candidates who produce performances that are way below pass standard. All candidates should be aware of the need to undergo thorough preparation before attempting this examination. However I have to say that the number of manifestly unprepared candidates appeared to be lower this time, which is clearly encouraging.

QUESTION 1
This question required the preparation of a consolidated balance sheet for a parent entity with two subsidiaries, one owned since incorporation and one acquired during the period.
On the whole the basics of this question were answered in a highly satisfactory manner. However a minority of candidates made two very basic consolidation errors, being:
• Proportionally consolidating partly owned subsidiaries, and/or
• Only including 6/12 of the balance sheet numbers of the subsidiary that had been acquired during the period.
The consolidation adjustments were generally handled well although not all candidates were able to compute the unrealised profit adjustment for the intra-group sale of property, plant and equipment.

QUESTION 2
This question required the preparation of an income statement, a statement of changes in equity and a balance sheet for a company from a trial balance. Once again this question was very well answered by the majority of students who attempted it. The only technical issue that caused a widespread problem was the adjustment in equity to reflect the transfer of realised profits from the revaluation reserve in respect of the revalued property. Few candidates realised that this would affect the deferred tax liability given that the excess depreciation reduced the temporary difference relating to the revalued property.

QUESTION 3
This question required candidates to explain the financial reporting implications of three issues:
a. Accounting for construction contracts
b. Accounting for government grants.
c. Accounting for the cost of an item of  property, plant and equipment.
The standard of answers to this question varied quite significantly.  However in general they showed a pleasing improvement when compared with similar questions set in previous sittings. A number of candidates produced excellent answers to all three issues. The following were the relatively common errors that candidates made:
• In the case of the construction contract, measuring the revenue using an ‘expected value’ approach or anticipating a penalty that was unlikely to materialise.
• In the case of the government grant, recognising the whole of the employment grant in the income statement in the current period rather than over the five year period to which the employment grant related.
• In the case of the property, plant and equipment, recognising a liability for a future overhaul to which the entity was not committed, rather than applying component depreciation

QUESTION 4
This question (relating to financial instruments) required candidates to explain the meaning of key terms and concepts set out in IAS 32 and IAS 39. Candidates were also required to present extracts from financial statements reflecting the issue of a convertible loan by the entity. On the whole this question was answered very well with a number of high marks being awarded. Candidates and tutors are to be commended for the high level of knowledge displayed. A minority of candidates appeared to be answering the question as a last resort and were awarded very few marks. Such candidates had no idea how to account for a financial instrument with a debt and equity component.

 
QUESTION 5
This question required candidates to consider three issues:
• The calculation of goodwill arising on a business combination.
• The preparation of extracts from financial statements relating to share based payments and associated deferred tax.
• The preparation of extracts from financial statements relating to the sale of an operating unit of the business.

The standard of answer to this question was quite variable. The first issue (on goodwill) was answered quite well, although a reasonable number of candidates were unaware of the acquisition costs that could be included as part of the goodwill figure rather than being taken to the income statement as an expense. Some candidates did not display sufficient knowledge of the intangible items that could be recognised as identifiable assets in the consolidated balance sheet.
 Answers to the second issue (on share based payments) were generally rather unsatisfactory. Many candidates were unable to present the correct accounting entries for the granting of share options as a means of employee remuneration. Answers that were unsatisfactory tended to focus on the market value of the share, rather than the fair value of the share option. This is surprising, given that I have made similar comments in the past.
Answers to the third issue varied considerably. Those candidates who had studied IFRS5 gave some excellent answers but some candidates appeared to have no knowledge of this fundamental standard. Similarly, those candidates that realised that there was an associated impairment issue were able to score very good marks, but those candidates that failed to spot this did not score well in this part.