Qualification Programme Examination Panelists’ Report

Module A – Financial Reporting

(December 2010 Session)

(The main purpose of the following report is to summarise candidates’ common weaknesses
and make recommendations to help future candidates improve their performance in the
examination.)

(I) Section A – Case Questions

General Comments

The case study questions tested the candidates’ knowledge of the borrowing costs,
investment property and consolidated financial statements. The overall performance
was less than satisfactory. Candidates found it difficult to prepare the whole set of
consolidated statement of comprehensive income and consolidated statement of
financial position. In particular, they failed to calculate the correct figures of goodwill
and non-controlling interest. In addition, candidates could not correctly account for
the deferred tax implications.

Specific Comments

Question 1(a) – 5 marks

This question required candidates to discuss and calculate the amount of borrowing
costs that should be capitalised as part of the cost of the plant. The performance
was satisfactory. Candidates in general could state that an entity should cease
capitalising borrowing costs when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are complete. Thus they could
calculate correctly the borrowing costs that should be captialised.

Question 1(b) – 7 marks

This question required candidates to discuss the reason for the different figures for
the investment property in the consolidated financial statements and in the separate
financial statements. The performance was satisfactory. Candidates were able to
identify that the property was leased to an employee of its subsidiary and hence it
should be regarded as an owner-occupied property. However, candidates were not
able to specify that the rental paid by the senior manager of its subsidiary is not an
intragroup income and thus the relevant rental income should not be eliminated in
preparing the consolidated financial statements.

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 Question 1(c)(i) – 12 marks

This question required candidates to prepare the worksheet for the consolidated
statement of comprehensive income. The performance was less than satisfactory.
Many candidates were unable to calculate the amount of the beginning unrealised
profit in inventory that was realised and the deferred tax implications of the
transactions.

Question 1(c)(ii) – 26 marks

This question required candidates to prepare the worksheet for the consolidated
statement of financial position. The performance was less than satisfactory. Some
candidates ignored the deferred tax implications. Many candidates did not perform
well in this question and they failed to calculate the correct amount of the goodwill,
retained earnings and non-controlling interest. Some candidates did not know that
the adjustments should be made to non-controlling interest for the fair value
adjustment on business combination and for the elimination of unrealised profit on
upstream sales.

(II) Section B – Essay/Short Questions

General Comments

This is the first examination under the enhanced QP with modification of the level of
competence on various topics and the questions were designed accordingly.
Average candidates could handle the straightforward, simple part of each question.
However, careless mistakes in the preparation of the answer and calculations might
have made meant that they failed to score an above average marks. There were
challenging areas in each question which require in depth analysis of the information
provided and more complicated calculations. Many candidates could only obtain the
easier marks with long answers, including description and computation.
Nevertheless, it was found that some well-prepared candidates were able to score
high or even full marks with a precise answer. The overall performance in section B
of this session was better than that of the previous sessions.

Specific Comments

Question 2(a) – 4 marks

This question tested the candidates’ knowledge and application of HKFRS 2 Share-
based payment on the share option granted to employees. The performance was
unsatisfactory. Most of the candidates misinterpreted the vesting condition, i.e. “one-
fourth of the awarded share options shall become vested at the end of each
anniversary from the date of grant”, in the calculation of the compensation expense
and simply assumed it was vested in the fourth year. According to this vesting
condition, in substance, 2,000,000 share options should be considered as four
separate batches of a 500,000 share options plan with a vesting period of one to four
years. Therefore, share based payments of each batch should have been calculated
accordingly.

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 Question 2(b) – 7 marks

This part required candidates to explain the accounting implications of the

cancellation of the unvested awarded share option and calculate the corresponding
compensation. Candidates could explain the accounting implications but only a few
of them calculated the compensation expenses correctly because of the failure to
compute that the payment exceeds the fair value of the equity granted measured at
the date of cancellation.

Question 2(c) – 3 marks

This part required candidates to explain the accounting treatment at the subsidiary
level at which the holding company granted share options to its employee. Not many
candidates could explain that it was considered as an equity-settled share-based
payment transaction with a contribution from the parent.

Question 3(a) – 7 marks

This question examined the candidates’ knowledge and application of HKFRS 3

(Revised) and HKAS 27 (Revised) in the calculation of goodwill arising from the
acquisition of a non-wholly owned subsidiary. Overall performance was satisfactory.
This part was straightforward and relatively easy to get high or full marks. Some
candidates were not able to calculate the non-controlling interest, i.e. not measure at
fair value on initial recognition, and this resulted in the incorrect calculation of
goodwill.

Question 3(b) – 5 marks

This part required the candidates to calculate the non-controlling interest (NCI) before
the change of share holding. The performance was average. Some of the
candidates scored full marks in this part, but others either made mistakes in the
calculation of additional depreciation and amortisation or incorrectly re-measured the
NCI at fair value.

Question 3(c) – 4 marks

This part required candidates to explain the accounting treatment and corresponding
consolidation adjustment journal(s) regarding the change in a parent’s ownership
interest in a subsidiary. Candidates could explain the accounting requirements under
HKAS 27 (Revised), but only a few candidates were able to identify the adjusting
entries at the level of the consolidated financial statements. The treatment is similar
to a disposal of partial interest in subsidiary that does not result in a loss of control at
nil consideration.

Question 4(a) – 5 marks

This question asked the candidates to prepare journal entries for the issue of
convertible financial instruments. The performance was satisfactory. Candidates
were able to calculate the equity and liability components with a correct journal entry.

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 Question 4(b) – 5 marks

This part further required the candidates to prepare journal entries for the subsequent
conversion of the bonds to shares. The performance was less than satisfactory. The
candidates made a common mistake in the calculation of the interest charge at
effective interest rate and the interest payment during the period from issue date to
conversion date of the convertible bond. These resulted in an incorrect carrying
amount for the convertible bond and in the journal entries.

Question 4(c) – 4 marks

This part required candidates to account for Interest-free loan from shareholder which
is frequently found in practice. The performance in this question was average.
However, certain common mistakes were found in this part. Candidates failed to
calculate the loan at fair value, and/or recognise it as a contribution from
shareholders. In addition, as the requirement of the question was the preparation of
journal entries, a proper description of the accounts to be debited and credited was
important.

Question 5 – 6 marks

This question examined the candidates' knowledge of the criteria for the adoption of
the Small and Medium-sized Entity Financial Reporting Standard (SME-FRS). The
challenge was in terms of the asset test which required the analysis of the implication
of development expenditure and the relevant cash payment on the total asset of the
entity. Many candidates spent too much time writing the details of the conditions set
out in the standard but failed to study the information in the question thoroughly,
therefore, candidates arrived at the wrong judgment regarding the size test.

(III) Conclusion and Recommendation

The overall performance for this session was better than that of the previous session
but was still less than satisfactory. Candidates found it difficult to collate the
information provided in the question or case background.

Candidates should understand the importance of good analytical and application

skills which are required in the actual practice and daily work of a professional
accountant. Candidates should develop the approach of reading and thinking about
the information provided first, writing the analysis of the question with reference to the
relevant accounting standards and supporting their answers with step-by-step
calculations, if required, and finally drawing a conclusion based on the question.

Candidates are reminded to make a reasonable attempt at answering each part of

the questions. Good time management is critical for success.

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