THE ESSENTIAL GUIDE - ACCA Global

APRIL 2011

ALL YOU NEED TO KNOW FOR THE JUNE 2011 EXAMS

THE ESSENTIAL GUIDE

EXAM ADVICE AND GUIDANCE FOR TRAINEESINCLUDING EXAMINERS’ FEEDBACK AND EXAMINABLE DOCUMENTS

EXAM ENTRY DEADLINE 15 APRIL 2011

LATEST ACCA EXAM RULES WWW.ACCAGLO

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COM/STUDENTS/RULES/EXAM_REGS

INCLUDING EXAMINERS’ FEEDBACK AND EXAMINABLE DOCUMENTS

EDITOR’SCHOICE

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 the International papers for fi nancial reporting and audit, and the tax rates for the UK tax papers. These are essential reading for the June 2011 exams.

The Noticeboard section includes the exam timetable for June 2011, 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, ACCA’s new suite of entry-level qualifi cations, and explain how applying for membership might be easier than you think.

I hope that you fi nd this essential guide useful in helpingyou prepare fully for the June 2011 exams.

Email me at [email protected] with your thoughts feedback on this issue.

Victoria MorganEditor, Student Accountant magazine

Access the latest information on Foundations

in Accountancy atwww.accaglobal.com/fi a

STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011 03

EDITOR’SCHOICE

Welcome to the

STUDENT ACCOUNTANT

CAT EXAM DOCUMENTS ONLINEExaminable documents relevant to CAT Papers 3, 6, 8 and 9 are available at www.accaglobal.com/students/pass/examinable_documents

INTERACTIVE Email us – [email protected] – your details if you would like to be profiled in Student Accountant

KEY DATES FOR THE JUNE 2011 EXAM SESSIONExam entry deadline 15 April 2011Exams start 6 June 2011 For a full list of the latest ACCA exam rules, go to page 73 of this issue

Welcome to the STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011 04 CONTENTS

STUDENT ACCOUNTANTIn addition to this twice-yearly printed issue, we also email an alert to a new issue of Student Accountant every two weeks. Make sure you’re keeping up to date with the latest issue at www.accaglobal.com/sa

EXAMS

RESOURCES

12 ACCA QUALIFICATION FEEDBACKFeedback 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 P751 CAT QUALIFICATION FEEDBACK51 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 verbs65 EXAMINABLE DOCUMENTS Relevant to ACCA Qualification financial reporting, audit and tax papers for the June 2011 exam sittingSTUDENT ACCOUNTANT TECHNICAL ARTICLE ARCHIVE All technical content from Student Accountant is on ACCA’s website atwww.accaglobal.com/students/student_accountant/archiveAnswers to frequently-asked questions about ACCA’s qualifications can be found at www.accaglobal.com/learningproviders/tuition_provider/faq

69 NOTICEBOARDESSENTIAL 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 myACCA73 Essential advice and rules that you should be aware of before you take

your June 2011 exams

EDITORIAL TEAMVictoria MorganEditor

Glen Patterson Deputy editor

Jackie Dollar Art editor

Richard GoodingDesigner

Rhian LewisEditorial executive

WWW.ACCAGLOBAL.COMJamie AmblerDigital publishing editor

29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom

tel: +44 (0)20 7059 5700email: [email protected]

PUBLISHING AND ADVERTISINGAdam WilliamsHead of publishing

Anthony KayProduction manager

For all advertising-related matters please contact Lisa Peake:tel: +44 (0)20 7902 1224email: [email protected]

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

FOUNDATIONS IN ACCOUNTANCYACCA’s 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

Please email [email protected] with your feedback on this issue

Welcome to the STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2011

UNDERSTANDING COMMAND WORDSExaminers 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, won’t 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 you’re not sure what you’re being asked to do, as command words are signposts to a successful answer.

See page 8 for a list of common question verbs

EXAMTECHNIQUE

06 TECHNIQUE TIPS

REVISION TIPS – IMPROVE YOUR TECHNIQUEIt’s 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.

SUCCESSFUL ANSWERSLIST KEY POINTS

DEMONSTRATEIN-DEPTH KNOWLEDGE

OR EXPLAIN

IDENTIFY ALL THE DIFFERENT COMMAND WORDS

YOUR TECHNIQUEIt’s 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.

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.

are all part of the process, but ‘active’ revision is more engaging – from simply highlighting key words, to

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MULTIPLE-CHOICE QUESTIONS – THE GOLDEN RULESMultiple-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 – don’t 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

EXAMTECHNIQUEMULTIPLE-CHOICE QUESTIONS AND TOP TIPS ON STRESS MANAGMENT

08 TECHNIQUE TIPS

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 it’s better to allocate time to groups of MCQs rather than individual questions. You’ll probably find some MCQs take less time to answer than others – by completing these questions first you’ll 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 you’re running out of time or knowledge make an educated choice.

STRESSMANAGEMENTExam 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 don’t 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.EXAM SUCCESS

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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

EXAMTECHNIQUE

10 TECHNIQUE TIPS

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

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.

INTELLECTUAL LEVELSKnowledge and comprehension Application and analysis Evaluation and synthesisPapers F1–F3 Papers F4–F9 Papers P1–P7¤ retention and recall of knowledge ¤ analysis of unfamiliar situations to ¤ generalisation, comparison ¤ understanding of major accounting prepare reports and solve problems and discrimination using complex and and business ideas, techniques using relevant concepts and theories unstructured information and theories ¤ recognition of subtle or hidden ¤ assessment and evaluation¤ use of knowledge and techniques in information patterns and trends within of complex information new but familiar situations financial and other information, ¤ use of reasoned argument ¤ recognition of fundamental cause and the ability to interpret these to infer and make judgments and effect in accounting. ¤ the ability to infer from given ¤ presentation and justification of information and draw conclusions. valid recommendations.

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 VERBSAnalyse Intellectual level 2, 3 Actual meaning Break into separate parts and discuss, examine, or interpret each partKey tips Give reasons for the current situation or what has happened.Apply Intellectual level 2 Actual meaningTo put into action pertinently and/or relevantly Key tips Properly apply the scenario/case.Assess Intellectual level 3 Actual meaningTo 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

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 worthDon’t explain the situation; instead analyse it Key tips Criticism often involves analysis. Define Intellectual level 1 Actual meaningGive the meaning; usually a meaning specific to the course or subject Key tipsAlso 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 againstKey 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.

Give the reason for an event Key tips Don’t just provide a list of points, add in some explanation of the points you’re 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 meaningList several ideas, aspects, events, things, qualities, reasons, etc Key tips Don’t 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 meaningExplain precisely Key tips Focus on the exact point.Summarise Intellectual level 2 Actual meaning Give a brief, condensed accountInclude conclusions. Avoid unnecessary details Key tips Remember to conclude your explanation.

INTELLECTUAL LEVELS AND QUESTION VERBS

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ACCA FEEDBACKPAPER F1ACCOUNTANT IN BUSINESSThe 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 Belbin’s 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 Mumford’s 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 QUESTIONSQuestion 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.


Question 45 related to different types of control in relation to management of accounting information.

DEF Co has decided to include in each customer’s 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 controlB Back-up controlC Output controlD 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.


CONCLUSIONSThe 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

12 EXAMS

ACCA FEEDBACKcandidates 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 under‑estimate 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 Porter’s 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.

PAPER F2MANAGEMENT ACCOUNTINGThis 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

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 QUESTIONSFOR DISCUSSION

EXAMPLE 1 A company which operates a process costing system had work‑in‑progress 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 $26,800B $28,200C $29,800D $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 (1,500–400) must have been started and finished in the month. These are valued at $22,000 (1,100×20). The 400 units from opening work‑in‑progress (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: $3,000+$(400×0.6×20) = $7,800. The total value of the month’s 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: $3,000+$(400×0.4×20) = $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 2A company uses standard marginal costing. Last month the budgeted contribution was $20,000 and the only variances that occurred were as follows: $Sales price 3,000 AdverseSales volumecontribution 5,000 FavourableFixed overheadexpenditure 1,000 Adverse

What was the actual contribution last month?A $18,000B $19,000C $21,000D $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: (20,000–3,000 + 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 3Are the following statements, which refer to different types of budgets, true or false?

STATEMENT 1An annual budget that can be broken

PAPER F1 CANDIDATES ARE ENCOURAGED TO ANSWER EVERY QUESTION ON THE PAPER. EVEN IF THECORRECT 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.


PAPER F2 CANDIDATES SHOULD READ PREVIOUS PAPER F2 EXAMINER’S 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 2An annual budget set before the start of a year based on estimated sales and production volumes is called a fixed budget.

Statement1Statement2A True TrueB False FalseC True FalseD False True

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.

¤ Read previous Paper F2 examiner’s reports – they are all still very relevant and helpful. Each contains three multiple-choice questions. Access these on the ACCA website.

PAPER F3FINANCIAL ACCOUNTINGThe 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

1ThefollowingextractisfromthefinancialstatementsofPompeii,alimitedliabilitycompanyat31October:

2010 2009 $000 $000Equity and liabilitiesShare capital 120 80Share premium 60 40Retained earnings 85 68 265 188Non-current liabilitiesBank loan 100 150 365 338

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 inflowB $10,000 inflowC $110,000 inflowD $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:

Cash flows from financing: $000 Issue of share capital

(120+60)–(80+40) 60 Repayment of bank loan (100–150) (50) Net cash inflow from financing 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.

2SmithandJonescommencedinpartnershipon1December2009sharingprofitsequally.Smithpaidcashof$40,000intothepartnership.Jonespaidincashof$25,000andbroughtinamotorvehicle,computerandfurnitureworth$15,000.Thepartnersmaintainbothcapitalandcurrentaccounts.

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? Smith JonesA $41,600 $41,600B $40,000 $40,000C $40,000 $25,000D $41,600 $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 shouldn’t 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.

3ThestatementoffinancialpositionofCartwright,alimitedliabilitycompany,showsclosingretainedearningsof$320,568.Theincomestatementshowedprofitof$79,285.Cartwrightpaidlastyear’sfinaldividendof

14EXAMS

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$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 $241,283B $387,653C $254,783D $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.

CONCLUSIONIt 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 LAWAs 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 4–6 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 COMMENTSQUESTION 1This 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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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 UK’s membership of the European Union.

QUESTION 2This 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 3This 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 4This 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 company’s 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 5This 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 6This 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

WHILE IT IS RECOGNISED THAT SOME ASPECTS OF THE PAPER F4 SYLLABUS ARE LESS CENTRAL THANOTHERS AND HENCE ARE EXAMINED LESS FREQUENTLY, THEY NONETHELESS HAVE TO BE EXAMINED AT SOME TIME. WHEN THESE AREAS ARE EXAMINED THEYARE 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.


SOME PAPER F4 CANDIDATES CLEARLY PREPARE ANSWERS TO TOPICS AND DELIVER THEM, EVEN IF THEY ARE NOT RELEVANT. SUCH ACTION MERELY INDICATES THATTHE 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.

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 don’t.

QUESTION 7This 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 8This 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 9This 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 10This 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 F5PERFORMANCE MANAGEMENTThis was my first paper as the new examiner for Paper F5 but the syllabus remained

18 EXAMS

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 can’t 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 activity‑based costing (ABC). In every question, candidates had the opportunity to earn some easy marks quickly, and well‑prepared candidates attempted these parts first.

SPECIFIC COMMENTSQUESTION 1This 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 didn’t 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 didn’t 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 pre‑empting 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 management’s 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 2This 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 part‑qualified 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 predecessor’s 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 Co’s 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, cross‑referencing different parts of the question, linking financial and non‑financial information etc.

QUESTION 3It 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 hadn’t even looked at this area at all. They took a gamble and it didn’t pay off.


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 isn’t there and it is necessary to make candidates realise that it is examinable under Paper F5 and that, if they don’t 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 can’t do a particular piece of work for them because it is on an area you studied last year, not this year? I don’t think so.

In accountancy, you have to carry knowledge forward with you to use at later stages. You can’t simply think that the exam is over, so you can forget it all now. If you have got an exemption from Paper F2 but can’t remember the subject, you’ve 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 weren’t 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 didn’t 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 4This 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. I’m 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 A’s 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 5This 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)TAXATIONThis 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 1In Part (a) candidates were required to calculate a taxpayer’s 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 taxpayer’s PAYE tax code and the code’s 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 2In Part (a) candidates had to (i) state which companies a company would be treated as being associated with, (ii) calculate the company’s corporation tax liability (this involved the computation of a deduction for a lease premium,

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 company’s 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 3This 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 taxpayer’s disposal of ordinary shares in the company qualified for entrepreneurs’ relief. Part (b) required a calculation of the taxpayer’s 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 company’s 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

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.


disappointing that the annual exempt amount was often deducted when calculating the corporation tax liability.

QUESTION 4This 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 director’s 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 director’s 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 director’s 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 director’s 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 company’s 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 taxpayer’s taxable income and taxable gains for each of the tax years from 2005–06 to 2009–10. The taxpayer had made a trading loss in the tax year 2009–10, 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 F7FINANCIAL REPORTINGI 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 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 COMMENTSQUESTION 1This required the preparation of consolidated statements of comprehensive income and financial position. It included a fair value adjustment for a downward valuation of the subsidiary’s 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-for-sale 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 INCOMEIntra-group sales should only be eliminated for the post-acquisition period (four months), many deducted $12m (being for 12 months) or $2m

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 ($2m×25%), but the 25% was a stated as a mark-up on cost which gave $400,000 ($2m×25/125).

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 subsidiary’s 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 increaseSome candidates used the subsidiary’s 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 parent’s share of the goodwill (note this does not apply to UK-based answers).

A surprising number did not correctly calculate the subsidiary’s 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 parent’s share capital and premium as a result of the share exchange.

A considerable number of candidates added the increase in the value of the parent’s 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 2This 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 incomeMany 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 year’s 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 equityThis 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 positionThis 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 3This 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.


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 4The 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 wasn’t. 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 5This 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.

CONCLUSIONOverall 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.

PAPER F8AUDIT AND ASSURANCEThe 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.

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 candidate’s 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 COMMENTSQUESTION 1This 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

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 audit’s 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 UNTILLAST CAN BE A RISKY STRATEGY, AS MANY ANSWERS PRESENTED WERE INCOMPLETE OR APPEARED RUSHED.

STUDENT ACCOUNTANT ESSENTIALEXAMGUIDE04/2011 25

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 2This 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 3This 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.

MANY PAPER F8 CANDIDATES FAILED TO SCORE THE FULL TWO MARKS AVAILABLE FOR PRESENTATION WHENANSWERING 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.

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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 company’s 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 examiner’s 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 4This 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 hospital’s 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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title deeds’ with no explanation of what in the deeds we were checking or why.

QUESTION 5This 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 management’s 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 F9FINANCIAL MANAGEMENTSuccessful 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 COMMENTSQUESTION 1Most 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’

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.


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 2Many 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 company’s 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 THEEOQ 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 3Many 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 4Many 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.


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.

PAPER P1GOVERNANCE, 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 don’t 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.

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 COMMENTSQUESTION 1The 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 couldn’t 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 company’s fraudulent accounting. The question asked candidates to distinguish between absolutism and relativism and then to critically evaluate Shazia Lo’s behaviour from these two perspectives for a total of 10 marks. This means that both perspectives had to be discussed in considering Shazia Lo’s 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

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.

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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 Sarbanes–Oxley (although it wasn’t 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 candidate’s 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 2This 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 organisation’s 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 3This 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 (chairman’s 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.


QUESTION 4Question 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 UU’s 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 company’s managers put pressure on the different aspects of the company’s 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 wasn’t 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 Carrol’s framework) in an attempt to answer the question.

PAPER P2CORPORATE REPORTINGAs 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 COMMENTSQUESTION 1This 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 2This 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 entity’s 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 company’s 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 3This 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 4In 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 P3BUSINESS ANALYSISThis 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 Mintzberg’s 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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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 Lewin’s 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 COMMENTSSECTION A QUESTIONSection 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 Lewin’s 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 QUESTIONSCandidates 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

THERE WAS LITTLE EVIDENCE OF TIME MANAGEMENT PROBLEMS FOR PAPER P3CANDIDATES 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.


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 accountant’s proposal to formalise structure, controls and processes. The question also specifically referenced Henry Mintzberg’s 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 P4ADVANCED FINANCIAL MANAGEMENTThe 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.

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.

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 ENDOF A QUESTION. IT IS IMPERATIVE THAT CANDIDATES LEARN TO MANAGE THEIR TIME EFFECTIVELY THROUGH PRACTISING PAST EXAM QUESTIONS UNDER TIMED AND EXAM-STYLE CONDITIONS.

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