Financial

Reporting
September/
December 2022
Examiner’s report
The examining team share their observations
from the marking process to highlight strengths
and weaknesses in candidates’ performance, and
to offer constructive advice for those sitting the
exam in the future.

Contents
General comments ....................................................... 2
Section A ...................................................................... 3
Question 1 ................................................................ 3
Question 2 ................................................................ 4
Question 3 ................................................................ 6
Question 4 ................................................................ 7
Section B ...................................................................... 9
Question 1 .............................................................. 11
Question 2 .............................................................. 12
Question 3 .............................................................. 13
Question 4 .............................................................. 14
Question 5 .............................................................. 15
Section C.................................................................... 17
Treats Co ................................................................ 17
Requirement (a) – 5 marks ................................. 18
Requirement (b) – 15 marks ............................... 19
Perd Co .................................................................. 21
Requirement (a) – 15 marks ............................... 22
Requirement (b) – 5 marks ................................. 25
General comments
This examiner’s report should be used in conjunction with the published September/
December 2022 sample exam which can be found on the ACCA Practice Platform.

In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process, highlighting
the strengths and weaknesses of candidates who attempted these questions. Future
candidates can use this examiner’s report as part of their exam preparation,
attempting question practice on the ACCA Practice Platform and reviewing the
published answers alongside this report.

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

This report includes the following:

• Section A: Objective test questions – we focus on four specific questions that
caused difficulty in these sittings of the exam.

• Section B: Objective test case questions – here we look at one specific case
that was challenging for candidates.

• Section C: Constructed response questions – here we provide detailed

commentary around two constructed response questions and identify some of
the main issues that affected candidates’ performance in this section,
identifying common knowledge gaps and offering guidance on where exam
technique could be improved, including in the use of the CBE functionality
where appropriate.
Section A
Here we look at FOUR Section A questions which proved to be challenging for
candidates.

Question 1

Saguaro Co acquired 25% of the equity shares in Cactus Co for $400,000 on 1 March
20X1. In July 20X1, Cactus Co paid a dividend of $36,000. Cactus Co's profit for the
year ended 31 December 20X1 was $115,200. All profits accrued evenly over the
year.

What is the carrying amount of the investment in the associate in Saguaro Co's
consolidated statement of financial position as at 31 December 20X1?

$ ____________

What does this test?

This question tests learning outcome D2(a).

Candidates needed to recognise that the time apportioning of profit was relevant but
that the dividend is not time apportioned, being that this is a transaction from the
associate’s statement of financial position (as at a point in time) and not the
statement of profit or loss.

The group share of dividend income received after the purchase of shares is based
on the full amount of $36,000.

What is the correct answer?

The correct answer was $415,000 and candidates were required to simply type
415000.

The investment in the associate was made two months into the financial year and so
only 10 months’ profit is accrued during the current financial year (for consolidation
purposes).

The initial cost of investment of $400,000 is increased by the group’s share of profit
of $24,000 (25% x 10/12 months x $115,200) and decreased by the group’s share of
the dividend of $9,000 (25% x $36,000).

Although not required, selected journal entries (in $’000) for the above information
are:
Dr Investment in associate 24
Cr Share of profit of associate 24
being share of profit of associate

Dr Investment income 9
Cr Investment in associate 9
being elimination of dividend from associate

Where did candidates go wrong?

The most common error was that candidates did not apportion the profit. A similar
number of candidates did apportion the profit correctly but removed the entire
dividend instead of just the group share.

Question 2

Theo Co acquired new plant on 1 January 20X3 for $6m. This was partly funded by
the receipt of a $2m government grant on the same date. The plant has a useful life
of 10 years. Theo Co is unsure whether to deduct the grant to calculate the carrying
amount of the plant or to use the deferred income method.

Based on the different ways to account for government grants, which TWO of
the following options can be recognised in the statement of financial position
for the year ended 31 December 20X3?

A. Non-current liability of $1.8m

B. Non-current liability of $1.6m
C. Non-current asset of $4m
D. Non-current asset of $3.6m

What does this test?

This question tests learning outcome B11(a).

Candidates needed to calculate both the non-current asset (plant, at carrying

amount) and the non-current liability (deferred income) for each method of
recognising a government grant.

Calculating the non-current asset included depreciating for 12 months to 31

December 20X3.
What is the correct answer?
The correct answers were B (a non-current liability of $1.6m) and D (a non-current
asset of $3.6m).

Method 1: Amend the non-current asset

• Liability = nil; no deferred income is created (not an option above)
• Undepreciated non-current asset = $6m - $2m = $4m (C)
• Non-current asset = 9/10 years x ($6m - $2m) = $3.6m (D)

Although not required, journal entries (in $’000) for the above information are:

Dr Plant – cost 6,000

Cr Bank/ Trade payables 6,000
being purchase of plant

Dr Bank 2,000
Cr Plant – cost 2,000
being receipt of grant, netted against the cost of the related non-current asset

Dr Depreciation charge 400

Cr Plant – accumulated depreciation 400
being depreciation of plant (1/10 years x $4m)

Method 2: Deferred income

• Total liability = 9/10 years x £2m = $1.8m (A)
• Non-current liability = 8/10 years x $2m = $1.6m (B) (£0.2m is the current
liability)
• Non-current asset = 9/10 years x $6m = $5.4m (not an option above)

Although not required, journal entries (in $’000) for the above information are:

Dr Plant – cost 6,000

Cr Bank/ Trade payables 6,000
being purchase of plant

Dr Bank 2,000
Cr Deferred income 2,000
being receipt of grant, creating deferred income

Dr Depreciation charge 600

Cr Plant – accumulated depreciation 600
being depreciation of plant (1/10 years x $6m)

Dr Deferred income 200

Cr Depreciation charge 200
being release of deferred income against depreciation (1/10 years x $2m)

Alternatively, the release of deferred income could be recognised in other income.

Where did candidates go wrong?
Most candidates chose A in their selection – wrongly selecting the total liability
instead of the non-current element only.

The next most common error was to select C and leave the asset undepreciated at
$4m.

Question 3

Barlow Co owns a property which it rents to third parties and does not occupy itself.
It acquired the property on 1 January 20X5 for $10m. At 31 December 20X5 the fair
value is estimated to be $10.6m, with expected selling costs of $0.2m.

At 1 January 20X5, the property had an estimated useful life of 40 years. Barlow Co
uses the fair value model to measure the carrying amount of the property.

In accordance with IAS 40 Investment Property, identify the correct gain to be

recognised in Barlow Co's financial statements at 31 December 20X5 and where
that gain should be presented in the financial statements.

What does this test?

This question tests learning outcome B1(g).

Candidates needed to recognise that IAS 40 applies the fair value method and that,
under this method, fair value gains/ losses are presented in the statement of profit or
loss each year. The fair value of an asset is not the same as its fair value less costs
to sell (IAS 36) and an investment property is not an asset classified as fair value
through other comprehensive income (IFRS 9).
What is the correct answer?
The correct answer was a $600,000 gain, presented in the statement of profit or
loss ($10.6m fair value at year end considered against the initial capitalised amount
of $10m).

Although not required, the journal entries (in $’000) for the above information are:

Dr Investment property 10,000

Cr Bank/ Trade payables 10,000
being recognition of investment property at 1 January 20X5

Dr Investment property 600

Cr Other income 600
being recognition of fair value gain on investment property at 31 December 20X5

Alternatively, the credit to the statement of profit or loss could be investment income
or could net against administrative or operating expenses.

Where did candidates go wrong?

The most common error was to incorrectly depreciate the asset under IAS 16 as
opposed to no depreciation under IAS 40 when using the fair value model.

A less common error was to incorrectly calculate a gain by comparing fair value less
costs to sell to the initial capitalised amount; the treatment under IAS 36 and not IAS
40 – sometimes compounded with the error above.

Few candidates presented the gain in other comprehensive income (IFRS 9).

Question 4

A company commenced work on the construction of a significant asset for one of its
customers on 1 May 20X5. Construction is scheduled to run for two years and the
total contract price is $5m.

At 31 December 20X5, the following details are obtained in relation to the contract:
• The percentage complete was 50%.
• Amounts invoiced to the customer totaled $1.7m.
• Amounts received from the customer totaled $0.8m.

What is the total amount that should be included in the statement of financial
position as at 31 December 20X5 as a contract asset or contract liability?

$ ____________
What does this test?
This question tests learning outcome B10(f).

Candidates needed to recognise that the balance in a contract account (i.e., a

contract asset or a contract liability) is not impacted by overall profitability or by
customer receipts. The relevant information, per IFRS 15, includes the amounts
invoiced to the customer and the revenue earned to date.

What is the correct answer?

The correct answer was a contract asset of $800,000 and candidates would have
been required to simply type 800000.

There is a contract asset as the revenue earned of $2.5m (50% x $5m) exceeds the
amounts invoiced of $1.7m. This gives, effectively, accrued income (a type of
contract asset) of $0.8m ($2.5m - $1.7m).

Although not required, the journal entries (in $’000) for the above information are:

Dr Contract asset 2,500

Cr Revenue 2,500
being recognition of revenue based on percentage completion

Dr Trade receivables 1,700

Cr Contract asset 1,700
being amounts invoiced to customer

Dr Bank 800
Cr Trade receivables 800
being amounts received from customer

Where did candidates go wrong?

The most common error was for candidates to simply provide the amounts invoiced
of $1.7m with the next most common answer being the trade receivables balance of
$0.9m ($1.7m - $0.8m).

Other errors included stating the revenue earned to date of $2.5m.

Section B
Section B tests candidates’ knowledge on several IFRS Standards in more depth
than Section A, with three case questions worth 10 marks each. Each case contains
five, two-mark objective test questions.

We have selected one of the cases that examined three IFRS Accounting Standards:
• IAS 16 Property, Plant and Equipment;

• IAS 21 The Effects of Changes in Foreign Exchange Rates; and

• IAS 36 Impairment of Assets.

Candidates must read the case scenario and its requirements carefully.

Each objective test question scores either two marks or zero marks and so it is
important that candidates do not misread or miss information in the scenario.

Close reading of the requirements is also important to identify any specific

instructions, such as rounding.
Scenario

NovAir Co is an airline and prepares its financial statements to 31 December each

year.

NovAir Co purchased a new aircraft for $15m on 1 January 20X5 with the following
details:

Aircraft components Cost Residual value Useful life

($'000) ($'000) (years)
Airframe 8,000 500 20
Engines 5,000 600 8
Engine testing costs 600 - 8
Interior of aircraft 1,400 - 5
Total 15,000

NovAir Co depreciates its assets on a straight-line basis.

To fund the purchase of the aircraft, NovAir Co borrowed 10 million euros on 1

January 20X5. The interest on the loan is insignificant and should be ignored. The
loan was due to be repaid in four annual equal instalments with the first repayment
being made on 1 January 20X6.

Information relating to the exchange rate is as follows:

1 January 20X5 1 euro = $1.00

31 December 20X5 and 1 January 20X6 1 euro = $1.25
Average rate for the year ended 31 December 20X5 1 euro = $1.20
31 December 20X6 and 1 January 20X7 1 euro = $1.10
31 December 20X7 1 euro = $1.00

NovAir Co's functional currency is the $.

On 31 December 20X5, a significant engine malfunction was discovered. As a result of

this, the aircraft was grounded. NovAir Co cannot reliably estimate a recoverable
amount for the engines. The aircraft, including the engines, can be treated as a cash-
generating unit.
Question 1

In accordance with IAS 16 Property, Plant and Equipment (PPE), which TWO of
the following statements are correct?

A. The depreciation charge should be recognised in profit or loss unless it is

included in the carrying amount of another asset
B. When fair value is used to measure PPE then all other assets must be measured
using the same principle
C. The costs of safety inspections that are legally required to operate PPE can
never be capitalised as the cost of an asset
D. At the very least, the residual value and useful life of an asset should be
reviewed at the end of each financial year

What does this test?

This question tests learning outcome B1(e).

Candidates needed to recognise some of the more complex and specific rules of IAS
16 to answer this knowledge-based question.

What is the correct answer?

The correct answers are A and D.

Depreciation is usually recognised in the statement of profit or loss but, in

circumstances such as an item of plant being used in the construction of an entity’s
held-for-use property, the depreciation charge for the plant becomes a direct and
capitalised cost of the property. A is, therefore correct.

The residual value and useful life of non-current assets should be reviewed, at the
very least, at year end. D is, therefore, correct.

Where did candidates go wrong?

If the revaluation model is applied to a classification of property, plant or equipment,
then it must be applied to that entire classification. It does not need to be applied
across the entirety of property, plant and equipment nor does it need to be applied
across all types of assets. B is, therefore, incorrect. Most candidates selected this
option.

Any safety measures, equipment or inspections must be capitalised as a direct cost,

even though they are unlikely to enhance the economic benefit generated by an
asset. C is, therefore, incorrect.

Examiner’s report – FR September/December 2022 11

Question 2

In accordance with IAS 16 Property, Plant and Equipment, what is the total
aircraft depreciation to be charged to profit or loss for the year ended 31
December 20X5 (to the nearest $'000)?

$ ____________ ,000

What does this test?

This question tests learning outcome B1(e).

Candidates needed to recognise that each element was a significant component of

the asset and must be depreciated separately. Residual value also needed to be
accounted for when calculating depreciation for the airframe and engines
components.

What is the correct answer?

The correct answer was $1,280,000 and candidates would have been required to
simply type 1280.

Aircraft Cost Residual Depreciable Useful Depreciation

components ($’000) value amount life charge
($’000) ($’000) ($’000) ($’000)
Airframe 8,000 500 7,500 20 375
Engines 5,000 600 4,400 8 550
Interior of aircraft 600 - 600 8 75
Engine tests 1,400 - 1,400 5 280
Total 15,000 1,280

There is no rounding of decimal points required in any of the depreciation charges;

that is, all depreciation charges are exactly rounded to $’000.

Where did candidates go wrong?

Although generally well performed, the most common error made by candidates was
to ignore the interior of aircraft component, assuming this not to be part of the asset.
Also, a similar number of candidates ignored residual value and incorrectly
calculated the depreciable amount for the airframe and engines components.

A less common error was to ignore the engine tests component.

Another error made by some candidates was not rounding to $’000 as instructed in
the question, incorrectly entering 1280000.

Examiner’s report – FR September/December 2022 12

Question 3

In accordance with IAS 21 The Effect of Changes in Foreign Exchange Rates,

what is the total balance of the loan liability at 31 December 20X5?

A. $10m
B. $12m
C. $8m
D. $12.5m

What does this test?

This question tests learning outcome B12(b).

Candidates needed to recognise that a loan liability is a monetary liability and,

therefore, must be retranslated at each year-end date. The correct exchange rate
was also required to be identified.

What is the correct answer?

The correct answer was D.

Using the year-end exchange rate, we calculate the liability to be $12.5m (10m euros
x $1.25).

Although not required, the journal entries (in $’000) for the above information are:

Dr Bank 10,000
Cr Loan liability 10,000
being recognition of loan on 1 January 20X5 at spot rate of 1 euro = $1

Dr Exchange loss 2,500

Cr Loan liability 2,500
being exchange loss on loan payable, recognised in the statement of profit or loss
and based on a spot rate at 31 December 20X5 of 1 euro = $1.25

Where did candidates go wrong?

The most common errors were to incorrectly divide by $1.25 and not multiply (C) or
to incorrectly use the average rate for the year of 1 euro = $1.20 (B).

Many candidates failed to restate the year-end balance at all (A).

Examiner’s report – FR September/December 2022 13

Question 4

At 31 December 20X6, the balance on the liability for the loan is 7.5 million euros. At
31 December 20X7, the balance is 5 million euros.

In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates,

which TWO of the following correctly reflect how the foreign currency
transaction should be reflected in the financial statements of NovAir Co for the
year ended 31 December 20X7?

A. The liability at 31 December 20X7 should be stated at $5m

B. A foreign currency exchange gain of $500,000 should be reported
C. The liability at 31 December 20X7 should be stated at $4.545m
D. A foreign currency exchange loss of $455,000 should be reported

What does this test?

This question also tests learning outcome B12(b), however, it addresses the impact
of changes in foreign exchange rates on both the statement of financial position and
the statement of profit or loss.

What is the correct answer?

The correct answers are A and B.

At 31 December 20X7, the loan liability is $5m as the spot rate at that date is 1 euro
= $1 (5m euros x $1).

As the equivalent loan liability at 31 December 20X6 was $5.5m (5m euros x $1.1),
there has been an exchange difference of $0.5m. This represents a gain as there is
a decrease in the fair value of the loan liability.

Although not required, the journal entry (in $’000) for the above information is:

Dr Loan liability 500

Cr Exchange gain 500
being exchange gain on loan payable, recognised in the statement of profit or loss
and based on a spot rate at 31 December 20X7 of 1 euro = $1

Where did candidates go wrong?

A candidate could incorrectly calculate a loan liability of $4.545m by dividing (not
multiplying) by the opening (not closing) spot rate (C). A candidate could,
subsequently, incorrectly calculate a loss of $0.455m (D) – the most common error.

Examiner’s report – FR September/December 2022 14

Question 5

In accordance with IAS 36 Impairment of Assets, which of the following

statements is correct?

A. NovAir Co must not recognise an impairment loss for the engines since the
recoverable amount cannot be estimated reliably
B. NovAir Co must determine the recoverable amount of the engines using the
depreciated replacement cost method
C. NovAir Co must write the carrying amount of the engines down to the residual
value since the recoverable amount cannot be estimated reliably
D. NovAir Co must determine the recoverable amount of the aircraft and allocate
a proportion of any impairment losses to the engines based on their carrying
amount

What does this test?

This question tests learning outcome B3(d).

Candidates needed to recognise the specific conditions of IAS 36 on recoverable

amount and that, if it is not possible to estimate the recoverable amount of the
individual asset, an entity shall determine the recoverable amount of the cash-
generating unit to which the asset belongs (the asset’s cash-generating unit). In this
case, the aircraft itself.

What is the correct answer?

The correct answer is D.

As recoverable amount cannot be estimated reliably for all parts of the aircraft, the
aircraft must be considered overall, as a cash-generating unit. Impairment is not
simply ignored for one element (A) and, instead, impairment is apportioned based on
the carrying amounts of each asset within the aircraft.

Although depreciated replacement cost is a method of valuation, it is not that it must

be used. Furthermore, as we are told that the aircraft is a cash-generating unit, we
wouldn’t be calculating the recoverable amount of this component individually for
impairment purposes – although it would be relevant when apportioning an
impairment loss (B).

The residual value is not necessarily a reliable estimate of recoverable amount and
so it cannot be mandatory to use this for valuation (C).

Examiner’s report – FR September/December 2022 15

Where did candidates go wrong?
The most common error was that candidates thought residual value was mandatory
in the absence of recoverable amount (C).

Examiner’s report – FR September/December 2022 16

Section C
We have selected two constructed response questions, Treats Co and Perd Co, that
are available on the ACCA Practice Platform.

Treats Co is a financial statements analysis and interpretation question for a single

entity, while Perd Co is a consolidated financial statements preparation question.
When using the following detailed commentary, it would be helpful to consult the
questions and answers available to you on the ACCA Practice Platform.

Treats Co

Treats Co required candidates to demonstrate and apply their knowledge from the
analysis and interpretation of financial statements (Section C of the FR Syllabus). The
question had both numerical information and additional information relating to a single
entity. Candidates were asked to calculate ratios for this entity and to analyse its
performance and position compared to sector averages.

The analysis of a single entity is an important area of the syllabus and will continue to
be examined in the interpretation question. There are many ways that candidates
may be required to compare the performance of a single entity, typically this could
include comparisons:
• year-on-year;

• to a competitor; or

• to sector averages.

As in previous examination sessions, candidates often failed to score highly on this

question. The main reason for this was often due to the analysis provided being of
poor quality and not addressing the information in the scenario to provide a plausible
discussion.

Examiner’s report – FR September/December 2022 17

The focus for this detailed commentary will be on how candidates can approach the
question in a logical manner to earn marks in the exam. It is not intended that all
candidates will recreate the model answer but, instead, will be able to draw upon the
information provided in the question to provide a valid analysis.

Requirement (a) – 5 marks

Calculate for Treats Co the equivalent ratios to those provided for the
confectionery manufacturing sector.

This part of the question required candidates to calculate eight ratios for Treats Co
and was generally well answered. Many candidates were able to score full marks.
Typical errors in the calculations provided by some candidates related to both return
on capital employed and net asset turnover.

The examining team continue to remind candidates to show both the formula for the
relevant ratio and all workings so that markers can allocate marks accordingly.

For example, where candidates had the incorrect denominator for return on capital
employed (ROCE), if workings were shown, when this error followed through to the
denominator for net asset turnover, markers were able to award the marks for net
asset turnover in full. If no workings were shown for either ratio, candidates would
lose the mark not only for ROCE but also for asset turnover.

Not providing workings continues to be an issue reported by the FR

examinations team.

Another common mistake (that also relates to other interpretation questions) is the
calculation of gearing. The question specifically stated, 'debt to equity”. Many
candidates calculated gearing as “debt, to debt + equity”. Even though this is a valid
way to calculate gearing, it was incorrect within the requirement of this question and,
therefore, was not awarded any marks.

Another error noted by the FR examinations team relating to gearing was where
some candidates included the overdraft as part of debt. Note (3) in the additional
information told candidates that the overdraft did not form part of long-term financing
and, therefore, the overdraft should not have been included in the calculation of
gearing.

Examiner’s report – FR September/December 2022 18

Requirement (b) – 15 marks
Analyse the performance and financial position of Treats Co in comparison to
its sector averages.

The FR examinations team noted that many candidates did not allocate sufficient
time to this part of the question with some only providing short sentences or bullet
points. Others omitted this part of the answer entirely.

Time management is crucial in all ACCA examinations. In a three-hour exam there

are 1.8 minutes per mark available (180 minutes / 100 marks).It may be beneficial to
allocate at least twenty-seven minutes to this part of the question. This time should
mostly be used to provide plausible explanations for the differences in performance
and position compared to the sector averages using information in the scenario.

Candidates are advised to structure their answer in a manner that addresses the
requirement. This question requires analysis of both the performance and position of
Treats Co compared to the sector and so it would be advised to have a ‘performance’
heading and a ‘financial position’ heading.

Under ‘performance’, candidates would typically discuss the profitability ratios (e.g.,
ROCE, net asset turnover and margins) and under position the efficiency and
solvency ratios (e.g., current ratio, working capital ratios and gearing). By using
headings to structure discussion, candidates should be encouraged to explore the
possible reasons for the ratio results.

As discussed in previous FR examining team reports, many candidates continue to

answer these questions with explanations that are rote learnt from a textbook and
bear no resemblance to the question scenario. This results in weak, largely generic
analysis.

For example, a typical comment on the reason that the current ratio for Treats Co is
lower was due to either “smaller assets or bigger liabilities” and no rationale was
provided as to why this may be the case, such as the large overdraft held by Treats
Co.

The FR examining team also noted that there are several candidates that are simply
copying out information from the question. This would appear to be because of
reading previous examiner reports where candidates have been advised to use the
scenario, however, to score marks this information must be used in the context of the
scenario and ratio results rather than just copy and paste.

Weaker candidates sometimes misunderstood the scenario and provided

commentary which was consistent with a year-on-year analysis rather than providing

Examiner’s report – FR September/December 2022 19

an explanation between the potential differences between Treats Co and the rest of
the sector.

A good answer covered the range of ratios and attempted to provide possible,
plausible reasons for the differences between Treats Co and the rest of the sector.
For example, it was pleasing to see that some candidates were able to recognise that
most of Treats Co’s profitability ratios were worse than the rest of the sector except
for asset turnover. Many candidates were able to use note (4) to identify that Treats
Co’s products were sold both via its own stores and through supermarket chains and,
therefore, margins were likely to be lower.

Very few candidates picked up on the information in note (1) where a low carrying
amount on property, plant and equipment, when compared to its original cost, likely
meant that the assets were old and may need replacing soon. This information meant
that asset turnover is likely to be artificially high and will fall in the future if/ when
these assets are replaced. For those candidates that did recognise this, some were
able to explore this further when analysing gearing.

Overall, the standard of the narrative on this question was disappointing, with many
candidates missing the obvious clues in the question scenario. As discussed above,
answers were generally too brief or too generic and lacked focus.

To produce an answer that scores well, candidates should consider the following:
• Use the scenario – when discussing the differences in the ratios, this should
be supported with information from the scenario.

• One mark will be awarded for a well-explained point.

• Talk about all areas in the scenario – for Treats Co this means coverage of
both performance and financial position.

• Always consider why results are different and do not simply state that a result
has increased/ decreased.

• Always provide a conclusion that is relevant to the requirement – for Treats

Co, following your analysis, comment on whether Treats Co is performing
better or worse that the sector average.

If a candidate follows these rules, they will be able to score well in this question.
Sadly, too many candidates have only learned ratio definitions and repeat these in
the exam.

Examiner’s report – FR September/December 2022 20

Perd Co

Perd Co is a consolidated financial statements question from syllabus area D2. This
type of question may ask you to prepare a consolidated statement of profit or loss and
other comprehensive income or a consolidated statement of financial position for a
simple group (parent and subsidiary) and may include an associate company.

Overall, this question is worth 20 marks and you should prepare to spend
approximately 36 minutes of your exam time to answer the entire question (180
minutes/100 marks = 1.8 minutes per mark x 20 marks).

It is suggested that you break this down further into the component requirements of
the question. For example, Requirement (a) is worth 15 marks overall and, therefore,
you should allocate 27 minutes of your exam time to this. Part (b) is worth five marks
and so 9 minutes should be spent here. Please note, you are not expected to answer
the requirements in chronological order so if you wish to complete part (b) first that is
acceptable. However, this may not be possible for some questions, depending on
the nature of the requirements.

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

Examiner’s report – FR September/December 2022 21

Requirement (a) – 15 marks
Prepare the consolidated statement of profit or loss and other comprehensive
income for the Perd group for the year ended 31 March 20X8.

When asked to prepare a consolidated statement of profit or loss and other

comprehensive income (SPLOCI) the FR examining team recommend that you set up
the proforma for the consolidation immediately. At the foot of the consolidation, it is
advised that you also include the split between the profit and the total comprehensive
income (TCI).

The FR examining team note that the most common omission in a SPLOCI is this
split of profit and this can often result in a significant number of marks being lost.

For example:
$’000
Profit for the period

Other comprehensive income

Revaluation gains etc.
Total comprehensive income (TCI)

Profit for the period attributable to:

Shareholders of parent company
Non-controlling interest (NCI)

TCI for the period attributable to:

Shareholders of parent company
NCI

In Perd Co, many candidates did not attempt to split the profit or TCI between the
parent shareholders and NCI. By not completing the split, candidates immediately lost
marks. If you spend a small amount of time laying out the split in the early part of your
answer, this will act as a reminder to attempt to complete this later and, in doing, so
help score valuable marks.

For candidates that did attempt the split, many failed to split both the profit for the
year and the TCI. Some candidates incorrectly took 80%:20% of the profit for the
year and the total comprehensive income. As a simpler approach, NCI must be
calculated and the parent share is always a balancing amount.

This is an area that candidates must revise and practise.

Candidates are advised to get some of the less complex marks from the question
once the proforma consolidation has been laid out. These marks are earned in the
initial consolidation process.

Examiner’s report – FR September/December 2022 22

You should add together all income and expenses and other comprehensive income
for the parent and subsidiary. Be careful though, it is extremely important to establish
how long you have had control over the subsidiary company. If control of the
subsidiary was acquired mid-way through the period, it will be necessary to time
apportion the subsidiary’s income and expenses only. This is vital in a
consolidated profit or loss question and is an area that many candidates often forget.
For Perd Co, however, the subsidiary was acquired two years ago and so the results
of Sebastian Co did not need to be time apportioned.

The FR examining team noted that, despite commentary in previous examiner

reports, several candidates continue to use proportional consolidation and applied
80% to Sebastian Co’s income, expenses and other comprehensive income. This is
fundamentally incorrect and relates to the basic consolidation marks. Do not
proportionately consolidate the results of the subsidiary based on ownership.

When the initial consolidation process is complete per the guidance above,
candidates are advised to consider the basic consolidation adjustments that may be
required. In this question there is:
• A deferred consideration – note (1).

• An impairment charge – note (2).

• A calculation of fair value depreciation – note (3)

• An intra-group sale and purchase with adjustment for unrealised profit on the
goods that remain in inventory at the reporting date – note (4).

• Other comprehensive income – note (5).

• An internal dividend that must be eliminated – note (6).

These are standard consolidation adjustments for the FR exam and, overall, were
well attempted. However, some common errors or omissions were noted by the
examining team:
• The unwinding of the discount from note (1) was generally dealt with well.
This transaction was relatively straightforward as the discounting of the
deferred consideration had already been performed and the prior year liability
at its (then) present value was given. Candidates needed to calculate 6% of
this opening liability and include it as a finance cost. A small number of
candidates attempted to discount the $7.547m incorrectly before unwinding.
This wasted time and resulted in those candidates not achieving full marks for
this part of the question.

• The impairments in note (2) relate to both the current and previous year. In
the SPLOCI, candidates needed to include the $300,000 expense for the

Examiner’s report – FR September/December 2022 23

 current year which most did correctly. However, there were several
candidates that incorrectly included both impairments at $700,000 or the
$400,000.

• Fair value depreciation in note (3) was generally calculated well but many
candidates failed to time apportion the depreciation, despite specifically being
told depreciation is charged on a pro-rata basis. A less common group
adjustment in note (3) related to the disposal of the property. The examining
team noted that many candidates did not attempt the disposal calculations
and, for those that did, they simply calculated the subsidiary gain or the group
gain (rather than both). Another common mistake when the gain(s) was/ were
calculated was to include the adjustment the wrong way (i.e., as a loss).
Marks were awarded accordingly.

• The examining team noted that many candidates are still unsure as to what
should and shouldn’t be included in other comprehensive income. Note (5)
indicated that group assets were revalued at the reporting date and the gains
were given for both Perd Co and Sebastian Co. A small number of candidates
correctly included both the $4.1m and the $0.7m in other comprehensive
income. There were many instances where the revaluation gains were omitted
completely and several candidates incorrectly included 80% of Sebastian Co’s
gain only.

• The dividend paid by Sebastian Co in note (6) was $1m and Perd Co only
received 80% of this, so $800,000 should be eliminated from investment
income. A significant number of candidates removed the full $1m and,
therefore, did not earn the full mark available. Some credit for elimination was
still awarded.

Consolidations are an integral part of the FR syllabus. The examining team note that
performance on a consolidated statement of financial position is generally better than
a consolidated SPLOCI. There is an equal likelihood that a consolidated SPLOCI
may be tested and, therefore, it is vital that you prepare for all aspects of the
syllabus.

Examiner’s report – FR September/December 2022 24

Requirement (b) – 5 marks
Calculate the total assets that would be recognised in the consolidated
statement of financial position for the Perd Group as at 31 March 20X8.

To answer this part of the question, candidates needed to determine which notes
from the further information would have an impact on the consolidated assets. This
included both current and non-current assets.

Performance on this part of the question was mixed. Disappointingly, many

candidates did not attempt this part of the question and, for others that did, it was
largely incomplete. This may indicate poor time management and so candidates are
advised to spend the appropriate amount of time on each part of the question.

To answer this question, candidates should begin by adding together the total assets
for both Perd Co and Sebastian Co. This gave the starting total asset balances that
would then be adjusted for the relevant information in the question.

Working through the notes in order, candidates should consider if any of the
information would adjust the consolidated total assets:
• Note (1) simply required candidates to unwind the discount on the deferred
consideration and this would have no impact on assets. Some candidates did
attempt to adjust for this in part (b) but this was ignored by the examining
team and marks were not impacted by this error.

• Note (2) required candidates to include the goodwill of $3.2m in total assets –
this was generally done well. The impairment charge would reduce the
goodwill asset and this, therefore, reduced total assets. Many candidates
correctly adjusted for the $700,000, whereas others reduced goodwill by one
of the impairment expenses only.

• Most candidates attempted to adjust total assets for the fair value depreciation
and the disposal outlined in note (3). This was not required as the disposal
had taken place during the year and had already been accounted for in the
financial statements of Sebastian Co. No marks were lost for any adjustments
made but adjusting for this will have wasted candidates’ time.

• The adjustment for unrealised profit in note (4) would reduce inventories in the
consolidated statement of financial position and so this would be deducted
from total assets. This was often overlooked in the adjustments. For
candidates that did adjust for the unrealised profit, it was common to see it
being added to total assets rather than deducted. Where candidates had
incorrectly calculated unrealised profit in part (a), own figure marks were
awarded accordingly in part (b).

Examiner’s report – FR September/December 2022 25

 • Note (4) also contained an intra-group receivable and payable that needed to
be eliminated from receivables. This adjustment was often ignored but it was
pleasing to see that some candidates made the adjustment for the $7m.
Others incorrectly adjusted for the $9m but some merit was awarded for this.

• Finally, many candidates did correctly adjust for the revaluation gains and
added these onto the total consolidated assets. The marks were consistent
with the adjustments made to other comprehensive income in part (a) and
own figures were awarded for this adjustment.

Examiner’s report – FR September/December 2022 26