p o o r t i m e m a n a g e m e n t p r o b a b l y c a u s e d s o m e c a n d i d a t e s t o r u n o u t o f t i m e o n t h e i r l a s t Q u e s t i o n . a n o t h e r f a c t o r c o n t r i b u t i n g t o p o o r p e r f o r m a n c e w a s w e a k o r n o n - e x i s t e n t a n s w e r s t o t h e s e c t i o n s o f t h e p a p e r r e Q u i r i n g w r i t t e n c o m m e n t , i n t e r p r e t a t i o n , a n d a n a l y s i s .
The composition and topics ofthe questions was such that onthis diet there was very littledifference in substance betweenthe International paper (theprimary paper) and all otheradapted papers and thereforethese comments generally applyto all versions of Paper F7.
This question required thepreparation of a consolidatedstatement of financial position(balance sheet) for a parent,a subsidiary (line‑by‑lineconsolidation), and anassociate (equity accounted).The question required thecalculation of goodwill, withthe consideration based on acash payment and loan noteissue (that had already beenaccounted for), and includedsome fair value adjustments.This was the best answeredquestion and demonstratedthat most candidates havea sound knowledge ofconsolidation techniques.The main areas wherecandidates went wrong wereas follows:
In the goodwill calculation,a failure to account for theloan note element of theconsideration and/or thenon‑controlling interestelement of the goodwill (notapplicable to UK version), andincorrectly accounting for thenew property by using its fairvalue rather than the excess offair value over cost.
Not realising thepost‑acquisition period wastwo years; many candidatesonly accounted for one‑year’sadditional depreciation on thenew property and amortisationof the brand.
The detailed components ofthe consolidated retainedearnings were often missed,namely depreciationadjustments, unrealised profit(URP) in inventory (oftencalculated wrongly as well – see below), and gain/loss onavailable‑for‑sale investments.
Many candidates did notcalculate the non‑controllinginterest under the revisedstandard by taking the fairvalue at acquisition (asgiven) and then adjusting forpost‑acquisition profits/losses(not applicable to UK version).
The URP was often calculatedas a gross profit percentage,whereas the question statedthat it was a mark up on cost.Some candidates eliminatedthe cost of the inventory ratherthan the URP in the inventory,and many incorrectly split theURP between the parent andthe subsidiary even though theparent had made the sale.
A small minority of candidatesare still proportionallyconsolidating the associate(some even proportionallyconsolidated the subsidiary);others fully consolidatedthe associate and computeda non‑controlling interestof 70%.
Many candidates did notaccount for the effect of theshare exchange, on acquisitionof the interest in the associate,on the share capital andshare premium.
This was a familiar question onpreparing financial statementsfrom a trial balance with variousadjustments. These involveda revaluation of a non‑currentasset, dealing with a financelease agreement, accounting for aconstruction contract, a revenuerecognition issue, an effectiverate finance cost for a financialinstrument, and taxation.This question was the secondbest answered question. Themost common errors wereas follows:
Deducting the agencysales from revenue,without recognising thecommission earned.
Rather worryingly, deductingthe closing inventory from thecost of sales (by definition ithas already been deducted).
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