Examiner’s report

Financial Reporting (FR)

March 2020

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

General comments

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

• Section A objective test questions – we focus on two specific questions that caused
difficulty in this sitting of the exam.
• Section B objective test case questions – here we look at the key challenge areas for this
section in the exam.
• Section C constructed response questions - here we provide commentary around some of
the main themes that have affected candidates’ performance in this section of the exam,
identifying common knowledge gaps and offering guidance on where exam technique could
be improved, including in the use of the CBE functionality in answering these questions.

Section A

Here we take a look at TWO Section A questions which proved to be particularly difficult for
candidates.

Example 1:
New Designs Co is considering the following potential assets for inclusion in its statement of
financial position.

Indicate which of the options below should be recognised as intangible assets by dragging
and dropping the appropriate options into the grey target boxes.

OPTIONS Intangible Assets

Brand name developed by New Designs
Co worth $10m
$2.5m spent on new equipment to
develop a new successful product
$3m spent on a licence to operate a
production facility for six years
$1.5m spent on training customer service
staff expected to increase revenue by
$5m
$2m spent on an advertising campaign
expected to increase revenue by $20m
$3m paid to acquire the brand name Fast
Designs
$1m spent on the construction of a
product prototype before its launch
$2m paid as goodwill when acquiring
Unique Co

Examiner’s report – FR March 2020

What does this test?
This question tests learning outcome B2(c) where candidates should be able to understand the
criteria for the recognition of intangible assets. It is important to note that all four options must be
correct to get 2 marks. Unfortunately, many candidates got three answers correct but not all four. It
is therefore vital that candidates read all of the options carefully and that each option is given equal
consideration before you move to the next question.

What is the correct answer?

The correct answers are identified below for the following reasons:
• $3m to acquire brand name Fast Designs – meets the definition of an intangible asset (note
that this contrasts with the internal development of a brand)
• $3m licence - meets the definition of an intangible asset
• $1m prototype expenditure – meets the definition of development expenditure
• $2m goodwill - meets the definition of an intangible asset

Why the correct answer is none of the other options?

The incorrect answers are identified below for the following reasons:
• $10m brand developed by New Designs Co – internally developed and therefore
capitalisation is prohibited
• $2m advertising campaign – this expenditure cannot be controlled therefore it does not
meet the definition of an asset
• $2.5m spent on equipment – this may be a tangible asset but it is definitely not an
intangible asset
• $1.5m staff training - this expenditure cannot be controlled therefore it does not meet the
definition of an asset

Example 2:
Root Co acquired 30% of the 100,000 equity shares in Branch Co for $7.50 per share on 1 January
20X7, when Branch Co had retained earnings of $460,000 and a balance on the revaluation
surplus of $50,000.

At the year end date of 31 December 20X7, Branch Co had retained earnings of $370,000 and a
balance of $70,000 on the revaluation surplus. Root Co considered that its investment in Branch
Co had suffered an impairment loss of $40,000

Calculate the carrying amount of the investment in Branch Co in the consolidated statement
of financial position of Root Co as at 31 December 20X7

What does this test?

This question tests a candidate’s understanding of how to account for a company’s investment in
an associate company (learning outcome D2). Using equity accounting, the carrying amount is:

COST +/- MOVEMENT IN POST-ACQUISITION RESERVES – DIVIDENDS RECEIVED - IMPAIRMENT

Examiner’s report – FR March 2020 2

What is the correct answer?
$
Cost of investment (30,000 x $7.50) 225,000
Post-acquisition loss in retained earnings (($370,000-$460,000) x 30%) (27,000)
Post-acquisition increase in revaluation surplus (($70,000-$50,000) x 30%) 6,000
Impairment (40,000)
164,000

Why the correct answer is none of the other options?

This was a fill in the blank question (so there were no other options) but many candidates ignored
the post-acquisition increase in the revaluation surplus and some also ignored the post-acquisition
loss in retained earnings. Some treated the post-acquisition loss in retained earnings as a gain and
adjusted for it the wrong way and others only wrote off 30% of the impairment. This suggests that
candidates are either not comfortable with equity accounting or were careless in their workings.
Candidates should take great care with fill in the blank questions and review their answer
thoroughly before moving on the next question.

Section B

Section B tests candidates’ knowledge on a number of topics in more detail than section A, with
three case questions containing five two-mark objective test questions. The range of topics
covered in the March 2020 examination was:

• Accounting policies
• Financial instruments
• Plant, property and equipment; borrowing costs; and government grants
• Leases
• Foreign exchange
• Revenue

Candidates found the following accounting adjustments difficult: the revaluation of a property;
government grants; costs associated with the construction of PPE (in particular borrowing costs);
and the calculation of the carrying amount of a right-of-use leased assets. Admittedly, some of
these topics are technically challenging but this does not mean that the FR examining team will not
examine them. Candidates should be prepared for a balanced FR exam which will contain
challenging questions in addition to questions that are less challenging.

A few key points that came out of section B were:

• Read the case scenario and requirements very carefully. This goes for the whole exam, but
any objective test question is ‘all or nothing’ – if you misread the requirement or miss a vital
piece of information from the scenario and get the answer incorrect you score zero for that
question. Close reading is also important for identifying the instructions in the question on
how to round your answers.
• Cover the whole syllabus. The list above should highlight this – FR has a large syllabus
which can seem daunting, but it is essential to have a broad knowledge. If, for example, a

Examiner’s report – FR March 2020 3

 section B OT case testing leases comes up, and you haven’t covered this in your revision,
the 10 marks available are left to chance.
• Be able to apply your knowledge of theories/techniques to the scenario provided, as in the
OT case questions these areas will often be examined in the context of the case. It is
important that you are able to apply the logic of a concept or theory to a problem and so
you need to understand the method and why you are doing the calculations and not just
focus on how to do the calculations.

Section C

Candidates were presented with questions drawn mainly from the areas of:

- Single entity accounts preparation

- Analysis of single entity financial statements
- Preparation of consolidated financial statements
- Analysis of consolidated financial statements

These will be discussed in turn. Although the specifics of individual questions will not be discussed,
common areas candidates either performed well on or struggled with will be highlighted. Advice will
be provided to improve exam performance.

Single entity accounts preparation

Some candidates were required to prepare a statement of profit or loss (SOPL) and other
comprehensive income (OCI), a statement of changes in equity (SOCIE) and extracts from the
statement of cash flow (SCF) using a trial balance (TB)and notes that required adjustments. On
the whole, performances in this area were not as good as in previous diets, however, there were
still many well-prepared candidates that were able to score highly.

A common mistake in the SOPL for some candidates related to the investment in shares. The
question stated that the investment was to be recognised as fair value through other
comprehensive income in accordance with IFRS 9 Financial Instruments. Many candidates
ignored the instruction to record changes in fair value in OCI and instead recognised the gain in
SOPL. There was also a significant number of candidates that viewed this investment as a share
issue in error and recognised it in the SOCIE. It was disappointing that such a large number of
candidates failed to recognise the investment correctly as this is a topic area where the basics
need to be grasped at the FR level to underpin the knowledge required for Strategic Business
Reporting (SBR).

The marking team commented that the SOCIE was often not attempted at all or was largely
incomplete. A surprising number of candidates did not show the opening balances or adjusted
them for a (non-existent) share issue in some questions. In questions where candidates were
presented with a rights issue that had already been recorded, this was often calculated incorrectly
using the opening share capital balances. A common omission throughout the preparation of the
SOCIE was the prior period adjustment that was rarely included. It was pleasing that the majority
of candidates were able to get “own figure” marks for including the profit after tax and OCI (where
relevant) in the SOCIE.

Examiner’s report – FR March 2020 4

Many candidates were able to correctly deal with the adjustment for revaluations and the
subsequent excess depreciation in respect of the annual transfer from the revaluation surplus.
This is an area of the syllabus that is regularly tested, so it was pleasing to see a stronger level of
performance here.

The requirement to prepare extracts from the SCF (investing and financing activities) was omitted
by a significantly large number of candidates. For those that did attempt this part of the question,
the dividend paid was often correctly included as a deduction from financing activities. It is worth
noting that when buying new assets such as investments or a brand, this will result in cash outflow
that should be recognised in investing activities. The requirement to prepare extracts from the
SCF is common in this style of question and is something that candidates need to work on and
improve.

The marking team noted that many candidates produced well-presented financial statements and
for those that provided clear workings, markers were able to apply the ‘own figure rule’. For
example, if a calculation error was made (such as on a rights share issue) candidates still gained
credit for following the incorrect figure through and accounting for it correctly in the SOCIE.

Despite previous guidance in the examiner’s reports, markers have reported that there are still
candidates that continue to type their answer into the spreadsheet rather than showing workings to
explain how they were calculated. In the absence of a working it is impossible for markers to give
credit and the ‘own figure rule’ cannot be applied.

There are multiple past exam questions that demonstrate how single company financial statements
are tested. The examining team recommend that you attempt Vernon Co from the March/June
2019 hybrid paper, Duggan Co from the September/December 2018 hybrid paper and Haverford
Co from the March/June 2018 hybrid paper. These are good examples of this type of question
which students must practice. The FR exam will remain technically challenging and it is essential
that students have a thorough working knowledge of IFRS standards. This knowledge is
necessary to pass this exam and progress to SBR.

Analysis of individual company financial statements

It was pleasing to see that many candidates were able to score maximum marks on the calculation
of basic financial ratios in these questions, with only a minority not attempting the calculations at
all. Some common mistakes included not using profit before interest & tax or using the wrong
capital employed in a return on capital employed calculation. Some candidates also calculated
gearing using debt to debt plus equity, despite the question asking for debt to equity. It is
important to read the question carefully and provide the calculations being asked for. Financial
analysis is something that is tested in every exam diet and therefore candidates must ensure they
are familiar with the various ratio formula. A final point to note for the ratio calculations is perhaps
one of the most important! Candidates must ensure that they show their workings for the ratio
calculations so that credit can be given accordingly.

Responses to the appraisal part of the question were often disappointing. There were many
answers that included very limited analysis, with numerous solutions simply citing the change in

Examiner’s report – FR March 2020 5

the various ratios. Generic comments that are not related to the scenario or performance of the
entity will not score marks. For example, stating that a reduction in gross profit margin could be
due to a fall in sales price or lack of cost control will not score marks when there are clear
indicators for the movement contained within the scenario and these are not addressed.

The marking team also noted that there was an increase in the number of candidates not providing
a conclusion to their analysis. Candidates are advised to provide a conclusion (with a suitable
heading) based on the objective of the question. For example, if you are comparing company
performance year on year, your answer should conclude whether performance has improved or
deteriorated based on your analysis?

It continues to be the case that candidates who score well in these types of questions are those
that attempt to use the scenario to provide a rationale for the differences in ratios (e.g. year on year
or compared to a competitor). These questions are designed to allow candidates to demonstrate
that they can deal with the information provided and prepare a good in-depth analysis of realistic
business scenarios. Candidates must demonstrate that they not only understand what ratios are
and potential reasons for their movement but they must be able to apply this knowledge using the
scenario to provide a robust analysis of company performance.

In recent diets, it has been noted that candidates are now using the CBE software to their
advantage in these question types. High scoring candidates often make use of tables to present
their ratio results and workings and use headings and short paragraphs for their analysis. This
approach makes it easier for the marker to identify the relevant points that the candidate is making.
Poorer performing candidates often do not use headings and provide continuous text where it is
difficult for markers to identify the points that the candidate is trying to make.

By using headings and small paragraphs, candidates will provide better structure to their answer
and enable them to identify how many points have been made. For example, if there are nine
marks for analysis, ideally you would provide nine points using the scenario. These points can be
clearly identified by the marker if you have included them separately in small paragraphs.

The examining team recommend that candidates practice past questions in this area. There are
multiple past exam questions that test the analysis of single entity financial statements, as this has
been a large part of the FR exam for many years. Bun Co from September/December 2019,
Mowair Co from September/December 2017 and Funject Co from March/June 2017 are good
examples of this.

Preparation of consolidated financial statements

General consolidation principles continue to be familiar to candidates with many being able to
score highly. Where workings are clearly shown, markers are able to award marks for relevant
calculations and apply the ‘own figure rule’. The marking team noted that, in line with previous
sittings, a greater proportion of candidates are showing their workings in this type of question,
either within the cell or shown separately elsewhere within the spreadsheet. Both are acceptable
methods and both will be marked by the marking team.

Examiner’s report – FR March 2020 6

This diet required some candidates to prepare a consolidated statement of profit of loss (CSOPL)
and for some to include OCI. The preparation of such statements was done reasonably well with
many candidates able to successfully deal with fair value depreciation, intra-group sales and
unrealised profits.

It was disappointing to note that a surprisingly large number of candidates did not recognise the
mid-year acquisition of a subsidiary which is common place in a CSOPL. In such a situation, the
results of the subsidiary should be time apportioned (for the period of time that the parent has had
control over the subsidiary) when including in the consolidated profit or loss.

Another area of weakness that was highlighted by the marking team was the failure to split the
consolidated profit for the year between the amount attributable to the shareholders of the parent
and the amount attributable to the non-controlling interests. This also extended to the total
comprehensive income (TCI) that also needed to be apportioned by some candidates. The
profit/TCI split is an area that is often overlooked by candidates in the exam and should be
addressed by candidates as part of their revision of this syllabus area.

It continues to be the case that elements of these questions related to ‘non-group’ accounting
adjustments, such as the correct inclusion of a loan per relevant IFRS standards are often not
correctly accounted for. In this diet an adjustment required candidates to reverse out an incorrect
treatment of issue costs and to calculate and correctly account for the correct finance cost. Many
candidates were unable to deal with such an adjustment in the context of consolidated financial
statements, whereas a similar adjustment required to the financial statements of a single entity is
usually well received. Candidates need to be prepared to make adjustments to either the parent or
subsidiary financial statements prior to consolidation.

Some candidates were required to account for an associate in the CSOPL and to calculate the
investment in the associate that would be recognised in the CSFP. On the whole these
requirements were generally well attempted. One of the main errors related to the share of
associate profit. The CSOPL should record the share of associate profit for the current accounting
period only whereas the investment in associate in the CSFP should include the share of all post-
acquisition profit to date. Many candidates calculated the unrealised profit for the associate in the
same way as they would for a subsidiary. Whilst this approach was partially correct, to complete
the calculation candidates needed to adjust only for the share of the associate’s unrealised profit,
for example, 30%.

There are multiple past exam questions that test the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. Runner
Co from the September/December 2019 hybrid paper, Party Co from the September/December
2017 hybrid paper, Dargent Co from the March/June 2017 hybrid paper and Bycomb Co from the
June 2015 paper are good examples of this type of question which students must practice.

Analysis of consolidated financial statements

This question type may require candidates to complete a small calculation for part (a) before
calculating a number of ratios and analysing the performance or position of a company. In the
March 2020 diet, candidates were either required to calculate goodwill or a group gain following the

Examiner’s report – FR March 2020 7

disposal of a subsidiary. Both the acquisition and the disposal took place mid-way through the
accounting period and the impact of this should have been noted in the analysis part of the
question.

A surprising number of candidates were unable to deal with the calculation of goodwill correctly.
Common errors included not discounting the deferred consideration to present value and using the
incorrect share price when calculating the share exchange and the non-controlling interest.

Group disposals have been part of the syllabus for several years now, so it was very disappointing
to note that many candidates were unable to correctly calculate the gain on the disposal of the
subsidiary. A number of candidates included non-controlling interest at disposal in the calculation,
despite it being a disposal of a 100% owned subsidiary. Candidates were told in the scenario that
the goodwill of the disposed company had been impaired by 50%. Candidates often misread the
information and simply took 50% of the consolidated goodwill from the consolidated statement of
financial position (which included the goodwill of other group companies) in error. Marks were
available for calculating the goodwill on the acquisition of the disposal company and subsequently
reducing this by the impairment amount of 50%. Many candidates did not attempt this and so
missed out on these marks.

It was pleasing to see that a large proportion of candidates were able to score full marks on the
ratio calculations in these questions. For the candidates that did not score full marks on the ratios
there were often errors in the formula used or no workings were provided for the marker. As
already noted in this report, candidates need to record all workings when calculating ratios.

The analysis section of the question produced answers that varied in quality. There was a notable
decline in the performance of candidates in this question type. Some candidates used information
from the scenario and incorporated it into their answer. Candidates that used this information and
recognised the impact that an acquisition or disposal of a subsidiary part-way through the year, or
one-off transactions (such as a gain on disposal or acquisition costs relating to a new subsidiary)
may have, scored very well.

Unfortunately, far too many candidates ignored the scenario provided in the question and the
acquisition/disposal of the subsidiary and produced vague, generic answers. When analysing
consolidated financial statements, it is essential that candidates recognise the impact that the
acquisition/disposal of a subsidiary will have on the financial statements to support their analysis
and use the additional information in the scenario to provide a rationale for the change.

The examining team recommends that previous questions containing group analysis issues are
considered such as Pirlo from the March/June 2019 hybrid paper, Duke Co from the
September/December 2018 hybrid paper, Perkins from the March/June 2018 hybrid paper and the
September 2016 question Gregory Co as examples of how to incorporate knowledge of
consolidations into an answer. To score well on this question type candidates MUST ensure that
they use and apply the information provided in the question scenario.

Examiner’s report – FR March 2020 8

Exam technique

Good exam technique is vital for success in the Financial Reporting exam. Strong candidates
continue to use clearly presented workings for both the preparation of financial statements and
calculation of ratios, enabling them to maximise the marks gained here. As stated earlier,
candidates who failed to provide workings often scored much lower marks on all aspects of
calculation.

The analysis discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should make clear statements and
avoid repetition. Numerous candidates continue to repeat the same point two or three times when
explaining the movement in a ratio which will waste time and not provide any further marks. It is
much better to make comments on a wider range of figures than to repeat similar points over one
specific balance.

Candidates should also ensure they include a conclusion on the analysis discussion. A sensible
conclusion summarising the main points of the analysis is important, and marks will be awarded for
a decent attempt to do this.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. In this diet, it was pleasing to see that the majority of candidates attempted all
sections of the exams. The most commonly omitted questions in section C tended to be areas
where candidates were asked to explain issues. The exam will involve elements of discussion, so
candidates cannot afford to neglect these sections as they practise questions.

Word processing and spreadsheet technique

As stated earlier, candidates using the word processing tool for the analysis question were less
likely to show their workings for calculating ratios than those sitting the paper-based exam, which
needs to be improved so marks are not lost.
Conversely, the narrative answers were often well presented, with headings and spacing used
well.

For the preparation of financial statements question, candidates often laid out the financial
statements and workings well. Some candidates tended to put figures in individual cells and add
the cells across for the answer, whereas others did the entire working in one cell using a formula.
Both approaches are perfectly acceptable as markers can allocate marks to both methods. As
stated earlier, the candidates who do workings on a calculator and simply type in the final answer
often lose marks.

There are resources on ACCA’s website giving more guidance on how to use the spreadsheet
software. A video introducing the main functionality and how to make best use of these in Financial
Reporting can be accessed here.

Examiner’s report – FR March 2020 9

Guidance and Learning Support resources to help you succeed in your exam

There are many resources available to candidates to help with the exam. Many of the common
themes discussed in this report regarding exam technique and ways to improve are comments that
are commonly made across sittings. Previous examiner’s reports can be found here and will give
good, consistent guidance in what the examining team is looking for from well prepared
candidates.

One of the keys to Financial Reporting is question practice, attempting questions and reviewing the
answer to see any areas you may have missed. This is particularly relevant on the analysis
questions. Often on this question candidates feel comfortable, but reviewing the answers can show
the depth of discussion that is being sought here. We strongly recommend that you use an up to
date question and answer bank from one of our Approved Content Providers but if this is not
possible then work through the most recent past exams on our website. However, please note if
you are using the past exams that these are not updated for syllabus changes or changes to the
exam format and so should be used with caution – so check the latest syllabus and study guide for
changes.

Some of the more challenging areas of the syllabus have specific articles describing them in more
depth in the technical articles section and these should provide greater understanding. The exam
technique section also provides guidance for approaching the analysis question, and further
guidance for resit students.

Examiner’s report – FR March 2020 10