Examiner’s report

Financial Reporting (FR)

July 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.
This report should be used in conjunction with the published March/June 2020 sample exam. Due
to the COVID-19 pandemic, the June 2020 exam was postponed and sat in July 2020. This report
labelled July 2020 refers to this exam.

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 challenging for
candidates.

Example 1

Millhouse Co received a government grant on 1 October 20X8. The grant was to help fund
rental costs of a factory in an urban regeneration area. The conditions of the grant were
that the factory must be rented and used for at least one year. Millhouse Co rented a
factory from 1 July 20X9 and was confident that the conditions of the grant would be met.
Millhouse Co owns other factories in different areas.

Which TWO of the following correctly reflect the accounting treatment for the
government grant that could be adopted by Millhouse Co in its financial statements
for the year to 30 September 20X9?

A. Recognise the grant in full as other income in the statement of profit or loss

Examiner’s report – FR July 2020

 B. Deduct the full amount of the grant from the cost of factories in the statement of
financial position
C. Recognise three months of grant income as other income in the statement of profit
or loss
D. Deduct three months of grant income from the factory rental expense in the
statement of profit or loss
E. Deduct the full amount of the grant from the factory rental expense in the statement
of profit or loss

What does this test?

This question tests learning outcome B11(a) where candidates should be able to understand
the accounting for a government grant. It is important to note that two options must be correct
to get 2 marks. Unfortunately, most candidates got one answer correct but not the two
required. 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 answer is C and D as IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance allows for two alternative presentations of grants related to income -
either separately or under a heading such as ‘Other income’ (option C) or they can be
deducted from the related expense (option D).

Why the other options are not correct?

Option A and E recognise the full amount of the grant however the question sets out the
requirements of the grant and that includes the requirement that the factory must be rented – this
only occurred on 1 July 20X9 and therefore the students should have time apportioned and only
recognised in profit or loss 3 months of the 12 month grant.
Option B would have been correct if it was a capital grant however Millhouse Co were renting not
purchasing a factory. This was a common error.

Example 2

Green Co acquired 70% of Blue Co on 1 January 20X4. At 31 December 20X4 the equity
of both companies was as follows:

Green Co Blue Co
$m $m
Share capital 20 20
Retained earnings 116 30

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 136 50

At the date of acquisition, the fair value of Blue Co's net assets is $40m and goodwill is
calculated to be $25m. At 31 December 20X4, 20% of this goodwill is to be written off due
to impairment. Non-controlling interests are measured at fair value.

What amount should be shown for consolidated retained earnings in the statement
of financial position as at 31 December 20X4 (to one decimal place)?

$ ____________ m

What does this test?

This question tests learning outcome D2(a) where candidates should be able to calculate the
figures for a consolidated statement of financial position. It is important to note this area of the
syllabus can be tested anywhere in the Financial Reporting exam and is not restricted to
section C. As this is a fill in the blank, candidates should take care to read all the information
given to ensure their calculation is accurate and has taken all details provided into account.

What is the correct answer?

The correct answer is calculated as follows:

The consolidated retained earnings includes 100% of the parents + groups share (70%) of the
subsidiaries post acquisition earnings less groups share of goodwill impairment.

$116m + (70% x [$50m - $40m)) – (£25m x 20% x 70%) = $119.5m

Where did students go wrong?

The most common error was to include the groups share of the subsidiary’s net assets at 31
December 20X4 rather than only consolidating the post-acquisition share of the subsidiary’s
increase in net assets. The candidates were provided with the fair value of the subsidiary’s net
assets at acquisition and therefore should ask why they have been given this information. Almost
all candidates adjusted for the groups share of the goodwill impairment.

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Section B
Section B tests candidates’ knowledge on a number of IFRS standards in more depth than section
A, with three case questions containing five two-mark objective test questions. The range of topics
tested in the July 2020 examination was:
• Intangibles, impairment, borrowing costs and government grants
• Earnings per share and a rights issue
• Deferred tax and the impact of asset revaluations
• Revenue recognition in a combined contract for goods and services

In one of the cases, there was a question that tested the reversal of an impairment of a tangible
asset. However, many candidates were not aware that the carrying amount of the asset after the
reversal should be restricted to its carrying amount had the asset been measured using historical
cost accounting. IAS 16 Property, plant and equipment is an accounting standard that is regularly
tested and so candidates need to ensure that they are comfortable with its content, regardless of
whether it is tested in Section A, B and/or C. Other topics that candidates struggled with were the
calculation of deferred tax and the journal entries required to account for its movement in the
statement of financial position and the amount of revenue to be recognised on a contract for the
sale of goods and services.

Candidates should also read the case scenario and its requirements carefully. As these questions
score either 2 marks or zero marks, it is important that you do not misread or miss any information
in the scenario. Close reading of the requirements is also important to identify specific instructions
such as rounding.

The FR exam aims to test your ability to apply your knowledge – this is a very important skill which
you will continue to develop in Strategic Business Reporting. Consequently, you need to
understand why you are producing accounting adjustments and try not to rote learn them.

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Section C

Preparation of individual company financial statements

Some candidates were required to present an adjusted profit calculation and a statement of
financial position (SFP) using the TB supplied and a list of relevant notes, from which they could
work out what adjustments to make to the TB figures. Traditionally questions which require a
statement of adjusted profit are ones which candidates struggle more with than producing a whole
statement of profit or loss. It was pleasing to see less evidence of this, with candidates generally
producing good attempts at this. Haverford Co from the March/June 2018 hybrid paper is a good
example of this for students to practice.

It was pleasing to see a good level of performance in relation to convertible loan notes. This has
been tested numerous times, but is a complex accounting area so it was good to note that many
students were able to produce calculations around this item.

Some candidates were required to provide entries largely involving a statement of profit or loss and
statement of changes in equity, outlining the impact on assets and liabilities of the entries. Answers
to this were quite pleasing, although the adjustments to the statement of financial position figures
were weaker than expected. The aim of this question was to test the candidate’s knowledge of
double entry, and a number of candidates produced single entry adjustments.

Candidates were also generally able to produce entries relating to tax and provision adjustments,
which were relatively simple but answered well.

The adjustments relating to non-current assets proved the most challenging. These were technical
adjustments, but performance still tended to disappoint a little. The most common mistake related
to a change in use relating to property, moving from PPE to investment property. This needed to
be revalued under IAS 16 before being then held under the fair value model per IAS 40 for
investment properties. Very few knew the steps for dealing with this, which was disappointing as
this is the kind of topic which provides a bridge towards Strategic Business Reporting. It was also
extremely surprising to see students struggle with simple depreciation calculations, often failing to
apply straight line or reducing balance accordingly, which was more of a problem than it should
have been for students.

In addition to the uncertainty over investment properties, candidates also appeared to struggle with
the disposal of a revalued asset, and how that is shown in the statement of changes in equity.
Many were able to produce a reserve transfer for the additional depreciation on a revalued asset,
but relatively few knew to release a revaluation surplus upon the disposal of a revalued asset.

Overall, there was slight improvement in the use of the software and layout from previous sittings,
where many candidates provided workings which could be followed. Those who continue to work
answers out on a calculator and simply type the answer into a spreadsheet continue to receive ‘all-
or-nothing’ marks, as it is impossible for markers to give credit if workings are not shown. This has
continued to diminish, and the majority of candidates are showing workings, either in the cell or
across different cells in the spreadsheet. Both of these are fine, and good technique is important to
pick up as many marks as possible in the exam.

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There are multiple past exam questions looking at the preparation of single company financial
statements, as this has been a large part of the Financial Reporting exam for many years. In
addition to the suggestion above, Vernon Co from the March/June 2019 hybrid paper and Duggan
Co from the September/December 2018 hybrid paper are good examples of this type of question
which students must practice.

Preparation of consolidated financial statements

The core principles of the preparation of consolidated financial statements remain an area that
candidates perform well on. Candidates with clear workings often scored highly on this area. As
noted within the discussion of the preparation of single company financial statements above, there
was an improvement in the number of candidates showing their workings, either within the cell or
shown separately in different lines of the spreadsheet. Both are acceptable methods, and both will
be marked by the marking team.

The preparation of a consolidated statement of profit or loss was done reasonably well, with
candidates able to process adjustments relating to intra-group sales, unrealised profits and fair
value depreciation. These are all core areas for consolidated financial statements so it was
pleasing to see students performing well.

A big disappointment was the number of students who neglected to split the profit between the
parent’s shareholders and the non-controlling interest (NCI). This is a fundamental part of a
consolidated statement of profit or loss and too many students lost substantial marks by not
attempting this. This was also identified in the Examiners Report in December 2019, and
candidates are losing far too many marks by omitting the parent/NCI allocation of profit. The split of
profit is an essential element of this type of question and will continue to be tested. There is no
reason for students to not attempt this, and we will be seeking improvement in relation to this in
future questions.

Another area of weakness among candidates is failing to time-apportion the figures of a subsidiary
with a mid-year acquisition. This is regularly tested and one which we would expect students to
apply. Failure to do so is a fundamental error by not recognising the principle of only consolidating
the results from the date of acquisition. A smaller, but still relatively common, issue is that of
proportionate consolidation. This displays a poor knowledge of the consolidation principles and
should not be happening in the exam.

The preparation of a consolidated statement of financial position was another area where
candidates performed less well than they usually do. Many of this stemmed from a basic lack of
technique, and too many simple fundamental errors were made.
Students who did well were able to apply discounting to a calculation of deferred consideration. A
number did this in the goodwill, but the strongest candidates also included the deferred
consideration as a liability in the statement of financial position.

Sadly, a number of students neglected the narrative discussion marks, meaning they lost up to
three marks immediately. The FR exam is essential preparation for the SBR exam, where students

Examiner’s report – FR July 2020 6

are expected to be able to discuss and explain items. Candidates should be adding that skill into
their portfolio at this stage of their studies so that they are able to perform well at the higher level.

Nevertheless, preparation of a consolidated statement of financial position continues to be an area

that students perform well on, with some ‘core’ adjustments on fair value adjustments and
impairment done well. It was surprising to see a number of students struggle with goodwill
calculations and share-for-share exchanges, as these have been examined consistently in the FR
syllabus. It was also disappointing to see basic errors such as using proportionate consolidation
and time apportioning for a mid-year acquisition. Candidates doing either of these had clearly not
practiced enough questions and tended to score very low marks.

There are multiple past exam questions looking at the preparation of consolidated financial
statements, as this has been a large part of the Financial Reporting exam for many years. 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 individual company financial statements

The calculation of basic ratios continues to be an area where many students score full marks,
which is good to see, but candidates absolutely must show workings when asked to redraft some
figures and prepare recalculated ratios.

As always, performance in the analysis section of the question was mixed. This question showed a
great divide in the capabilities (and marks) of the students.

The first group of students relates to a good number of individuals who attempted to use the
information in the scenario to provide explanations for movements, and these students tended to
score very well. The only weakness is that sometimes answers were too brief, and if the students
had expanded their initial comments they would have been able to score more marks. It was
pleasing to see these candidates identify the key points well, but then sad to see them simply
move on or feel they had made enough points, when they clearly had the ability to score more.
Candidates should be working on the basis of scoring one mark for each well explained point, so if
11 marks are available for the analysis they should try to make 11 separate points.

The second group of students are those who continue to ignore all information given in the
question scenario. These students continue to use ‘textbook’ answers to explain what a ratio
means, or to suggest generic reasons for movements. Students who simply commented that an
increase in inventory showed a lack of ability to sell goods completely neglected the fact that there
had been a significant increase in revenue. This kind of answer simply serves to show markers that
students think they can simply learn what an increase or decrease in a ratio must mean and repeat
that in an exam.

The aim of these questions is to display that students are able to deal with the information given
and provide a good analysis of realistic scenarios. These answers cannot simply be rote learned
and copied from notes. Students must understand what the ratios are and potential reasons for

Examiner’s report – FR July 2020 7

changes, but ultimately need to be able to apply these to a specific situation to provide a good level
of analysis.

Candidates were asked to explain the simple accounting treatment for the repayment of a
government grant. Many simply wrote double entries which gained marks, but does not constitute
an explanation. This further highlighted the reluctance of candidates to produce comprehensive
narrative answers. This is essential in the bridge to SBR and we will continue to ask questions of
this nature, so that candidates develop this skill.

The word processing software does appear to mean that students are thinking about how they lay
out their answer, and the higher performing students often used short paragraphs and headings so
they are carefully identifying the specific points made.

Some weaker candidates type everything in one block of text. This often reads poorly as it feels
like students are just throwing anything they can think of into the answer. It is far better to make
one or two points per paragraph. This would also help students to know how many points they
have made and will give a good guide to how much more they should be writing.

There are multiple past exam questions looking at the analysis of single entity financial statements,
as this has been a large part of the Financial Reporting exam for many years. Bun Co from the
September/December 2019 hybrid paper, Mowair Co from the September/December 2017 hybrid
paper and Funject Co from the March/June 2017 hybrid paper are good examples of this type of
question which students must practice.

Analysis of consolidated financial statements

This question involved the calculation of the gain/loss on disposal of a subsidiary. In general
candidates made a reasonable attempt at this, displaying that they were aware of the processes
and workings behind such a calculation. Candidates produced accurate calculations of goodwill as
part of the disposal calculation, but really struggled with how to work out the non-controlling
interest at the date of disposal. A few applied the proportionate method when the fair value was
required. The most common situation was students either omitting it or simply using the non-
controlling interest at the date of acquisition.

Following the calculation of the gain/loss on disposal, candidates were then required to remove the
subsidiary from the consolidated results in order to produce the results of the group without the
subsidiary. Candidates were generally able to do this well and calculate ratios on this basis. The
most common error was failing to recognise that the subsidiary had been disposed of after 6
months of the year, meaning only 6 months of results needed to be removed. Candidates who
failed to notice this lost a mark here but picked up follow through marks in the ratio calculations,
providing they showed adequate workings.

Of the ratio calculations, the most common error was failing to know how interest cover and return
on equity are calculated. This is something we have seen in previous sittings and candidates need
to ensure they know the key ratios in the learning materials. The number of ratios examined is not
unrealistic for students, and these really need to be learned.

Examiner’s report – FR July 2020 8

The discussion element was sadly very disappointing. Stronger candidates were able to separately
discuss the performance of the disposed subsidiary and the rest of the group, in addition to
commenting on other areas highlighted in the scenario. These included new contracts, a newly
received loan, new marketing costs and the costs of a new product launch. The students who
discussed these were able to score very well.

Sadly many answers were extremely brief, and in fact much briefer than in the analysis of
individual financial statements. Candidates seemed to simply calculate numbers and hope that was
sufficient. The analytical discussion will always be the majority of the marks available, and is
included to build a bridge between FR and SBR. Candidates who refuse to engage with such
analysis will struggle at SBR, so this is a crucial skill to develop.

Candidates must look at Pirlo Co 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. This type of question is one which can often divide candidates.
Those who are well prepared can often score good marks, but sadly far too many individuals are
picking up either very limited marks or no marks at all for their discussion.

Exam technique

Good exam technique is vital for success in FR. Strong candidates continue to use good 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 analytical discussion points should be laid out clearly, using headings for each area requested,
such as ‘performance’, ‘position’ or ‘cash flow’. Candidates should also ensure they include a
conclusion. A sensible conclusion summarising the main points of the analysis is important, and
marks will be given here.

The completion rate of questions continues to be high, suggesting that many candidates are able
to manage time well. The most commonly omitted sections 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 were asked to use the word processing tool for the analysis question
and were less likely to show their workings, 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 are perfectly acceptable as markers will follow both methods. As stated earlier, the

Examiner’s report – FR July 2020 9

candidates who do workings on a calculator and simply type in the final answer often lose marks
and should be careful using this ‘all or nothing’ approach.

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.

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 exam 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 performing well in the FR exam is question practice 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 carefullyreviewing 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.

As always, exam technique is an important aspect of success in any exam. Throughout this report
the importance of reading and interpreting requirements very carefully has been reiterated many
times; failure to do this is often the cause of poor scores. The tendency for some candidates is to
answer the question that they want to get rather than answering the question which they have
been given.

Candidates should ensure that they have read all the requirements and noted the mark allocation
for each requirement; this is especially important in CBE as the requirements might be split over
more than one screen. Each requirement should be properly broken down so that it can be
established what is being asked. A recommended approach to this would be that at the start of an
answer, candidates should do a small plan in which they have broken down a requirement and
asked themselves how many things they are being asked to do, making sure that they consider all
aspects of the requirement.

Finally, please remember to use the spreadsheet functionality available. Totals should be
calculated by inserting formulae rather than typing in the number.

Examiner’s report – FR July 2020 10