Financial Reporting

March/June 2023
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in Candidates’ performance, 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 ............................................................................... 5
Question 4 ............................................................................... 6
Section B ..................................................................................... 7
Question 1 ............................................................................... 9
Question 2 ............................................................................. 10
Question 3 ............................................................................. 11
Question 4 ............................................................................. 12
Question 5 ............................................................................. 13
Section C ................................................................................... 14
Vroom Co .............................................................................. 15
Requirement (a) – 4 marks ............................................. 15
Requirement (b) – 3 marks ............................................. 16
Sphinx Co .............................................................................. 18
Requirement (a) – 4 marks ............................................. 19
Requirement (b) and (c) – 6 marks and 10 marks....... 19

Examiner’s Report – FR March/June 2023 1

General comments

This examiner’s report should be used in conjunction with the published March/June
2023 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 question
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.

Examiner’s Report – FR March/June 2023 2

Section A

Here we look at FOUR Section A questions which proved to be challenging for candidates.

Question 1

For several years, Jaswinder Co has applied the cost model to its investment
properties. From 1 April 20X3, the fair value model was applied to investment
properties. As fair values were greater than carrying amounts across all investment
properties, a fair value gain of $30m was recognised in the financial statements.

There has been no change in the useful life of investment properties.

What effect will this change in accounting policy have on the financial
statements for the year ended 31 March 20X4?

A. Both operating profit margin and gearing will increase

B. Other Comprehensive Income will increase and gearing will decrease
C. Profit before tax will increase and gearing will decrease
D. Profit before tax will not change and gearing will increase

What does this test?

This question tests learning outcome C3(b) and IAS 40 Investment Property.

Candidates needed to understand that, under the fair value model, increases in the fair
value of investment properties are recognised in the statement of profit or loss. They also
needed to consider the impact on very commonly examined ratios – operating margin
and gearing.

What is the correct answer?

The correct answer is C.

Under the fair value model, a fair value increase in investment property increases both
non-current asset carrying amounts and the statement of profit or loss.

Operating margin would increase because of the fair value increase in investment
properties. This is due to the increase in operating profit (numerator) with no change in
revenue (denominator).

An increase in the statement of profit or loss increases profit and, ultimately, also
increases retained earnings. This means that the ‘Equity’ element of the gearing ratio
(denominator) increases whilst debt (numerator) remains the same; therefore, the
gearing ratio decreases.

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

Examiner’s Report – FR March/June 2023 3

Dr Investment properties 30,000
Cr Operating expenses/Other income 30,000
being fair value increase on investment properties

Where did candidates go wrong?

Most candidates believed the fair value increases on investment property should be
included in other comprehensive income (B). A similar but smaller number of candidates
selected the correct answer with very few candidates selecting other options (A) (D).

Question 2

Kajak Co manufactures canoes and kayaks for the European market. It is,
consistently, a highly profitable company. This trend is expected to continue.

Most revenue is earned during the Northern Hemisphere’s warmer months of March
to August. All sales are on credit terms of 30 days.

Upon incorporation, Kajak Co chose between an annual reporting date of 31

January and 31 August; selecting the 31 January.

Which TWO of the following would be true if Kajak Co had, instead, chosen a
reporting date of 31 August?

A. The statement of financial position as at 31 August would show Kajak Co at its

most liquid
B. The time and costs of counting inventories should be minimised at or near 31
August compared to 31 January
C. Profits for the year ended 31 August would be higher than it would for 31
January
D. Net cash generated from operations would be higher for the year ended 31
August than it would for 31 January

What does this test?

This question tests learning outcome C1(c).

Candidates needed to understand the impact of a seasonal industry on the financial

statements (excluding the statement of changes in equity).

What is the correct answer?

The correct answers are A and B.

In a seasonal industry, it would be expected that the year-end trade receivables would be
relatively high whilst the inventories would be low. Trade payables would also be
relatively low compared to earlier in the year. This would lead to a strong, liquid position.

Examiner’s Report – FR March/June 2023 4

If we take each in turn, assuming a year-end date of 31 August:

• With a high number of sales transactions on credit (30-day term), it would be

expected that trade receivables remain high in the final months of the financial
year and into the first month of the next financial year (i.e., the 30 days following
the end of the busy period).

• With a high number of sales, it would be expected that inventories are low by the
year end (i.e., the end of the busy period)

• Manufacture would be lower coming towards the end of the busy period as you
would not expect an inflow of raw materials at year end – therefore, trade
payables would be expected to be low as would raw materials and work in
progress inventories.

If inventories are lower at the year end, it would be expected that the time and costs of
inventory counting are minimised due to reduced volume.

Where did candidates go wrong?

Most candidates chose (A), (C) and (D) as their options (two of the three) and so failed
to consider the impact of holding less inventories by the end of the busy period, at
year end.

Profits and cash generated for the year would be no different under a January or August
year end as both incorporate a full 12 months, therefore, both have a full busy period
within the year (C) (D). This holds true as we are told that profits are consistently high
and that this is expected to continue.

Question 3

Bubber Co acquired 60% of Randit Co on 1 April 20X6. On that date, the carrying
amount of Randit Co's net assets equalled the fair value, except for property.

Randit Co’s property with a carrying amount of $1,800,000 had a fair value of
$3,200,000 and a remaining useful life of 50 years. This is the only property within
the Bubber Group.

What is the impact of the fair value adjustment on the Bubber Group’s
consolidated retained earnings as at 31 March 20X7?

A. $16,800
B. $28,000
C. $38,400
D. $64,000

Examiner’s Report – FR March/June 2023 5

What does this test?

This question tests learning outcome D2(e) and both:

• IFRS 3 Business Combinations; and
• IFRS 10 Consolidated Financial Statements.

Candidates needed to recognise that fair value adjustment and not the total fair value
is being tested. Furthermore, candidates needed to recognise that non-controlling
interests take a share of the increased depreciation charge.

What is the correct answer?

The correct answer is A.

Fair value adjustment = $3,200,000 - $1,800,000 = $1,400,000

Total depreciation adjustment = $1,400,000 x 1/50 years = $28,000

Impact on Group retained earnings = 60% x $28,000 = $16,800

Where did candidates go wrong?

The most common error made was to ignore non-controlling interests, selecting the total
depreciation adjustment of $28,000 only (B).

Some candidates considered the total fair value instead of just the fair value increase in
property ($3,200,000 x 1/50 years x 60%) (C). A small number of candidates combined
these errors ($3,200,000 x 1/50 years) (D).

Question 4

On 1 January 20X6, Causeway Co acquired property through a seven-year lease.

The following information is relevant:
• On 1 January 20X6, an initial lease payment of $6m was made.
• Annual lease payments of $12m are due on 31 December each year.
• The rate of interest implicit in the lease is 5%.
• The present value of lease payments on 1 January 20X6 (before the initial
lease payment) was $75m.

What will be the finance costs in respect of this lease in Causeway Co's
statement of profit or loss for the year ended 31 December 20X7 (to the
nearest $)?

$ _____________

Examiner’s Report – FR March/June 2023 6

What does this test?

This question tests learning outcome B6(a) and IFRS 16 Leases.

Candidates needed to identify that finance costs were required for the second year of
the lease. They also needed to understand the impact of making payments in arrears.

What is the correct answer?

The correct answer is $3,022,500

Initial lease liability = $75m - $6m = $69m

Lease calculations:

Year Opening liability Finance costs ($) Payment in Closing liability

($) arrears ($) ($)
20X6 69,000,000 3,450,000 (12,000,000) 60,450,000
20X7 60,450,000 3,022,500 (12,000,000) 51,472,500

Although not required, the journal entries (in $’000) for the first year only are:

Dr Right-of-use asset – cost 75,000

Cr Lease liability 69,000
Cr Bank 6,000
being recognition of right-of-use asset and lease liability, including initial
lease payment

Dr Finance costs 3,450

Dr Lease liability 8,550
Cr Bank 12,000
being lease payment in arrears

At 31 December 20X6, the current and non-current elements of the lease liability would
have been:
• $51,472,500 (non-current); and
• $8,977,500 (current) ($60,450,000 - $51,472,400)

Where did candidates go wrong?

The most common error was for candidates to provide the first year’s finance costs
($3,450,000).

Section B

Section B tests candidates’ knowledge on several IFRS® Accounting 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 a case that examined two IFRS® Accounting Standards:

Examiner’s Report – FR March/June 2023 7

• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
and
• IAS 33 Earnings per Share.

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

Gammon Co manufactures and sells a wide variety of furniture. Its year-end date is
31 October 20X4.

During the year, Gammon Co commenced restructuring and, as part of this, the
Garden Furniture division was classified as held for sale. The Garden Furniture
division was sold on 12 January 20X5. Prior to its classification as ‘held for sale’, the
division’s current assets were realised and the proceeds were used to settle its
liabilities.

Relevant information on the non-current assets of the Garden Furniture division at 31

October 20X4 is presented below:

$’000
Carrying amount 31,350
Value in use 20,010
Fair value 26,940
Selling costs 2,040

On 1 August 20X4, to partly-fund the restructuring:

(1) 18m equity (ordinary) shares were issued at market value.
(2) $60m of 8% convertible loan notes were issued at par. The effective interest
rate was also 8%.

Additional relevant information for Gammon Co:

(1) 60m equity (ordinary) shares were in issue on 1 November 20X3.
(2) On 1 March 20X4, a one-for-four issue of bonus shares was made.
(3) Profit for the year from continuing operations for the year ended 31 October
20X4 was $103.8m.
(4) The income tax rate is 20%.

Examiner’s Report – FR March/June 2023 8

Question 1

Assuming it has been sold in the reporting period, which of the following
would meet the definition of a discontinued operation in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations?
(1) A component of an entity that represents a separate major line of business
(2) An associate acquired exclusively with a view of resale

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

What does this test?

This question tests learning outcome B9(b).

Candidates needed to be aware of the definition of a discontinued operation.

What is the correct answer?

The correct answer is A.

IFRS 5 defines a discontinued operation, in part, as “A component of an entity that either

has been disposed of or is classified as held for sale and represents a separate major
line of business … ”.

Where did candidates go wrong?

Most Candidates selected both statements (C) with very few candidates selecting other
options (B) (D).

Equity accounting and not acquisition accounting is applied when accounting for an
associate; this means that it is not consolidated. Treatment as a discontinued operation
would not, generally, faithfully represent the economic reality (B) (C).

IFRS 5 does, however, state that a “subsidiary acquired exclusively with a view to resale
must be classified as a discontinued operation”.

The final part of the definition for a discontinued operation is a component of an entity
that “represents a separate … geographical area of operations”.

Examiner’s Report – FR March/June 2023 9

Question 2

Assuming it has been sold in the reporting period, which of the following
should be disclosed in accordance with IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations?
(1) The gain or loss recognised on the measurement or on the disposal of the assets
(2) The post-tax profit or loss of discontinued operations
(3) The related income tax expense on any taxable gains or profits

A. 1 only
B. 1 and 3
C. 2 and 3
D. 1, 2 and 3

What does this test?

This question tests learning outcome B9(a).

Candidates needed to recognise the basic disclosure requirements for discontinued

operations.

What is the correct answer?

The correct answer is D.

IFRS 5 requires that “An entity shall disclose:

(a) a single amount in the statement of comprehensive income comprising the total of:
(i) the post-tax profit or loss of discontinued operations and
(ii) the post-tax gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:
(i) the revenue, expenses and pre-tax profit or loss of discontinued operations;
(ii) the related income tax expense as required by paragraph 81(h) of IAS 12.
(iii) the gain or loss recognised on the measurement to fair value less costs to sell
or on the disposal of the assets or disposal group(s) constituting the
discontinued operation; and
(iv) the related income tax expense as required by paragraph 81(h) of IAS 12”.

Where did candidates go wrong?

Without the knowledge of required disclosure, most candidates selected “The gain or loss
recognised on the measurement or on the disposal of the assets” only (A).

Examiner’s Report – FR March/June 2023 10

Few candidates selected statements from other options (B) (C).

Question 3

At what amount should the Garden Furniture division be measured at in the

statement of financial position as at 31 October 20X4?

A. $20.01m
B. $24.90m
C. $26.94m
D. $31.35m

E. $12m
What does this test?
F. $8m
This question also tests learning outcome B9(b) but, unlike Question 1, it is numerical.
G. $12.5m

Candidates needed to recognise that the lower of carrying amount and fair value less
costs of disposal is required when measuring non-current assets held for sale.

What is the correct answer?

The correct answer is B.

IFRS 5 states that “An entity shall measure a non-current asset (or disposal group)
classified as held for sale at the lower of its carrying amount and fair value less costs to
sell”.

Fair value less costs to sell = $26.94m - $2.04m = $24.9m

Where did candidates go wrong?

Most candidates selected the correct answer, with only a small number of candidates
selecting other options.

Value in use (A) is not relevant. Value in use is a measurement basis used when
assessing impairment in accordance with IAS 36 Impairment of Assets and not IFRS 5.

Fair value (C), without subtracting costs to sell, is not relevant. Fair value without
consideration for selling costs is a measurement basis used, for example, when non-
current assets are measured in accordance with the revaluation model per IAS 16
Property, Plant and Equipment.

Carrying amount (D) is inappropriate as this is the higher of the disposal group’s carrying
amount and fair value less costs to sell.

Examiner’s Report – FR March/June 2023 11

Question 4

What is the weighted average number of shares to be applied when calculating

basic earnings per share for the year ended 31 October 20X4??

A. 64.5m
B. 74.5m
C. 75.0m
D. 79.5m

What does this test?

This question tests learning outcome B9(e).

Candidates needed to recognise that weighted average shares can be calculated using
one of two methods and, also, that an issue of bonus shares is included from the start of
the year in question.

What is the correct answer?

The correct answer is D.

In accordance with IAS 33 Earnings per Share, “For the purpose of calculating basic
earnings per share, the number of ordinary shares shall be the weighted average
number of ordinary shares outstanding during the period”. Further, per IAS 33, “The
weighted average number of ordinary shares outstanding during the period and for all
periods presented shall be adjusted for events, other than the conversion of
potential ordinary shares, that have changed the number of ordinary shares
outstanding without a corresponding change in resources.”

An issue of bonus shares in an event which changes the number of ordinary shares
without a corresponding change in resources (as they are issued at no cost to existing
shareholders).

IAS 33 continues that the “number of ordinary shares outstanding before the event is
adjusted for the proportionate change in the number of ordinary shares outstanding as
if the event had occurred at the beginning of the earliest period presented”.

This means that we consider the issue of bonus shares to have occurred on 1 November
20X3, being the beginning of the year ended 31 October 20X4.

Issue of bonus shares = 1/4 issue x 60m = 15m

Examiner’s Report – FR March/June 2023 12

Per IAS 33, the weighted average number of shares is calculated either methods:
(1) (75m x 9/12 months) + (93m x 3/12 months) = 79.5m; or
(2) (75m x 12/12 months) + (18m x 3/12 months) = 79.5m

Where did candidates go wrong?

Although most candidates answered correctly, an equal number of candidates selected

each of the incorrect answers.

If the issue of bonus shares is, incorrectly, accounted for from the date of issue (B):
(1) (60m x 4/12 months) + (75m x 5/12 months) + (93m x 3/12 months) = 74.5m; or
(2) (60m x 12/12 months) + (15m x 8/12 months) + (18m x 3/12 months) = 74.5m

A similar number of candidates selected the other incorrect answers.

If the issue of bonus shares is, incorrectly, ignored (A):

(1) (60m x 9/12 months) + (78m x 3/12 months) = 64.5m; or
(2) (60m x 12/12 months) + (18m x 3/12 months) = 64.5m

If the issue of bonus shares is treated correctly but the issue of shares for consideration
ignored (C):
75m x 12/12 months = 75m

Question 5

What are the earnings to be applied when calculating diluted earnings per
share from continuing operations for the year ended 31 October 20X4?

A. $105.00m
B. $107.64m
C. $107.76m
D. $108.60m

What does this test?

This question also tests learning outcome B9(e) but, unlike Question 4, this tests
earnings and, specifically, dilutive earnings instead of basic weighted average number
of shares.

Candidates needed to recognise the need to adjust earnings for the potentially dilutive,
after-tax effect of the finance costs in relation to the compound instrument.

What is the correct answer?

The correct answer is B.

Examiner’s Report – FR March/June 2023 13

Per IAS 33, “For the purpose of calculating diluted earnings per share, an entity shall
adjust profit or loss attributable to ordinary equity holders of the parent entity … for the
effects of all dilutive potential ordinary shares”.

Convertible loan notes were issued at par. At the issue date, the liability component was
measured at $60m and the effective rate of interest was 8%. As we are not required to
calculate dilutive potential ordinary shares, we do not require information on future
conversion.

The required adjustment to the $103.8m profit for the year ended 31 October 20X4, per
IAS 33, is to account for the “after-tax effect of any interest recognised in the period
related to dilutive potential ordinary shares”. Therefore, we must adjust for the after-tax
effect of interest on convertible loan notes. The after-tax effect will be 80% as income tax
is charged at 20%.

Earnings = $103.8m + (80% x [$60m x 8% x 3/12 months]) = $107.76m

Where did candidates go wrong?

Most candidates ignored the apportionment of the interest.

If the apportionment is ignored (B):

Earnings = $103.8m + (80% x $60m x 8%) = $107.64m

An equal number of candidates selected the correct answer and the remaining two
incorrect answers.

If the income tax expense is ignored (A):

Earnings = $103.8m + ($60m x 8% x 3/12 months) = $105m

If both the income tax expense and apportionment are ignored (D):
Earnings = $103.8m + ($60m x 8%) = $108.6m

Section C

We have selected two constructed response questions, Vroom Co and Sphinx Co, that
are available on the ACCA Practice Platform.

Vroom Co is a financial statements analysis and interpretation question for a group

entity, while Sphinx Co is a single-entity 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.

Examiner’s Report – FR March/June 2023 14

Vroom Co

Vroom Co required candidates to demonstrate and apply knowledge from the analysing
and interpreting financial statements area of the syllabus (Section C). The question had
both numerical information and additional information relating to a company that had
acquired a subsidiary during the year. Candidates were asked to complete several tasks
using this information.

The analysis and interpretation of a group is an important area of the syllabus and will
continue to be examined. As in previous examination sessions, most candidates failed to
score high marks on this question. The reason for this seemed to be poor exam technique:
• not addressing the requirement; or
• not adequately using the information in the scenario.

The focus for this detailed commentary, rather than simply recreating the suggested
solution, will highlight the importance of using the scenario when constructing an answer
to an interpretation question.

Requirement (a) – 4 marks

Calculate the goodwill that arose on the acquisition of Sleek Co .

Part (a) of this question specifically addresses syllabus area D2(g) “Describe and apply
the required accounting treatment for consolidated goodwill”.

Overall part (a) was well done but there were common mistakes noted by the marking
team and these are discussed below.

The cost of investment includes the immediate cash payment of $650m and the
contingent consideration. The contingent consideration for the goodwill calculation should
be included at its fair value at the acquisition date of $210m. Many candidates incorrectly
included the contingent consideration as either $300m or $160m and marks were not
awarded for these amounts.

Examiner’s Report – FR March/June 2023 15

Vroom Co measures non-controlling interests at fair value at the date of acquisition. This
is to be calculated at $136m ([100m shares x 20%] x $6.80). This was often calculated
incorrectly, with candidates using the full 100m shares or 80m shares in error (100m
shares x 80%). Some candidates also incorrectly calculated non-controlling interests by
applying the proportion of net assets method in error.

The net assets at acquisition were calculated as:

Net assets were generally calculated correctly; however, some candidates omitted the fair
value adjustment and others incorrectly adjusted the fair value for the post-acquisition
amortisation.

Requirement (b) – 3 marks

Using the preformatted table provided, calculate the following ratios for the years
ended 31 December 20X3 and 31 December 20X2 for the Vroom Group and Vroom
Co respectively:
• Gross profit margin;
• Operating profit margin; and
• Return on capital employed (ROCE).

Part (b) required candidates to calculate three non-complex profitability ratios. Gross profit
and operating profit margins were mostly correct. However, ROCE was sometimes
calculated incorrectly or omitted completely which indicated that some candidates were
not well prepared for the ratio calculations.

Candidates must ensure they are familiar with and have practiced all ratio calculations
ahead of the FR examination.

It was noted that some candidates continue to exclude workings for the ratio calculations.
In the absence of a working, an incorrect ratio will score zero. However, it may be a simple
arithmetical error that has been made and, if a working was provided, full marks could be
awarded.

For example, a candidate may have calculated gross profit margin for 20X3 as 16.0%.
This would score zero without a working. However, if a candidate included a working
either on the spreadsheet or using the software functionality (see below) then ‘own figure’
marks may be awarded.

In the example below the candidate has included revenue as $14,350 rather than
$13,450. The marking team would note this as a simple transposition error and would

Examiner’s Report – FR March/June 2023 16

award the mark accordingly. This highlights the importance of ensuring all workings are
visible.

Requirement (c) – 13 marks

Analyse the performance for the Vroom Group for the year ended 31 December
20X3 compared to the performance of Vroom Co for the year ended 31 December
20X2.

As in previous examination sessions, candidates who used the scenario to provide a

plausible rationale for changes in the ratios year on year generally performed well in
section (c).

Unfortunately, many candidates continue to make generic comments and provide a

‘textbook’ rationale that bears little or no resemblance to the scenario. This results in a
low-scoring, weak analysis. The marking team noted that an increasing number of
candidates are copying and pasting content from the scenario into their answer with no
attempt to draw upon it as an explanation for changes. This will not achieve any marks.

The marking team also noted that many candidates provided either an extremely brief
analysis or did not provide any analysis at all. It is not clear whether this was due to time
management or not being prepared to answer this style of question.

Vroom Co acquired its first subsidiary at the beginning of the financial year. Surprisingly,
many candidates failed to make the link that it was Vroom Co’s individual performance
from 20X2 that was now being compared to the group performance in 20X3. A good
answer would consider the fact that the new subsidiary would distort the ratios year on
year and that a better assessment could be made in the following year.

When comparing the performance for 20X3 and 20X2, it can be noted that all profitability
ratios have declined. Candidates would need to explore why this may be the case. There
were many clues in the scenario that could be considered. For example, Sleek Co made
operating losses in the year that reduced consolidated profit. Also, following the
acquisition of Sleek Co, capital employed increased and this had a further detrimental
impact on ROCE.

A plausible reason for the increase in capital employed could relate to the acquisition of
Sleek Co and the consolidation of any non-current liabilities that they may have.
Candidates are encouraged to review the suggested solution to gather ideas as to how
the scenario can be used to form sensible discussion.

Finally, when completing the analysis part of the question, please ensure that you always
provide a conclusion linked to the requirement. Ideally, you should give this a

Examiner’s Report – FR March/June 2023 17

‘Conclusion’ heading to make it clear to the marking team that a conclusion is being
reached.

Sphinx Co

Sphinx Co is a typical example of a published accounts preparation question – covering

syllabus areas D and B. This style of question will provide you with a trial balance (or an
extract from a trial balance) and additional information that will require adjustment in
accordance with relevant IFRS® Accounting Standards and accounting principles.

The requirements of the question will vary; however, you can expect to be asked to
prepare one or more of the following:
• statement of profit or loss;
• statement of profit or loss and other comprehensive income;
• schedule of adjusted profit;
• statement of financial position (SFP); and/or
• statement of changes in equity (SCE) or part of a statement of cash flow.

Sphinx Co contains three requirements.

Examiner’s Report – FR March/June 2023 18

Requirement (a) – 4 marks

Prepare a schedule of adjusted profit for the year ended 31 December 20X5.

The examining team advise you to set up your answer/layout for the requirements first.
For example, for Sphinx Co, set up some space for the adjustments to profit and include
the draft profit from the trial balance of $166,450 as the starting point for adjustment. We
would advise you to then put in an entry for ‘Adjusted profit’ as this amount will be
subsequently transferred to retained earnings within the SFP and SCE.

$’000
Draft profit 166,450
* Adjustment 1
* Adjustment 2 etc. Transfer to retained
Adjusted profit earnings in the SFP and
the SCE

Requirement (b) and (c) – 6 marks and 10 marks

Prepare Sphinx Co's statement of changes in equity for the year ended 31
December 20X5.

Prepare the statement of financial position of Sphinx Co as at 31 December 20X5.

Next, layout the SCE and SFP within the response area. A well-presented answer will
leave a small amount of space between each working/statement to clearly present the
response.

It is important to note that you do not have to deal with the adjustments in the order
presented in the question, although this is a logical approach. For example, in this
question, you may be most confident in adjusting for the interest on the loan notes in note
(3) and be less confident with the foreign currency issue in note (2). Dealing with the
adjustments that you are most familiar with first could be beneficial to you.

The following discussion will look at each of the adjustments in more detail and may help
when you work through the question for practice.

(1) Non-current assets

This note contains information relating to both land, buildings, plant, and equipment.

Plant and equipment

The depreciation of plant and equipment is the least time-consuming adjustment in
note (1) and you may choose to deal with this first. Most candidates calculated the
depreciation and adjusted part (a) and the SFP correctly.

The most common error noted by the examining team was adding the depreciation of
$31.32m ([$320m - $111.2m] x 15%) to adjusted profit in error. Depreciation is an
expense and, therefore, reduces profit. A small number of candidates incorrectly
calculated depreciation using the straight-line method but partial credit for ‘own figure’
amounts was awarded in the SFP.

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 Land and buildings
When dealing with revaluations, it is important to determine the date of the revaluation
before calculating the revaluation increase/decrease. Some candidates incorrectly
adjusted the revaluation in Sphinx Co as if it took place at year end. The question is
clear – the revaluation took place on 1 January 20X5 and, therefore, the revaluation
increase should be calculated before depreciation is considered.

The revaluation gain can be calculated as follows:

Once calculated, the revaluation surplus of $140m is presented in the SCE. Many
candidates calculated the gain correctly but did not adjust the appropriate financial
statements.

Before dealing with remaining adjustments, it is a good idea to calculate the deferred
tax as the relevant tax rate will be applied to the revaluation increase calculated. The
deferred tax of $28m ($140m x 20%) should be accounted for as follows:

$’000
Dr Revaluation surplus 28,000
Cr Deferred tax liability 28,000

Many candidates correctly calculated deferred tax based on their own revaluation
increase but often did not deduct this from the revaluation surplus in the SCE.

Depreciation of buildings is a non-complex adjustment as the question states that,

following revaluation, the buildings have a remaining useful life of 20 years.

Depreciation of $8.5m ([$250m - $80m] x 1/20 years) will reduce profit in part (a) and
the carrying amount of land and buildings in the SFP.

The final adjustment required to complete note (1) relates to the annual reserve
transfer and can be calculated in two ways:

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 (i) Difference between the old and new depreciation calculations:

$’000
Old depreciation 3,000
([$200m - $50m] x 1/50 years)
New depreciation 8,500
Amount to transfer 5,500

(ii) The balance on the revaluation surplus (relating to the buildings only) is
transferred, annually, over the remaining useful life:

$’000
Amount to transfer 5,500
($110m x 1/20 years)

The reserve transfer will reduce (debit) the balance on the revaluation surplus and
increase (credit) the balance on retained earnings.

Do not forget to complete the SCE to take these adjustments into account and
achieve marks:

(2) Foreign currency adjustment

This adjustment requires you to demonstrate your understanding of the monetary and
non-monetary balances that are included in the SFP at the reporting date. Inventories
are an example of a non-monetary item and, therefore, will not be re-stated at the
reporting date. However, the trade payable is an example of a monetary item that will
need to be re-translated at the closing rate as follows:

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 The exchange gain should be accounted for as follows:

$’000
Dr Trade and other payables 2,000
Cr Exchange gain – part (a) 2,000

Many candidates correctly calculated the exchange gain but did not adjust parts (a)
and (c). It is important to think about the impact that the calculation will have on the
financial statements to earn full marks.

The marking team noted that some candidates incorrectly calculated the using the
wrong rates or by multiplying the dinars by the exchange rate. In this instance, the
calculation marks were lost but credit was still awarded for the correct adjustment in
the financial statements, based on ‘own figure’ rule.

(3) Loan note interest accrual

The loan note interest for the last six months of the financial year is not due to be paid
until 1.1.X6. Therefore, the interest should be accrued at the reporting date.

When performing calculations in the exam, it is recommended that you make use of
the spreadsheet functionality as follows:

$’000
Dr Loan interest – part (a) 1,050
Cr Trade and other payables 1,050

The marking team noted that this adjustment was dealt with well by many candidates;
however, some ignored the adjustment altogether. Others did not time-apportion the
interest and accrued for a full 12 months. In this instance, marks were awarded in the
SFP based on the ‘own figure’ rule.

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(4) Income tax

The opening balance on current tax payable in the trial balance is an example of an
under-provision. The examining team recommend that you clear the balance on the
current tax payable first. To do this you should credit the current tax payable with
$2.5m to reset it to zero and the debit would go to profit or loss. A debit entry will
reduce profit and, therefore, the $2.5m should be deducted in part (a).

The provision for the year-end estimate of $30m should be deducted as an expense
from part (a) and recognised as a current liability in the SFP.

Common errors included adding the $2.5m into part (a) or leaving it on the SFP within
current liabilities. The marks in the SFP for current tax were not awarded when the
$2.5m was not removed; the current liability should always be the year end estimate
only.

(5) Share issue

The share issue has already been correctly accounted for and is included in both the
share capital and share premium balances in the trial balance.

In the SCE, the share issue and the opening balances will need to be recorded. To do
this it is advised that you work out how many shares were in issue before the 1
September 20X5 and then you can determine the number of shares that were issued
via the rights issue. Finally, calculate the monetary amounts that were taken to share
capital and share premium.

An example of the working is:

Once the share issue has been determined, you will need to update the SCE
accordingly. For example:

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The marking team noted that the most common mistake in this adjustment was not
recognising the trial balance amounts as the closing share capital and share premium.

Many candidates calculated the share issue by using the closing balances in error. This
further highlights the need to read the information in each note, carefully.

In this question, you were required to prepare both a SCE and SFP. The mark for the
equity section in the SFP was only awarded when the balances agreed to the SOCIE.

For example, the closing balances highlighted in yellow below, should agree to the totals
recorded in the equity section of the SFP:

Finally, as a general comment, you must ensure that all trial balance amounts are
included either in the relevant working or within the financial statements themselves. It is
often noted by the marking team that some amounts are not transferred from the trial
balance into the answer and, therefore, less complex marks are lost.

Examiner’s Report – FR March/June 2023 24