F7, Financial Reporting Steve Scott

REVIEW OF PAST EXAMS

Overall disappointing pass rates

Until December 2010, a persistent downward trend June papers pass rates significantly worst than those of Decembers December 2010 pass rate at 46% Candidates on a first time attempt have the highest success rate Pass rate at third (or more) attempt is very low

WHAT WAS DONE WELL?

Consolidated accounts
Still the best answered question, but the average mark before December 2010 declining slightly (by 2 marks) Candidates do well on basic techniques aided by tutors standard workings

Financial statements
Candidates score well on Q2 although few gain full marks. As with consolidations average mark is declining. Good at the technique of taking trial balance figures to the income statement and SOFP Statements of cash flows also well answered

WHAT WASNT DONE WELL?

Consolidated accounts problems

Technique is good, but not sure candidates understand why the standard working (should) give the correct answer Many INT candidates do not apply full goodwill method correctly Post-acquisition change of NCI not well understood and often completely omitted in income statement questions Other problem areas: - contingent and deferred consideration - confusion between pre and post-acquisition adjustments - calculation of group retained earnings often poor Written sections (as in June 10) often omitted or totally misunderstood

Performance appraisal
At the last conference I stated that I would target certain cash flow classifications and specific ratios to prevent mechanical churn. Candidates response to this has displayed a fundamental lack of understanding. Interpretation of ratios remains very poor for many candidates: not really interpreting them at all, not relating answer to the question asked (e.g. whether to grant the renewal of a loan). Full cash flow statements are generally well done, but the focused extracts less so. More specific recently tested problem areas: - provision for environmental costs shown as a cash flow; - cannot distinguish the cash flow effects of a loan to equity conversion/redemption - the effects of (new) finance leases on non-current assets and the repayment of lease obligation

Financial statements
Many recently examined adjustments not done well: - revenue recognition issues: deferred revenue relating to ongoing servicing, agency sales and a cut-off error. - not applying the effective interest rate; or applying it to nominal value of loan instead of carrying value - classification issues: gains on investment (especially realisation of previous gains), presentation of dividends - even simple deferred tax is poorly understood let alone on a revaluation - much confusion over construction contracts - revaluations of non-current assets is examined in virtually every paper, but it is still answered poorly:
wrongly timed, not depreciating on remaining life, incorrect calculation of the gain

Other areas

Many old favourites: - Written questions less well answered (often not at all) than numerical questions - Not understanding substance over form issues - Treatment of finance leases - EPS, particularly what dilution means - Inability to apply definitions from the Framework and Standards,

Technique issues

Failure to properly read requirement and answer question asked (answers often drift off topic). Handwriting seems to be getting worse
Poor timing/planning Repetition of same point

LESSONS LEARNED

Candidates must:

Ensure up to speed with F3 material before embarking on F7 Study the wider syllabus over a sensible time period Attempt all questions asked Avoid question spotting Read the Examiners Reports

WHICH AREAS NEED TO BE IMPROVED?

A telling extract (adapted) from recent Examiners Report:

One marker reported to me her despair in that she had lost count of the number of candidates that had scored around 40 marks after completing the paper up to Q3 (a)(i) and then failed to score more than 5 further marks on the rest of the questions.

Candidates must focus on:

Develop an ability to apply accounting Standards to a specific example or scenario. Be prepared to criticise and correct accounting treatments suggested by management. It is unlikely that simply agreeing with them will earn many marks. Focus on the questions requirement Planning and presentation of answers: -Sections of questions should be answered together (not scattered through answer booklet) - referenced workings (although workings can be taken to excess which is time wasting) - handwriting must be legible; language must be intelligible

WHERE CAN TUITION PROVIDERS HELP?

Doing a good job, but:

Try to emphasize an understanding of issues rather than rote learning Although useful, cannot rely on mechanical answer techniques Exam technique is useful, but not a substitute for knowledge Not effective to memorise past answers Use of mock exams

FOCUS ON FUTURE EXAMS

WHATS NEW?

Changes to UK paper

Mostly based on INT paper (at least 90%) Therefore use of IFRS and $ currency denomination Some Companies Act rules (POB requirement) Up to 10% of marks will test UK differences to IFRS

Natural progression

Slight increase in rules based (legal) requirements Revisions to Framework and Standards under examinable date rule Question requirements

WILL THINGS CHANGE?

I will continue to test understanding and application:

Legal constitution of a group and its implications; understanding of hat group financial statements represent Several accounting standards appearing in one question I will expect answers on interpretation to relate to the scenario and the question requirement