Financial Reporting

(FR)
March/July 2020
Detailed
commentary
The aim of this commentary is to provide constructive
guidance for future candidates and their tutors by
giving insight into what markers are looking for and
identifying issues encountered by candidates who sat
these questions.

Contents
General comments ............................................................... 2
FIT ........................................................................................ 2
PLANK ................................................................................. 3

Examiner’s report – FR March/July 2020 1

General comments

This detailed commentary should be used in conjunction with the published

March/July 2020 sample exam which can be found on the ACCA website.

FIT

This was considered to be a relatively straightforward performance appraisal question

that required candidates to calculate some financial ratios and provide a commentary
on the performance and position of two companies operating in the same sector.
Part (a) required the calculation of five standard financial ratios for both companies. It
was pleasing to note that many candidates were able to score full marks on this part
of the question. There were some common errors made in the calculation of some
these ratios such as profit before tax being incorrectly used in both operating margin
and return on capital employed. Also, many candidates used the wrong capital
employed figure to arrive at the return on capital employed (this should be debt +
equity).

It was surprising that despite previous guidance from the examining team there
continues to be a number of candidates that calculate gearing using the formula of
debt to debt + equity despite the question specifically asking for debt to equity. While
the former is acceptable in some questions, if you are given specific guidance in the
question requirement ensure you calculate the ratio as instructed to achieve the mark
available.

The quality of the commentary provided to part (b) of this question was particularly
disappointing. The trend continues where many candidates provide either little or no
analysis or the analysis provided is superficial and does not attempt to use the
information in the scenario to guide the commentary. Those candidates that link their
commentary to the scenario tend to score very well.

There was plenty of information in the scenario of this question that could act as a
prompt for a more detailed commentary. For example, both companies operate in the
same sector. However, one company is a manufacturer and retailer of premium
branded sportswear, while the other sources mid-market sportswear from its suppliers
and retails them separately. Based on this information it is likely that both sales prices,
costs etc. will be significantly different for each company and could be used to explain
the differences in performance.

Both companies sell online, but one sells through its own branded stores and one sells
through department stores. Again, this would give rise to differences not only in the
costs incurred by each business but the structure of the statement of financial position
is likely to be different (Fit would be expected to have more assets due to its
manufacturing facilities and premises for its stores) and this in turn would impact return
on capital employed.

These are not the only prompts given in the question! Candidates are encouraged to
look at the information provided in the scenario and to use it to add depth and meaning
to their analysis. The marking guide to this and other published FR questions can be
used to give you further ideas of the commentary required to score well on a

Examiner’s report – FR March/July 2020 2

performance appraisal question and a useful article on performance appraisal can be
found here.

The marking team continues to encourage candidates to provide a conclusion to their

analysis/commentary. Whilst some candidates did attempt to provide a conclusion on
this question, there were many that did not. In this particular question for example,
candidates could summarise their findings to determine which company is considered
to be the best performing based on the limited information available.

PLANK

The first part of this question required candidates to prepare a consolidated statement
of profit or loss and other comprehensive income (SPLOCI). Many were able to score
well on this question but the marking team noted common areas where problems
occurred and these will be discussed below.

Almost all candidates that attempted this question were able to complete the basic
consolidation by adding the income and expenses of the parent and subsidiary
together to show control. However, some candidates failed to time apportion the
results of the subsidiary to represent the nine month post acquisition period. This
continues to be a problem when this type of question is examined. A minority of
candidates’ time apportioned the subsidiary results by an incorrect number of months,
for example eight months instead of nine. In this situation, the marking team were
able to provide own figure marks providing workings were clearly shown.

Surprisingly, there continue to be a minority of candidates that proportionately

consolidate the results of subsidiary (e.g. including 85% of Strip Co’s income and
expenses). As previously noted, this is a fundamental error and the basic
consolidation marks will not be awarded when using this method.

This question required candidates to make adjustments for common consolidation

transactions, including an adjustment for fair value depreciation and intra-group
adjustments for sales and purchases, unrealised profit and internal dividends. On the
whole these were generally dealt with well. The nine month post acquisition period
continued to be a problem here, with some candidates forgetting to time apportion the
fair value depreciation while others incorrectly time apportioned unrealised profit or the
dividend.

It was pleasing to see that many candidates recognised that the dividend received
from Strip Co was to be removed from investment income. However, there were a
considerable number of candidates that removed the entire $18 million. As Plank Co
only owns 85% of the shares in Strip Co it was necessary to adjust the dividend by
this percentage before removing.

Note (iii) not only required candidates to adjust for the internal dividend discussed
above, but it also required an adjustment in respect of intra-group loan interest. There
were some candidates that seemingly missed this from the question and failed to deal
with it at all. For those that did, a variety of answers were produced. To correctly
adjust for this transaction, candidates needed to recognise that the loan interest was
both payable by Strip Co and receivable by Plank Co. This interest therefore needed
to be eliminated from both finance costs and investment income. The interest of $5

Examiner’s report – FR March/July 2020 3

million did not need to be time apportioned as the loan to Strip Co was made on 1 April
20X8 (the same as the acquisition date).

It was noted in the opening paragraph that Plank Co had previously acquired 35% of
Arch Co. Further detail in note (v) confirmed that Arch Co is an associate of Plank Co
and is therefore equity accounted for in accordance with IAS 28 Investments in
Associates and Joint Ventures. Only a minority of candidates correctly included the
share of Arch Co in the consolidated statement of profit or loss.

The marking team noted that this area of the consolidation had the largest variation in
responses. Firstly, the dividend received from Arch Co needed to be eliminated from
Plank Co’s investment income (e.g. 35% x $35 million) and then the ‘income from
associate’ was to be included as a separate entry within the consolidated profit or loss.
Using the equity accounting method, candidates were required to include 35% of Arch
Co’s profit for the year and then adjust for the unrealised profit. Many candidates were
able to calculate the unrealised profit as they would for a subsidiary ($26 million x
30/130), but the majority then failed to multiply this amount by the 35% influence that
Plank Co had over Arch Co.

It was disappointing to note that a number of candidates attempted to incorrectly

consolidate the results of Arch Co on a line-by-line basis. Again, this treatment is
considered to be a fundamental error that does not follow the equity accounting
method and should be discouraged.

When preparing a SPLOCI candidates must remember to split both the profit for the
year and total comprehensive income between the amount attributable to the parent’s
shareholders and the amount attributable to the non-controlling interest. This
continues to be the most commonly omitted part of the statement and often represents
a significant portion of the total marks.

Part (b) to the question was well done with many of the candidates that attempted this
part of the question able to score well. Markers were able to apply the own figure rule
for the dividend and unrealised profit adjustment if previously adjusted for incorrectly
in part (a).

Examiner’s report – FR March/July 2020 4