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F7, Financial

Reporting

Steve Scott

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REVIEW OF

PAST EXAMS

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Until December 2010, a persistent downward trend

June papers pass rates significantly worst than those ofDecembers

December 2010 pass rate at 46%

Candidates on a first time attempt have the highest successrate

Pass rate at third (or more) attempt is very low

Overall disappointing pass rates

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WHAT WAS

DONE WELL?

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Still the best answered question, but the average mark beforeDecember 2010 declining slightly (by 2 marks)

Candidates do well on basic techniques aided by tutorsstandard workings

Consolidated accounts

Financial statementsCandidates score well on Q2 although few gain full marks. Aswith consolidations average mark is declining.

Good at the technique of taking trial balance figures to theincome statement and SOFP

Statements of cash flows also well answered

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WHAT WASNT

DONE WELL?

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Technique is good, but not sure candidates understand whythe standard working (should) give the correct answer

Many INT candidates do not apply full goodwill methodcorrectly

Post-acquisition change of NCI not well understood andoften 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

Consolidated accounts problems

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At the last conference I stated that I would target certain cash flowclassifications 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: notreally interpreting them at all, not relating answer to the questionasked (e.g. whether to grant the renewal of a loan).

Full cash flow statements are generally well done, but the focusedextracts 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 equityconversion/redemption

- the effects of (new) finance leases on non-current assets and the

repayment of lease obligation

Performance appraisal

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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 tonominal value of loan instead of carrying value

- classification issues: gains on investment (especiallyrealisation of previous gains), presentation of dividends

- even simple deferred tax is poorly understood let alone on arevaluation

- much confusion over construction contracts

- revaluations of non-current assets is examined in virtuallyevery paper, but it is still answered poorly:

wrongly timed, not depreciating on remaining life, incorrectcalculation of the gain

Financial statements

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Many old favourites:

- Written questions less well answered (often not at all) thannumerical questions

- Not understanding substance over form issues

- Treatment of finance leases

- EPS, particularly what dilution means

- Inability to apply definitions from the Framework andStandards,

Other areas

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LESSONS

LEARNED

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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

Candidates must:

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WHICH AREASNEED TO BEIMPROVED?

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One marker reported to me her despair in thatshe had lost count of the number of candidatesthat had scored around 40 marks aftercompleting the paper up to Q3 (a)(i) and thenfailed to score more than 5 further marks on therest of the questions.

A telling extract (adapted) fromrecent Examiners Report:

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Develop an ability to apply accounting Standards to a specificexample or scenario.

Be prepared to criticise and correct accounting treatmentssuggested by management. It is unlikely that simply agreeingwith them will earn many marks.

Focus on the questions requirement

Planning and presentation of answers:

-Sections of questions should be answered together (notscattered through answer booklet)

- referenced workings (although workings can be taken toexcess which is time wasting)

- handwriting must be legible; language must be intelligible

Candidates must focus on:

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WHERE CANTUITION

PROVIDERSHELP?

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Try to emphasize an understanding of issues rather than rotelearning

Although useful, cannot rely on mechanical answertechniques

Exam technique is useful, but not a substitute for knowledge

Not effective to memorise past answers

Use of mock exams

Doing a good job, but:

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FOCUS ON

FUTURE

EXAMS

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WHATS NEW?

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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

Changes to UK paper

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Slight increase in rules based (legal) requirements

Revisions to Framework and Standards under examinable

date rule

Question requirements

Natural progression

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WILL THINGS

CHANGE?

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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 scenarioand the question requirement

I will continue to testunderstanding and application:

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