The Institute of Chartered Accountants of Pakistan

                                   


Advanced Accounting And Financial Reporting
 
General:The overall performance of the students was unsatisfactory. Lack of in-depth knowledge of the accounting concepts and their application and inability to interpret the IFRS and IAS were mainly responsible for the poor performance.   It was also observed that a large number of the candidates were not well conversant with  the specific requirements of  financial statements of listed companies. This was apparent from the replies to Question Numbers 2, 3 and 6. Question-wise comments are given hereunder:
     
Q.1 This Question carrying 22 marks required the preparation of Consolidated Balance Sheet and Profit and Loss Account after booking appropriate adjusting entries. A large number of replies to this question were incorrect and few candidates were able to secure passing marks.  The typical errors in the replies were as follows:
     
  (a) The students were unable to correctly calculate the amount of goodwill of BMP Limited. A number of candidates wasted considerable time in the calculation of goodwill of JPG Limited which was not required, as JPG was sold before year-end.
     
  (b) Majority of the students incorrectly calculated the gain on sale of investments in JPG Limited by comparing the original cost of investment with the proceeds realized from sale of investments. They should have compared the sales proceeds realized, with the group’s proportionate interest in net assets of JPG Limited, on the date of sale of the interest in the entity.
     
  (c) Most of the candidates were unable to calculate correctly the amounts of the consolidated reserves, consolidated net assets and consolidated minority interest.
     
  (d) Only a few candidates were able to respond to the requirements of the question in a  logical and proper step-by-step manner.
Q.2 This was relatively a simple question, based on IAS-38 “Intangible Assets”. However, most of the candidates could not secure passing marks and committed  the following errors:
     
  (a) They were unable to prepare a proper draft of an accounting policy to be presented along with the financial statements. Instead of briefly stating the accounting policy, extensive explanations were given on treatment of research and development expenses as defined in IAS-38.  It is suggested that the students should carefully study the notes and appendices to the published financial statements of listed companies to obtain a proper insight of practical issues  in financial reporting.
     
  (b) Majority of the students wrongly capitalized the Training Costs instead of charging  these to the profit and loss account.
     
  (c) Grants received from the Government by way of technical assistance constitute long-term benefits and should therefore be recognized as intangible assets. Only few candidates could do this correctly.
     
Q.3 This question was framed to test the skills of  practical  applications of IASs.  The response to this question was quite poor and it appears that most of the replies showed a lack of in-depth knowledge of the accounting concepts and disclosure requirements. Comments on the common mistakes made by the candidates in the various  situations are as follows:
     
  (a) Management’s subsequent restructuring plan is a non-adjusting event and should be disclosed only if it is material and non-disclosure would influence the decisions of the readers. However, most of the candidates incorrectly stated that this is an adjusting event because the financial statements have  not yet been finalized.
     
  (b) Curtailment of a defined benefit plan is also a non-adjusting transaction and has to be accounted for from the period when the curtailment occurs. However, it needs to be disclosed as it is a material event. A number of  candidates wrongly mentioned that this amount should be adjusted in  the  financial statements pertaining to the year 2004.
     
  (c) The changes in tax rates is a non-adjusting event and should be disclosed if material. However, a number of candidates were of the view that this amount should be accounted for.

 

 

 

 

(d) Issuance of guarantee is a subsequent event and does not have any impact on the financial statements as on 30.6.2004. However, most of the students mentioned that because of the materiality, the disclosure of this item should be made in the 2004 financial statements.

 

   

 

(e) Subsequent rescheduling of long-term loan is a non-adjusting event but has to be disclosed as per IAS-1. However, most candidates mentioned that this event would not affect the 2004 financial statements.

 

   

 

(f) Subsequent fall in selling price of inventories after the year end affects its net realizable value. This should be accounted for in the financial statements of 2004. However, several candidates stated that this would not affect the 2004 financial statements.

 

   

Q.4

   This question was performed quite satisfactorily. However, the following mistakes were noted in most of the scripts:

 

   

 

(a) Change in the rate of provisioning for bad debts was considered as a change in accounting policy instead of change in accounting estimates. Consequently, retrospective effect was given to the profit and loss account.

 

   

 

(b) The drafting of accounting policy was very poor in most of the replies.

 

   

 

(c) The effect of change in rate of provision for bad debts was erroneously recorded in general and administration expenses instead of selling and distribution expenses.

 

   

 

(d) Opening balances of retained earning for both the years were not correctly restated. The candidates should have mentioned the original opening balances (excluding effect of policy change) and then mentioned the impact of the  policy effect on opening balances.

 

   

Q.5

 The performance of candidates in this question was quite satisfactory and resulted in scoring of high marks. However, following common mistakes were observed in some of the scripts:

 

   

 

(a) The presentation was poor as most of the disclosures were not substantiated  with relevant workings.

 

   

 

(b) Movement in defined benefit obligation was not mentioned by many candidates.

 

   

 

(c) The drafting of accounting policy was rather poor.

 

   

 

(d) Calculations of payment of additional gratuity to the retiring employee were  not made correctly.

 

   

Q.6

 This question required the preparation of (i) a Distribution Statement and (ii) Statement of Movement in Unit Holders’ Funds. It was observed that most of the students were not conversant with the specific requirements involved in the preparation of financial statements of mutual funds. Consequently they attempted to solve this question on the basis of their overall knowledge of accounting. The following types of  mistakes were common in most of the answers:

 

   

 

(a) Distribution of bonus and dividend was not calculated correctly.

 

   

 

(b) Presentation and format of both statements was unsatisfactory.

 

   

 

   

 

The students who were well conversant with presentation requirements of financial statements of mutual funds were able to score high marks in this relatively simple question.