01 exams
an overall pass mark. It is clear that large numbers of candidates believed
Paper F7
Financial Reporting
All Paper F7 exam questions are
compulsory, with Questions 1,
2, and 3 worth 25 marks each,
Question 4 worth 15 marks, and
Question 5 worth 10 marks.
Candidate performance
was disappointing for the
June 2009 paper. After an
encouraging increase in the
pass rate in December 2008,
success levels are back to the
disappointing levels of June
2008. The causes of this poor
performance are familiar, but
they seemed present on a much
more widespread basis than ever
before. One marker commented
that it seemed as if some
candidates, on reaching the end
of Question 3 Part (a), stopped
writing. A significant number of
candidates did not attempt either
Question 4 or 5, or even both.
Questions 1, 2, and 3 were
on groups, company financial
statements, and interpretation/
cash flow respectively, which
are considered the ‘core’ topics.
Questions 4 and 5 covered
the remainder of the syllabus.
had scored 20 or more marks on Question 1 and had failed to achieve
one marker commented that she had never had as many scripts that Another marker commented
that she had never had as many
scripts that had scored 20 or
more marks on Question 1 and
yet had failed to achieve an
they could pass the paper just by learning the core topics. overall pass mark. It is clear,
more than ever before, that large
numbers of candidates believed
they could pass the paper just by
learning the core topics, or that
they engaged in unsuccessful
question spotting.
Poor time management
probably caused some
candidates to run out of time on
their last question. Another factor
contributing to poor performance
was weak or non‑existent answers
to the sections of the paper
requiring written comment,
interpretation, and analysis.
Once again, there was evidence
that many candidates did not
answer the question that was
asked; candidates must read
the question requirements
very carefully. Restating the
scenario and facts given in the
question will not earn marks.
This approach was particularly
prevalent in Question 3 Part (b)
(see detailed comments below).
Overall, candidate
performance can be summarised
as very good on Question 1,
good (but not as good as in past
diets) on Question 2, good on the
cash flow element of Question
3, and very poor on Questions 3
Part (b), 4, and 5.
It is worth mentioning a
number of additional factors that
make marking the exam difficult:
¤ poor, sometimes
illegible handwriting
¤ starting a question, leaving
it unfinished, going on to
a different question, then
returning to the first question
later in the script (an example
of poor planning)
¤ not following ACCA instructions
to start each question at the
top of a new page and to
indicate, at the top of each
page, the question the page
relates to
¤ unnecessary workings; only
the more complex calculations
need (referenced) workings,
but, in extreme cases, some
candidates produced pages
and pages of unhelpful
workings, which is very time
consuming for both candidates
and markers
¤ the converse of this is also
a problem; many incorrect
figures were not supported
by workings, meaning
markers could not give partial
credit where it may have
been merited.

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Poor time management probably caused some candidates to run out of time
on their last question. Another factor contributing to poor performance
The composition and topics of
the questions was such that on
was weak or non-existent answers to the sections of the paper
this diet there was very little
difference in substance between
the International paper (the
primary paper) and all other
requiring written comment, interpretation, and analysis.
adapted papers and therefore
these comments generally apply
to all versions of Paper F7.
QUESTION 1
This question required the
preparation of a consolidated
statement of financial position
(balance sheet) for a parent,
a subsidiary (line‑by‑line
consolidation), and an
associate (equity accounted).
The question required the
calculation of goodwill, with
the consideration based on a
cash payment and loan note
issue (that had already been
accounted for), and included
some fair value adjustments.
This was the best answered
question and demonstrated
that most candidates have
a sound knowledge of
consolidation techniques.
The main areas where
candidates went wrong were
as follows:
¤ In the goodwill calculation,
a failure to account for the
loan note element of the
consideration and/or the
non‑controlling interest
element of the goodwill (not
applicable to UK version), and
incorrectly accounting for the
new property by using its fair
value rather than the excess of
fair value over cost.
student accountant 10/2009
Read Paper F7 technical articles
¤ Not realising the
post‑acquisition period was
two years; many candidates
only accounted for one-year’s
additional depreciation on the
new property and amortisation
of the brand.
¤ The detailed components of
the consolidated retained
earnings were often missed,
namely depreciation
adjustments, unrealised profit
(URP) in inventory (often
calculated wrongly as well –
see below), and gain/loss on
available-for-sale investments.
¤ Many candidates did not
calculate the non-controlling
interest under the revised
standard by taking the fair
value at acquisition (as
given) and then adjusting for
post‑acquisition profits/losses
(not applicable to UK version).
¤ The URP was often calculated
as a gross profit percentage,
whereas the question stated
that it was a mark up on cost.
Some candidates eliminated
the cost of the inventory rather
than the URP in the inventory,
and many incorrectly split the
URP between the parent and
the subsidiary even though the
parent had made the sale.
02
¤ A small minority of candidates
are still proportionally
consolidating the associate
(some even proportionally
consolidated the subsidiary);
others fully consolidated
the associate and computed
a non‑controlling interest
of  70%.
¤ Many candidates did not
account for the effect of the
share exchange, on acquisition
of the interest in the associate,
on the share capital and
share premium.
QUESTION 2
This was a familiar question on
preparing financial statements
from a trial balance with various
adjustments. These involved
a revaluation of a non-current
asset, dealing with a finance
lease agreement, accounting for a
construction contract, a revenue
recognition issue, an effective
rate finance cost for a financial
instrument, and taxation.
This question was the second
best answered question. The
most common errors were
as follows:
¤ Deducting the agency
sales from revenue,
without recognising the
commission earned.
¤ Rather worryingly, deducting
the closing inventory from the
cost of sales (by definition it
has already been deducted).
03 exams
¤ Basing calculations of the
depreciation and impairment
reversal of the leasehold
property on the revaluation as
if it had been at the beginning
of the year (the question
clearly stated it was at the end
of the year).
¤ Taking the reversal of the
impairment to reserves rather
than through the income
statement as, on this occasion,
this reversed a previous
impairment loss recognised in
the income statement.
¤ Worryingly, depreciating the
owned plant and equipment
using cost rather than carrying
value; the distinction between
straight line and reducing
balance depreciation should be
very familiar to candidates at
this stage.
¤ Deciding that the leasehold
property and the leased
plant (and hence the finance
lease payment) were the
same asset; this produced
some very unhelpful workings
and balances.
¤ Providing many complex (and
unnecessary) lease calculations
– if future payments are to be
discounted, the appropriate
factors will be provided as part
of the question.
Less well-prepared candidates showed poor format knowledge, with little
idea of which items should appear in which section of the statement, nor
¤ Incorrectly calculating the ¤ On the treatment of the finance
did they know the difference between cash and non-cash flows.
finance cost of the redeemable lease, basing the finance
preference shares at the cost and current/non-current
nominal rate of its dividend liability on the carrying amount
rather than at the effective rate of the leased asset rather than
based on the carrying amount on the opening liability for the
at the start of the period. Also, lease obligation.
the dividends are part of the ¤ Showing equity dividends in
finance cost in the income the income statement rather
statement and the shares than as part of the retained
themselves are classified as earnings (or statement of
debt on the statement of changes in equity if it had
financial position; redeemable been required).
preference shares do not
have the characteristics of an The statement of financial
equity instrument. position was generally well done
¤ Making errors in the treatment and most of the errors that were
of the taxation in both the made related to the following
income statement and the through of errors from the
statement of financial position. income statement.
These errors included: crediting
the under-provision of tax from QUESTION 3
the previous year to the income Part (a) required the preparation
statement (as a debit balance of a statement of cash flows
it should have been charged); (for 15 marks) followed by some
treating the closing provision ‘targeted’ interpretation (for 10
for deferred tax as a charge marks). Cash flows are generally
in the income statement (it popular with candidates and
should be the movement on the many scored well. However, again
provision that appears in the the overall performance was not
income statement); showing as good as I would have expected,
the current tax net of the with surprisingly few candidates
under‑provision as a current earning maximum marks. Less
liability (only the current year’s well-prepared candidates showed
tax is a current liability). poor format knowledge, with
¤ Making a fair attempt at the little idea of which items should
construction contract figures appear in which section of the
in the workings (credit was statement, nor did they know
given for this), but often not the difference between cash and
following these through to the non‑cash flows.
financial statements.
 student accountant 10/2009
04
Practise past papers for Paper F7
www.accaglobal.com/students/acca/exams/f7/past_papers

an area causing marks to be lost was geeting the cash movements the wrong

normally for correctly identifying them as inflows or outflows rather

way around. marks for the movement in working capital items are
For example, reserve Many candidates got this Some candidates realised
movements, provisions (for correct, but a number did not that the question required other
warranties), and the loss on the seem to read the requirement examples of causes of changes
disposal of the displays were correctly and calculated the in gross profit margin, but often
sometimes treated as cash flows. actual profit margin (rather gave examples of items that did
A number of candidates had than the ‘theoretical margin’). not affect gross profit such as
difficulty with the accumulated A number of candidates made higher bad debt charges, cash
depreciation being reset to the adjustments to the 2008 discounts, and additional finance
zero after a revaluation, and revenue and cost of sales costs – these do affect net profit,
the cost of the disposal of an figures rather than to the 2009 but not gross profit. A number
asset was often treated as the figures, which may have resulted of candidates referred to quality
sale proceeds. from not reading the question issues and the return of goods to
Many candidates could not carefully enough. suppliers and from customers,
work out the movement on the Part (b) (ii) was a written with a small number of very
accumulated depreciation; they section effectively requiring perceptive candidates even noting
could not follow the impact of the candidates to identify other that the latter was reinforced by
disposal of the displays which factors (apart from the cost and the disproportionate increase in
gave them a depreciation amount revenue changes) that could have the warranty provision.
to be credited to the income caused the change in gross profit Part (b) (iii) was again
statement. An area causing many margin. This was generally very a targeted area of ratio
marks to be lost was getting the badly answered; many candidates understanding related to the
cash movements the wrong way stated that the cost changes changes in the credit periods (for
round (signing errors). instigated by the directors were payables and receivables). The
For example, marks for the solely responsible for the overall question required candidates
movement in working capital change in the margin, despite the to quantify the effect it would
than for correct arithmetic.

items are normally for correctly previous section having already have had on the bank balance
identifying them as inflows or identified the effect of those if the previous year’s (2008)
outflows rather than for correct changes. The same candidates credit periods been maintained
arithmetic. Some candidates split were usually convinced that the in the current year (2009). This
the two finance costs both within changed credit periods were the involved calculating 2008’s
the adjustments and within the cause of the changes in the gross credit periods and then applying
cash outflows (often in different margin, which shows a lack of those to the credit sales and
sections of the statement) which understanding between profit credit purchases of 2009 to
was not necessary. and cash. give ‘theoretical’ receivables and
Part (b) gave information payables balances for 2009.
about percentage changes in These could then be compared
the sales and the cost of sales to the actual payables and
instigated by the directors’ receivables balances of 2009 to
actions, which was accompanied identify the ‘theoretical’ effect on
by information on changes the bank balance.
in credit periods. Part (b) (i)
required candidates to calculate
the gross profit margin that
should have resulted from the
cost and revenue changes.
05 exams
but simply did not discuss all the elements of the scenarios which inevitably
There were many candidates who were on the right lines with question 4,
Many candidates presented Also, in Part (a), there was a
a simple comparison of this lot of confusion over the period
year’s credit periods with those covered by the standard. Many
of the previous year; either candidates thought there was a
those candidates did not read set time (eg three or six months)
the requirement properly or or that the period extended to the
they only have a ‘mechanical’ AGM. To state that an adjusting
understanding of the ratios and event requires adjustment – and
cannot adapt this understanding a non-adjusting event doesn’t
to a different scenario. Weaker – did not earn any marks as it
candidates decided to calculate says nothing and certainly does
the inventory turnover figures for not relate to the issues raised by
both years and then compute IAS 10.
the working capital cycle, which Many candidates also thought
was of no relevance to the that the determining factor –
question set. regarding whether to adjust
or not – was whether the item
QUESTION 4 was material or not. Several
Performance was particularly candidates suggested that
disappointing for this question. examples (ii) and (iii) were not
Part (a) was straightforward for material, despite the note to
anyone who had read IAS 10, the question providing clear
Events after the Reporting Period guidance on this point. Weaker
(or equivalents), and the three candidates confused the topic
illustrative examples are well with prior period adjustments
documented in both the standard and the use of provisions and
and in textbooks. In Part (a), contingent items.
many candidates attempted to Unsurprisingly, if candidates
limited the marks gained.
distinguish between adjusting were not able to correctly answer
and non-adjusting events through Part (a), they did not gain
the use of examples rather than many marks in the examples
by description. Examples were in Part (b). However, many
not asked for in Part (a) and candidates who did know the
therefore did not earn marks. definitions in Part (a) still could
not apply the circumstances to
the Part (b) scenarios. There were
a lot of comments in Part (b) that
contradicted definitions given in
Part (a).
Part (b) (i) dealt with the
consequences of a fire after
the reporting period. Common
errors were to say that this
was an adjusting event (it
was non‑adjusting), and most
candidates netted off potential
insurance proceeds from the
losses and did not appreciate
that the losses and the related
insurance claim required
different considerations. Hardly
any candidates realised that
the subsequent disruption of
trading may have brought into
question the going concern of the
company (which would then make
it an adjusting event). Even those
candidates who correctly stated
that this was a non-adjusting event
proceeded, often at great length,
to itemise the journal entries
needed as if it was an adjusting
event (without any mention of the
going concern aspects).
Part (b) (ii) was an example of
sale of inventory at a loss after the
reporting period. Most candidates
focused on the sale itself, saying
that it should be dealt with in
the following year and therefore
no adjustment was required.
Some correctly appreciated
that the relevant issue was that
the inventory’s value should be
adjusted because its net realisable
value (NRV) was below cost.

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However, two further errors
were common: either candidates
did not extend the lower of NRV
or cost principle to the whole of
the inventory (instead to just the
70% that had been sold), or they
wanted to put the sale through the
current year’s accounts rather than
write the inventory down.
Weaker candidates stated
that the transaction was a
non‑adjusting event, as it took
place after the reporting date, but,
in contradiction, then proceeded
to explain at great length the
adjustments that the sale and
commission would create.
Part (b) (iii) concerned a change
in taxation legislation after the
financial statements had been
authorised. The main point of
this example was the timing of
the event – after the financial
statements had been authorised by
the board – and it was thus neither
an adjusting nor non-adjusting
event (it was outside the scope of
the standard). Most candidates
did not appreciate the timing of
the event and even those who did
still wanted to adjust for it and
proceeded to explain the nature
and purpose of deferred tax.
There were many candidates
who were on the right lines with
this question, but simply did not
discuss all the elements of the
scenarios which inevitably limited
the marks gained.
student accountant 10/2009
06
Listen to the Paper F7 examiner analysis interview
Basic depreciation, accruals, and an inability to correctly classify items in
overall, Markers reported that poorly prepared candidates did not seem to
the financial statements were notable weaknesses of some candidates.
have mastered the understanding and techniques examinable at Paper F3.
QUESTION 5 CONCLUSION
This question required As detailed in the introduction,
candidates to depreciate the overall performance of
the separate components candidates was disappointing,
of a ‘complex’ asset (an with too many candidates
aircraft), dealing with different pinning their hopes on passing
methods of depreciation, and by just learning the main topics
distinguishing between capital or relying on numerical skills
and revenue expenditures. alone. There was evidence
A significant number of of poor exam technique,
candidates did not start this including poor planning, time
question and many of those management, and question
who did appeared to run out spotting. Markers reported that
of time. Although, there were poorly prepared candidates did
no general issues here with not seem to have mastered the
candidates not understanding understanding and techniques
what they were meant to do or examinable at Paper F3. Basic
not reading the requirements depreciation, accruals, and an
properly, many answers lacked inability to correctly classify
a methodical approach meaning items in the financial statements
they got hopelessly lost in the (eg receivables included in
detail. Generally, the exterior the income statement) were
structure of the aircraft was notable weaknesses of some of
dealt with correctly although these candidates.
many capitalised the repainting In fairness, many of the above
costs (which is revenue comments on the individual
expenditure). For the cabin questions concentrate on
fittings, the upgrade was often candidates’ weak areas. This
correctly capitalised but then the has been done for reasons
depreciation was calculated on of directing future study and
(total) cost, not the new carrying highlighting poor techniques
amount, and also over the wrong such that candidates can
period. The engines caused the improve future performance.
most problems. This gives a pessimistic view
Candidates often tried to of performance, so I would like
perform the calculations on them to draw attention to the good
together, instead of separating number of excellent papers
them, and then became confused where it was apparent that
in what they were doing. candidates had done a great
deal of studying and were
rewarded appropriately.