F2 - Financial Management

Post Exam Guide

March 2014 Exam

Examiner’s Comments

The paper covered many of the usual core areas, including share-based payments, pensions,
financial instruments, groups and ratio and financial analysis, however many of the answers
illustrated how genuinely unprepared the candidates were for answering on these technical areas.

There was no obvious issue with time allocation as most were able to complete answers to all
seven questions. The problem was in the lack of core understanding and inability to make narrative
relevant to the questions.

The most disappointing results came in the consolidation questions. It was abundantly evident that
candidates had no understanding of what information a cash flow statement contained, many
including share of associate’s profit, movement on revaluation reserve, depreciation under the
headings of cash flow. The majority could not identify under which heading the related cash flows
would appear with acquisitions appearing under financing and share issues under investing
activities. A number of candidates then attempted to prepare the cash flow from operating activities
which had not been asked for. The attempts at Q6 were equally disappointing although not quite as
alarming in respect of basic principles. Few were able to answer part (b). It was evident to the
markers that many candidates were not equipped to progress through the financial pillar.

The candidates that had seriously revised since the November 2013 session tended to pass
convincingly.

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

SECTION A – 50 MARKS

Question One

Required:

(a) In accordance with IFRS 2 Share-based Payment:

(i) calculate the charge to MR’s statement of profit or loss for the year ended 31 December 2013 in
respect of the share options AND prepare the journal entry to record it; and

(ii) explain why share options, such as those granted by MR, generate a charge to the statement of
profit or loss despite no cash transaction having occurred.
(5 marks)

(b) Explain, in accordance with IAS 19 Employee Benefits (revised) how:

(i) the defined benefit pension plan would be accounted for by MR within its financial statements;

(ii) the past service costs would be accounted for in the year to 31 December 2013.
(5 marks)

Total for Question One = 10 marks

Rationale

This question was intended to test two of the key areas in Syllabus Section B, being share-based
payments and retirement benefits. The share-based part requires knowledge and practical application of
IFRS 2 and an understanding of why the requirements are necessary.
The retirement benefit pension plan section focuses on the accounting rules for a defined benefit plan and
includes the revised rules for accounting for past service costs.

This question examined learning outcome B1(f).

Suggested Approach

Candidates should have been familiar with the format required for the answer and those who had
completed past exam questions in their studies are likely to have prepared their workings in the format
shown in this answer.

Marking Guide Marks

The following is an approximate guide as to how the marks were allocated to workings:
(a) Calculation of share options for year and journal entry 3
Explanation of treatment 2
(b) Explanation of impact of defined benefit plan on financial statements 3
Accounting for past service costs 2

Total for Question One 10

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Examiner’s Comments

Many candidates were able to prepare the correct journal entry for part (a) however a surprising number
did not calculate the correct expense. This is a calculation that has appeared in numerous past exam
questions and we would have expected this question to provide some easily attained marks. The most
common mistakes included using $6.50 instead of the fair value at the grant date and credited liability
rather than equity.
Many candidates commented on actuarial gains and losses going through OCI but often failed to comment
on the impact in P/L and SOFP. Accounting for past service costs was well done.

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Question Two

Required:
Prepare the following extracts from the consolidated statement of cash flows for the ER group for the year
ended 31 December 2013, in accordance with IAS 7 Statement of Cash Flows:

(i) cash flows from investing activities; and

(ii) cash flows from financing activities.

Total for Question Two = 10 marks

Rationale

This question tested consolidation and required candidates to calculate and draft sections of the statement
of cash flows.

The question examined learning outcome A1(a) and (b).

Suggested Approach

The most time-efficient process would have been to annotate the question paper with the headings for the
cash flows and then set up the pro-formas for the sections of the cash flow. Using the missing figure
approach to calculate the cash flows would have been the most logical approach.

Marking Guide Marks

Acquisition of PPE 2
Acquisition of subsidiary and impact on other cash flows 2
Dividend received from associate 2
Share issue for cash and repayment of loans 2
Dividends paid 2
Total for Question Two 10

Examiner’s Comments

The attempts submitted for this question were very disappointing. They were typically random workings of
movement and even those who had calculated the movement correctly were often unable to include the
movement under the correct heading and in the correct direction. The overall feeling from the marking
point of view was that this group of candidates had no real awareness of the statement of cash flows and
more alarmingly no understanding of what constituted a cash flow! Something that every employer would
expect from an accountant.

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Question Three

Required:

(a)
(i) Calculate the basic earnings per share to be reported in the financial statements of NAT for the
year ended 31 December 2013, including the comparative figure, in accordance with
IAS 33 Earnings Per Share.

(ii) Explain why the bonus issue of shares and the share issue at full market price are treated
differently in the calculation of the basic earnings per share.
(7 marks)

(b) Calculate the diluted earnings per share to be reported in the financial statements of NAT for the
year ended 31 December 2013, in accordance with IAS 33 Earnings per share.
(3 marks)

Total for Question Three = 10 marks

Rationale

This question tested the calculation of basic and diluted earnings per share. The EPS question included
dealing with two issues during the year, a bonus issue and an issue at full market price. The diluted EPS
required candidates to incorporate a convertible instrument when calculating diluted EPS.

This question examined learning outcome C1(a).

Suggested Approach

The question was deliberately spilt into (a) and (b) to help candidates focus on the fact that both the bonus
and full market price issue were to be included in the basic EPS and the diluted EPS then adjusted for the
potential ordinary shares. The formats of candidates’ workings were expected to follow the approach
shown below.

Marking Guide Marks

(a) Calculation of basic eps 3

Explanation of the treatment of the two share issues 4
(b) Calculation of diluted eps 3

Total for Question Three 10

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Examiner’s comments

Only a minority of candidates knew that bonus issue was not time apportioned. Many treated the full
market price issue correctly but it was worrying that a great number then included a value in the share
number that had been multiplied by the share price. It is difficult to believe that this is something that has
ever been taught or read in a text book. It was a bit worrying that the difference between income and cash
was missed by the majority of candidates. Many discussing how an issue at full market price brought
income rather than distinguishing the resource that could be used to help generate income. Many made a
reasonable attempt at calculating the diluted eps and were given credit where they had used their own
figures from part (a).

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Question Four

Required:

(a) In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates:
(i) explain how RD would have established the A$ as its functional currency; and

(ii) calculate the amounts to be included in the financial statements of RD for the year to 31 December
2013 in respect of the above transaction.
(6 marks)

(b) Prepare, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, the
journal entries to record:
(i) the initial measurement of the investment at 1 December 2013; and

(ii) the subsequent measurement of the investment in RD’s financial statements at

31 December 2013.
(4 marks)

Total for Question Four = 10 marks

Rationale

This question tested two areas. The first was a discussion of functional currency and the translation of a
monetary balance in accordance with IAS 21. The second was the initial and subsequent measurement of
a financial instrument.

This question examined learning outcomes A2(b) and B1(e).

Suggested approach

In part (a) candidates should have referred to the rules for establishing functional currency as outlined in
IAS 21. The second element of the foreign currency question was about restating the monetary item at
the year end. Candidates should have been entirely prepared for answering part (b) of this question and
for setting their answers out in journal entry format as this question is consistent with how this has been
tested in past exams.

Marking Guide Marks

(a) Discussion on functional currency 3

Calculation and journals 3
(b) Initial measurement 2
Subsequent measurement 2

Total for Question Four 10

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Examiner’s comments

Part (a) of this question was in the main answered well with candidates listing the criteria from IAS 21.
Poorer candidates plumped for the answer “where the entity is based”. The main issue with part (a) was
that many recorded the FOREX difference within OCI rather than P/L, but were given credit for the
recording of the PPE and the payables.
Part (b) – the obvious mistakes were made, mixing up the treatment of the transactions costs and
recording the gain/loss in reserves.

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Question Five

Required:

(a) Discuss why, despite an entity investing in staff training and development, the statement of financial
position does not contain an asset relating to human resources.
(6 marks)

(b) Discuss why a potential investor might not wish to rely solely on the financial information within the
financial statements of a service-based entity in order to make investment decisions.
(4 marks)

Total for Question Five = 10 marks

Rationale

This question was intended to test candidates’ understanding of human asset accounting and the issues
around its reporting.
This question examined learning outcome D1(d).

Suggested Approach

Part (a) should have been relatively easy to answer as candidates would have seen the discussion about
non-recognition of human assets numerous times in previous sessions. Part (b) marks could only be
earned by specifically discussing the issues from the investor’s viewpoint.

Marking Guide Marks

(a) Discussion of recognition criteria 6

(b) Investors viewpoint 4

Total for Question Five 10

Examiner’s comments

There were lots of good answers to this question and a number achieved 8+. Part (a) was definitely better
as it was more knowledge-based, and many were well versed in the recognition criteria for an asset which
was excellent. Many could not quite convert this knowledge into practical application in part (b) and failed
to consider the viewpoint of investors.

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

SECTION B – 50 MARKS
ANSWER BOTH QUESTIONS

Question Six

Required:

(a) Prepare the consolidated statement of financial position for the MAT group as at
31 December 2013.
(19 marks)

(b)
(i) Explain how this additional acquisition will impact on the preparation of the consolidated financial
statements of MAT for the year to 31 December 2014.

(ii) Calculate the adjustment that will be required to be made to the group’s statement of financial
position in respect of this acquisition.

(6 marks)

(Total for Question Six = 25 marks)

Rationale

This question tested consolidation. The first section tested candidates’ ability to prepare a group
statement of financial position, including a partly-owned subsidiary and a joint venture. Impairment and
the accounting for long-term borrowing were also tested. Part (b) then tested the more complex issue of a
further acquisition of shares in an entity already controlled.
This question examined learning outcomes A1(a) and A1(b).

Suggested Approach

The most time-efficient approach would have been to draft the pro-forma for the statement of financial
position and then work systematically through the headings adjusting them appropriately for consolidation.

Marking Guide Marks

The following is an approximate guide as to how the marks were allocated to workings:
(a) Goodwill 3
Investment in joint venture 4
Group retained earnings 5
Non-controlling interest 2
Consolidated SOFP and LT borrowings 5
(b) Explanation of impact of extending ownership 3
Adjustment to retained earnings 3

Total for Question 6 25

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Examiner’s Comments

Only the minority managed to treat the joint venture correctly and equity account it choosing instead to
fully consolidate it or ignoring it totally. It was pleasing to see that many knew that the other reserve
balance was eliminated in the group accounts. There were few that managed to correctly calculate
goodwill with common mistakes being including the fair value of the investment rather than the original
cost and failing to include the fair value adjustment. The accounting applied to the joint venture was a
disaster – even those that knew it was to be equity accounted were unable to calculate post acquisition
reserves (albeit many calculated it correctly within retained earnings – just illustrating a total lack of
understanding of the underlying accounting entries they were dealing with) – very few knew to adjust the
JV for the unrealised profit. Both the NCI and the long term borrowings were done very well.
Part (b) gave the most surprising answers with candidates redoing their workings for retained earnings
and goodwill and NCI. The majority failed to see that this was an adjustment to parent’s equity.

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 F2 - Financial Management
Post Exam Guide
March 2014 Exam

Question Seven

Required:

(a) Analyse the financial performance and the financial position of LW.
(8 marks are available for the calculation of relevant ratios.)
(20 marks)
(b) Discuss why investors may find it useful to review the segmental information of LW when
attempting to assess the future profitability of LW.

(5 marks)

Total for Question Seven = 25 marks

Rationale

The question formed the main test of financial analysis and required candidates to calculate relevant ratios
and analyse the information. There was a deliberate focus on the investors’ needs when commenting on
the analysis.

The question examined learning outcomes C1(a), C2(b) and C2(c).

Suggested Approach

Calculation of the ratios and then re-reading the opening scenario would have been the natural first steps,
ensuring that the ratios selected were relevant for this question and covered both financial performance
and position and in particular the investor ratios.

Marking Guide Marks

Again there is an element of fluidity about the marking in this question as we are committed
to awarding credit for well-analysed points with good back-up explanations.
Ratios 8
Analysis of financial performance 6
Analysis of financial position 6
Segmental discussion 5
Total for Question Seven 25

Examiner’s comments

Part (a) -This was surprisingly one of the best answered questions on the paper. There was improvement
in the ratio calculation, the ability to absorb the scenario and remain relevant to the question and the
quality of the analysis in general.
Part (b) – was not answered well with most failing to discuss segmental disclosures from the investors’
viewpoint. A number of candidates still believed that different segments would be subject to different
accounting standards which simply shows they do not appreciate the core accounting principles.

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