Tackling recurring issues

May 01, 2019
Garret Mulvin of the Exams team in Chartered Accountants Ireland sat down recently with the CAP 2 Financial Reporting examiner to discuss the challenges facing students in the Financial Reporting examination. 

Candidates generally performed well in the 2018 financial reporting (FR) exam. Were you pleased?

Of course. They should feel proud of their achievement and I sincerely wish them well as they continue their studies. However, after the dust has settled on any set of FR results, what tends to reside with me most are the topic areas where students have not performed well. In many cases, recurring topics are poorly answered by candidates. This can ultimately be the difference between passing the FR exam or not. 

The FR Competency Statement is quite broad in itself. Is it really possible to label topic areas as ‘recurring’?

I agree it is a broad syllabus. It aims to equip students with the skill set to prepare financial statements for the individual corporate and group entity. However, some areas are fundamental to the preparation of these financial statements. These areas should be central when studying for the FR exam.

I understand that question one will require the candidate to prepare a single entity’s financial statements. What do you see as ‘fundamental’ here?

First and foremost, Chartered Accountants Ireland recognises that ethics is an intrinsic part of the training of a professional accountant. It is important that FR students demonstrate an understanding of how ethical issues can occur when preparing financial statements, the ethical principles involved and how they should react to such issues. Unfortunately, the ethical requirement in the FR exam continues to be very poorly answered. I can only imagine that this area is neglected by students who, instead, prefer to focus their study on more numerical aspects of the syllabus. Ethics is a staple of the FR exam and candidates should show their competence in this area.

As regards the financial statements themselves, there is no mystery in the fact that a well-prepared student should produce a presentable profit and loss, and a statement of financial position with labelled workings. Presentation marks will, as ever, be available to those who wish to score them. Beyond this, the vast majority of companies have to account for tangible non-current assets (IAS 16; IFRS 5; IAS 40, for example), and income tax (IAS 12). I see these areas as being mainstays of the FR exam going forward. Candidates should bear in mind that the calculation of an income tax expense includes an understanding of current tax and deferred tax. 

That’s a very definite starting point for any FR candidate wishing to do some preparation for question one.

Yes. In fairness to candidates, they generally seem prepared to crunch the numbers and provide journal adjustments in preparation of the financial statements. The candidate should also note that preparation of financial statements isn’t confined to the statements themselves. Accounting policies and disclosure notes are fundamental to the user’s understanding of the financial statements.

It is staggering, however, how many candidates perform abysmally in this component of the question, or, in many cases, ignore it entirely. Preparation of the disclosure note and accounting policy involves using the same information that is used in preparing the financial statements. There is no reason not to score 
well here.

In the summer 2018 sitting, for example, six marks were available for the preparation of an accounting policy and disclosure note. The average score achieved by candidates was a little over one mark. Considering that the majority of these same candidates performed well when producing the financial statements, it is a shame that a more competent effort is not being made to prepare the accounting policy and disclosure note. FR results statistics remind us that, for a significant number of students, these ‘forgotten’ marks are the difference between an overall passing and a failing score.

Preparation of accounting policies and disclosure notes will continue to feature in the FR paper.

The preparation of consolidated financial statements is also a compulsory question on the FR paper. Do you also see ‘recurring’ areas here?

Absolutely! Regardless of which consolidated financial statement a candidate is required to prepare, they should expect to deal with a parent company and a partially-owned subsidiary. Hence, accounting for goodwill, intra-group trading and non-controlling interests should be seen as unavoidable. Again, well-presented financial statements and labelled workings will be rewarded.

Questions three and four are optional; the candidate only needs to attempt one of these. Do you have any words of advice to offer in relation to these questions?

FR has a broad competency statement and candidates should expect the examination paper to reflect this. The optional questions are typically answered very poorly – it is obvious that candidates have not adequately covered the FR syllabus, or perhaps have cherry-picked particular standards based on what they have seen in more recent examinations. It goes without saying that all areas of the competency statement are examinable and I look forward to visiting all of these topics over time.