FR syllabus

Perd Co is a consolidated financial statements question from syllabus area D2. This type of question may ask you to prepare a consolidated statement of profit or loss and other comprehensive income or a consolidated statement of financial position for a simple group (parent and subsidiary) and may include an associate company.

Overall, this question is worth 20 marks and you should prepare to spend approximately 36 minutes of your exam time to answer the entire question (180 minutes/100 marks = 1.8 minutes per mark x 20 marks).

It is suggested that you break this down further into the component requirements of the question. For example, Requirement (a) is worth 15 marks overall and, therefore, you should allocate 27 minutes of your exam time to this. Part (b) is worth five marks and so 9 minutes should be spent here.

Please note, you are not expected to answer the requirements in chronological order so if you wish to complete part (b) first that is acceptable. However, this may not be possible for some questions, depending on the nature of the requirements.

In this type of question, it is vital that you present your workings clearly for the examining team.

Workings can either be shown separately or can be included within a cell in the spreadsheet. If you calculate an amount on the calculator tool incorrectly and do not show the working, the marking team will not be able to award any ‘own figure’ marks.

When asked to prepare a consolidated statement of profit or loss and other comprehensive income (SPLOCI) the FR examining team recommend that you set up the proforma for the consolidation immediately.

At the foot of the consolidation, it is advised that you also include the split between the profit and the total comprehensive income (TCI).

The FR examining team note that the most common omission in a SPLOCI is this split of profit and this can often result in a significant number of marks being lost.

In Perd Co, many candidates did not attempt to split the profit or TCI between the parent shareholders and NCI.

By not completing the split, candidates immediately lost marks.

If you spend a small amount of time laying out the split in the early part of your answer, this will act as a reminder to attempt to complete this later and, in doing, so help score valuable marks.

For candidates that did attempt the split, many failed to split both the profit for the year and the TCI.

Some candidates incorrectly took 80%:20% of the profit for the year and the total comprehensive income.

As a simpler approach, NCI must be calculated and the parent share is always a balancing amount.

This is an area that candidates must revise and practise.

Candidates are advised to get some of the less complex marks from the question once the proforma consolidation has been laid out. These marks are earned in the initial consolidation process.

You should add together all income and expenses and other comprehensive income for the parent and subsidiary.

Be careful though, it is extremely important to establish how long you have had control over the subsidiary company.

If control of the subsidiary was acquired mid-way through the period, it will be necessary to time apportion the subsidiary’s income and expenses only.

This is vital in a consolidated profit or loss question and is an area that many candidates often forget.

For Perd Co, however, the subsidiary was acquired two years ago and so the results of Sebastian Co did not need to be time apportioned.

The FR examining team noted that, despite commentary in previous examiner reports, several candidates continue to use proportional consolidation and applied 80% to Sebastian Co’s income, expenses and other comprehensive income.

This is fundamentally incorrect and relates to the basic consolidation marks.

Do not proportionately consolidate the results of the subsidiary based on ownership.

Some common errors or omissions were noted by the examining team:

1. The unwinding of the discount from note (1) was generally dealt with well.

   This transaction was relatively straightforward as the discounting of the deferred consideration had already been performed and the prior year liability at its (then) present value was given. 

   Candidates needed to calculate 6% of this opening liability and include it as a finance cost. 

   A small number of candidates attempted to discount the $7.547m incorrectly before unwinding. 

   This wasted time and resulted in those candidates not achieving full marks for this part of the question.

2. The impairments in note (2) relate to both the current and previous year. In the SPLOCI, candidates needed to include the $300,000 expense for the current year which most did correctly. However, there were several candidates that incorrectly included both impairments at $700,000 or the $400,000

3. Fair value depreciation in note (3) was generally calculated well but many candidates failed to time apportion the depreciation, despite specifically being told depreciation is charged on a pro-rata basis. 

   A less common group adjustment in note (3) related to the disposal of the property. 

   The examining team noted that many candidates did not attempt the disposal calculations and, for those that did, they simply calculated the subsidiary gain or the group gain (rather than both). 

   Another common mistake when the gain(s) was/ were calculated was to include the adjustment the wrong way (i.e., as a loss). 

   Marks were awarded accordingly.

4. The examining team noted that many candidates are still unsure as to what should and shouldn’t be included in other comprehensive income. 

   Note (5) indicated that group assets were revalued at the reporting date and the gains were given for both Perd Co and Sebastian Co. 

   A small number of candidates correctly included both the $4.1m and the $0.7m in other comprehensive income. 

   There were many instances where the revaluation gains were omitted completely and several candidates incorrectly included 80% of Sebastian Co’s gain only.

5. The dividend paid by Sebastian Co in note (6) was $1m and Perd Co only received 80% of this, so $800,000 should be eliminated from investment income. 

   A significant number of candidates removed the full $1m and, therefore, did not earn the full mark available. 

   Some credit for elimination was still awarded.

Consolidations are an integral part of the FR syllabus.

The examining team note that performance on a consolidated statement of financial position is generally better than a consolidated SPLOCI.

There is an equal likelihood that a consolidated SPLOCI may be tested and, therefore, it is vital that you prepare for all aspects of the syllabus.