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Incorporating subject areas:
- Interpretation of Financial Statements
- Performance Management.

This was the second sitting of the paper under International Financial Reporting Standards (IFRS). However, the structure of the exam remained as in previous sittings:
- Section A – 20 compulsory
multiple-choice questions, each of which is worth two marks
- Sections B and C – a total of 6 questions (three in each section) of 20 marks
each.

Candidates are required to answer a total of three questions from Sections B and C. At least one question from Section B and at least one question from Section C must be attempted.
For the benefit of candidates preparing for future sittings, it is worth reiterating this structure means that at each sitting almost all of the syllabus is tested. Therefore, candidates are encouraged to ensure that their studies cover the whole syllabus.
The main reason that candidates do not pass is a lack of thorough preparation. It is interesting to note that, while at this sitting the same evidence of inadequate preparation was apparent, there was an increase in the number of candidates who attempted four questions in Sections B and C, even though only three answers were required. In such cases, the answers presented were invariably very brief, and did not gain many marks.
In my report on the December 2006 sitting, the need to answer the question which has actually been set was noted. It is a matter of some concern that this continued to be a problem at this sitting. There is no value in a candidate providing everything they think they know on a particular subject in the hope that marks will be awarded.
As noted in the report on the previous sitting, only material which addresses the question set will attract marks.
A common feature of scripts which do not gain a pass mark is that there is often no evidence of answer planning. While it would be simplistic to say that those candidates who plan their answers will pass, it is fair to say that there is a high correlation between planning and success.
Candidates at future sittings should also note that as the syllabus is now based on IFRS, answers which apply UK GAAP cannot be regarded as correct. For example, in Question 2 in Section B, some answers discussed amortisation of goodwill. This is the approach under UK GAAP. The IFRS treatment is not to amortise goodwill, but to test goodwill for impairment.

SECTION A
It remains the case that candidate performance in this section ranges from those candidates who score very high marks to those who score very low marks. As has been noted at previous sittings, the main reason for candidates not scoring highly in this section is that they have not prepared on a range of topics from across the syllabus.

SECTIONS B AND C
QUESTION 1
There were a number of very good answers to this question. Such answers were produced by candidates who had clearly taken time to read the question and plan their answers. One way of doing this was to note the requirements and the mark allocation carefully.
Part (a) asked for a memo. If there had not been any marks allocated to answering in the correct format, this requirement would not have been included in the question. It follows that credit would be given for the format of the answer. Also, the question asked for an ‘explanation’. This is entirely different to a ‘description’. Nevertheless, some candidates chose to spend some considerable time describing, rather than explaining. In some cases, answers provided a description of how to carry out depreciation calculations on both the straight line and reducing balance bases. This is a good example of candidates not answering the question set, but writing everything they know about a topic.
The question also required the explanation to relate to two issues (1 – nature;
2 – accounting treatment) of three items
(1 – depreciation; 2 – impairment;
3 – revaluation). Therefore, it could conveniently be broken down into six subparts. This means that a detailed discussion of each was not required. Nevertheless, a number of candidates chose to write at length on one item (usually depreciation), and not to write very much on the other items.
In Part (b), the requirement was to calculate. This did not call for much discussion. However, there was the opportunity to develop the answer, based on Part (a) by noting that the balance sheet value could be based on either cost or revalued amounts.
It was surprising that a number of candidates were unable to correctly calculate the depreciation charge for the year or the accumulated depreciation. In some cases, the opportunity to gain marks was not taken because candidates presented calculations and results in such an unstructured manner that it was impossible to ascertain what they had calculated. Perhaps the most careless aspect of some answers was to calculate the value of each class of non-current assets before accumulated depreciation, and the accumulated depreciation, but not to net these off to provide the final value for reporting in the balance sheet. One can only assume that the requirement had not been read carefully by such candidates.

QUESTION 2
In the main, this question was well answered. Most candidates were able to recognise that option 1 would lead to the acquired company becoming a subsidiary, and option 2 would create an associated undertaking. However, not all candidates were able to explain the accounting treatment. It is recognised that explaining an accounting treatment is more difficult than applying that treatment. However, an attempt to provide a structure
for candidates’ answers was included in the question. Once again, the requirement could be broken down into a number of subparts. Those candidates who applied such an approach tended to gain full marks.
In Part (b), most candidates’ preparation of the consolidated balance sheet was very good. The main reasons for some candidates not gaining good marks were:
- Errors in the calculation of goodwill, usually by including post acquisition profits in the calculation of the net assets of the acquired company.
- Including the share capital of both companies in the consolidated balance sheet.
- Not deducting the cash used to acquire the subsidiary from the calculation of the consolidated bank balance.
- Including all of the post acquisition reserves of the subsidiary in the calculation of consolidated reserves.
- Incorrectly calculating the value of the minority interest.
- Omitting either, or both of, goodwill and minority interest from the consolidated balance sheet. 

QUESTION 3
This question was attempted by fewer candidates than any other. This may be because to obtain good marks, candidates needed to have a clear technical understanding of generally accepted accounting practice in respect of events after the balance sheet date, provisions, and contingent liabilities.
In many cases, candidates who attempted the question scored good marks.
In Part (a), good answers demonstrated an awareness of the need to break the requirement down in to subparts. This approach would have shown clearly that an appreciation of the key issues relating to events after the balance sheet date, provisions, and contingent liabilities would lead to gaining a lot of marks.
For those candidates who did not score well, the main reason was a lack of clarity of the nature of these items – particularly events after the balance sheet date and contingent liabilities. A number of candidates were unable to differentiate between provisions and contingent liabilities. Another common problem was a lack of awareness of the difference between an adjusting event after the balance sheet date and a non-adjusting
event.
Generally, those candidates who had answered Part (a) well scored good marks in both Parts (b) and (c). In many ways, this was not surprising, because the question required the points discussed in Part (a) to be applied in the subsequent parts of the question. What was surprising was the fact that in Part (c), some candidates did not follow through on their discussion to calculate the two values required by the question.

QUESTION 4
This question tested candidates’ understanding of issues relating to budgeting. Once again, the three parts of the question followed from one another. They were drafted to assist candidates in developing their answers. The main reason that some candidates did not score good marks was a failure to read the question carefully.
For example, in Part (a), the question asked for an explanation of the problems and weaknesses of traditional budgeting.
A surprising number of candidates chose to list the advantages and disadvantages of traditional budgeting. This is a completely different question – not least because the requirement made no reference to advantages, or benefits.
Part (b) followed logically from Part (a)
in that it required possible strategies to overcome the problems identified in Part (a) to be identified – and to explain how these can contribute to improved performance. Those candidates who chose to list or describe approaches without specifically referring to the points made in Part (a) could not be awarded many marks.
In some answers to Part (c), there was further evidence of careless reading of the requirement, with some candidates simply describing the elements of the ‘beyond budgeting’ approach. However, the question asked for the benefits of the strategies identified in Part (b). Once again, the key to obtaining marks was to build the answer on the points made in the previous part of the question. 

QUESTION 5
This question attempted to replicate the kind of decision-making situation that managers might face. There were a number of key issues that candidates were required to deal with in order to develop a good answer. As noted in previous questions, the most successful approach was to read the question carefully.
The significance of these comments can be illustrated by considering one or two points from the question.
The first key issue was that Part (a) provided the criterion on which the decision would be based – contribution per processing hour. Here, the most common mistake was to calculate contribution as revenue less direct costs. This was a fundamental mistake as the question clearly stated that direct costs included a fixed element. This was further emphasised by the fact that a breakdown of the advertising cost across the lines of business was provided.
The second key point was recognising that although the number of processing hours was not explicitly stated in the question, it could fairly easily be derived from the allocation of central costs at a fixed rate, based on processing hours.
In Part (b), the key issues were noted at the end of the data provided. The fact that contribution per processing hour and the product mix were not expected to change meant that the result of the calculation in Part (a) was the basis for the analysis in Part (b). Unfortunately some candidates chose to ignore the data provided and made their own assumptions. This meant that they provided an incorrect analysis. While assumptions that are consistent with the data provided in the question are acceptable, it is not acceptable to introduce additional data to a question.
Other reasons that some candidates did not obtain marks in Part (b) were treating the upgrade costs as an annual cost, rather than a total cost to be written off over three years (as stated in the question), and not applying the required 10% increase to obtain the target profit.
Part (c) provided an opportunity for candidates to challenge the basis of the decision by critically examining the assumptions provided in the question. The best way to approach a question such as this is to offer reasons why each of the assumptions may not hold. Those candidates who took this approach usually achieved full marks in this part of the question. Those candidates who simply accepted the assumptions were unable to offer much discussion, and consequently did not obtain good marks.    

QUESTION 6
In the recently published examiner’s approach article, the fact that the DipFM is intended for managers who wish to develop financial awareness was noted. The critical nature of the manager’s role was also inherent in Question 6, which was on the subject of activity-based costing (ABC). The question of how to measure overheads and to recover such costs is of critical importance to all organisations. For this reason, ABC has become a widely-used tool. This question therefore required two approaches to be used to calculate product cost – a traditional volume-based approach and ABC.
Most candidates were able to calculate the cost using the volume-based approach. The almost universal reason why some candidates did not obtain the marks available for this calculation was not correctly calculating the budget for labour hours. This required two items of data provided in the question to be brought together. The first (that each job required 27 labour hours) was provided in the second paragraph. The second was provided in the final paragraph – 36,000 internet-based orders and 12,000 telephone orders – with each order being treated as a separate job.
With regard to the ABC calculations, the most common problem encountered by candidates was a lack of awareness of the difference between the cost per unit of cost driver and the cost of each order. Another reason that some candidates did not obtain marks was not recognising that the two methods of receiving orders had different order processing costs.
In Part (b), candidates had an opportunity to demonstrate their ability to undertake critical thinking by examining whether ABC offered substantial advantages for the organisation. Unfortunately too many candidates did not read the question carefully enough or did not use the results of their calculations in Part (a) to develop their answers to Part (b). Such answers tended to take the approach that ‘ABC should be used because…’ followed by a list of the purported advantages of the technique. Needless to say, such answers did not attract many marks.