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Module A, Paper DA1 (examination)
Incorporating subject areas:

• Interpretation of Financial Statements
• Performance Management.

General comments

The paper comprised three sections, as follows:

• Section A
  20 compulsory multiple-choice questions of two marks each
• Sections B and C
  Three questions of 20 marks each in both sections. Candidates were required to answer a total of three questions from these two sections, with at least one question from each section.

Overall performance was disappointing, with fewer candidates achieving a pass than in previous sittings. In the main, this was due to a lack of understanding of the key issues across the syllabus. While all questions were attempted by some candidates, there were a number of candidates who did not attempt the required number of questions. Such candidates tended to present incomplete answers to those questions which they had attempted, suggesting that lack of preparation, rather than lack of time, was the problem. A few candidates attempted more than the required number of questions. Given the normal time constraints of an exam, this is somewhat surprising.

A possible explanation is that these candidates had prepared for questions on certain topics, and their exam technique was to present anything they knew in the hope of picking up marks. Candidates should note that only relevant answers will be awarded marks, and no additional credit can be given for answering more questions than are required.

As in the previous sitting, most candidates who obtained low marks produced scripts which lacked coherence and structure. Very often, it was difficult to interpret the calculations presented for computational answers. In some cases there was no evidence of workings, making it impossible to work out what the candidate was trying to calculate. Candidates are again reminded of the value of clear workings.

Question comments

Section A

The multiple-choice questions were equally divided between the two subject areas, and covered a range of outcomes from the Study Guide. Candidate performance in this section ranged from very good to very weak. In particular, the questions on deferred taxation and research and development expenditure were answered correctly by only a few candidates. These are important areas of the syllabus and can be mastered by understanding a small number of key points.

Section B

Question 1

This question covered the accounting treatment of an investment in an associated undertaking. This is an important part of the syllabus. The reported balance sheet is affected in a fundamentally different way depending on how an investment is classified. There are a few key points which indicate whether the investing company has a dominant influence or a significant influence, and hence how the investment should be clarified. Candidates who understood the key differences between a subsidiary and an associate scored good marks. Those candidates who did not perform well on this question were confused about the differences between the two types of investment.

It was disappointing to note that many candidates who were able to discuss the differences between the two types of investment were unable to apply the accounting treatment to an associate. Many candidates correctly identified the investment as being an associated undertaking, but prepared the consolidated balance sheet on the basis that it was a subsidiary.

Question 2

Candidates were required to discuss the accounting treatment of post balance sheet events in general and to apply the discussion to two separate events. To obtain good marks, candidates needed to know the period within which events must be considered, and to differentiate between adjusting events and non-adjusting events. A number of candidates did not appear to appreciate the importance of the dates on which the events occurred, and consequently provided a confused discussion.

One of the events also required a basic understanding of how to place a value on liabilities. Candidates were required to provide for liabilities at the best available estimate. While prudence which was discussed at length by some candidates, is of some relevance, it is not a basis for simply using the highest potential valuation for a liability, as was suggested by a number of candidates.

Question 3

In this question, candidates were required to apply the rules of stock valuation. This is a fundamental issue in financial reporting, and as such, one would have expected that this question would have produced good answers.

While this was the case with some candidates, a disappointing number of answers lacked a fundamental understanding. While knowledge of the basic rule that stock should be valued at the lower of cost or net realisable value was demonstrated in many cases, few candidates demonstrated an awareness of how to apply the rules of stock valuation to long-term contracts. Even fewer were able to explain why an element of profit can be reported in such cases.

Section C

Question 4

Activity-based costing is an important development, and as such is an important area of the syllabus. It is pleasing to note that a number of good answers to this question were presented. In the main, candidates who attempted this question demonstrated a sound understanding of the issues. However, it must be said that answers to the discursive parts of the question tended to be weaker than the computations.

Candidates should remember that this paper is intended to test their ability to use and apply information in a management context. While the ability to calculate, and therefore convert data into information is important, it is not sufficient on its own. It is also worth noting that while there is a correct answer to computations (although a fair number of marks can be obtained even if the final result is incorrect due to an error in calculation), there is often no absolutely correct answer when information is interpreted. Candidates are encouraged to think logically and use their business experience to make relevant suggestions.

Question 5

This question produced the best overall performance, with many candidates presenting very good answers. Where candidates did not score highly, it was for two main reasons. The first was a failure to read the question carefully, and as a consequence, candidates discussed the most likely reasons for variances and not, as the question required, the most likely reasons for adverse variances. The second reason was a lack of clarity in discussing why not all adverse variances need to be investigated, which led to candidates giving vague comments.

Question 6

This question tested candidates’ ability to assess the likely profit from different markets. A number of very good answers were presented in respect of the domestic market, in which there was certainty about the level of demand. Unfortunately, many candidates were unable to apply the probabilities in order to assess the likely results in the export market, where there was a lack of certainty. This was compounded by confusion about how to treat the additional fixed marketing costs.

Even some candidates who presented good calculations were unable to discuss the context in which the decision was to be made. This meant that few candidates obtained high marks in the final part of the question. Once again, a little logical thought and application of business experience would have been sufficient.

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