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Introduction

Although this was the first sitting of the paper in which International Financial Reporting Standards (IFRS) were relevant, the structure of the exam did not change. There continued to be three sections:

• Section A comprises 20 compulsory multiple-choice questions, each of which is worth two marks
• Sections B and C contain a total of six 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.

This structure means that at each sitting almost all of the syllabus is tested through the combination of the exam and the project. 

As noted in previous reports, candidates are encouraged to ensure that their preparation has included coverage of the whole syllabus. It is not possible to achieve a pass by concentrating on selected topics. It should be noted that all of the outcomes from the Study Guide can be tested at any sitting.

The comments above indicate that the most persistent reason why some candidates are not successful in the exam is a lack of preparation. A lack of preparation manifests itself in a number of ways.

The first of these is not answering the required number of questions. Although the number of candidates in this category has fallen in recent sittings, it is still apparent.

Another common problem is that candidates produce answers that are not fully developed. Candidates need to be aware that because the DipFM is aimed at managers, they must demonstrate the management competence of providing an explanation. (A good way of doing this is to make sure answers clearly show how a technique is applied, why it applied, and how the results can be used to improve performance or decision making.)

It is interesting to note that a small number of candidates answer more than the required number of questions. Inevitably, such answers are extremely brief, and therefore do not gain many marks. In such circumstances, it is highly unlikely that the marks awarded to the first three answers will be sufficient to pass.

It is essential that answers address the question that has been set. Candidates can approach the exam with the confidence that the requirements of each question have been carefully thought through. The key objective of this process is to present questions which are unambiguous. This means that it is not expected that a candidate will decide to
re-write questions to fit answers that they have a predisposition to write down. Any answer that does not address the question set will not attract any marks, no matter how technically correct it may be.

At each sitting there are a number of scripts which are poorly presented. This can take a number of forms, but the main problem is often that no time has been taken to plan the answer. This can often mean that an answer is presented in one part of a question when it is more relevant to another part. It can also lead to material being repeated in two parts of an answer. In both these cases, it is not possible to award good marks.

It is also worth referring to the need to annotate workings so that the marker is absolutely clear as to what the calculation is supposed to represent. This is particularly important when an error has been made. When sufficient annotation is provided, candidates can often achieve good marks. This is because they have adopted an appropriate approach – and credit will be given for this.

One aspect of the change to IFRS which is worth noting is that a number of candidates continue to base their answers on UK GAAP. Where this is simply a matter of terminology (eg referring to ‘stock’ rather than ‘inventory’), this was not considered to be a problem. However, as noted in the comments on Question 1, when there is a difference in accounting treatment, and the answer was based on UK GAAP, it was not possible to award marks.

Section A

Candidate performance in this section is variable. Although in general the proportion of marks awarded in this section tends to be higher than in Sections B and C, the range in performance is wide. Some candidates score very highly, while others obtain a disappointingly low number of marks. Those candidates in the latter category have clearly not achieved the broad syllabus coverage referred to above.

Sections B and C

Question 1

This question tested candidates’ knowledge and application of the correct accounting treatment of inventory. It included the treatment of items bought at different prices, and construction contracts. Those candidates who demonstrated a clear understanding of the key issues around this topic scored good marks. However there was a disappointing number of candidates whose answers were not based on appropriate accounting principles. In Part (a), the key issue was that inventory should be valued at the lower of cost or net realisable value. This basic principle provided a starting point for answers, which could be developed by discussing how cost and net realisable value could be defined. These definitions could then be applied to the facts presented in the question to obtain good marks. This approach is a good example of the need to develop answers and apply knowledge, which was referred to above.   

In Part (b) most candidates were able to describe FIFO. However, a number suggested Last In First Out (LIFO) as an alternative method of valuation. LIFO is not an accepted method under International GAAP. While a number of candidates provided a good discussion on the reasons why construction contracts are not valued at cost, only a minority of candidates provided appropriate calculations of the correct valuation of the contracts and the consequent effect on profit.

Question 2

Knowledge of how ‘fair presentation’ and reported earnings per share (EPS) can be affected by the treatment of certain items was necessary to answer this question. Those candidates who could apply the principle of materiality, in the context of the need for additional disclosure and the correction of errors made in previous periods, were awarded good marks. Those candidates who did not obtain good marks tended to share the NED’s misunderstanding of the nature of separate disclosure, and suggested that items which are separately disclosed may be excluded from the calculation of ‘earnings’, and therefore EPS. Such a misunderstanding arises from a lack of clarity as to the nature of ‘earnings’ and a lack of awareness that all costs are included in the calculation.

A surprisingly high number of candidates did not consider the materiality of the items, although this was an important matter. This meant that such candidates did not recognise that the correct treatment of each of the three items was slightly different. Two of them (sale of machine and reorganisation costs) required no adjustment, while the third (warranty provision) did give rise to an adjustment. Of the two items not requiring an adjustment, only one required separate disclosure. The key issue in the case of the warranty provision is that the error had arisen in the previous accounting period, thereby giving rise to an adjustment to the opening reserves, rather than the current year profit.   

Question 3

Understanding and application of a number of conceptual matters in accounting was tested in Question 3. Part (a) required an explanation of two of the key qualitative characteristics of useful financial information, while Part (b) required underlying conceptual matters to be applied. This differentiation was apparent in the mark allocation: 25% of the available marks (Part (a)) were available for basic knowledge. This was demonstrated in two forms. Some candidates provided the definitions from the IASB’s Framework for the preparation and presentation of financial statements, while others discussed the key matters from such definitions. Either approach was acceptable, given the relatively low proportion of marks available.

The need to apply knowledge could not have been avoided in Part (b), which also provided the majority of the available marks. The key issue was that there was a degree of uncertainty with regard to both whether the painting was sold at the year-end, and whether the value should be placed on the computer system. This leads to the conclusion that prudence should be applied. Those candidates who developed a discussion around this point scored good marks. Those candidates who did not score well tended to make uninformed or confused decisions, based on opinion, rather than the facts as presented in the question.

Question 4

Once again, good marks could have been obtained in this question by identifying a logical starting point and logically developing a discussion from that point. The topic was the purpose of a mission statement, and how this relates to organisational structure and performance measurement. These key issues were clearly identified in the wording of the requirement.

Those candidates who used the requirement of the question as their starting point and developed their answer by using the facts provided in the scenario scored good marks. On the other hand, those candidates who ignored the key issues, the facts in the scenario, or failed to develop their answer did not score well. Specific examples of these three errors were:

          Some candidates appeared to only use the words ‘mission statement’ as the basis for their answer, and provided a (in some cases, extensive) description of what a mission statement is. Such answers ignored the fact that the question specifically asked for a ‘discussion’ of the purpose of a mission statement, together with the benefits and problems likely to be faced by a company such as that described in the scenario. This was a specific requirement, and to obtain strong marks, it was necessary to address all parts of the question. For example, the requirement had three distinct elements – (1) discuss the purpose of a mission statement (2) discuss the benefits and (3) discuss the problems. Given that there were seven marks available, and using the rule of thumb noted in the examiner’s report following the June 2006 paper that each valid point tends to be worth one mark, it was possible to obtain almost full marks by making two points on each of these three requirements.

          Many answers were descriptive. The most obvious example of this was the tendency to answer Part (b) by suggesting that the company should use cost centres. While it is hard to disagree that one aspect of the company’s structure would be the use of cost centres, what was required was to explain why such a (or any other) responsibility centre was considered relevant, and how this could assist in achieving the company’s objectives – as expressed in the mission statement.

          Some answers demonstrated a lack of logic. This was most evident in answers to Part (c). A key element in measuring performance is the need to measure performance against agreed objectives. This is perhaps the most obvious benefit of a mission statement as it provides a context in which, and objectives against which, performance can be measured. This clarity will tend to contribute to a greater awareness of the actions which should be taken, which should improve motivation and goal congruence.

Question 5

This question was largely computational, with only two marks for discussion. Given the nature of the marking process, which means that if an error has been made in a calculation, the correct use of the (albeit incorrect) result will gain marks, most candidates obtained the two discussion marks.

The three options to be assessed were all based on the same core information, so the key issue in the question was to recognise that, as the useful life of the investment in the first option was clearly stated as being three years, this was the most appropriate time horizon on which to base the assessment. Once that was established, Part (a) required a manipulation of the data, to calculate the resulting profit. This was most effectively done by applying a marginal cost approach and calculating contribution first. The use of marginal (or incremental) costing continued in the second option. This was signalled by providing data regarding the incremental sales volume. In the third option, the use of contribution continued, with the need to identify the most effective use of the limiting factor.

A high proportion of candidates

attempted this question and of these, candidates who read the question carefully and had a good understanding of the key points of marginal costing, obtained good marks. The most common cause of candidates not obtaining good marks was a lack of clarity as to how to calculate the benefits obtained under each option using a marginal cost approach. Also, a number of candidates did not assess the options over a common time period.

Question 6

This was a popular question, which was attempted by a large number of candidates. This may have been because the topic was clearly stated in the requirement. Those candidates who had a reasonable understanding of target pricing and variable cost-plus pricing and read the question carefully were able to pick up good marks. This was the case for most candidates who attempted the question.

For those candidates who did not score well, the main reasons were the same as noted in respect of earlier questions – not reading the question carefully and only picking up on part of the requirement in Part (a). This meant that such answers did not indicate when each approach might be appropriate.

Part (b) involved few complications and required a straightforward calculation of cost and comparison of the result with the customer’s requirement. This was answered well by most candidates, but some candidates who produced good calculations and then wasted an opportunity to obtain a mark by not providing a conclusion. In a few cases marks were missed due to incorrect calculation of the overhead costs.

In Part (c) candidates invariably got good marks by suggesting appropriate techniques to reduce cost.