How to pass Financial Statements

Financial statements is the unit where we get asked most frequently:

 

“Where do I start, there is so much to learn!”

How to pass Financial Statements

Financial statements is the unit where we get asked most frequently:

 

“Where do I start, there is so much to learn!”

Please don’t despair, no one can be expected to know everything in this unit. This is the hardest unit at the hardest level.  We are not looking for you to get 100%.

To pass this exam, you should be getting just about full marks in tasks 1 and 2, so long as you are well prepared.  They are worth 40 marks out of a possible 150.  Your statements might not balance, but you could well have 39/40 marks.  There are a lot of level 3 concepts tested here, such as depreciation, accruals and prepayments, but in the context of a limited company.

Consolidated accounts, whilst initially hard, is another one where you should be doing well, as you will always have to deal with PUP and intercompany transactions.  Here the tasks tend to be very repetitive, and are worth 30 marks, for which sometimes the task is simply to add two numbers together.

It is hard to guess the first written task, as there are many financial reporting standards, though the last one will be ratio analysis. This will usually be centred around gross margin and operating margin due to them being so key to test understanding.  Gearing and interest cover are another two which I would bet on coming up.

You can just use the same standard answers for these every time, but tweak them to the context of the scenario.  For example, if gross profit has changed, you know this is related to the cost per unit changing and/or the sales price per unit changing.  Don’t forget to link one ratio to another and give real world suggestions as to what may have caused the change or movement in the ratio.

Please don’t think that you need to learn every IFRS, you don’t, and life is too short.  We are testing that you know what to do, not which IFRS tells you what to do.

You don’t need to know every single standard off by heart.  However, these will be tested in tasks 4 and 5.  You need to know a reasonable amount about the main ones.

So with IAS 17 leases, you need to know a few things which are indicative of a finance lease.

With IAS 38 intangible assets, just learn PIRATE and you will get plenty of marks.

 

Probable future economic benefits will be generated by the asset

Intention to complete and use/sell asset

Resources adequate and available to complete and use/sell asset

Ability to use/sell the asset

Technical feasibility of completing asset for use/sale

Expenditure can be measured reliably

 

IAS 36 impairment of assets, you need to know that the asset should be held at the lower of Net Book Value and the recoverable amount.  The recoverable amount is the higher of the fair value less costs to sell, and the value in use.

IAS 37 provisions and contingencies.  You must know that you can only recognise a provision when it has an obligation, either legal or constructive, it is probable that there will be an out flow in money, and you can measure is reasonably accurately.

This is definitely where the AAT are looking for competency, not perfection.

 

Please don’t despair, we are looking for you to pass the exam, not get 100%!

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