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CAA ITC BOARD COURSE 2018

MANAGEMENT ACCOUNTING AND FINANCE (MAF)

LECTURE 1


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Menu

1. Introduction

2. Lectures Outline

3. Strategy

4. Risk management

5. Weighted Average Cost of Capital

6. Financial Statement Analysis


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Bridging the Gap

From CTA to ITC :

1. Integrated papers

2. 4 Exam papers

3. 200 pass mark

4. Need at least 40% in an area

5. Key principles

6. Balance on theory and calculations

Bridging the Gap

From SA CTA to Zim ITC :

What is different (Manfin Perspective)

1. The context is Zim – currency, places and names (Important in strategy and risk questions)

2. Tax rate – 25.75% and tax rules as they apply to Manfin

3. Risk management and strategy questions

Our Approach

• Cover Exam Techniques

• Look at an example

SAICA/ICAZ Exam Model

In view of the primary objective of ITC, namely to test the integrated application of technical competence, candidates are tested on their ability to –• apply the knowledge specified in the subject areas set out

in the prescribed syllabus; • identify, define and rank problems and issues; • analyse information; • address problems in an integrative manner; • exercise professional judgement; • evaluate alternatives and propose practical solutions that

respond to the users‟ needs; and • communicate clearly and effectively.

Exam Scoping

Exam Scoping – 2017 Jan

Key Issues

• Application of knowledge

• Workings

• Communication

• Time management

• Layout and presentation

• Irrelevancy

• Drilling down

• Recommendations / interpretations

Paying equal attention to all the competency areas

• I draw your attention to the following regulation:

• “4.2 A minimum of 200 marks (thus 50%) are required to pass the ITC.

• 4.3 Candidates need to demonstrate an appropriate level of competence in ALL areas and disciplines, and therefore the overall pass mark of 50% shall be subject to the candidate achieving a sub-minimum of 40% in at least three of the four professional papers.”

MAF Lecture OutlineSession Topics

1 • Strategy and Risk management;• Weighted Average Cost of Capital;• Financial Statement Analysis.

2 • Cost classification;• Inventory Costing;• Activity Based Costing;• Budgeting.


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MAF Lecture Outline (cont’d)

Session Topics

3 • Cost-Volume-Profit Analysis;• Relevant Costing;• Capital Budgeting;• Valuations.

4 • Dividends Policy;• Standard Costing;• The Treasury Function;• Transfer pricing;• Performance Evaluation.


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Strategy and Risk management

Sub-Topic Analysis1. Understanding strategy

• SWOT analysis;

• PESTEL analysis;

• Ansoff matrix;

• Porter’s Five forces model

2. Performing risk assessment.


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Highly examinable!!!

Integration with other topics

Strategy & Risk

Management

Financing decision

Investment decision

Dividend decision

Decision making

Ethics

Governance


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Application


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Vision

• Where do we want to go?

• What do we wish to become?

• What will success look like?

Mission

• What should our business be?

• What is our purpose?

Strategy

How to we get there?

What action or steps do we

need to take to achieve

objectives?

Implementation

Specific steps taken to

meet objectives

Feedback & Control

Common Student Pitfalls


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Nature of questions Examiner’s Expectations Common Pitfalls

Identify and explain five key risks the HH Ltd group faces with regards itsoperations and describe ways, if any, in which the company could mitigate these risks.

The students were expected to be able to identify KEY risks. It was not enough to justidentify risks, they had to identify ones that have a major impact on business and itsstrategy. The mitigatory measures had to address the risks identified by eitherminimizing them to an acceptably low level or eliminate them totally. They also hadto be feasible.

Poor time management –using statements such as “in the scenario we are told”Use of inappropriate terminology - failure to acquire funding may render the firm in trouble to fund its long term investments. Not presenting solution in a tabular formatStudents identified that the MCAZ had regulations in place but did not identify that the major risk with regards to that and other regulations, is non-compliance.



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Identify key business risks for ETI and discuss how these risks can be mitigated.

Candidates had to demonstrate anunderstanding of ETI as depicted in the scenario, enough to highlight thesignificant challenges being faced by the company. They had to identify the risks faced by ETI, the defining matter was thatthe risks identified had to be key risks and not general ones.Candidates had to ensure that the risks were specific to ETI and for most of them, they had to stem from the triggers within the scenario.

Some candidates did not present their answers in tabular format thereby losing an easy presentation mark which was expected from them.Some candidates were just memory-dumping, and not applying themselves to the scenario, for example, defining reputational risks, refinancing risks, liquidity risks, etc.Some candidates were defining what a business risk is. This wastes time and there are no marks at this level that are awarded for defining key terms in aquestion.



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Describe the strengths, weaknesses, opportunities and threats of UnifreightAfrica Ltd.

Candidates are expected to:• To give a detailed

explanation of the strengths, weaknesses, opportunities and threats of Unifreight Africa Ltd; and

• Correctly classify those strengths, weaknesses, opportunities and threats in order to earn marks.

• Mere identification will not be awarded marks.

Some candidates misinterpreted thescenario thereby leading to incorrect answers for example “Unifreight is theonly logistics company in Zimbabwe hence it enjoys all the benefits in themarket”Other candidates failed to express themselves by writing points that are not clear enough to convince the marker to award them some marks.

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• Family Bank Limited (‘Family Bank’) is a publicly owned holding company listed in the financial services sector on the main board of the ZSE Limited. The company operates solely within the Zimbabwean unsecured credit environment underwriting unsecured credit risk through the provision of credit to the formally employed emerging market. No transactional or savings services are offered. Family Bank was incorporated in 1999 with a focus on the micro finance segment and grew quickly through the acquisition of a number of businesses operating in this market. Family Bank is registered as a bank under the Banking Act (Chapter 24:01). Major competitors in the unsecured lending market in Zimbabwe include CBZ Bank Holdings, NMB Bank Limited, Barclays Bank Limited, Kingdom Bank Limited, MBCA and Stanbic Bank. Unsecured lending includes credit cards and personal loans.

• Discuss opportunities and threats faced by Family bank


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Tutorial Analysis

• Azzure

Discuss the risk faced by Ithemba


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Ithemba Continued

• To diversify the risk, Ithemba is considering buying Golden Bricks which manufactures clay bricks for both domestic and industrial construction. Golden brinks is a well established brand in Zimbabwe and command a considerable market share in the bricks market in Zimbabwe

• What strategic considerations are needed before taking this decision


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Questions ?


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Cost of Capital

Sub-Topic Analysis

Key topic areas:

1. Various sources of capital;

2. The link with strategy;

3. Cost of equity:

• Dividend growth model;

• CAPM approach.

3. Cost of debt:

• Preference shares;

• Long-term loans;

• Convertible debt.


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Financing

• TnT is considering two financing options to finance its expansion project:

1. Obtain a loan for it current bankers at a variable rate repayable in monthly instalments over 5 years

2. Do a rights issue

3. Issue a Rand Denominated bond at a fixed rate repayable in one bullet payment after 10 years.


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Continued

• If TnT Choses the loan option, what will be the impact of the loan on the discount rate for the project.


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WACC

• Beta

• Components of WACC

• Risk Free Rate

• Different debt instruments


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Application


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1. Equity• Dividend growth model (estimating g)

• CAPM approach (un-levering and re-levering the beta)

2. Debt• Redeemable and irredeemable debt

• Convertible debt (identifying the correct dates to exercise the options and who is exercising them)

Common Student PitfallsNature of questions Examiner’s Expectations Common Pitfalls

Calculate the weighted average cost of capital for the merged firm. State reasons for any items excluded from yourcalculation.

Candidates are expected to:• Identify all the long-

term sources of finance and calculate their market values and required returns; and

• Calculate the weighted cost of capital.

Failure to identify the option holder.Some candidates did not know how to remove the dividend in the cum-divordinary share price. Other candidates faced challenges in interpreting the information relating torisk associated with the beta of Unifreight.Though principle marks were awarded for the conversion option, somecandidates did not show a high level of understanding of the principle ofevaluating a conversion option.


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Calculate the weighted average cost ofcapital for Kalife.

Candidates are expected to:• Identify all the long-

term sources of finance and calculate their market values and required returns.

• Identify all short-term sources of finance and document that they are not part of the long-term capital structure.

• Calculate the weighted cost of capital.

Some candidates failed to recognise the new terms on the loan and this resulted in loss of marks. Some candidates failed to document that deferred tax was not a form offinance.


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Tutorial Analysis

• Question 24 (a)


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Questions ?


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Financial Statement Analysis

Sub-Topic Analysis

Key topic areas:

1. Financial statement analysis as part of performance evaluation;

2. The link with strategy;

3. Profitability ratios;

4. Solvency ratios;

5. Liquidity ratios;

6. Commenting on ratios.


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Application


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1. Ability to carry out a holistic analysis of the financial information of a company together with other background information provided.

2. Cause and effect analysis


Analyse the performance of the two divisions based on calculations of any 10 ratios which cover performance, liquidity, solvency and working capital management. Your analysis should provide evidence on which division performed better.

Candidates are expected to:• Calculate any 10

financial ratios that cover performance, liquidity, solvency and working capital management;

• Identify ratios that can interlink;

• Provide commentary on which division performed better as evidenced by ratios calculated and other information provided in the scenario.

Some candidates lost

marks by not calculating

ratios for the

comparative year.

Candidates were

generally providing

weak commentaries by

just documenting what

they had already

calculated, without

providing corroborative

information about the

performance of the two

divisions.


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Common Student Pitfalls (cont’d)Nature of questions

Examiner’s Expectations

Common Pitfalls

Only a few candidates managed to look

for relationships between some ratios in

their analyses – this is what was

expected! Candidates are encouraged to

calculate all ratios first before

commenting as this will provide them

with an opportunity to see “the bigger

picture” and provide more value adding

commentaries.

Some candidates lost time trying to

explain the meaning of a ratio – this was

not required and therefore did not earn

them any marks.


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Tutorial Analysis

• Question 2 (a)


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Questions ?

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