MCS Key things to remember

Question 1

Business Model

Answer 1

Defining Value
Creating Value
Delivering Value
Capturing Residual Value

Question 2

Intangible assets: capitalise when…

Answer 2

Probably future economic benefits
cost can be measured reliably

Question 3

Development costs, PIRATE criteria:

Answer 3

P - probably future economic benefits
I - intention to complete
R - resources to complete
A - ability to use or sell
T - technically feasible
E - expenditure reliably measured

Question 4

4 Types of Business Risk

Answer 4

Product Risk - factors that can negatively affect products success in the market

Product reputation risk

Contractual inadequacy risk

Operational risk - business operations inefficient/processes fail

Question 5

Goodwill on acquisition is….

Answer 5

The difference between amount paid as consideration at acquisition and the fair value of the subsidiaries net assets

Question 6

Consideration to be valued at (for calculating GW):

deferred cash
Shares

Answer 6

deferred cash - discount to PV
Shares (incl. deferred) - market value @ acq

Question 7

Difficulties in determining fair value of subs net assets (for calculating GW)

Property
Equipment
Licenses
Trade receivables
Liabilities (incl. contingent liabilities)

Answer 7

Property - check values, compare to others, professional valuation

Equipment - check for damage or if technically obsolete. If intent to sell PPE recognise at realisable value

Licenses - transferable? reliably measurable since no 2nd hand market for licenses?

Trade receivables - recognise recoverable amount

Liabilities (incl. contingent liabilities) - recognise at fair value

Question 8

Fair value adjustments to subsidiaries net assets

1. if subs net assets fair value higher than carrying amount
2. if contingent liabilities

Answer 8

If subs net assets fair value higher than carrying amount:
1. Add fair value uplift to the carrying amount of subs net assets
2. this reduces the difference between consideration and fair value of subs net assets which reduces goodwill
3. additional depreciation will reduce profits

Contingent liablities:
1. deduct fair value of contingent liabilities from subs net assets
2. this increases the diff between consideration and fair value of subs net assets which increases goodwill

Question 9

Integrated Reporting - 6 capitals

Answer 9

1. Financial capital (financial resources)
2. Manufactured capital (physical assets e.g. PBSAs)
3. Intellectual capital (technical know-how/expertise)
4. Human capital (staff skills/competencies)
5. Social & relationship capital (reputation & relationships)
6. Natural capital (environmental resources e.g. green spaces / energy sources / materials used)

Question 10

Characteristics of DEBT (5)

Answer 10

• cheaper (since lenders are protected by rights that come into force if interest repayments of principal not made)
• Plenty of property to secure against
• Loan interest is an expense for tax purposes - further reduces Kd
• Ranks ahead of equity for repayment, so repayment more likely
• more flexible & quicker to organise

Question 11

Characteristics of EQUITY (5)

Answer 11

• Permanent finance source, suitable for long term investments
• more expensive, lenders exposed to risk associated with FH (more risk = more retun)
• Quoted company - reasonably practical to raise large sum but expensive due to professional fees
• share price will decrease if returns are not delivered
• right issue is the simplest way to raise additional equity

Question 12

KEY RATIOS

OP% =

GP% =

ROCE =

Gearing =

Interest Cover =

Dividend Cover =

Answer 12

OP% = PBIT / revenue

GP% = Gross profit / revenue

ROCE = PBIT / capital employed

Gearing = Debt / Equity

Interest Cover = PBIT / finance costs

Dividend Cover = Profit / Divis paid

Question 13

Subsidiaries are entity controlled by another entity….criteria for control:

Answer 13

1. voting rights or right to appoint key management/decision making
2. Rights to variable returns (dividends)
3. Ability to use power to affect investor returns

Question 14

Consolidation of foreign subs

(P/L, A & L, Exchange G/L)

Answer 14

• P/L translated at average rate for the year
• Assets & liabilities translated at closing rate
• exchange differences taken to foreign currency exchange reserve (doesn’t affect reported earnings but will impact equity - consider ratios)

Question 15

Currency effects on financial statements

SOFP - NET ASSETS

SOPL

Answer 15

SOFP - NET ASSETS
1. net assets of each foreign sub (incl. GW) must be retranslated at each year end using the closing rate

2. Gains/losses taken to currency reserve
3. currency G/L are not recognised in consolidated P/L so do not affect reported profit.
4. Currency loss would reduce equity, so would increase ROCE and vice versa
5. impact is decreased if investments spread across different countries

SOPL
Any expenses in P/L translated at the average rate for the year - less likely to be affected by large swings in FX rates

Question 16

Transfer Pricing

Needed for….

4 types

Answer 16

Needed for: goal congruence & prevention of dysfunctional behaviour

1. Marginal cost - when there is spare capacity
2. Market based - when there is no spare capacity

If cannot agree…
3. Dual pricing - record different prices, adjustment for fictious profits needed
4. Two-part tarrif - marginal cost transfer plus periodic lump sum to contribute to fixed costs

Question 17

Provision =
3 criteria

Contingent liability =

Answer 17

Provision = PROBABLE liability of uncertain timing
3 criteria:
1. present obligation due to past event
2. Probable future transfer of economic benefit
3. measured reliably

Contingent liability = POSSIBLE obligation arising from a past event which will be confirmed by a future uncertain event outside the company’s control
-> disclose in notes to the financial statements

NOTE: if only a remote possibility then do not recognise

Question 18

ASSOCIATES - How can significant influence be determined?

Answer 18

• power to participate in decision making (but not control)
• Implied by equity holding >20% of voting rights (ordinary shares). If less, more detailed analysis needed…
• right to nominate board directors (since can represent on board and give opinions on policy)
• sole customer/supplier

Question 19

Accounting for associates:

Inter company balances

unrealised profits

Share of P/L

Distributed profits

If significant influence lost

Answer 19

Inter company balances - NOT cancelled out

unrealised profits - adj for unrealised profit on inventory - reduce the sellers profits by the parents share only.
(if A seller - reduce share of associates profit in P/L
if P seller - increase parents COS)

Share of P/L - parent to recognize share of P/L in consolidated P/L

Distributed profits - show in investment in associate

If significant influence lost - if significant influence is lost, mist reclassify associate as an investment as equity method no longer appropriate

Question 20

Revenue Recognition - 5 steps

Answer 20

1. identify the contract
2. Identify performance obligations - must be distinct and separately identifiable
3. determine contract price
4. allocate transaction price to performance obligations
5. recognise revenue as/when performance obligations are met
   - evenly throughout contract?
   - may need to defer/accrue income

Question 21

Fixed Rate Bonds

Answer 21

Predictable fixed return (coupon) rate paid

interest paid is tax deductible

secured against NCAs

Question 22

Rights Issue

Answer 22

shareholders can increase their holding or sell their rights

issued at less than current market value to encourage uptake

no dilution of control

higher divi payments if more shares in issue

more shares = lower eps

significant professional fees to issue but reasonably practical since quoted company

Question 23

Activity Based Management

Answer 23

Uses info from ABC to analyse relationships between costs & activities

focus on activity costs, not departmental

Revolved around value added: cost reduction, quality, process improvements, innovation

useful to ensure all overheads are allocated to activities for assessment

Question 24

Negotiation 4 stages

Answer 24

Prepare - state what negotiations, gather all info needed to make informed opening offer

Open - must set opening bid at the right level (high enough to keep engaged, low enough for movement)

Bargain - contingencies, assurances, seat on the board, deferred cash/shares

Close - ratify & sign agreement quickly to prevent counter offers

Also consider: face to face negotiations to build relationships & explain issues more effectively. Senior decision makers to be present to ensure agreements can be upheld

Question 25

Project management: key phases

5 process areas

Answer 25

Key phases:
1. need - determine goals/scope, feasibility study, project initiation doc (scope, deliverables, budgets)

2. solution - project plan, select appropriate solutions, investment appraisal calcs
3. implementation - solution put into place, PM necessary to keep on track, flexibility & adaptations needed, contingencies in budget/time plan?
4. completion - confirmation that goals achieved. post completion audit for lessons learnt

5 process areas:
1. initiation
2. planning
3/4. controlling/executing
5. closing

Question 26

Effective Teams

Important for….

To encourage effective teamwork….

Answer 26

Important for….
- good service to students & institutions, quality
- trust, cooperation, engagement in achieving shared objectives

To encourage effective teamwork….
- managers should encourage staff to share opinions to feel valued and motivated
- regular team meetings to give designated forum for opinion sharing rather than just disagreeing unconstructively
- specific targets and shared objectives & rewards e.g. student satisfaction = bonus for whole team
- lack of familiarity/ability to relate to one another can be an issue in achieving effective teamwork - consider social events for interaction & rapport building

Question 27

Benchmarking 4 types

Answer 27

internal - one internal unit to another

operational - one operation to that in a different industry

competitive - compare to most successful competitor

customer - against what customers expect

limitations:
- doesnt give reasons
- can encourage continuation in wrong direction if original benchmarking strategy flawed
- external factors could have caused improvements

Question 28

Responsibility centres

Answer 28

give managers well defined area of responsibility for which they have control & can influence - only assessed on this - motivating

cost centre - buildings generate own costs but consider who organises insurance etc.

revenue centre - usually filled to capacity, do managers have much influence? customer service team responsible for marketing material on social media & web which is where bookings are made

profit centre - remember cannot increase prices - can managers have much influence

investment centres