Net present value (NPV)

NPV is an important term where you will see it in a lot of your FIA/ACCA papers. Its meaning must be understood in detailed. This article is intended to give an idea about NPV.

Definition
CIMA Official Terminology gives this technical definition: difference between the sum of the projected discounted cash inflows and outflows attributable to a capital investment or other long-term project. In simple words, NPV = present cash flows + future cash flows converted to present values.

Making decision
The decision criteria is to accept a project with positive NPV (but you must also consider non-financial factors such as legal requirement, social responsibility etc). This is because positive NPV project will be able to increase company's value and therefore shareholders wealth.
But what if NPV is zero? In this case, the project is still acceptable, why? This is because it means that the project will not increase/decrease company's value, but the project is still making profit (it can be loss as well). However, in practice management will not accept such project as it is not meeting the company's (stock market listed companies) financial objective of maximising shareholders wealth.

Other uses - F7/P2
The concept of NPV is used in other areas as well. For example, in financial reporting, the term value in use (IAS 36) means the discounted present value of the future cash flows expected to arise from the continuing use of an asset and from the disposal at the end of its useful life. This is actually the NPV of the asset (not considering investment cost). The concept of NPV must be understood and applied in other situations.

Discount rate
This is the rate to be used to convert the future cash flows into present value. For a project it is normally the company's cost of capital (required rate of return by investors of the capital). Therefore, to calculate NPV, you have to first estimate a relevant cost of capital (will be given in FIA papers). Present value table and annuity table will be given in exam, you have to extract the correct rates relevant for different time periods to be used to calculate NPV.

Finally, we can conclude that NPV considers relevant cash flows rather than profits (profits include non-cash items such as depreciation, provision). NPV also considers time value of money (therefore, cash flows in different time periods are discounted/converted to present value at different rates).

Tucker's 5 questions model - P1

One of the useful models for ethical decision making is the Tucker's 5 questions model. In this model, you ask 5 questions to determine whether a decision is ethical. The 5 questions are:
1. Is it profitable?
2. Is it legal?
3. Is it sustainable/environmentally sound?
4. Is it right?
5. Is it fair?

You will find that answering the first 3 will be straightforward. However right and fairness require judgement. One way to put is "is it right to shareholders" (for profit making companies) and "is it fair to stakeholders" although there are many ways to express ideas.

In exam, don't just say 'yes or no'. You should also justify your 'yes or no' to get maybe 2 marks per question. If majority is 'yes', then the decision may be ethical. :)

IFRS 11 Joint Arrangements - P2

IAS 31 has been replaced by IFRS 11 and the changes will be outlined here. Joint arrangement is an arrangement of which two or more parties have joint control, ie. contractually agreed sharing of control. Definition of control follows the one defined in IFRS 10.

Types of joint arrangements
There are only two types:
1. Joint operation - parties (joint operators) have rights to the assets and obligations for the liabilities relating to the joint arrangement.
2. Joint venture - parties (joint venturers) have rights to the net assets of the joint arrangement.

Accounting
1. Joint operator accounts for assets, liabilities, revenues and expenses in accordance with relevant IFRSs and only include the portion of share.
2. Joint venturer accounts for the investment using equity method (no more proportionate consolidation) in accordance with IAS 28. This means to present in statement of financial position initially at cost and subsequently increase/decrease with any share of profit/loss.

Therefore, the main changes are the classification of joint arrangement and the accounting for joint venture. This article does not intended to cover IFRS 11 in detailed.

IFRS 10 Consolidated Financial statements - control - F7/P2

"Control" is a very important term in business combinations. We (investor/parent) start to consolidate subsidiaries (investee) at the date of control obtained and also calculate goodwill. IFRS 10 gives a revised definition for control.

Control
Investor has the control when he/it has power, exposed to risk and can use power to affect the amount of return.

Power
This is the power to direct relevant activities. Power arises from rights such as voting rights or contractual arrangement.

Exposure
The investor must be exposed to variability of returns as a result of involvement with an investee.

Ability to use power
Investor must also have the ability to use its power over investee to affect its return from its involvement with the investee.

The assessment of control will not be straightforward and a great amount of judgement will be involved.

Note that IFRS 10 is only applicable for annual reporting periods beginning on or after 1 Jan 2013. :)

F4 Finish on time

The main problem in F4 is not about the difficulties of the questions, it is about whether you can finish the questions within 3 hours. 15 minutes reading time are very important to achieve the objective of completing the questions.

What to do in 15 minutes
Look at the time, when it is very near to the start time, prepare to open the question paper and when you hear a sound from the announcer, immediately look at question 8, 9 and 10. Write down points for each of them as much as possible, therefore you should read the case given as well. If you do have time left, start writing points for question 1-7 until you hear a sound from the announcer again, then start writing answer for question 8, 9 and 10 (or questions from 1-7 that had been planned). With your points, this will become an essay writing activity where you just expand the points into sentences.

Another approach will be to focus on planning your answer first, give yourself a maximum of 30 minutes including reading time. A good plan will speed up the work later.

It is good that you practice writing fast, don't stop and think (this can be avoided with a proper plan), you should leave the difficult questions to be done last. The most important thing is you should finish all questions to enhance your chance of passing significantly. Good luck :)

F7 Finish on time

F7 may be a time-consuming paper but if your approach is right, you should be able to finish the paper easily.

What to do in 15 minutes reading time?
1. Calculate the percentage of control in question 1, then leave it.
2. Calculate the relevant ratios in question 3, then leave it.
3. Write points for question 4 and 5 (ignore question 5 if it has more calculation).
4. If you still have time, write down double entry beside each note in question 1.
5. If you still have time, write down double entry beside each note in question 2.

The 15 minutes reading time are very important, they are for you to plan your answer and if you have properly planned the answer, it will save you invaluable time later.

Answering question 1 and 2
You are normally required to open statements. To save time, you should only add vertically and not horizontally, ie. don't bother about balancing your statement of financial position, leave this job at the end when you have spare time. Also, maintain a "don't care" attitude, don't think too much about the note, just leave it or guess the adjustment first if you don't know or not sure about it, come back when you have spare time (which you should have if you maintain this attitude).

With this exam technique, you can even have 30 minutes spare time or more. You have one chance only in exam so you should try these techniques in a past year paper first, give yourself 2 hours 45 minutes to do it. If you can finish the paper then you will be fine in exam. All the best :)

What opinion to give? - F8

When there is no material problem found in the financial statements, auditor will express an unmodified opinion which states that financial statements show a true and fair view. However, there are situations where auditor may need to modify the opinion. There are three types of modified opinion: qualified (except for...), adverse (do not show true and fair view) or disclaimer (we do not express an opinion) of opinion. ISA 705 provides guidance on which opinion to express.

Firstly, I will introduce the word "pervasiveness". This is one important factor to consider. Something is pervasive if it:
1. Affects the whole financial statements, eg. no longer going concern.
2. Does not affect the whole financial statements but is itself very significant, eg. unreasonable accounting estimates were used.
3. Non-disclosure of something fundamental to users' understanding of the financial statements.

Next, ISA 705 states that auditor shall modify the opinion when:
1. Financial statements as a whole are not free from material misstatements or,
2. Auditor is unable to obtain sufficient appropriate audit evidence to express an opinion.

Now, it's time to use common sense.
1. If financial statements are materially misstated but it is not pervasive, we only qualify the opinion (because not so serious). However, if it is pervasive, then we might express an adverse opinion.
2. If auditor is unable to obtain sufficient appropriate audit evidence about something (eg. going concern status) but it is not pervasive, we only qualify the opinion. However, if it is pervasive, then we might disclaim the opinion (because we don't have enough evidence to prove that it is bad).

Using sampling to obtain information - FMA

Sampling means taking samples from a population. Why we only take samples? This is because we don't have enough time to obtain information from the whole population. Sampling is particularly useful in auditing, but here we focus on the sampling techniques identified in FMA syllabus. I will first explain the theories, then I will provide an example for each technique using Zodiac signs. Let's take our objective as understanding the characteristics of Gemini. ;)

Random sampling
Sample will be chosen in a way that every item in the population has a chance of being selected, probably using random number table or random number generator. This is suitable when the population is known and not too big.
With our objective in mind, our population is the Gemini people. If our sample size is 20, we will generate 20 random numbers (each Gemini people is given a number) and interview the corresponding Gemini people to understand them.

Systematic sampling
The starting point is random, then sample is picked with fixed intervals. This is useful if population is logically same type but can introduce bias if population has a repetitive pattern.
In our case, again sample size is 20 and let's say we have 100 Gemini people, then our fixed interval can be determined as 5 (100/20), this means that 1 in every 5 Gemini people is chosen. Now, our random start can be from 1st to 5th Gemini people, let's say we choose 4th, then our samples will be taken as the 9th, 14th, 19th, 24th, 29th, 34th and until 99th Gemini people, total will be 20 Gemini people chosen to be interviewed.

Stratified sampling
The population will be divided into sub-populations (strata) and random samples are taken from each stratum. This technique requires prior knowledge of each item of population.
In our case, from 100 Gemini, we may categorise into "0-18 years old", "19-37 years old", "38-56 years old" and "57 years old and above". Then from each strata, we pick samples randomly to interview.

Multi-stage sampling
Population will be divided into sub-populations, and then divide again to sub-sub-populations until it is small enough, then random sample is selected from the small sub-populations. This is useful if the population is very large.
In our case, let's say our population is the Gemini people in whole Malaysia, there are too many to interview so we might only want to interview Gemini people in Selangor, but still this is too large, so we further divide into Gemini people in Subang and Klang. From here, we use random sampling technique to select Gemini people in Subang and Klang for interview.

Cluster sampling
This is similar to multi-stage sampling but at the end, all items in the small sub-populations will be selected. Again, this is useful if the population is very large.
Using the same example, we will interview all Gemini people in Subang and Klang.

Quota sampling
Investigators are told to interview all the people they meet up to a certain quota. This is very biased because they choose how to fill the quota.
In our case, we told the investigators to interview 200 Gemini people, they will decide who to interview. This is biased because if the investigator is a boy, he might interview more girls.

Zero-based budgeting - what's so special? - F5/P5

Zero-based budgeting (ZBB) is a more modern type of budgetary system. In the past (and also current), many companies prepare budgets with an incremental budgeting system which takes last year figure and adjusts for changes in volumes or inflation. Such system is known to cause management to build in budgetary slack (overestimation of expenses or underestimation of revenues). ZBB solves this problem and requires management to prepare budgets from zero base, ie. a new beginning.

In ZBB, every item of expenditure has to be justified by the management first before it is allowed to be included in the budget. This means that management must have a good reason for the provision of certain expenses. Generally, ZBB involves three stages: Defining decision packages, ranking decision packages and allocating resource.

1. Define decision packages
Decision packages are plans. Firstly, management has to prepare a base decision package showing the minimum level of expenditure required to run the department/company/project. Incremental package can then be prepared which shows the extra expenditure that will be needed. Management will try to justify the incremental package so that it can be chosen as priority.

2. Ranking decision packages
After the senior management received all decision packages from each manager, he will rank the incremental decision packages based on the benefit to the organisation.

3. Allocating resource
The incremental decision packages that are chosen as priority will be given resources so that the management can do according to the decision packages. Those ranked as low priority may not be allocated resources. However, resources will be allocated to all base decision packages.

From the above, we can easily identify one obvious disadvantage, that is time-consuming. Preparing ZBB involves a significant amount of time and due to its complexity, management might have to be trained first. ZBB should not be implemented unless the benefit of implementing ZBB exceeds cost.

Roles of nomination committees - FAB/P1

Nomination committees have a number of roles which mainly involve dealing with the board. Gaps, diversity, balance, succession planning and size of board could be the key words to remember.

Gaps
They identify the gaps in current board's skills and ensure that such gaps are filled.

Diversity
They should ensure that the board members are well-diversified, for example in terms of background, age, gender and so on. This will be helpful in the way that more different ideas could be generated in deciding on a strategy.

Balance
They should ensure that executive and independent non-executive directors (excluding chairman) are balanced. Therefore, the number and types of NEDs are determined by the nomination committees.

Succession planning
They should have a plan for continuity of the retiring directors, ie. there should be someone prepared to replace the retiring directors.

Size of board
They determine the optimal size of the board for the company, taking into account the complexity of the strategies to be undertaken.

You can add one more role. Nomination committees will also recommend on the re-appointment of the directors who are due for re-election. They would take into account the contributions made by the directors to arrive at a conclusion.

Letter - Your sincerely or your faithfully?

When should we use your sincerely or your faithfully at the end of the letter? Are they the same? Well the words are different so they are different. ;)

"Your sincerely" should be used when the addressee is named, for example "Dear John" and "Your faithfully" should be used when the addressee is anonymous, for example "Dear shareholders". This shows that "Your sincerely" is used when you write the letter to someone that you know and only to one person while "Your faithfully" is used when you write to many or someone you don't know, for example "trustee of trade union".

Using the wrong word might result in losing one mark as it would seem funny to the marker. ;)

Possible topics for F8 and F9 - December 2011

F8
1. Tests of controls and substantive procedures on inventory/cash and bank
2. ISA 530 Audit sampling (probably in question 2)
3. Corporate governance with ethics
4. Audit risk
5. Review of subsequent events and mix some of the reporting elements (as usual)

F9
1. Investment appraisal - ROCE/ARR method, probability analysis (do June 2009 question 1), capital rationing
2. Cost of capital - cost of equity, cost of debt, WACC, MM's theories
3. Business finance - rights issue (theoretical ex-right price), sources of finance, dividend policy
4. Working capital management - cash (cash flow forecast, Miller-Orr model), identifying whether overtrading
5. Business valuation - P/E ratio method, dividend valuation/growth model
6. Risk management - causes of interest rate fluctuations
These topics will be squeezed into 4 questions.

The above are "possible" topics, which mean not more than 50% chance, so be careful ;)

Key areas of accounts receivable management - FFM/F9

In dealing with accounts receivable (AR), we hope to sell to a receivable who can pay back on time. We can group the stages in receivables management into 4 stages.

1. Policy formulation
There must be a framework prepared for managing receivables. Such framework can cover the three periods: before giving credit, during credit period and the end of credit period. This will be the overall procedures of next three stages.

2. Credit analysis
Here we assess the creditworthiness of the new customer. Information about the customer could be obtained from bank references, trade references and credit reference agency reports. Generally we can also consider the 5C which banks always use, ie. character, collateral, capital, capacity and condition.

3. Credit control
After giving credit, we have to monitor the receivables, probably using aged receivables analysis, paying attention to those taking long time to pay. Administrative procedures should be in place, for example prompt invoicing, sending monthly statement as gentle reminder, maintaining account records and so on.

4. Collection of amounts due
Amounts due will be collected, this is the end of credit period. Procedures will be taken for overdue accounts such as telephone calls, personal visits, charging interest, stopping supply, sending reminders and legal action will be the last resort. For any action, benefit should exceed cost.

In a big company, credit controllers will be dealing with these jobs and they must communicate with sales and marketing department regarding to which customers to choose, how much credit limit to be given and how long is the credit period. This is to ensure that sales person does not sell to one who can't pay back the amounts due.

Basic variance calculations - FMA/F5

Many would have remembered the formula, but in actual case only fixed overhead variances require a bit of remembering, the rest follows the same approach, which is standard vs actual = variance. Material, labour, variable overhead variances and sales variances use this approach, for example material price variance = (standard price x actual units) - actual cost or (standard price - actual price) x actual units, depending on what information is given. Standard price x actual units is equal to standard cost. As you can see, our aim is to compare the standards set with the actual result obtained. Actual result is always given, you must be careful about the standard. The name of the variance is important to identify what information is needed.

Another example, variable overhead efficiency variance = (standard cost/hour x actual unit - actual variable overhead) x standard cost/hour. Efficiency implies speed, so hours are relevant. Standard cost/hour x actual unit is equal to standard variable overhead. Now you can see that these formula are derived from the logic of standard vs actual, by using the correct information to identify the standard, you will calculate the correct variance.

Fixed overhead variances
This will be more troublesome and need few memory works.
Fixed overhead expenditure variance (easiest) = budgeted fixed overhead - actual fixed overhead. This only involves budget (not adjusted to actual activity level) compared to actual.
Fixed overhead volume variance (the word "volume" implies units) = (actual units - budgeted units) x standard fixed overhead per unit.
Fixed overhead capacity variance (the word "capacity" implies ability to work longer) = (actual hours - budgeted hours) x standard fixed overhead per hour. (If actual hours worked are longer, then it will be favourable variance)
Fixed overhead efficiency variance = (standard hours - actual hours) x standard fixed overhead per hour.
As you can see, the names of the variance help you to identify what information is needed, be careful of the standard fixed OAR used for volume, capacity and efficiency variances. Fixed overhead total variance is the mixed of the above and it is actually over/under-absorption of fixed overhead.

Labour idle time variance
When idle time occurs, idle time variance = idle time x standard cost/hour. This is always adverse unless company has budgeted a idle time which is higher than actual idle time.
The problem is what labour hours to use to calculate rate variance and efficiency variance? With understanding, actual hours paid are used in rate variance and actual hours worked are used in efficiency variance.

Identifying favourable or adverse variance
This is a common sense work, when your standard (expected result) is better than actual result, adverse variance occurs. Nothing to remember.

Variances analysis is a significant and big area, but it is very simple to calculate the variances once you practised enough questions and understand the logic. You may have different ways to calculate, use the way that you are most comfortable with. The key skill to learn should be the interpretation of variances (mainly for F5).

Tips to memorise - P1 eg. chairman's roles

P1 may seem overwhelmed with knowledge to learn and remember but actually there are many things that you don't need to memorise. For those that you need to memorise, you should always try to create mnemonics for aiding memory. But there is one approach better than using mnemonic but not always applicable, I call it "ideas from mnemonics". This technique brings you many ideas from the mnemonic itself. I will take chairman roles (you need to remember for exam) as example. (It is a best practice to separate chairman and chief executive)

Chairman roles - BINS

Board
1. Act as a leader of the board.
2. Ensure board's effectiveness.
3. Set board's agenda.
4. Promote culture of openness and debate in board.
5. Design appropriate induction programmes for new board members and training programmes for all directors.
6. Chair all meetings.
7. Ensure that board meetings take place on regular basis.
8. Ensure that board members' performance is formally evaluated on an annual basis.

Information
1. Ensure that directors receive accurate, timely and clear information.
2. Ensure that directors receive relevant information in advance of board meetings.

Non-executive directors (NEDs)
1. Hold separate meeting with NEDs.
2. Facilitate good relationships between EDs and NEDs.
3. Coordinate the contributions of NEDs.
4. Chairman, along with NEDs, should hold chief executive to account.

Shareholders
1. Represent company to shareholders and other stakeholders.
2. Ensure effective communication with shareholders (probably using chairman's statement or dialogue).

The above gives you some ideas, some roles can be linked. By only remembering BINS you can generate a number of ideas by yourself which is more effective than remember each role separately. Again, this technique is not always applicable and require some skills to do it. :)

Professional ethical principles - FAB/F8

International Federation of Accountants (IFAC) developed fundamental ethical principles for all professional accountants to follow and ACCA has adopted the similar principles. They can be examined in many ACCA papers, not only FAB and F8. It is relatively straightforward in FAB and slightly harder in F8. This article doesn't consider how it can be asked in P1.

Fundamental principles - COPPI or PICOP
1. Confidentiality - members should respect the information obtained as a result of professional and business relationships. They should not use such information for personal advantage nor disclose them without permission obtained.
2. Objectivity - judgement should not be influenced by bias, conflict of interest or undue influence by others. Professional or business judgement should be made fairly.
3. Professional competence and due care - members should continue to maintain professional knowledge and skill, undertaking various continuous professional development (CPD) programmes. Members should also act diligently when providing service.
4. Professional behaviour - members should avoid any actions that can discredit the profession, complying with laws and regulations will be one thing, behave in courtesy and consideration is another thing.
5. Integrity - members should be straightforward and honest in all professional or business relationships. Integrity is the highest level of honesty which also implies the need of fair dealing and truthfulness.

The ethical threats are also identified - FASSI
1. Familiarity threat - eg. audited the client for 10 years.
2. Advocacy threat - eg. represent client in a court case.
3. Self-interest threat - eg. holding shares in client's company.
4. Self-review threat - eg. providing audit and consultancy services.
5. Intimidation threat - eg. wife working in client's company.

FAB
In FAB, you only need to understand the above principles. Question may simply state the definition and ask you which is the principle. Also, question can ask you the ethical threats that can be found in the short case given. Always imagine that you are a very ethical person when you face any ethic questions, they are very straightforward and yet essential at higher level papers.

F8
Common question will require you to explain ethical threats and recommend safeguards from a case. Again, it is important that you become ethical first, then you might identify the points easily (be careful, stating the threat is "identify", to explain you need to understand why it can be a threat, this is the real F8 level). Safeguards are, most of the time, common sense but you need to practice questions.

Remember the above ideas for the rest of your professional life, we are professionals not only because of our technical competence, but because we keep professional ethics in mind and act in public interest. By entering this route means that we have sacrificed self-interest and we will do anything as long as it serves the public interest. :)

Improved conceptual framework for financial reporting (chapter 1 and 2) - P2

Conceptual framework is improved mainly to achieve convergence with US's framework as IASB and US FASB decided to focus on improving their existing framework rather than a comprehensive reconsideration of all concepts. Also, IFRS developed in future will be more consistent with this improved conceptual framework. Chapter 1 and 2 are actually completed and are examinable in P2.

Chapter 1: The objective of financial reporting
The fundamental objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors (including suppliers, employees and customers) in making decisions in their capacity as capital providers. General purpose financial reports are used both for future investment decisions and for assessing the stewardship of resources (management has a stewardship responsibility to protect the economic resources from unfavourable effects of economic factors and use the resources in an efficient manner) already committed to the entity. Management's performance in discharging stewardship responsibilities can affect entity's ability to generate net cash inflows, therefore potential capital providers are also interested in it.

Chapter 2: Qualitative characteristics and constraints of decision-useful financial reporting information
Reliability is no longer a qualitative characteristic of financial statement. Two fundamental qualitative characteristics are identified:
1. Relevance - information is relevant if it is capable of making a difference in the decisions made by capital providers. Such information has predictive value (can be used to form expectations about the future), confirmatory value (can be used to confirm past expectations) or both. Increasing use of fair value is an example of increasing relevance in favour of reliability.
2. Faithful representation - information should be faithfully represented and such information should be complete (include all necessary information about economic phenomenon), neutral (free from bias) and free from material error.

Enhancing qualitative characteristics are also identified to complement fundamental qualitative characteristics, these include:
1. Comparability - information enables users to identify similarities in and differences between two sets of economic phenomena. Such information should also enable comparison with another entity.
2. Verifiability - information helps users to assure that information faithfully represents the economic phenomena that it appears to represent. Verifiability implies that different knowledgeable and independent observers could reach general consensus that information is faithfully represented.
3. Timeliness - information is available to decision-makers in time to be capable of influencing their decisions.
4. Understandability - information enables users to comprehend its meaning. Understandability is enhanced when information is classified, characterised and presented clearly and concisely. It is assumed that users have a reasonable knowledge of business and economic activities and review and analyse information with diligence.

Fundamental qualitative characteristics differentiate useful information from information that is not useful or misleading. Enhancing qualitative characteristics differentiate more useful information from less useful information.

There are two constraints that limit the information provided in useful financial reports:
1. Materiality - information is material if its omission or misstatement affects the decisions made by the users on the basis of entity's financial information. It is not possible to specify a uniform quantitative threshold for determining whether information is material.
2. Cost - reporting some information imposes costs and those costs should be justified by the benefits of reporting that information. IASB assesses costs and benefits in relation to financial reporting generally, not solely in relation to individual reporting entities.

ED Revenue from contracts with customers - P2

ED proposes a single revenue recognition model in which entity recognises revenue as it satisfies performance obligation in the contract by transferring a promised good or service to customer. The use of percentage of completion method in IAS 11 is withdrawn. As the contract progresses, the remaining rights and obligations change, resulting in either contract asset (net right to receive consideration) or contract liability (net remaining performance obligations). In applying the model, 5 steps are followed:

1. Identifying the contract
One contract would be separated into two or more contracts accounted for separately if some goods or services are priced independently (if interdependently, then no need to separate).

2. Identifying separate performance obligations
This will determine whether to account the performance obligation separately or not. If goods or services are provided at the same time (performance obligations satisfied at the same time), then account for single performance obligation. If the performance obligations are distinct and satisfied at different times, then account for separate performance obligations. For example, sale of goods with one year warranty have two performance obligations, ie. sale of goods and sale of warranty.

3. Determine transaction price
The transaction price should reflect the probability-weighted amount of consideration that is expected to receive in exchange for delivering goods or services. If transaction price is variable (eg. subject to discounts), it will be estimated at each reporting date. Transaction price and revenue recognised include only amounts that can be estimated reasonably.

4. Allocating transaction price to separate performance obligations
Transaction price is allocated to separate performance obligations in proportion to their relative stand-alone selling prices. If it is not directly observable, use approaches such as expected cost plus margin approach or adjusted market assessment approach. Subsequent change in transaction price would be allocated to all performance obligations, including those satisfied.

5. Satisfying performance obligations
Performance obligation is satisfied when control is transferred to customer, ie. when customer has the ability to direct use of and receive benefit from the goods or services. Revenue is recognised when the performance obligation is satisfied.

Other proposals
1. Costs incurred in fulfilling the contract which are not eligible for capitalisation (eg. cost incurred to obtain a contract) under other IFRSs would be expensed unless they relate directly to future performance under a contract and are expected to be recovered, then they are recognised as separate asset.
2. Test would be conducted to identify performance obligations that are deemed onerous (expected directly related costs to satisfy obligation exceed allocated transaction price). If performance obligation is deemed onerous, contract loss is recognised resulting in impairment of assets related to the contract and/or recognise separate liability.

Presentation
Contract asset/liability is presented depending on the remaining rights and obligations in the contract. Contract costs capitalised would not be presented as part of contract asset/liability but according to their nature.

ED Fair value measurements - P2

There have been many problems in fair valuing an asset or liability because there are a number of ways to determine the fair value such as using exit price, net realisable value and so on. Efforts are focused on determining consistent fair value measurement method which an ED is proposed which is examinable in P2 2011 (actually IFRS 13 has been developed).

Fair value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly (ie. not forced) transaction between market participants at the measurement date. All fair value measurements will follow this definition. The following elements have to be determined:
1. Particular asset/liability that is the subject of the measurement.
2. For a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use.
3. Principal or most advantageous market for the asset or liability.
4. Appropriate valuation techniques - consider availability of data with which to develop inputs and fair value hierarchy.

Market participants in most advantageous market
Market participants should not be related party, are knowledgeable, and willing to enter into the transaction. Most advantageous market is the market that maximises the amount that would be received on sale of the asset (or minimises the amount that would be paid to transfer the liability), taking into account transaction and transport costs. However transaction costs do not form part of the fair value measurement because they are not a characteristic of asset/liability.

Fair value hierarchy
The hierarchy categorises the inputs used in valuation techniques into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Level 1 inputs are unadjusted quoted prices in active markets that the entity can assess at measurement date.
Level 2 inputs are inputs other than quoted market prices included in level 1 that are observable.
Level 3 inputs are unobservable inputs for the asset or liability, eg. interest rate swap.

Valuation techniques
There are three approaches for determining fair value using a valuation technique:
1. Market approach - uses prices and other relevant information generated by market transactions involving identical or comparable assets/liabilities. Eg. for level 1 inputs.
2. Income approach - converts future amounts (eg. cash flows or income and expenses) to a single discounted present value amount. Eg. for level 3 inputs.
3. Cost approach - use current replacement cost. Eg. for level 2 inputs.
An appropriate valuation technique will be consistently applied, will maximise the use of relevant observable inputs (minimise unobservable inputs) and will be calibrated periodically to actual transactions.

For more information you can refer to IFRS 13, this article did covered some of it. :)

IFRS 1 First Time Adoption of International Financial Reporting Standards - P2

This article covers the basic principles in IFRS 1. It states that first-time adopter must prepare an opening statement of financial position (SOFP) in accordance with IFRS on the date of transition from generally accepted accounting principle/practice (GAAP) to IFRS. Also, entity must select accounting policies based on IFRS. For example, if the entity adopts IFRS for the first time in financial statements year ended 31 December 2009, it should select accounting policies based on IFRSs effective at 31 December 2009 and prepare opening SOFP (restate retrospectively) as at 1 January 2008 (because IAS 1 requires full comparative financial statements to be presented, which will be 2009 and 2008 financial statements).

In preparing opening SOFP, the following rules should be followed unless IFRS 1 grants exemptions or prohibits retrospective application:
1. Eliminate previous GAAP assets and liabilities if they don't qualify for recognition under IFRSs.
2. Recognise assets and liabilities required by IFRS but previously not recognised under GAAP.
3. Reclassify previous GAAP assets/liabilities/equity into appropriate IFRS classification.
4. All recognised assets and liabilities should be measured according to IFRS principles.

First-time adopter should apply accounting policies consistently throughout the periods presented in its first IFRS financial statements. Transitional provisions in other IFRSs do not apply to first-time adopter. However, first-time adopter is allowed to elect to use one or more exemptions from general measurement and restatement principles such as:
1. Can use fair value of assets (property, plant and equipment, intangible assets, investment property) previously fair valued or revalued under GAAP as deemed cost under IFRS cost model. Deemed cost is an amount used as surrogate (substitute) for cost or depreciated cost.
2. Keep the original GAAP accounting for business combination that occurred prior to date of opening SOFP. If entity decides to retrospectively apply IFRS 3 to business combination, it must apply consistently to all business combinations occurring between date it decides to adopt IFRS 3 and date of transition.
3. Can recognise all cumulative actuarial gains and losses for all defined employee benefit plans.
4. Recognise all cumulative translation reserve under GAAP to retained earnings.

There are also mandatory exceptions to general measurement and restatement principles:
1. Conditions in IAS 39 for hedging relationship that qualifies for hedge accounting are applied at opening SOFP date, not retrospectively.
2. Apply derecognition requirements in IAS 39 prospectively for transactions occurring on or after 1 January 2004, not retrospectively unless needed information was obtained at the time of initial recognition of those transactions.

Overview of financial audit stages - F8

In the process of financial auditing, auditors go through a number of stages in order to arrive at the audit report.

1. Audit planning and risk assessment - In this stage, staffing is an important consideration. Furthermore, auditors will gain an understanding of the entity and its environment, particularly to assess the risk of material misstatements in financial statement. Audit procedures to be undertaken will be planned in detailed. (Timing = before year-end)

2. Test of control - Auditors will decide whether to rely on the internal controls of the company. This may first involve the use of internal control questionnaire (ICQ) and internal control evaluation questionnaire (ICEQ). The result will indicate whether the internal control is strong or weak. If it is strong then test of controls (TOC)/compliance testing will be undertaken to determine whether it is really strong. However if the internal control is perceived to be weak earlier, then auditors will follow a substantive approach (ignore TOC).
After TOC, if the internal controls are really strong, then a reduced substantive procedures can be performed later. If the internal controls are actually weak, then the full substantive procedures have to be undertaken. (Timing = before and/or after year-end)

3. Substantive procedure - If the internal controls are strong, auditors will rely more on substantive analytical procedures (comparing information to determine any material differences). If the internal controls are weak, auditors will rely more on test of details (select sample and find hard evidence to assure the amount recorded is correct). The purpose of substantive procedure is to substantiate financial statement assertions (eg. whether receivables are valued correctly). (Timing = after year-end)

4. Finalisation - review of subsequent events and going concern would be undertaken. Furthermore, an overall review of financial statements will be done which analytical procedure may be used. Any important matters that come to auditors' attention during the audit will be reported to management. Finally an independent auditor's report will be produced. (Timing = near and at the end of audit)

Foreign currency risk management - money market hedge - F9

Money market hedge may be difficult to understand. It involves the consideration of interest rate and exchange rate. However if you get the idea then it will be very easy to answer the question.

Hedging foreign currency receipt
In this case, we aim to create a foreign currency liability. Later when the money is received, we will use this money to settle this liability. With this, the foreign currency receipt will not be subjected to risk of fluctuation in exchange rate. By creating this liability, we borrow in foreign currency, by translating it to home currency we have a certain amount of money immediately which can be deposited to earn interest or invested.
Remember, in creating the foreign currency liability, we only need to borrow enough so you have to take into account the interest rate, ie. amount to borrow x (1 + borrowing interest rate) = foreign currency receipt.

Hedging foreign currency payment
This is just the opposite. We aim to create a foreign currency asset and later we will take the money out from this foreign currency account and pay the foreign currency payment. This means we will borrow home currency money and translate to foreign currency and deposit it (create foreign currency asset). With this, we are not subject to risk of fluctuation in exchange rate from the time we owe the money to the time we have to pay the money, therefore transaction risk is managed.
Remember, in creating the foreign currency asset (deposit), again we only need to borrow enough to deposit, ie. amount to deposit x (1 + depositing interest rate) = foreign currency payment.

With these basic ideas in mind, try to tackle some questions. :)

TARA framework for risk management - P1

TARA framework provides a simple idea of risk strategies. TARA stand for transference, avoidance, reduction and acceptance. Each strategy is suitable for different risks and it is the job of P1 students to be able to recommend suitable strategies for different risks by taking into account the information given.

Transfer
This means to share the risk with another party. Common example will be to buy an insurance to share part of the risk of losses with insurance company. For example, this strategy is suitable when the risk has a significant impact to the company but low probability to occur. It is better to transfer rather than reduce in this case because the risk may not occur. However transfer is limited if there is no alternative arrangements for bearing the risk.

Avoid
This means to avoid the activity that causes the risk. For example, this strategy is suitable when the risk is likely to occur and has a significant impact. However if it is strategically vital to undertake the activity, then transference or reduction may have to be undertaken.

Reduce
This means to reduce the risk exposure probably by carrying out the activity in a different way. For example, this strategy is suitable when the risk does not have significant impact but likely to occur. This is to reduce the likelihood of occurrence by using different method to carry out the activity. However if reduction cannot be done, company might have to accept the risk if it does not have significant impact or avoid it if otherwise.

Accept
This means to accept the risk and do nothing. For example, this strategy is suitable when the risk has a low impact and low probability of occurrence. This is because the risk is not really a matter even if it is realised.

The above only provides some examples on applying TARA. In exam, you have to decide based on the information given rather than remembering when to use which strategy. :)

IAS 12 Income taxes (part 2/2) - P2

Matching
Recognition of deferred tax in income tax expenses will ensure that the income tax as the percentage of profit before tax is consistent with the tax rate.

Rules to note
1. Temporary differences arising on the initial recognition of asset/liability are not subject to deferred tax because they affect neither accounting profit nor taxable profit.
2. Temporary difference arising on goodwill is not subject to deferred tax.
3. Deferred tax asset can only be recognised to the extent that future taxable profit will cover the deductible temporary difference.
4. Discounting is not allowed.
5. Deferred tax is revised whenever the tax rate changed as we should always use the rate expected to apply to the period. This ensures the best estimate of the amount. The adjustment will be shown separately.

Group financial statements
In P2, deferred tax can be examined as part of consolidation, some issues must be noted:
1. Fair value adjustment - the fair value adjustment at date of acquisition may not alter the tax base of subsidiary's net assets, temporary difference will occur. Deferred tax asset/liability will be included in fair value of subsidiary's net asset at acquisition in calculating goodwill.
2. Goodwill - as noted above, it is specifically disallowed to recognise deferred tax liability for temporary difference of goodwill (tax base is nil).
3. Unrealised profits - we remove unrealised profit from inventory which reduced the carrying value, but tax base is based on individual financial statements and so will be at higher transfer price. Deferred tax asset will arise and must be recognised.

Inconsistent with framework
Part of the definition of liability is "present obligation". However deferred tax liability arising on revaluation surplus may not satisfy the definition as there is no present obligation to pay the future tax, because if company did not sell the asset (no present obligation to sell), there will not be future tax payable because of the revaluation. Therefore, deferred tax asset/liability does not necessary meet the definition of asset or liability.

What if tax base is not clear
Sometime tax base may not be given, in this case you might have to ask yourself, "is there future tax payable/receivable?" If there is future tax payable, then there will be a taxable temporary difference, tax base might be zero. Such situation could be when company recorded accrued expenses which tax relief is only available when the expenses are paid, tax base will be zero and taxable temporary difference will arise.

It is all about understanding in P2, you have to think further and more detailed in order to provide good answer for a question. :)

IAS 12 Income taxes (part 1/2) - FFA/F7

In accounting, income tax is divided into current tax and deferred tax. Deferred tax is not examinable in FFA. Income tax expense is shown below profit before tax.

Current tax (FFA/F7)
Current tax payable is recognised as current liability (debit income tax expenses, credit current tax payable) and current tax recoverable (uncommon) is recognised as current asset. Since company estimates the current tax payable, there may be over or under-provision in prior year. When there is over-provision (credit balance in trial balance), we should debit over-provision, credit income tax expenses (Income statement). When there is under-provision (debit balance in trial balance), we debit income tax expenses (I/S), credit under-provision. Therefore, amount charged to income statement will be current tax payable + under-provision/- over-provision.

Deferred tax (F7)
Deferred tax is the future tax payable or receivable arising from temporary difference. Temporary difference = carrying value of asset/liability - tax base of asset/liability.
Tax base = amount valued for tax purposes. (For example, a machine is depreciated in accounting, but in tax company can claim capital allowance, so cost - depreciation = carrying value, cost - capital allowance = tax base).
You must be able to determine whether there is taxable temporary difference (this multiplies tax rate = deferred tax liability) or deductible temporary difference (this multiples tax rate = deferred tax asset).
A simple way is to arrange your formula of temporary difference like the above and then the temporary difference will be taxable when it is positive and deductible when it is negative.

Example: Carrying value of a machine is $300000 while its tax base is $350000, tax rate is 30%, determine the deferred tax.
Solution: Temporary difference = 300000 - 350000 = ($5000), ie. deductible temporary difference. (This is because in future the claim of capital allowance is more than depreciation, leading to future tax savings)
Deferred tax asset = 30% x 5000 = $1500, debit deferred tax asset (normally non-current asset), credit income tax expenses.

Deferred tax on revaluation (F7)
When an asset is revalued, the carrying value increases so there might be taxable temporary difference arising. In this case, because there is a revaluation reserve account, the deferred tax liability arising on revaluation surplus can be deducted from revaluation reserve, the remaining deferred tax liability is recorded as usual.

In FFA only current tax is examined. In F7 normally deferred tax liability will occur. The next part of this I will be dealing with those examinable in P2 only.

Identifying relevant cost

Relevant cost is important for decision making and identifying it actually requires some common sense. In general, relevant is always future, incremental cash flow.

Future
Therefore, sunk cost (past cost) should be ignored.

Incremental
The key question is "Is there extra cost making this choice?". When there is more cost to be incurred such as hiring new labour, it is a relevant cost. Fixed cost (like an unavoidable cost) is not relevant but if there is an increment, the increase is relevant.

Cash flow
Therefore, non-cash flow cost such as depreciation and provision should be ignored.

Furthermore, variable cost (avoidable cost) will be relevant for decision making. A committed cost, although is a future cash flow, is not relevant as it must be incurred, cannot be avoided even if the decision is not made. Opportunity cost (the sacrifice from choosing this decision instead of another) is relevant as well.

Relevant cost for material
This requires more common sense.
Example: Company has 100 units of material in inventory and need another 200 units for the job, current purchase price is $10 per unit. Such material will not be replaced. Such material can be used for another job to earn a contribution of $15 per unit and it has a net realisable value (NRV) of $18 per unit.
Solution: The problem is dealing with the 100 units, 200 units will be purchased so relevant cost is $2000 (200 x $10). For the 100 units, since they will not be replaced, if without this job company can actually sell them or use them to generate contribution of $15 per unit. It is obvious that company will sell ($18 is more than $15) if without this job, so by taking this job, the opportunity cost is 100 x $18 = $1800.
Total relevant cost = 2000 + 1800 = $3800.

Relevant cost for labour
Again this needs common sense. When labour is hired the relevant cost is the cost of hiring. If labour has free time to do this job then there is no incremental cost (unless overtime) so relevant cost will be $0. If labour is transferred from other job to do this job, then again opportunity cost arises as contribution from other job is lost because of this job.

Relevant cost for non-current asset
If without this job, non-current asset such as machine might be sold for money or used to generate contribution. By taking this job, opportunity cost occurred again and this time, opportunity cost is the higher of NRV or contribution from using the machine elsewhere because we want to know the maximum that we lost. Alternatively, the machine could be replaced and therefore there is a replacement cost. In such situation, replacement cost can be compared to opportunity cost identified earlier, as we want to save cost, the relevant cost will be the lower of replacement cost and opportunity cost.

With the above idea I hope the relevant cost concept is clearer to you now, as you can see there is nothing to remember. :)

Opportunity cost

This is an important term used in many of the FIA/ACCA papers, however it is sometime not obvious and tend to be ignored in finding the relevant cost.

The definition is the benefit forgone from taking one action instead of another. With this, we can understand the principle underlying opportunity cost, that is "each act of choice involves some sacrifice". Therefore, here is a simple example, let say you have two choices, one is to attend ACCA class for 3 hours and one is to sleep for 3 hours, if you choose to attend the 3 hours class, your opportunity cost is the 3 hours of sleep.

Therefore, you can see that it is not really a difficult thing, you just have to think "if I do this, what I will lose?" then you should be able to find the opportunity cost and include it as part of relevant cost. :)

ED Management commentary - ACCA P2

Exposure draft (ED) could be asked in question 4 as a current issue question. Management commentary, also known as Operating and Financial Review (OFR) or Business Review, is an important means used to communicate with capital markets and stakeholders. IASB proposes this ED to recommend a framework for the preparation and presentation of management commentary to accompany financial statements that are prepared under IFRS. It is not mandatory to prepare and publish management commentary, however if an entity would like to prepare one, it should:
1. Not make it available without the financial statements.
2. Clearly distinguish management commentary from other information in the same financial report.

The ED states that the purpose of management commentary is to provide existing and potential capital providers with information that helps them in making decision. A decision-useful management commentary:
1. Discusses and analyses the entity's performance, position and development through the eyes of management.
2. Provides additional explanations of amounts presented in the financial statements and including information that is not presented in financial statements.
3. communicates the direction the entity is taking, include forward-looking information.

IASB proposes that management commentary should contain the following information:
1. The nature of the business.
2. Management's objectives, and strategies for meeting those objectives.
3. Entity's most significant resources, risks and those relationships that might impact the entity's performance and value.
4. Results of operations and prospects.
5. Critical performance measures and indicators that management uses to evaluate the entity's performance against stated objectives.
There should be a mixture of narrative and numerical disclosures.

In conclusion, management commentary should supplement and complement financial statements, including orientation to the future, and fairly present the views of management on the relationship between the financial statements and the company's strategies and objectives.

Double entry concept relevant to FA1/FA2/FFA

Double entry concept is a very important concept underpinning financial accounting. The idea is that every financial transaction has dual effect and therefore is recorded twice, one debit and one credit. This concept is sometime difficult to apply in certain transactions, it requires practice.

The followings are some examples:
1. Debit expenses = more expenses are incurred.
2. Debit asset = more asset is controlled.
With the above, you should understand that credit will be the opposite:
1. Credit income = more incomes are earned.
2. Credit liability = more liability is obliged.
3. Credit capital = more capital is injected/created.
Note: Capital provider injects money or other assets to the business, thus created capital. Capital is therefore the amount that business owes to the capital provider and so it is on the credit side, like liability.

Now let's mix them up:
1. Debit income = income is reduced.
2. Credit asset = asset is reduced.
3. Debit liability = liability is reduced.
Therefore, by knowing a little of double entry principles, you can do the rest, this is where common sense applies.

Certain accounts are known as contra asset, for example accumulated depreciation and allowance for receivables (provision for doubtful debt). The word "contra" implies cancel, so you would credit them to the relevant assets, ie. non-current assets and trade receivables. Drawing made by the sole proprietor or partner is a contra capital/equity account so you debit drawing to the capital account.

One more common question asked by student is why profit is credited to the capital account. This is because profit earned from the business belongs to the capital provider, by crediting the capital account, the business is owing more to the capital provider.

Do not underestimate this concept because you will use it throughout your accountancy life, it is still very important even in ACCA P2. Catch the logic and master them now. :)

IAS 11 Contruction contracts - advanced

Two issues to look at are the unplanned rectification costs and when we are not in the first year of contract.

Unplanned rectification cost
When there is such cost exist, it should be recognised in full in the income statement. This is because the cost is not originally estimated so what we do is to deduct the gross profit to be recognised in the period.

We are not in the first year of contract
You should understand that income statement only shows figures in an accounting period, ie. 12 months while statement of financial position shows the balance to date (therefore the amount is accumulated). Therefore, we have a problem, in the second year of contract for example, you should only show the 12 months revenue, cost of sales and gross profit in the income statement. However, the one who certifies the work will only be able to identify the sale value of work done to date, he can't determine exactly how much of work certified is for the 12 months. What we can do is to follow the steps as normal, then take the revenue/cost of sales/gross profit less the last year balance, with this we can identify the amount for current period (12 months). Do not confuse with the revenue/cost of sales/gross profit in the income statement, here I am referring to those relating to the contract only.

You will need to practice some questions to understand what I have just said here, June 2011 question 5 would be a good question to try.

IAS 11 Construction contracts - basic ideas

This standard seems to be complicated, but if you know the concept then it should be easy to handle. It follows accrual basis of accounting so although money is received in progress payments, you should recognise revenue earned in the period.

Recognition of revenue and cost
They are recognised when it is probable that economic benefits attached to the contract will flow to the entity and outcome can be measured reliably.

Stage of completion
This can be calculated either using revenue basis (work certified to date/contract price) or cost basis (cost to date/estimated total cost). If you are using revenue basis, revenue to be recognised in the period is equal to the work certified to date and if you use cost basis, cost of sales to be recognised in the period is equal to the cost incurred to date.

Steps of accounting
1. Determine profit or loss - this can be found by contract price - estimated total cost. Estimated total cost includes any contract cost incurred to date - estimated further cost to complete the contract. If it results in loss, then you don't need to calculate stage of completion of the contract because loss must be recognised in full as a gross loss.
2. Determine stage of completion and profit to recognise - use the stage of completion calculated and multiply by the estimated profit in step 1, that will be the gross profit.
3. Determine amount due from customers (current asset) - this is calculated from cost to date + profit recognised (from step 2) - progress payment. The idea is that cost + profit is the price that customer should pay, then less the progress payment will arrive at the amount that customer is still owing to us. If it is a negative figure, then it should be a current liability (amount due to customer).
4. Prepare income statement and statement of financial position. The trick is that let say you use revenue basis to calculate stage of completion and then profit to be recognised, you know that the revenue to be recognised is equal to work certified to date, therefore with both revenue and gross profit amount, the balance is cost of sales.

More complicated issue is discussed later.

Inti Social night 2011

The date is at 14th of October 2011, 7.00pm to 10.30pm, Kampungku restaurant near Holiday Villa in Subang. Price is at RM25 and the theme is black and gold. Do register for this event as there are variety of food and we have prepared some games for you all. The price is much subsidised and 50 pax is the maximum. Register NOW!!! :D

F8 Performance materiality

ISA 320 gives this definition:

Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

By interpreting this definition, it shows that performance materiality/planning materiality (PM) is set to reduce the risk that misstatements are too large.

Auditor will first determine the PM based on eg. 5% of profit before tax or larger amount if the company is very large, then any item that is more than this materiality level will be tested, ie. considered to be material. For those items less than this materiality level, ie. considered immaterial, sample will be taken for testing.

Later, errors will be projected to be compared to the materiality set for the financial statements as a whole (let's call it final materiality here). When the projected errors are still larger than final materiality, then auditor will consider whether to revise the PM.

Note that the setting of PM requires the exercise of professional judgement.

In conclusion, ISA 320 also states that the purpose of determining performance materiality is to assess the risks of material misstatement and determining the nature, timing and extent of further audit procedures. :)

Warren Buffett

Warren Buffett is the world's second richest man. He has donated $31 billion to charity! The following is his stories (red) and advices (blue) to us.

1. He bought his first share at age 11 and he now regrets that he started too late!
Things were very cheap that time, encourage your children to invest.

2. He bought a small farm at age 14 with savings from delivering newspapers.
One could have bought many things with little savings, encourage your children to start some kind of business.

3. He still lives in the same small 3-bed house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.
Don't buy more than what you "really need" and encourage your children to do and think the same.

4. He drives his own car everywhere and does not have a driver or security people around him.
You are what you are.

5. He never travels by private jet, although he owns the world's largest private jet company.
Always think how you can accomplish things economically.

6. His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.
Assign the right people to the right jobs.

7. He has given his CEO's only two rules. Rule 1: do not lose any of your shareholder's money. Rule 2: Do not forget rule number 1.
Set goals and make sure people focus on them.

8. He does not socialise with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.
Don't try to show off, just be yourself and do what you enjoy doing.

His advices to young people:
Stay away from credit cards (bank loans) and invest in yourself and remember:
1. Money doesn't create man but it is the man who created money.
2. Live your life as simple as you are.
3. Don't do what others say, just listen to them, but do what you feel good.
4. Don't go on brand name; just wear those things in which you feel comfortable.
5. Don't waste your money on unnecessary things; just spend on them who really in need rather.
6. After all it's your life then why give chance to others to rule our life.

You may like to take him as your role model :D

Remember to claim discount for exam fees

The last date for paying a reduced exam fees is just 3 days away from now, ie. 8th of September. As you know, you will save a lot of money if you pay before or at this date. Therefore, don't hessitate anymore, pay as soon as possible and don't miss out this chance.

For those who have problem in paying the fees, you can try to call ACCA to pay as I have heard of people paying through telephoning ACCA.

Note that you can also pay for June 2012 sitting but I don't recommend that because the papers that you can sit will be uncertain. Finally, make sure that you select the papers that you are going to sit in December 2011 with great care, including the variants.

What after result?

Congratulation for those who passed all their papers sat in June 2011 and for those who do not pass all, don't keep it in mind and start thinking forward, failure is part and parcel of success and it is very common in ACCA exams.

Now we are moving into second term and this indicates that December 2011 is coming soon! Therefore, don't wait, start to revise what you had learnt in first term now because you will learn many more new things in second term. Don't do last minute study because the cumulative unrevised topics cannot be revised in a short time.

Remember ACCA is not an academic exam, to pass ACCA paper, the first condition is to cover the whole syllabus, the second condition is to practice enough questions to get the skill of attempting questions and the third condition is to revise in a continuing basis. If you have passed these 3 conditions, it is very likely that you will pass the exam.

Result time is decided

ACCA has decided to release the result at 22nd of August, 0500 BST (British Summer Time). This information can be found when you click on "myacca" at ACCA website. 0500 BST is equal to 12.00pm Malaysia time so take note of this, it is not 1.00pm :)

5 days to go for result

Result will be out in just 5 days away from this date, ie. release at 22nd of August 2011. The time of release is most likely 0500 GMT, ie. 1.00pm Malaysia time. If you had not registered to receive your result through email, the only choice for you is to try and log in to "myacca" at 1.00pm (best time) as many will start to log in and after a while you may not be able to log in due to high traffic. It is not possible to register to receive result through email now as I think the option is not there anymore in "myacca".

I wish you all the best in the result and hope to see you guys in second term ;)

When we inject capital, why we credit capital instead of debit capital?

Have you ever thought that when the owner invests money into the business, why does the double entry shows as debit cash, credit capital? Some of you may think that it is because of double entry principle that one entry must be debit and another must be credit. There is actually a reason behind it.

If you are unawared, to obtain a right (asset) there must be an obligation (liability). Therefore, applying this to the above case, image yourself as the business and one guy puts money into your pocket, you get the rights of using money but at the same time you will also have an obligation toward the guy who puts his money into your pocket.

Therefore, we credit capital account when it increases because it shows the obligation of the business to its owner, that means the amount that business owes to the owner.

Those who are studying ACCA P level papers should have such detailed understanding of something and not just learning something without knowing the reason. This is an example of the bigger picture of something :)

Tackle paper F5

Here are some guidance on how to pass this paper. This paper is more special and you can't be sure that you can pass by just practising a lot of questions. Generally, you need to have good understanding in each and every topics, and think out of the box when you are attempting a question. Guidance is given for each syllabus area:

A: Specialist cost and management accounting techniques
This is an easy area but don't underestimate it, questions will not just focus on calculations, the theories part of each technique must be understood. For example, question could ask "suggest ways to account for environmental cost for this business", in this case you have to look at the nature of the business and also the size of the business to determine whether the business can afford to install an activity-based costing (ABC) system for example. Other ways include input/outflow analysis, flow cost accounting and life cycle costing. An ability to keep an eye on the information given for the company is essential.

B: Decision-making techniques
Difficult questions will require you to think outside the box while the easy one tests your ability to apply your knowledge such as CVP analysis, identifying relevant cost etc. This area is big and a good understanding is essential to keep you safe.

C: Budgeting
This is probably the easiest area. Learn different budgetary systems, the ability to do simple forecasting and understand learning curve will get you through questions on this area.

D: Standard costing and variance analysis
Try to understand what you are calculating and be able to link variances when evaluating performance will be enough. Normally people are good at calculating variances but not evaluating management performance.

E: Performance measurement and control
This area is probably the hardest in F5. What you need is the overall knowledge and common sense. Calculating ratios are the key skills to learn, also understand them. Tools such as balanced scorecard and building block model must not be ignored. The ability to link your calculated information to the given information is an essential skill.

F5 is a 50% numerical and 50% discursive paper, although most of the time more marks are given for discursive part. People who ignored the theories part of the paper will fail and those who learn will pass confidently. Do not try to predict topics because new examiner knows what you think.

Flexible examination entry service

ACCA has a new service which encourages us to register early for exam, you can find about this in your myACCA and click "exam entry". ACCA has announced the exam fees of December 2011 and June 2012 (which increase again), but to avoid paying the standard fee, pay early to get discounted exam fees!

For December 2011 exam fees (pounds):
1. Pay by 8/9/2011, knowledge - 55, skill - 69, professional - 81 :)
2. Pay within 9/9/2011-8/10/2011, knowledge - 61, skill - 76, professional - 89
3. Pay within 9/10/2011-8/11/2011, knowledge - 183, skill - 198, professional - 211

For June 2012 exam fees (pounds):
1. Pay by 8/3/2012, knowledge - 55. skill - 69, professional - 81 :)
2. Pay within 9/3/2012-8/4/2012, knowledge - 64, skill - 80, professional - 94
3. Pay within 9/4/2012-8/5/2012, knowledge - 192, skill - 208, professional - 222

Categorising stakeholders

Stakeholder is any group or individual who can affect or be affected by the achievement of an organisation's objectives (by Freeman). CIMA official terminology defines stakeholder as those persons and organisations that have an interest in the strategy of an organisation. We can categorise stakeholders into eight types:

1. Internal or external - internal stakeholders are normally inside organisation and external stakeholders are outside the organisation. However, we have some stakeholders who have internal and external membership (connected), for example shareholders, customers, trade unions and so on.

2. Primary or secondary - company needs primary stakeholders to be going concern and the existence of secondary stakeholders is not a matter to going concern.

3. Narrow or wide - narrow stakeholders are most affected by organisation's policy and wide stakeholders are less affected by organisation's policy.

4. Active or passive - there are active stakeholders who actively participate in organisation's activity and passive stakeholders do not.

5. Voluntary or involuntary - voluntary stakeholders are those who engage with the organisation voluntarily and involuntary stakeholders get involved without choice.

6. Legitimate or illegitimate - legitimate stakeholders' claims are valid (normally those having economic relationship with the organisation) and illegitimate stakeholders' claims are not valid (eg. terrorists).

7. Recognised or unrecognised - this relates to the legitimacy of stakeholders' claims, if the claim is considered legitimate, then the stakeholder is recognised, otherwise not.

8. Known or unknown - examples of unknown stakeholders are undiscovered species and nameless sea creatures, they can be affected by, for example oil spill. The main difficulty lies on whether the claims of unknown stakeholders are legitimate or not. Normally stakeholders are known.

The above are relevant to P1 and it is important to remember them, subject of stakeholders featured in several areas of P1 syllabus.

New ACCA exam timetable

You should have noticed that there is a new ACCA exam timetable applicable starting December 2011, here I list down the dates of exam of relevant qualifications in ACCA for December 2011:
5/12 Monday - FTX, DA1, F5, P7
6/12 Tuesday - MA2, FFM, DB1, F6, P4
7/12 Wednesday - FA2, F7
8/12 Thursday - MA1, F8, P5
9/12 Friday - FAB, F1, F9, P6
12/12 Monday - FAU, F4, P3
13/12 Tuesday - FFA, Diploma in International Financial Reporting, F3, P2
14/12 Wednesday - FA1, FMA, F2, P1

About IAC in facebook

Take note that the IAC group is currently under the process of archiving by facebook as it is not upgraded to new format. The administrators and creator are not able to upgrade the group as facebook has set that only those groups with enough recent activity will have the option to upgrade.

After it is archived, there will be a new group format, almost everything from the old group will be available in the archived group with some exceptions. Things that will be available in the archived version include:
1. Group photos and wall posts.
2. Group discussion threads, which become wall posts.
3. The group description, which can be found at the top of the page when you click "See All" members in the new group.

Things that will not be available in the archived version include:
1. Recent news.
2. Group officers title.
3. The info box under the old group picture.
4. The group network.
5. The members of old group. You can add friends by clicking "Add friends to group".

See you in July 2011!

Hope to see you guys again starting July 2011, please register as early as possible to avoid penalty. You should first go to ACCA department to get the registration form and then go to level 2 of main campus to generate invoice and pay. All of these should be done by 8th of July, after that RM300 would be charged for penalty. Take care and enjoy the last few moment of holidays! :)

Answering theory questions

What to write? How much to write? How to earn full marks? Theory questions are seen by many as one of the problems to pass the exam. The further you go, the more important are the theories.

The keys to getting good marks in theory are:
1. Focus on answering the question - the verbs are important to note.
2. Use simple and clear English.
3. Good presentation - Use headings to ease marking.
4. Take into account the reader.

For point 4, you should ask yourself, is your answer useful for the reader? For example, if you are asked to advise the financial controller about whether to authorise the proposed project, then your answer should be the one that the financial controller may want to know, ie. net present value (NPV), cost of capital, constraints, non-financial factors etc.

Another example, when you are required to write a report about the performance of the company to directors, you have to write a report, this can give you format mark of about 1 mark and is very important in P level paper to earn professional marks. Again to earn good marks, your answer must satisfy the directors, show your ratios and other calculations in the appendix (professional marks may be gained from good presentation), then make financial and non-financial analysis, identifying possible causes of the ratios and linking them to the non-financial calculations (if possible), a conclusion should be given at the end. Answers like "the revenue has increased by 20% from last year, this is good" will never be adequate for the directors.

It is likely that theory questions are easy to gain marks as we will make mistake in calculations, not theory. You just have to make attempt to the questions even if you can't sure. Theory questions, in many cases, essential to pass the exam.

Foundation in professionalism

As ACCA has introduced foundation in accountancy (FIA), students have an opportunity to obtain diploma in accounting and business after completed 3 papers only, namely FAB, FFA and FMA. These 3 papers have similar syllabus as F1, F3 and F2 respectively but with increased size of syllabus. However FIA students cannot be awarded the diploma until they have completed foundation in professionalism (FIP). FIP is an online module allowing you to explore and learn the key concepts of ethics and professionalism in the workplace. FIP can be done by anyone registered under ACCA, but it is a must to be completed in order to get diploma in accounting and business.

It is important for FIA students to note about this. :)