F2 Financial Management
EXAMINER’S APPROACH TO F2
May 2010 will bring the first examination of F2 Financial Management. You have only to read the learning outcomes for F2 to know what it is designed to test – the verbs contained in the outcomes include prepare, analyse, discuss, explain – this is a test of application! Candidates are required to apply practical skills in business scenarios in order to pass this exam.
Syllabus weightings
The learning outcomes should be the main focus, as they dictate the level and depth of knowledge and application required. However it is perhaps the syllabus weightings that provide the best guide as to how the technical areas will be covered in the exam. F2 syllabus weightings are similar to those of P8 Financial Analysis and are:
- Group financial statements 35%
- Issues in recognition and measurement 20%
- Analysis and interpretation of financial accounts 35%
- Developments in external reporting 10%
As examiner it is my responsibility to ensure that all the learning objectives are tested and that the exam papers reflect sufficient coverage of the key technical areas within the syllabus. To achieve this I tend to plan 2 or 3 diets at a time and view the coverage of learning objectives on a cumulative basis. I don’t say this to encourage question spotting! but to assure you that no one area is less examinable than any other – I am required to test all learning outcomes and the testing of the learning outcomes is reviewed on a cumulative basis.
Syllabus section A
Group financial statements accounts for 35% of the F2 syllabus and the focus is on the complexities that affect consolidation – changes in group structure in the year, having a foreign subsidiary, fair value adjustments, etc. Each F2 exam paper will have approximately 35 marks (give or take a few marks) attributable to group accounts and it is therefore likely that one of the 25 mark questions will require the preparation of a group financial statement and all or part of a 10 mark question will make up the weighting. There are plenty of 10-mark past paper questions on consolidation that would be an appropriate benchmark.
Syllabus section B
In previous PEGs I commented that I was surprised to find candidates unprepared to answer questions on pensions and financial instruments, in particular. I found this surprising as the syllabus weighting for section B of the syllabus is 20%. Candidates can therefore assume that approximately 20% of the exam paper will test “Issues in recognition and measurement”. If we look through the components of section B of the syllabus we find substance over form, financial instruments, pensions, share-based payments and valuation bases. Not only are the areas defined, the syllabus tells us what elements are to be studied and examined – the recognition and measurement issues. Candidates should be able to answer the following questions:
- Should the item in question be recognised?
- At what value should it be initially recognised?
- How should it be subsequently measured?
Recent P8 exams will give an insight as to how this area is likely to be tested. One thing is guaranteed - the questions will require application of skills – identify and discuss inappropriate accounting treatment, create correcting entries (yes, accountants should be expected to create a journal entry that has both debit and credit entries!) and explain the requirements of the relevant accounting standard (no need for candidates to learn the number and title of standards as this is not an open book exam).
Syllabus section C
Section C of the syllabus deals with analysis, and the approach for F2 will be the same as for P8. The focus being on the ability to “analyse and interpret” in the context of a business scenario. Questions may require the calculation of ratios or ratios will be provided and the requirement will focus on the narrative. Again, the syllabus weighting almost dictates that one of the 25 mark questions be on financial analysis, however in order to ensure the weighting is met, candidates will now have a 10 mark question (or part of) to answer in this area. There will be fewer past exams that give examples of Section C being tested in short question format but questions could include earnings per share calculations, limitations of financial analysis and interpretation of a given set of ratios.
Syllabus section D
Syllabus section D on developments in reporting could cast a wide net, however is narrowed by the component listed in the syllabus. The area could be tested as a stand-alone 10 mark question or as part of a 25 mark question. It will, however, be narrative based.
To conclude on my approach to this exam – I will test candidates on application of skills. There will be no tricks or “red herrings” (items designed to distract or confuse). There is no intention to make it time pressured – I would rather give candidates time to show what they can do.
HOW DOES THE F2 SYLLABUS COMPARE TO P8 FINANCIAL ANALYSIS?
Learning outcomes
On the face of it the F2 syllabus appearsto be the same as P8. There are subtle differences in the verbs used in some areaswhich result in a higher level learning outcome being set. The main changes however come from the introduction of new and revised accounting standards.
Revised components
The impact of the revised IAS 1Presentation of financial statements will be applied throughout the paper and given that F2 includes financial instruments and pensions, candidates will regularly be dealing with items found in other comprehensive income.
The biggest impact is obviously the effect on consolidation of the revised IFRS 3 Business combinations and IAS 27Separate and consolidated financial statements. The policy to be adopted for non-controlling interest will always be stated in the group questions. Changes in group structure – both step acquisitions and disposals in the accounting period will require completely different calculations. This is something that should be made clear to any students that previously sat P8 or those who studied group accounts in a previous accounting qualification. It will also require many answers to be redrafted if past exam questions are being used to revise consolidation.
The components within each syllabus area and the weightings are similar to that of P8.
IFRS 2 Share-based payments in now included in Section B of the syllabus.
Note that the F1 syllabus now covers the basics of consolidation, and although F1 is not a pre-requisite for F2, candidates are advised by CIMA to complete F1 before F2.
THE F2 EXAM FORMAT
The format of the exam has changed significantly from P8. All questions are now compulsory. The exam will comprise five 10- mark questions and two 25-mark questions. The questions can overlap on syllabus areas, but it is likely given the weightings that the majority of the marks in the 25 mark questions will come from Sections A and C of the syllabus.
The 10 mark questions may cover two or more technical areas, in the style of the most recent P8, 10-mark questions.
THE MARKING STYLE ADOPTED BY THE F2/P8 TEAM
The need for chit chat
The exam is broadly half narrative and half calculation so candidates will have to write to pass this exam! The learning outcomes almost dictate this split, as “discuss” and “explain” are the most common outcomes, with “prepare” appearing in the group accounts section. “Calculate” only appears for accounting ratios.
The marking guide that we apply has to reflect this combination of calculation and narrative, but in general we are more concerned that the correct accounting principles are being applied and less concerned about candidates’ ability to use their calculators.
Because...... because
I know this point has been laboured both by me and the previous examiner, but when it comes to analysis there are no marks for comments about ratios going up or down. The marks are awarded for good quality analysis which takes into account the business scenario that the entity is in and the ultimate reader of the report. A marker once commented to me that candidates would score well in these questions if they remembered to write the word “because” over and over ! And on reflection she is right. The use of the word because means candidates are focused on explaining why an issue has occurred or why actions should be taken to resolve an issue.
8 marks for ratios normally require the calculation of 8 pairs of relevant ratios.
We try to keep the use of half marks to an absolute minimum at P8/F2 and in fact they are not used at all in the marking of narrative answers.
Borderline candidates
The guidance given to the marking team when considering borderline candidates for P8 will continue through F2. That is; if the paper is still borderline after a second marking, then consider the candidates’ performance in the two core areas of the syllabus, namely consolidation and financial analysis. If the principles followed in group accounts are sound and the candidate has earned the analysis marks from the big issues in the question then they are likely to pass.
SHOW THEM THE WAY!
Consolidation
When it comes to consolidation I would recommend that students are comfortable with the basics – full consolidation for subsidiaries, equity accounting for associates, calculation of non-controlling interest and goodwill, and the process for calculating group retained earnings. Then urge them to consider how each of the complexities will affect the calculation of each of these basic areas. I am mindful that this is not an open book exam and therefore disclosure has little impact on the syllabus, but would expect candidates to be able to prepare the primary financial statements in a form that is in accordance with IAS 1.
Financial analysis
The financial analysis area is all about question practice because candidates must develop the ability to absorb the scenario, identify relevant ratios and focus on the main issues. I often find that candidates ignore the scenario and the positive or negative vibe given – in fact, this intended to help them focus their answer and not used as a “red herring” (to distract or confuse).I usually ask students – do you think a client would pay for this report - have you explained the big issues and the ultimate impact and recommended how to resolve the issue?
There are two specimen papers for F2, which will illustrate the new exam format. The style of the 10 mark and 25 mark questions from recent P8 papers are also highly relevant, as I was examiner for 2008/9 and technical assessor for P8 for the few years before that.
READING TIME
The reading time can now be about planning answers and not about selecting optional questions. A key part of exam preparation will be deciding how best to use this valuable planning time – likely for either the consolidation or the analysis. This is valuable time and tutors could encourage students to consider what would work best for them – the important thing is that they are not thinking about it for the first time on the day of the exam.
I hope this article is of use to you as you prepare your students for the forthcoming exams. Please urge them to use the learning outcomes and weightings to focus their studies – it’s what I have to use when creating the exam papers. It will ensure we are reading from the same script!