technical article august 01

8/9/2019 TECHNICAl Article August 01

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Th f6 (pol) papr is dsignd To TsTknowldg of a broad rang of TaxaTionmaTTrs. focusing, as many sTudnTs do,

on corporaT incom Tax is insufficinT. Thskill rquird aT This lvl dmands ThaTknowldg is noT suprficial and confindTo compuTaTional maTTrs, buT candidaTsar xpcTd To xplain maTTrs inTllignTly.

This article is based on the examinersexperience of setting and thenreviewing candidates attempts topass Paper F6 (POL) over the past few

years. It is aimed to help focusthe efforts of new and previouslyunsuccessful candidates.

What is worrying is that the overallstandard of scripts has somewhatdeteriorated, and it is clear thatknowledge of many important areasof the syllabus is shallow or missing.There is also evidence of poor studyapproach and weak exam technique.

aims of Th paprThe paper is designed to testknowledge of a broad range of taxationmatters. Focusing, as many studentsdo, on corporate income tax (CIT)is insufficient.The skill required atthis level demands that knowledgeis not superficial and confined tocomputational matters, but candidates

are expected to explain and discussmatters intelligently, for examplechoosing an appropriate tax methodwhere there are options, or explainingVAT to a layman.

The breadth of the syllabus doesrequire a lot of study, since there are nooptional questions, and all areas of thesyllabus are covered in exams, althoughof course the examiner will set theminor topics only occasionally. In fact,the relative infrequency of some itemsseems to have caused candidates toignore them altogether. There is no hardand fast rule as to when a particular

topic will occur, but failing to examineone item for two or three diets mayindicate that it is due this time, or itmay not. A badly answered topic mayreoccur surprisingly soon. Not studyingan area is not an option for the seriouscandidate. I provide below the areasof study that need to be fully grasped,some of which will come up in eachpaper, some only occasionally. I also

mention points frequently done poorlyby candidates in those areas.

ky TopicsThe basic income tax computations.Most students are familiar withthe many disallowables and otheradjustments required. However, thestructure of the computations is notwell understood.

Crucial is the magic formula thattaxable revenue minus allowablecosts gives income, which is not

always the tax base, but must alwaysbe computed, since other mattersdepend on it.

The application of and rules forreliefs, including loss relief, againstthe income to arrive at tax base.Poland had in recent years reducedthese significantly, but the half dozenor so that remain in each of theincome taxes are examined in depth.

The fixed asset classification anddepreciation rules, including thechoices available. The latter is notalways done well.

key advice on

pass polishrlvanT To acca qualificaTion papr f6 (pol)

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The separate sources in personalincome tax (PIT). It is extremelyimportant to understand anddistinguish between the six types of

earnings that are cumulated, andthe principles of cumulation. Eachsource has somewhat different rulesfor costs, which need to be known.

Non-cumulated PIT sources are notparticularly significant, but propertydisposal is. Rules for property sales,and the relief available, were recentlyexamined and it would appear thatthese were not well understood.

The incidence of health and socialsecurity charges against the threemajor earnings from work sources,that is employment, registeredbusiness activities, and contracts. Rulesvary significantly between sources.

Rules for married couples andsingle parents.

The peculiarly exotic and specificallyPolish alternative methods

available for taxing PIT businessearnings. Although the tax card, flatrate on revenue, and flat 19% onincome seem odd, they are used byup to one million businesswomenand men, and need to be fullyunderstood, including the reliefs, ifany, that are available.

Tax deduction on account byremitters from each source, including

the alternate method. The rulesare messy, but differences arisedepending on the particular source,and are not always known.

Studying Paper F6?pee jete 19 20 e eet t t e

how totaxation

The taxation of foreign sourceincome, for both CIT and PIT, andthe two methods for mitigating theeffects of double taxation. These have

generally been poorly understood.The value added tax (VAT) basicallowed and disallowed inputsand outputs, and rules for partialexemption and carry forward/repayment of any excess input tax.

Administrative matters, such as transferpricing rules, due dates for returnsand payments, including arrears. Thesedo not each offer many marks, but

overall a fair part of the paper requiresknowledge of them, spread acrossseveral of the above areas.

xam TchniquThe following points may be of value.Practise questions! Knowledge is allwell and good, but the exam tests itin case study scenarios. Each majortopic has been covered, some several

times, so a comprehensive grasp of thenecessary knowledge will be achieved.Think about what is required before

putting pen to paper, in order notto produce repetitive and confusing,chaotic answers. Requirements arecarefully drafted to ensure that the taskis clear and logical.

Set out computations of income taxand VAT accounts in two columns, tomake life easier for yourself and themarker. If the marker can clearly see

what you are trying to set out, it ismuch easier to award the mark.Do not blur simple computations

with paragraphs of explanation. Thereis no time and no marks for lengthywording. Please see the model answersprovided for all prior exams.

However, do show necessary, complexworkings separately and clearlyannotate them.

Allocate time approximatelyin proportion to the marks available.The marking scheme is deeplyanalysed and fair. If you are spendingexcess time on a topic, you are doingsomething wrong; for example inrecent history recomputing 10 yearsof reducing balance depreciationat 28/14% to prove that an asset wasfully depreciated for half a mark.

Jan Czerniawski is examiner forPaper F6 (POL)

Th marking schm is dply analysd andfair. if you ar spnding xcss Tim ona Topic, you ar doing somThing wrong.

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For many ACCA students there is no phrase which causesgreater fear than Using an appropriate model or models ofyour choice. Immediately a number of problems arise:Which might be appropriate?

How many?Choice I might not choose correctly Id much rather betold what to use.

If I choose incorrectly Ive ruined my chances.

This article will look at some of these problems and willuse as a subject to work on Question 1 from the June 2008Paper P3 exam, AutoFone. This is reproduced here, withannotations. This is a typical Paper P3 Part (a) question withabout three pages of information, including financial data,

then three requirements.

Wht th xi sidAfter each exam session, the examiner issues a report,available on the ACCA website. Its worth reproducingextracts here of what the examiner said about candidatesperformance in this question: the use of case study scenarios. Many candidates had

a problem applying the theoretical knowledge they hadlearned to the context of the scenario. At this level, there

are relatively few marks available for describing a modelsuch as Porters five competitive forces. The vast majorityof the marks are for recognising the presence and effect ofthese forces in the context of the case study scenario.

It is important that the 15 minutes of reading time at thestart of the exam is used effectively. One of the ways ofmaking it more effective is to read the questions (ie therequirements of the case study) before reading the casestudy! This allows the candidate to put the case study intothe context of the questions.

there is no irrelevant information in the case studyscenarios. Candidates must concentrate on linking thescenario information to questions and (where applicable)to appropriate models.

As expected, most candidates chose to use Portersfive competitive forces as a framework for answeringthis question. there are very clear barriers to entrysignposted in the scenario and the data summarised in

Table 2 provided information about industry competitors.Some candidates chose to use PESTEL and SWOTcandidates who used these two models could gain marksas they do identify relevant issues in the scenario.Unfortunately many candidates penalised themselvesby actually describing and using all three models (fiveforces, PESTEL and SWOT), leading to long answers withsignificant repetition. There is little to be gained by usingdifferent models to make the same points.

Wd but dlsModels (or frameworks) are ubiquitous in Paper P3, butit is important to realise that models are not designedto guarantee anyone a correct answer. How could they?Organisations, their strategic positions, the requirementsof their stakeholders and so on come in all shapes andsizes, and no model could cope perfectly with everysituation thrown at it. At best, perhaps, models are betterthan starting with a blank sheet of paper; they give you astructure for the information and a methodology that might

help you to progress your analysis towards a conclusion,such as giving advice. Sometimes the word model israther flattering. PESTEL, for example, is little more than achecklist of potential environmental influences. This is whythe examiner complains about candidates describing models;at this level in your exams they are means to an end, not anend in themselves.

how to: businesscase

lvt t cc quliicti pp p3

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A second point is that although you might not be providedwith input for all parts of the model, a model can still beused. For example, there might be information about yourcompetitors and suppliers, so Porters five competitive

forces might be of some use even if you know nothing aboutthe other three forces. Similarly, you might be given someinformation about pending legal and technological changesand PESTEL can be used as a checklist to see that no otherenvironmental factor has also been mentioned.

Of course, you do have to know the models, andoccasionally you might be specifically asked to use one.At other times a specific model might be heavily hinted at(see below) because the examiner feels it would be usefulin the context of the information provided. But do not get

too obsessed with them. I often see discussions aboutwhether there are 7, 8 or 9Ms to list resources, or whethertax is a political, economic or a legal influence. It doesntreally matter: you have identified that considering resourcesmight be important and also that tax can be an importantenvironmental influence.

You do not need to know any models that are notmentioned in the ACCA Paper P3 Study Guide.

clus but th i dls ight b usul

The question mentions, or Model that mightthe scenario has information yield progress:

about, or we want to findout about:The environment PESTELCompetitive position Porters five forcesPortfolio of products Boston consulting group

matrix; productlife cycle analysis

Portfolio of companies Goold and Campbell; AshridgeOutsourcing Harmons process strategy

matrix

Stakeholders Medelows matrixChange management Balogun and Hope Hailey;Lewin

Competitiveness of nations Porters diamondHow we make profits Value chain; generic strategies

And then there is SWOT. SWOT will always work insofar as itis possible to allocate all effects and pieces of informationto strengths, weaknesses, opportunities or threats. But itis barely sophisticated enough to be called a model; its

more of a sorted list, and other models might enable moreprogress to be made. For example, using SWOT you couldlabel an ambitious firm thinking of entering your market asa threat, but a Porters five forces analysis specifically opensup the possibility of considering barriers to entry. This allowsyou to make a judgment about the strength of the threatand also what you might be able to do about it. RearrangingSWOT as a TOWS matrix is of more help: use strengths tocapitalise on opportunities, but avoid relying on weaknesses;if there is a threat try to find a way in which your strengths

can be used to defend you.

Studying Paper P3?performane ojee 7, 8 an 9 are reean o eam

analysisstudy approach

dls ( Wks) ubiquitus i pp p3, but it isiptt t lis tht dls t dsigd t guty cct sW. hWculd thy? gistis c

i ll shps d sizs, d dl culd cp pctly Withvy situti thW t it.

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Note what the examiner said about making the same pointrepeatedly using different models: theres no point in doingthat. Nor is there any point in trying use too many modelsin an attempt to show off your knowledge. Better to use twomodels well to let you move towards a conclusion than endlessanalysis but no conclusion. You will notice that the last rowof the table contains generic strategies as a model. These areoften not thought of as a way of collecting information andare not usually considered until strategic choices are to bemade. However, consideration of the generic strategies can beimmensely helpful when trying to understand a business: If the business is successful it must be following a generic

strategy: cost leadership or differentiation, each with orwithout focus.

If the business is not successful, it is not successfullyfollowing a generic strategy and should be advised to try todo so.

th qusti: utphsThe suggested four-step approach is:

Step 1. Read the requirements. This will alert you to what thequestion is about: a takeover, opening up abroad, powerfulforeign competition, maturing market, or whatever.

Step 2. Use your 15 minutes of reading time to read thequestion in as relaxed a manner as you can. Annotate,underline, highlight as you go but try not to underline orhighlight every word. Perhaps you could mark P, E, S, T, E,L or Cost leadership against sentences as you go through.Reread several times if you need to and keep the requirements

in mind. Some people fear the case study because it containsa lot of information, but these details provide you with yourammunition. As the examiner says, there is no irrelevantinformation, so always think what the information might allowyou to surmise. Be open-minded at this stage and annotatewith appropriate terms where you see fit. Try to use thestrategic planning vocabulary and terminology as this willgive hooks to theories that might be useful. For example,the scenario uses the phrase our central business idea.Essentially that is the companys Mission. Remember, treat

information and detail as friends: the hardest questions areoften the short ones, such as What is life? As mentionedabove, a scenario gives you lots of ammunition with which toattack the requirements.

Step 3. Look at the financial or quantitative data. This hasalways been provided in the case study, but it seems thatcandidates adandon their particular quantitative and financialskills too easily and rush off to use strategic planning models.Odd, given that this is an exam for accountants. Would you notnormally expect quantitative data to shout information at you?Look at trends, calculate a few ratios (GP%, liquidity, marketshare, cost per unit) and see what might be there. Financialinformation and strategic planning are inseparable.

Step 4. Plan you answer. Make sure you address therequirements, particularly two part requirements suchidentify and appraise or describe and recommend. Payattention to the marks available as this will indicate howmuch time to spend on that part of the question.

par (a)Step 1: The requirements, part (a):(a) Using an appropriate model or models, analyse

the competitive environment of AutoFones retailshops division.

Note: requirement (a) includes 2 professional marks.(20 marks)

So, you are to analyse the competitive environment. Probablythe best tool is Porters five forces, but there is no reasonwhy PESTEL could not also be used where appropriate, oreven SWOT. Therefore, you should be ready to read throughthe scenario, annotating it as you go (eg: C = competitors,B = buyers, Sup = suppliers, N = New entrants, Sub =substitutes. Similarly for PESTEL).

Step 2: Read the question in the light of the requirements.Annotate the question paper. The question reproduced herehas been annotated with comments relating to AutoFonescompetitive environment.

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Step 3: Table 1 on page 8 shows how relatively unimportantboth AFDirect and AFInsure are to the business so far. Theanalysis by age of customer shows that younger people arerelatively keen on buying over the internet. As internet-savvypeople age, this branch of the business is likely to becomemore important at the expense of the retail shop division.

Table 2 on page 8 shows how the mobile phone industryhas changed from a growth rate of 5% 03/04 to only 0.7%06/07. The only way for a firm to get bigger is to gain marketshare so rivalry will become more intense. AutoFone hasmanaged to increase its market share from 2003 to 2007and itself enjoyed growth of 2% 06/07.

Also, Table 2 shows five competitors of roughly equalsize (oligopoly). Price reductions by one have to be followedby others to maintain their market shares a potentiallyunstable setup

Step 4: Answer planpotential entrants: low threat: providers already in market;

other entrants would be given poor deal suppliers: hardly any bargaining power (30-year contracts)

rivalry: providers; equal sizes; technology allows rivalryover internetbuyers: little customer loyalty despite claim that AutoFone

is impartial substitutes: none known for the phone functionmarket conditions: low growth = high competition;

technology = internet competition.

par ()Step 1: The requirements, Part (b):

(b) AutoFones CEO is anxious to develop a rational and wellargued case for retaining the retail shops division.Write a briefing paper for the CEO to submit to thestrategy planning committee explaining why the retailshops division should continue to form a key part ofAutoFones future strategy.Note: requirement (b) includes 3 professional marks.

(15 marks)

Briefing paper = memorandum to all intents and purposes.

You are not asked to say ifthe retail shops division shouldremain important, you are asked to justify why it should.

Step 2: By now you will be familiar with the question, but willneed to skim again in the light of the requirements. Look forreasons to keep the retail shops and ways of refuting the twodirectors paper.

Step 3: Financial data.The retail shops contribute 85% of the companys totalturnover and 88% of mobile phone sales.

Retail shops are still profitableROCE 2007 = 5% (11/205); 2003 = 18%GP% 2007 = 26%; 2003 = 33%NP% 2007 = 3%; 2003 = 12%

Step 4: Answer planA change in approach to pushing more profitable phones

would increase profits (though perhaps at the expense ofthe companys reputation).

Shops are on long leases so there could be substantialexit costs.

Retail shops are still profitable.

Retail shops are by far the largest part of the business.The brand is based on the reputation of the shops andthis may be linked to the success of the internet andinsurance businesses.

par ()Step 1: The requirements, Part (c):(c) The AutoFone retail shops division faces problems

in remaining faithful to the original business idea ofoffering impartial advice to customers and developing an

appropriate rewards system for its staff. Evaluate what changes the AutoFone retail sales divisionshould consider making to both its business idea andits rewards system.

(15 marks)

Evaluate implies that you must make a judgment on changesthat might be necessary to its business idea and reward system.

Step 2: By now you will be familiar with the question.

Relevant material is in the fifth paragraph and threeparagraphs between Tables 2 and 3.



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Step 3: Financial data.Doesnt seem very relevant here

Step 4: Answer planBusiness idea might no longer be viable (note success

of City branch). There will now be many review sites andforums on the internet dedicated to comparing phones andgreater customer knowledge.

Mature business usually means more competition and theold ways of achieving profits might not apply any more.

There has to be recognition in reward scheme ofrepair work done to phones bought from AFDirect,otherwise resentment.

An attempt at management by objective which does notreally work.

Conflict/inconsistency: rewards closely based on profit.Managers supposed to be entrepreneurial but the Citybranch manager was reprimanded. If our central businessidea is offering independent and impartial advice,remuneration should be linked to that, not profits.

Mission statement (or equivalent) might need to be lookedat and updated. Emphasis now, perhaps, needs to bewider eg not just independent advice, but advice, service,insurance. A one-stop shop.

itductiThe question is reprinted here from June 2008: Autofone. TheACCA model answer is available from the ACCA website atwww.accaglobal.com/students/acca/exams/p3/past_papers

AutoFone was established almost 20 years ago at the

beginning of the mobile telephone boom. It was formed bya dynamic chief executive officer (CEO) who still remains amajor shareholder of the company.

AutoFone brought two new concepts to the market. First,it established retail shops where customers could go andhandle the products and discuss mobile phone options withtrained sales people. Before AutoFone, all mobile telephoneswere sold through the customer directly contacting thetelephone network provider (like conventional home landline services) and were generally aimed at business rather

than leisure users. Second, AutoFone sold products andservices from all the four major network providers licensedby the government to provide telecommunications servicesin the country.

Previously, customers could only choose products andservices from within one network providers range. AutoFoneallowed customers to choose products and services acrossthe range of the four providers and reflected this in thecompanys motto ethical advice: the customers choice.

In 1990, AutoFone signed a 30-year supply contract witheach provider. Although, in retrospect, these deals were oncommercially favourable terms for AutoFone, the networkproviders were happy to agree these deals because none ofthem believed that mobile telephones could be successfullysold through retail shops. However, speaking in 2003, themanaging director of one of the networks suggested thatAutoFone had got away with incredible profit margins whenthey signed the deals in 1990. The four network providersthemselves had re-signed 25-year licence deals with thegovernment in 1995. Under the terms of these deals,licences will be restricted to the four current providers untiltheir renewal date of 2020.

ea o onAutoFone currently has 415 shops around the country. To

reduce costs most shops are on the edge of (but not in) themain shopping area of the town they serve. It is usual forAutoFone to sign a 50-year shop lease in return for low initialannual rental and a rent-free period at the start of the leasewhile the company fits out the shop to reflect AutoFonescorporate image. In 1997, AutoFone floated on the countrysstock market to assist the funding of further shops and socontinue its organic growth. The national coverage of itsshops, the publicity generated by its CEO and a successfultelevision advertising campaign culminated, in 2005, with

it being rated by consumers as one of the top 20 brands inthe country.

B: Good brand = lower buyer pressure

Sup: low supplier pressure but locked in

N: no new entrants to networks

N: large scale = barrier to entry

Sup: low supplier pressure

N: not so profitable any more barrier to entry

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(i) The licensed network providers have opened theirown retail stores, usually in city centres. AutoFone hasreacted to the opening of these shops by stressingAutoFones independence and impartiality. Only atAutoFone can impartial advice be received on all fourcompeting networks and their supporting services. TheCEO now refers to this as our central business ideaand, as well as being core to their strategy, it is heavilyemphasised in all their promotional material.

(ii) Mobile phones have become more sophisticated. Manynow offer integrated cameras, mp3 players, web browsersand email facilities. AutoFone offers these products inboth its shops and through its internet operation. Mobilephones are either purchased outright or provided onmonthly contracts. The minimum contract period with thenetwork provider is usually 12 months.

AutoFone has itself established its own internet division,AFDirect, as a separate division within the group. It hasalso established an insurance division (AFInsure) offeringinsurance to cover loss or damage to mobile phonespurchased from the company. Revenue earned from eachdivision, analysed by the age of the customer, is shown inTable 1 on page 8.

Analysts agree that growth in the mobile phone businessis slowing down and this is supported by the figuresgiven in Table 2 on page 8showing revenue from sales(both retail and Internet) for AutoFone and its competitors,the four licensed network providers, for the period20032007.

The CEO of AutoFone established the retail shops along,in his words, entrepreneurial lines. He regards each shopas an independent business, having to achieve a profittarget but without being closely monitored within thesetargets. He believes that the company is about providingopportunity to its employees, providing them with autonomyand responsibility to achieve their goals. It is not aboutmonitoring them every hour of the day, stifling creativityand enthusiasm. To support this approach, sales staff aregiven a relatively low basic salary with a substantial elementof profit-related pay linked to the profit targets of the shop.Commission is also paid to sales staff who successfullysell mobile phone insurance to the customer. Each shop isrelatively small, usually employing three or four people.

In recent years the CEO has been increasingly involved intelevision, sports promotion and charity work. At AutoFonehe has established a strategic planning committee ofsenior headquarters managers to develop and implementthe companys business strategy. This committee includesthe two longest serving board directors. The strategy stillcontinues to have at its heart the central business idea ofgiving independent and impartial advice to customers sothat they can choose the best equipment and network fortheir needs.

areae renSince AutoFones arrival into the market, two significanttrends have emerged:

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C: increased competition

Mission? Differentiation

Management by objective?



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However, while the AFDirect and AFInsure divisions areprospering, there are increasing problems in the retail shopsdivision. Profitability has been declining over the past fewyears (see Table 3) and this has had a demoralising effecton shop employees. One shop manager commented, in hisexit interview, that the profit targets were unattainable in thecurrent market. They might have been appropriate in 1997,but they are not in 2007. Staff are particularly demoralisedby spending time explaining a particular product to acustomer who then leaves the shop and buys the productcheaper on the internet. They have to wait for it to bedelivered (usually two or three days) but they are prepared todo this to gain the lower prices offered by the direct internet-based companies, including AFDirect. It is also increasinglycommon for customers who have bought from AFDirect totake their phones to AutoFones retail shops for support andservice. This activity is not recognised in the shop employeesreward package.

oone enra ranDespite the overall decline in the profitability of theshops, one branch has continually met or exceeded itsprofitability targets and is held up by the CEO as an exampleof best practice proof that the companys approach tomobile phone selling can still be profitably applied. Thisis the central city branch in one of the countrys mostprosperous cities.

The CEO arranged for three members of the strategicplanning committee to visit the shop, posing as customers,to investigate the reasons for the shops success. They foundthe staff very friendly and helpful. However, they also foundthat they were guided towards products and services whichhad higher profit margins. Further investigation showed thisalways to be the case and so customers were sold productswhich were profitable to the shop, rather than those bestsuited to the customers needs. On receiving this information,AutoFones board concluded that this was unethical as itcompromised their central business idea which stressedimpartial advice to guide the customers choice. Themanager of the shop was reprimanded and asked to adhereto company policy. He resigned soon afterwards, followed by

his two assistants. The shop is currently run by temporarystaff and profitability has significantly dropped.

re raeThe two longest serving directors on the strategic planningcommittee are increasingly concerned about the companysdecline in profitability (see Table 3). They have written aninternal paper suggesting that the retail division shouldbe sold off and that AutoFone should re-position itself asan online retailer of phones. They believe that the retailshops business model is no longer appropriate. They arguethat a company concentrating solely on Internet sales andinsurance would be a smaller but more profitable andfocused business. The CEO is strongly opposed tothis suggestion because it was the shop-based approachto selling mobile phones that formed the original businessmodel of the company. He has a strong emotionalattachment to the retail business. The two directors claimthat this attachment is clouding his judgment and hencehe is unable to see the logic of an economically justifiableexit from the retail business.

See Table 3 on page 9.

Required:(a) Using an appropriate model or models, analyse

the competitive environment of AutoFones retailshops division.Note: requirement (a) includes 2 professional marks.

(20 marks)(b) AutoFones CEO is anxious to develop a rational and well

argued case for retaining the retail shops division. Write a briefing paper for the CEO to submit to the

strategy planning committee explaining why the retailshops division should continue to form a key part ofAutoFones future strategy.Note: requirement (b) includes 3 professional marks.

(15 marks)(c) The AutoFone retail shops division faces problems

in remaining faithful to the original business idea ofoffering impartial advice to customers and developing anappropriate rewards system for its staff.

Evaluate what changes the AutoFone retail sales divisionshould consider making to both its business idea and itsrewards system.

(15 marks)(50 marks)

Ken Garrett is a freelance author and lecturerEntrepreneurship punished

C: increased competition/technologyB: little buyer loyalty

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tbl 1: lysis ut sls: 2007 (ll igus i $)

e of omeruner 15 1525 2640 4160 er 60 toa

Division AutoFone retail shops 5 90 60 120 65 340AFDirect 0 15 20 8 2 45Total sales of mobile phones 385

AFInsure 0 1 3 7 3 14Group total 399

tbl 2: kt lysis (ll igus i $) sls bil phs

coman 2007 2006 2005 2004 2003AutoFone 385 377 367 340 320NetAG 350 348 345 340 30509Net 390 388 380 365 350PhoneLine 315 315 315 305 300NetConnex 295 295 294 290 285Total 1,735 1,723 1,701 1,640 1,560

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tbl 3: xtctd icil iti ut (til shps divisi ly)

rae nana nformaon (a re n $m)Extracted from the Balance Sheet

2007 2006 2005 2004 2003Total non-current assets 143 140 134 128 123Current assets:Inventories 345 340 335 320 298Trade receivables 1,386 1,258 1,216 1,174 1,120Cash and cash equivalents 345 375 390 400 414Total current assets 2,076 1,973 1,941 1,894 1,832Total assets 2,219 2,113 2,075 2,022 1,955

Total shareholders equity 150 155 160 165 169

Non-current liabilities:Interest bearing long-term loans 55 50 45 40 35Other provisions 16 15 13 13 10Total non-current liabilities 71 65 58 53 45Total current liabilities 1,998 1,893 1,857 1,804 1,741

Total equity and liabilities 2,219 2,113 2,075 2,022 1,955

Extracted from the Income Statement

2007 2006 2005 2004 2003Revenue 340 337 332 320 305Cost of Sales 250 252 230 220 205Gross Profit 90 85 102 100 100Wages and Salaries 39 38 37 35 33Other expenses 40 38 35 30 30Interest payable 4 4 3 3 3Total 83 80 75 68 66Net Profit before tax 7 5 27 32 34Tax 2 3 5 4 4Net Profit after tax 5 2 22 28 30

Extracted from annual reports

Number of employees 1,400 1,375 1,325 1,300 1,275

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Prior to my first exam in December2010, the purpose of this articleis to explain my approach as a newexaminer and what, if any, changes canbe expected from the previous exams.

This article will be supplemented byan example question which will appearin Student Accountantand on theACCA website.

The Paper P5 exam is based on thesyllabus which has not significantlychanged in the past year. The maincapabilities that a successful candidatemust possess are to: use strategic planning and control

models to plan and monitororganisational performance

assess and identify relevantmacroeconomic, fiscal and marketfactors and key external influences onorganisational performance

identify and evaluate the designfeatures of effective performancemanagement information andmonitoring systems

apply appropriatestrategic performancemeasurement techniquesin evaluating and improvingorganisational performance

advise clients and seniormanagement on strategic businessperformance evaluation andon recognising vulnerability tocorporate failure

identify and assess the impactof current developments inmanagement accounting andperformance management onmeasuring, evaluating and improving

organisational performance.

Performance management systemsare the systems in an organisationby which the performance of anorganisation is measured, controlledand improved. The thrust of the paperwill move towards the strategic levelof considering different performancemeasurement techniques andmanagement systems. Paper P5builds on knowledge gained at otherlevels, for example, Paper P3 andespecially from Paper F5. PaperF5 tests the candidates ability inapplication and analysis of coremanagement accounting techniques.Paper P5 develops key aspectsintroduced at the Paper F5 levelwith a greater focus on the synthesisand evaluation of the key topics andtechniques. It will also introduce morespecialised techniques and currentissues in performance management.Therefore, candidates should notexpect to be retested in a Paper F5style on topics but need to be awarethat all of Paper F5 knowledge isassumed to be known and will now beused in a more critical capacity.

Questions will continue to be setwithin a specific scenario surroundinga business or its sector. Candidateswill need to absorb the informationprovided in the scenario as it will be

vital in order to be able to demonstratethe ability to apply theory in practice.However, general business knowledgeabout a sector and the current issuesfacing businesses will also providefertile ground for demonstrating acandidates ability to make the skillsand knowledge built up at earlier levelsof study applicable in the real world.

At the Professional level, it isnecessary that candidates take a morerounded view of the whole subjectrather than seeing it as a set ofdisconnected topics. For example, thecandidate will be expected to be ablenot only to explain and use a particularmethod of performance measurementor management but also, to be ableto evaluate its use compared to othersystems or metrics. This will mean thatsingle questions will often range overdifferent topics in the Study Guide.

As the business environment has beenprofoundly affected by the increaseduse of technology, there is less need ata strategic level to manually performcalculations. This is already tested heavilyin earlier papers; therefore, there will be areduction in the volume of computationalwork required for this paper.

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Occasionally, longer computations mayappear but these will be used as a way ofallowing the student to absorb the datain a question and become comfortablewith the scenario. Large repetitious

calculations will be avoided but itshould be noted that some repetition isinevitable as, for example, a trend canonly be identified with at least two ormore realistically three data points.

However, computational work will nottotally disappear from Paper P5 butit will feature more in the interpretationand further analysis of data providedin the question. Candidates will haveto demonstrate the ability to add valueto their advice by taking informationalready produced and identifying theimportant features. At the Professionallevel, comments should be helpfullyquantified where possible and thecommercial implications discussed.

Candidates should be constantlyon the lookout for ways to maketheir numbers more understandable,for example, by comparing it toincreased activity of the business or tocompetitor performance.

Studying Paper P5?performance objectives 12, 13 an 14 are reevant to tis exam

paper p5Finally, the implications of the

information should be considered fromthe business managers perspectivenot just the finance professionals.Therefore, commenting on trends

or reasons for trends should be anopportunity to demonstrate that thecandidate has absorbed the scenarioinformation and can combine itwith general business awarenessto provide useful advice for thebusinesss managers.

plNow, taking each capability in turn,the first capability asks for theapplication of strategic planningand control models in performancemanagement. These modelsemphasise the need to take aholistic view of the factors affectingthe business and to consider themwhen giving strategic advice onperformance. Good candidates atPaper P5 often distinguish themselvesby being able to synthesise disparatedetailed points into an overall,strategic approach for an organisation.

The second capability addressesfactors external to the businessand signifies an additional area ofconcern for candidates from the lowerlevels where the focus was more on

the internal factors associated withtraditional management accounting.This second point emphasises the needto consider the information needs ofthe strategic level of managementrather than merely the operational andtactical levels.

The third capability relates to theinformation that management requireand the systems that are needed forits delivery.

Candidates will not be required tohave detailed technical knowledge ofhardware and software but are expectedto be conversant with the broadhardware and software trends andissues and how these interact with theprovision of performance informationthroughout the organisation. It isthe effect of these technologieson the performance managementdecision-making processes that ismost significant.

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The fourth capability is theapplication of the techniques of Paper

P5 and its assumed knowledge inspecific scenarios. The fifth capabilitytakes this information and seeks to turnit into commercially valuable advicefor strategic decision makers. Thiscapability also requires the candidateto be able to recognise and advise onsituations where the organisation is indanger of failing.

The final capability reflects the

requirement that at the final level ofACCAs examinations, the candidate isexpected to show the ability to gathernew knowledge from the generaltechnical press and so the articles inStudent Accountantwill be sourcesof topics for exam. These articles willalso be the principal route by whichthe students will have new techniquesand trends communicated outside of

the slower cycle of revisions to thesyllabus. Candidates should note thatunlike in the compliance topics suchas financial reporting and tax, changesare not regularly made to the syllabusareas so that older articles may well beas relevant to the upcoming exam asthe most recent ones.

Any additional reading beyond theACCA-approved texts and StudentAccountantarticles should be viewedas advisory and not required. Butthe candidate would also be advisedto broaden their general businessknowledge by the regular reading ofgood quality business articles. Thiswill provide additional background andexamples of the techniques and issuesof performance management.

Professional marks will continueto be a regular feature of at least

one of the Section A questions and itshould be possible for a well-preparedstudent to score most of these easily.Efficient preparation will involve theidentification of appropriate formatsand structures to use in answeringquestions and practising writinganswers in order to improve clarity.The effective use of appropriateintroductions, conclusions and helpfully

breaking the document into properlyheaded subsections will help todemonstrate a professional approach.However, it should be stressed that theapproach taken will vary from questionto question and the exam tests thecandidates ability to apply theirknowledge of professional presentation.In order to score full professionalmarks, the answer will have to be

tailored to the specifics of the scenarioin the question recognising the needsof the readers of the document.

Finally, there are some regularlyrepeated but still valuable presentationpoints. First, on rounding, at thisfinal level the candidate should usetheir own judgment on how to roundfigures the basic rule is that thereshould be enough detail to make auseful conclusion without obscuringit in insignificant figures. Second,short paragraphs are usually clearbut single sentence paragraphs areoften insufficient and unable to getto the depth required at Paper P5.Bullet points are useful for lists butnot if commentary is required. Finally,reading model solutions is not asubstitute for actually writing out yourown answers.

Practice brings the experience ofhandling the time limitations that you

will face in reality and the confidenceof having met and defeated problemsoutside the exam hall.

luThe key advice in order to passPaper P5 remains that thecandidate should: understand the objectives of the

exam as explained in the Syllabus

and prepare the detailed topics in theStudy Guide

be very comfortable with the areastested in Paper F5 and Paper P3

ensure that preparation for the examhas been based on a programme ofstudy set for the required syllabusand exam structure

use an ACCA-approved textbookfor Paper P5. They are structured

around the syllabus and theexaminer reviews them so that theygive an effective coverage of whatis examinable

practise questions under examconditions in order to improve speedand presentation skills, ensuringthese test discursive, computationaland analytic abilities

study all the relevant articles thatappear in Student Accountant

be able to clearly communicateunderstanding and applicationof knowledge in the context of aProfessional level exam.

Alex Watt is examiner for Paper P5

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technical article august 01

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