1 Formats..................................................................................................................................................................6
2 Finance...................................................................................................................................................................8
2.1 Exam focus (inc finance checklist).....................................................................................................................8
2.2 Financing options for small and medium sized enterprises (SMEs)...................................................................9
2.3 Alternative Investment Market........................................................................................................................9
2.4 Procedures for obtaining listing on an international stock exchange................................................................9
2.5 Financial reconstruction.................................................................................................................................10
2.6 Financial distress............................................................................................................................................14
2.7 International Financial Management..............................................................................................................15
2.7.1 Risks of international trading..............................................................................................................................................15
2.7.2 Financing overseas investments.........................................................................................................................................16
2.7.3 Remittance restrictions.......................................................................................................................................................17
2.7.4 Dividend management........................................................................................................................................................18
2.7.5 Transfer pricing for multinationals.....................................................................................................................................18
2.8 Equity Financing Options................................................................................................................................19
2.8.1 Dividend policy....................................................................................................................................................................19
2.9 Debt Financing Options...................................................................................................................................20
2.9.1 Bonds...................................................................................................................................................................................20
2.9.2 Bank loans...........................................................................................................................................................................22
2.9.3 Bonds / Bank loans comparison..........................................................................................................................................23
2.9.4 Convertible bonds...............................................................................................................................................................23
2.9.5 Auditors/ Bank Enquirers about new finance request.......................................................................................................23
2.11 Cost of Capital...............................................................................................................................................25
2.12 Capital Structure (MM theory vs Traditional)................................................................................................26
2.13 Dividend Policy.............................................................................................................................................26
2.14 Treasury Management..................................................................................................................................27
2.15 Working Capital Management (inc EOQ Model)...........................................................................................29
3 Finance risk management.....................................................................................................................................30
3.1 Introduction....................................................................................................................................................30
3.1.1 Type of financial risk...........................................................................................................................................................30
3.1.2 Whether to hedge...............................................................................................................................................................30
avaHedge efficiency & Basis Risk (futures and traded options)..................................................................................................31
3.1.3 Key products and definitions..............................................................................................................................................32
3.1.4 CR implications for each hedge type..................................................................................................................................33
3.2 Interest rate risk.............................................................................................................................................33
3.2.1 Interest rate futures (IRFs)..................................................................................................................................................33
3.2.2 Forward rate agreements (FRAs)........................................................................................................................................34
3.2.3 Interest rate options...........................................................................................................................................................35
3.2.3.1 OTC Options..................................................................................................................................................................35
3.2.3.2 Traded options.............................................................................................................................................................35
3.2.3.3 Caps, collars and floors (Interest & FX)........................................................................................................................36
3.2.4 Interest rate swaps (coupon swaps)...................................................................................................................................38
3.3 Foreign exchange rate risk..............................................................................................................................39
3.3.1 Forecasting exchange rates................................................................................................................................................39
3.3.2 Currency forward contracts................................................................................................................................................40
, 3.3.3 Currency futures.................................................................................................................................................................40
3.3.4 Foreign currency options....................................................................................................................................................41
3.3.4.1 OTC Currency options...................................................................................................................................................41
3.3.4.2 Traded currency options..............................................................................................................................................41
3.3.5 FX swaps..............................................................................................................................................................................42
3.3.6 Currency Swap....................................................................................................................................................................42
3.3.7 Money market hedge..........................................................................................................................................................43
3.4 Options Valuation...........................................................................................................................................44
3.5 Hedging – Audit Points...................................................................................................................................44
4 Business Valuation................................................................................................................................................45
4.1 General principles...........................................................................................................................................45
4.2 Valuations - EXAM TEMPLATE ANSWER..........................................................................................................46
4.3 Valuations – theory, assumptions/issues and use...........................................................................................47
4.4 Asset based methods......................................................................................................................................50
4.4.1 NAV.....................................................................................................................................................................................50
4.5 Income and earnings based methods..............................................................................................................51
4.5.1 DVM....................................................................................................................................................................................51
4.5.2 Discounted Earnings...........................................................................................................................................................52
4.5.3 P/E Multiple........................................................................................................................................................................53
4.5.4 EV/EBITDA Multiple............................................................................................................................................................54
4.5.5 FCF and FCFE.......................................................................................................................................................................56
4.5.6 APV......................................................................................................................................................................................57
4.5.7 EVA and MVA......................................................................................................................................................................60
4.5.8 SVA......................................................................................................................................................................................62
4.6 Valuations – specific scenarios........................................................................................................................63
4.6.1 Valuation – High Growth Start-up......................................................................................................................................63
4.6.2 Valuation – Loss Making Businesses...................................................................................................................................63
4.6.3 Valuation – Administration.................................................................................................................................................64
4.7 CAPM..............................................................................................................................................................64
4.8 Valuation of debt............................................................................................................................................65
4.9 Brand Valuation..............................................................................................................................................67
4.10 Additional Information for all valuations......................................................................................................68
5 Investment appraisal............................................................................................................................................69
5.1 All methods (inc. positives and negatives)......................................................................................................69
5.1.1 Bond yield calculation (alternative to IRR).........................................................................................................................70
5.1.2 Annualised rate of return....................................................................................................................................................70
5.1.3 MIRR Example.....................................................................................................................................................................70
5.1.4 Average Rate of Return.......................................................................................................................................................70
5.2 Narrative points and professional scepticism.................................................................................................71
5.3 Real options....................................................................................................................................................71
5.4 Sensitivity analysis..........................................................................................................................................71
5.5 Foreign currency NPV.....................................................................................................................................72
5.6 Breakeven Analysis.........................................................................................................................................74
6 Risk management.................................................................................................................................................76
, 6.1 Insurance........................................................................................................................................................76
6.2 Risk reviews - considerations..........................................................................................................................76
6.3 Examples of general risks................................................................................................................................77
7 Business plan........................................................................................................................................................78
8 Strategic choice....................................................................................................................................................79
8.1 Exam Focus (inc generic ideas)........................................................................................................................79
8.3 Growth options...............................................................................................................................................80
8.3.1 Organic growth...................................................................................................................................................................80
8.3.2 Acquisitions.........................................................................................................................................................................80
8.3.2.1 Benefits and risks.........................................................................................................................................................80
8.3.2.2 Financing an acquisition...............................................................................................................................................82
8.3.2.3 Financial statement impact..........................................................................................................................................84
8.3.2.4 Synergies......................................................................................................................................................................84
8.3.2.6 Assurance - Due Diligence............................................................................................................................................85
8.3.2.7 Specific scenarios.........................................................................................................................................................88
8.3.3 Joint development strategies.............................................................................................................................................89
8.3.4 Ansoff Matrix Ideas.............................................................................................................................................................91
8.4 Demergers and divestment.............................................................................................................................93
8.5 Overseas.........................................................................................................................................................96
8.5.1 Generic Overseas Expansion Risk Assessment...................................................................................................................96
8.5.2 Outsourcing.........................................................................................................................................................................97
8.5.3 Exporting Overseas.............................................................................................................................................................98
8.5.4 Overseas Operation............................................................................................................................................................99
8.5.6 Advantages and Disadvantages ways to expand overseas...............................................................................................101
8.6 Online sales strategy.....................................................................................................................................102
8.7 How to withdraw cash/ realise investment from the business.....................................................................102
8.8 Withdrawal from a Business - Director Considerations.................................................................................103
8.9 Problems associated with change of ownership...........................................................................................103
9 Strategic implementation...................................................................................................................................104
9.1 Business process reengineering (BPR)...........................................................................................................104
9.2 Operations Management..............................................................................................................................104
9.3 Customer relationship management (CRM)..................................................................................................104
9.4 Supply chain management............................................................................................................................105
9.4.1 Costs of Quality.................................................................................................................................................................105
9.5 Change management....................................................................................................................................106
9.6 Project Management....................................................................................................................................108
10 Information systems.........................................................................................................................................109
10.1 Exam focus..................................................................................................................................................109
10.2 Management Accounting Information........................................................................................................109
10.3 Integrated reporting...................................................................................................................................110
10.4 Big data.......................................................................................................................................................112
10.5 Information technology risks......................................................................................................................113
, 10.6 Outsourcing IT function..............................................................................................................................113
11 Human resource management (HRM)...............................................................................................................114
11.1 Generic HR issues and actions.....................................................................................................................115
11.2 HRM issues in an acquisition.......................................................................................................................115
11.3 Remuneration.............................................................................................................................................116
12 Data analysis....................................................................................................................................................119
12.1 Key Ratios...................................................................................................................................................120
13 Performance Measurement..............................................................................................................................124
13.1 BS and Beyond Budgeting Model................................................................................................................124
13.2 CSFs............................................................................................................................................................125
13.3 Benchmarking.............................................................................................................................................125
13.4 KPIs.............................................................................................................................................................125
14 Costing..............................................................................................................................................................127
14.1 Marginal costing.........................................................................................................................................127
14.2 Absorption costing......................................................................................................................................127
14.3 Activity based costing (ABC)........................................................................................................................128
15 Corporate Governance......................................................................................................................................131
15.1 The UK Corporate Governance Code...........................................................................................................131
15.2 Board Structures and Make up...................................................................................................................133
15.3 Shareholding Percentages - Narrative Comments.......................................................................................134
16 Assurance.........................................................................................................................................................135
16.1 Review Engagements (ISRE 2400)...............................................................................................................135
16.2 Assurance on Business Plans and Forecasts (ISAE 3400)..............................................................................136
16.3 Assurance on Service Providers (ISAE 3402)................................................................................................138
16.4 Assurance on Internal Controls (ISAE 3410)................................................................................................138
16.5 Agreed Upon Procedures (ISRS 4400)..........................................................................................................139
16.6 Compilation engagements (ISRS 4410)........................................................................................................139
16.7 Forensic auditing.........................................................................................................................................140
16.8 Internal audit..............................................................................................................................................142
18 Ethics................................................................................................................................................................144
18.1 Exam Focus.................................................................................................................................................144
18.2 Corporate Social Responsibility (CSR).........................................................................................................145
18.4 Sustainability..............................................................................................................................................146
18.5 CSR vs Sustainability...................................................................................................................................147
18.6 Independence - Advisory Manager joining a client.....................................................................................147
18.7 Social Audit.................................................................................................................................................147
2 Finance...................................................................................................................................................................8
2.1 Exam focus (inc finance checklist).....................................................................................................................8
2.2 Financing options for small and medium sized enterprises (SMEs)...................................................................9
2.3 Alternative Investment Market........................................................................................................................9
2.4 Procedures for obtaining listing on an international stock exchange................................................................9
2.5 Financial reconstruction.................................................................................................................................10
2.6 Financial distress............................................................................................................................................14
2.7 International Financial Management..............................................................................................................15
2.7.1 Risks of international trading..............................................................................................................................................15
2.7.2 Financing overseas investments.........................................................................................................................................16
2.7.3 Remittance restrictions.......................................................................................................................................................17
2.7.4 Dividend management........................................................................................................................................................18
2.7.5 Transfer pricing for multinationals.....................................................................................................................................18
2.8 Equity Financing Options................................................................................................................................19
2.8.1 Dividend policy....................................................................................................................................................................19
2.9 Debt Financing Options...................................................................................................................................20
2.9.1 Bonds...................................................................................................................................................................................20
2.9.2 Bank loans...........................................................................................................................................................................22
2.9.3 Bonds / Bank loans comparison..........................................................................................................................................23
2.9.4 Convertible bonds...............................................................................................................................................................23
2.9.5 Auditors/ Bank Enquirers about new finance request.......................................................................................................23
2.11 Cost of Capital...............................................................................................................................................25
2.12 Capital Structure (MM theory vs Traditional)................................................................................................26
2.13 Dividend Policy.............................................................................................................................................26
2.14 Treasury Management..................................................................................................................................27
2.15 Working Capital Management (inc EOQ Model)...........................................................................................29
3 Finance risk management.....................................................................................................................................30
3.1 Introduction....................................................................................................................................................30
3.1.1 Type of financial risk...........................................................................................................................................................30
3.1.2 Whether to hedge...............................................................................................................................................................30
avaHedge efficiency & Basis Risk (futures and traded options)..................................................................................................31
3.1.3 Key products and definitions..............................................................................................................................................32
3.1.4 CR implications for each hedge type..................................................................................................................................33
3.2 Interest rate risk.............................................................................................................................................33
3.2.1 Interest rate futures (IRFs)..................................................................................................................................................33
3.2.2 Forward rate agreements (FRAs)........................................................................................................................................34
3.2.3 Interest rate options...........................................................................................................................................................35
3.2.3.1 OTC Options..................................................................................................................................................................35
3.2.3.2 Traded options.............................................................................................................................................................35
3.2.3.3 Caps, collars and floors (Interest & FX)........................................................................................................................36
3.2.4 Interest rate swaps (coupon swaps)...................................................................................................................................38
3.3 Foreign exchange rate risk..............................................................................................................................39
3.3.1 Forecasting exchange rates................................................................................................................................................39
3.3.2 Currency forward contracts................................................................................................................................................40
, 3.3.3 Currency futures.................................................................................................................................................................40
3.3.4 Foreign currency options....................................................................................................................................................41
3.3.4.1 OTC Currency options...................................................................................................................................................41
3.3.4.2 Traded currency options..............................................................................................................................................41
3.3.5 FX swaps..............................................................................................................................................................................42
3.3.6 Currency Swap....................................................................................................................................................................42
3.3.7 Money market hedge..........................................................................................................................................................43
3.4 Options Valuation...........................................................................................................................................44
3.5 Hedging – Audit Points...................................................................................................................................44
4 Business Valuation................................................................................................................................................45
4.1 General principles...........................................................................................................................................45
4.2 Valuations - EXAM TEMPLATE ANSWER..........................................................................................................46
4.3 Valuations – theory, assumptions/issues and use...........................................................................................47
4.4 Asset based methods......................................................................................................................................50
4.4.1 NAV.....................................................................................................................................................................................50
4.5 Income and earnings based methods..............................................................................................................51
4.5.1 DVM....................................................................................................................................................................................51
4.5.2 Discounted Earnings...........................................................................................................................................................52
4.5.3 P/E Multiple........................................................................................................................................................................53
4.5.4 EV/EBITDA Multiple............................................................................................................................................................54
4.5.5 FCF and FCFE.......................................................................................................................................................................56
4.5.6 APV......................................................................................................................................................................................57
4.5.7 EVA and MVA......................................................................................................................................................................60
4.5.8 SVA......................................................................................................................................................................................62
4.6 Valuations – specific scenarios........................................................................................................................63
4.6.1 Valuation – High Growth Start-up......................................................................................................................................63
4.6.2 Valuation – Loss Making Businesses...................................................................................................................................63
4.6.3 Valuation – Administration.................................................................................................................................................64
4.7 CAPM..............................................................................................................................................................64
4.8 Valuation of debt............................................................................................................................................65
4.9 Brand Valuation..............................................................................................................................................67
4.10 Additional Information for all valuations......................................................................................................68
5 Investment appraisal............................................................................................................................................69
5.1 All methods (inc. positives and negatives)......................................................................................................69
5.1.1 Bond yield calculation (alternative to IRR).........................................................................................................................70
5.1.2 Annualised rate of return....................................................................................................................................................70
5.1.3 MIRR Example.....................................................................................................................................................................70
5.1.4 Average Rate of Return.......................................................................................................................................................70
5.2 Narrative points and professional scepticism.................................................................................................71
5.3 Real options....................................................................................................................................................71
5.4 Sensitivity analysis..........................................................................................................................................71
5.5 Foreign currency NPV.....................................................................................................................................72
5.6 Breakeven Analysis.........................................................................................................................................74
6 Risk management.................................................................................................................................................76
, 6.1 Insurance........................................................................................................................................................76
6.2 Risk reviews - considerations..........................................................................................................................76
6.3 Examples of general risks................................................................................................................................77
7 Business plan........................................................................................................................................................78
8 Strategic choice....................................................................................................................................................79
8.1 Exam Focus (inc generic ideas)........................................................................................................................79
8.3 Growth options...............................................................................................................................................80
8.3.1 Organic growth...................................................................................................................................................................80
8.3.2 Acquisitions.........................................................................................................................................................................80
8.3.2.1 Benefits and risks.........................................................................................................................................................80
8.3.2.2 Financing an acquisition...............................................................................................................................................82
8.3.2.3 Financial statement impact..........................................................................................................................................84
8.3.2.4 Synergies......................................................................................................................................................................84
8.3.2.6 Assurance - Due Diligence............................................................................................................................................85
8.3.2.7 Specific scenarios.........................................................................................................................................................88
8.3.3 Joint development strategies.............................................................................................................................................89
8.3.4 Ansoff Matrix Ideas.............................................................................................................................................................91
8.4 Demergers and divestment.............................................................................................................................93
8.5 Overseas.........................................................................................................................................................96
8.5.1 Generic Overseas Expansion Risk Assessment...................................................................................................................96
8.5.2 Outsourcing.........................................................................................................................................................................97
8.5.3 Exporting Overseas.............................................................................................................................................................98
8.5.4 Overseas Operation............................................................................................................................................................99
8.5.6 Advantages and Disadvantages ways to expand overseas...............................................................................................101
8.6 Online sales strategy.....................................................................................................................................102
8.7 How to withdraw cash/ realise investment from the business.....................................................................102
8.8 Withdrawal from a Business - Director Considerations.................................................................................103
8.9 Problems associated with change of ownership...........................................................................................103
9 Strategic implementation...................................................................................................................................104
9.1 Business process reengineering (BPR)...........................................................................................................104
9.2 Operations Management..............................................................................................................................104
9.3 Customer relationship management (CRM)..................................................................................................104
9.4 Supply chain management............................................................................................................................105
9.4.1 Costs of Quality.................................................................................................................................................................105
9.5 Change management....................................................................................................................................106
9.6 Project Management....................................................................................................................................108
10 Information systems.........................................................................................................................................109
10.1 Exam focus..................................................................................................................................................109
10.2 Management Accounting Information........................................................................................................109
10.3 Integrated reporting...................................................................................................................................110
10.4 Big data.......................................................................................................................................................112
10.5 Information technology risks......................................................................................................................113
, 10.6 Outsourcing IT function..............................................................................................................................113
11 Human resource management (HRM)...............................................................................................................114
11.1 Generic HR issues and actions.....................................................................................................................115
11.2 HRM issues in an acquisition.......................................................................................................................115
11.3 Remuneration.............................................................................................................................................116
12 Data analysis....................................................................................................................................................119
12.1 Key Ratios...................................................................................................................................................120
13 Performance Measurement..............................................................................................................................124
13.1 BS and Beyond Budgeting Model................................................................................................................124
13.2 CSFs............................................................................................................................................................125
13.3 Benchmarking.............................................................................................................................................125
13.4 KPIs.............................................................................................................................................................125
14 Costing..............................................................................................................................................................127
14.1 Marginal costing.........................................................................................................................................127
14.2 Absorption costing......................................................................................................................................127
14.3 Activity based costing (ABC)........................................................................................................................128
15 Corporate Governance......................................................................................................................................131
15.1 The UK Corporate Governance Code...........................................................................................................131
15.2 Board Structures and Make up...................................................................................................................133
15.3 Shareholding Percentages - Narrative Comments.......................................................................................134
16 Assurance.........................................................................................................................................................135
16.1 Review Engagements (ISRE 2400)...............................................................................................................135
16.2 Assurance on Business Plans and Forecasts (ISAE 3400)..............................................................................136
16.3 Assurance on Service Providers (ISAE 3402)................................................................................................138
16.4 Assurance on Internal Controls (ISAE 3410)................................................................................................138
16.5 Agreed Upon Procedures (ISRS 4400)..........................................................................................................139
16.6 Compilation engagements (ISRS 4410)........................................................................................................139
16.7 Forensic auditing.........................................................................................................................................140
16.8 Internal audit..............................................................................................................................................142
18 Ethics................................................................................................................................................................144
18.1 Exam Focus.................................................................................................................................................144
18.2 Corporate Social Responsibility (CSR).........................................................................................................145
18.4 Sustainability..............................................................................................................................................146
18.5 CSR vs Sustainability...................................................................................................................................147
18.6 Independence - Advisory Manager joining a client.....................................................................................147
18.7 Social Audit.................................................................................................................................................147
