20 DIRECTORY

teCHniCAl
how to pass
Access ACCAs How to pass website for a range of support to help with your studies

22 changes to the cat Qualification with the launch of foundations in accountancy

Relevant to CAt Qualification students

bribery act 2010

changes to the cat and acca Knowledge module exams with the launch of accas diploma in accounting and business
Relevant to all students

Relevant to ACCA Qualification Paper F4 (enG), (GlO), (SCt)

analysing the suitability of financing alternatives

process costing

Relevant to ACCA Qualification Paper F9

Foundations in Accountancy papers FMA and MA2 and ACCA Qualification Paper F2

24 exam support

Relevant to all ACCA Qualification students

technical archive on the acca website

Access the technical article archive at www. accaglobal.com/students/student_accountant/archive/

22

technical

teChniCal artiCles
15 June 2011
Changes to the Cat and aCCa Knowledge module exams with the launCh of aCCas diploma in aCCounting and Business
Relevant to all students Gareth Owen, ACCA qualifications development manager, discusses the new ACCA Diploma in Accounting and Business as part of the Foundations in Accountancy suite of qualifications, effective from December 2011. Relevant to acca qualiFication PaPeR F4 (enG), (Glo), (sct) Focusing on the Bribery Act 2010, which will be examinable from June 2012, this article considers the likely key role accountants will play in reviewing organisational risks relating to bribery, and implementing adequate procedures and controls. access ResouRces Relevant to acca qualiFication PaPeR F4 www.accaglobal.com/students/acca/ exams/f4/

BriBery aCt 2010

Relevant to cat qualiFication students This article outlines the new Introductory and Intermediate Certificates in Financial and Management Accounting as part of the Foundations in Accountancy suite of qualifications, effective from December 2011.

Changes to the Cat QualifiCation with the launCh of foundations in aCCountanCy

proCess Costing

Relevant to Foundations in accountancy PaPeRs FMa and Ma2 and acca qualiFication PaPeR F2 This article looks at the process costing method, which is used mainly in manufacturing where units are mass-produced through one or more processes. access ResouRces Relevant to acca qualiFication PaPeR F2 www.accaglobal.com/students/acca/ exams/f2/

aCCa QualifiCation teChniCal artiCles

analysing the suitaBility of finanCing alternatives

PaPeR F1 www.accaglobal.com/students/acca/ exams/f1/technical_articles/ PaPeR F2 www.accaglobal.com/students/acca/ exams/f2/technical_articles/ PaPeR F3 www.accaglobal.com/students/acca/ exams/f3/technical_articles/ PaPeR F4 www.accaglobal.com/students/acca/ exams/f4/technical_articles/ PaPeR F5 www.accaglobal.com/students/acca/ exams/f5/technical_articles/ PaPeR F6 www.accaglobal.com/students/acca/ exams/f6/technical_articles/

Relevant to acca qualiFication PaPeR F9 Many students have struggled with this key area of the Paper F9 syllabus. In this article, William Parrott suggests an approach for students to apply before finishing with a worked example to demonstrate the technique discussed. access ResouRces Relevant to acca qualiFication PaPeR F9 www.accaglobal.com/students/acca/ exams/f9/

student accountant issue 12/2011

23

PaPeR F7 www.accaglobal.com/students/acca/ exams/f7/technical_articles/ PaPeR F8 www.accaglobal.com/students/acca/ exams/f8/technical_articles/ PaPeR F9 www.accaglobal.com/students/acca/ exams/f9/technical_articles/ PaPeR P1 www.accaglobal.com/students/acca/ exams/p1/technical_articles/ PaPeR P2 www.accaglobal.com/students/acca/ exams/p2/technical_articles/ PaPeR P3 www.accaglobal.com/students/acca/ exams/p3/technical_articles/ PaPeR P4 www.accaglobal.com/students/acca/ exams/p4/technical_articles/ PaPeR P5 www.accaglobal.com/students/acca/ exams/p5/technical_articles/ PaPeR P6 www.accaglobal.com/students/acca/ exams/p6/technical_articles/ PaPeR P7 www.accaglobal.com/students/acca/ exams/p7/technical_articles/

Conversion arrangements for existing Cat students

Conversion of students from the existing CAT Qualification to Foundations in Accountancy will be awarded on a paper-for-paper basis. The conversion arrangements will ensure no student is disadvantaged in the transition from the current to the revised syllabus. Students who have not completed the current CAT exams by June 2011 will be automatically transferred to Foundations in Accountancy and awarded converted exemptions or passes for all papers they have previously been given exemption from or passed.

learn more about accas suite of entry-level qualifications Foundations in accountancy at www.accaglobal.com/en/ qualifications

foundations in aCCountanCy

study resourCes

ACCA is committed to providing support to all students. Examiner reports, examiner interviews and a wide variety of technical articles are available in a range of different media on the ACCA website at www.accaglobal.com/students/ Access the Student Accountant technical article archive at www.accaglobal.com/students/ student_accountant/archive/

aCCa online study resourCes

www.accaglobal.com/ students/acca www.accaglobal. com/students/cat

how to pass

www.accaglobal. com/students/ pass

24

tEchnical

exam support
ACCA is committed to providing support to all its students. As part of this support, a range of materials in a variety of media to reach as many students as possible is available specifically to address the ACCA Qualification exams. Information from ACCAs examiners including examiner reports, examiner interviews and a wide variety of technical articles are available in a range of different media on the ACCA website. The two sets of examiner interviews are available on www.accaglobal.com and are extremely valuable resources. Each set of interviews can help you prepare for your exams in different ways and, when used in conjunction with the paper resources available, they can make a big difference to your studies. ExaminErs approach intErviEws The examiners approach interviews are very useful when you are undertaking a particular paper for the first time, giving you a real insight into what examiners are looking for in terms of exam performance. They cover the main themes of each paper and give information on the style of the exams and how they are structured. They also advise on exam technique, with tips on how to succeed and potential pitfalls to avoid. The examiners approach interviews complement the examiners approach articles, which were written to give guidance on how to tackle each exam paper. These resources contain similar information but the difference in delivery method can be a useful advantage when studying and may give you a better chance of absorbing

ExaminErs approach and ExaminErs analysis intErviEws

acca is committEd to providing support to all its studEnts. ExaminEr rEports, ExaminEr intErviEws, Exam notEs (which providE guidancE on ExaminablE matErial including rElEvant accounting and auditing documEnts for papErs f3, f7 and p2) and a widE variEty of tEchnical articlEs arE availablE in a rangE of diffErEnt mEdia on thE acca wEbsitE at www.accaglobal.com/studEnts/acca/Exams
the examiners advice. The examiners approach interviews also contain useful links to other relevant resources for your exam. ExaminErs analysis intErviEws The examiners analysis interviews build on the examiners approach interviews. They highlight where students are performing well, where students are performing less well, and give advice on how students can improve performance in problem areas. Its never too soon to start listening to the examiners analysis interviews, but they would probably be most useful once you have covered the syllabus and are starting to think about the detail of a paper and how to apply what you have learned in the exam. They are designed to give guidance around which areas of the syllabus students have been struggling with in recent exam sittings and how students can tackle the difficulties others have been having. The analysis interviews are closely related to the examiners reports, which are published after each exam session. They bring together the examiners reports from the first three sessions of the ACCA Qualification, illustrating that some mistakes are being repeated consistently and highlighting critical areas of the syllabus to focus on. Remember, this does not mean one of those areas will necessarily be examinable in the next session. The ACCA website also now features new examiner interviews recently recorded at this years Learning Providers Conference. It is still very important to make use of the individual examiners reports available in Student Accountant and on the ACCA website, as well as listening to the analysis interviews. After you have worked through a practice question, refer to the relevant examiners report and you will find an analysis of that question, what the examiner is looking for in a good answer, typical answers given by students, why they might not be relevant and so on. All of these resources and others such as the Syllabus and Study Guide, past papers, examinable documents and technical articles can be accessed at www.accaglobal.com/ students/acca/exams/

RELEVANT TO ALL STUDENTS

Changes to the CAT and ACCA Knowledge module exams with the launch of ACCAs Diploma in Accounting and Business
With effect from December 2011, the ACCA Diploma in Accounting and Business will be launched as part of the new Foundations in Accountancy suite of qualifications. This new Diploma will provide a flexible open entry route into the Skills module of the main ACCA Qualification for candidates who do not start their ACCA Qualification studies with the usual entry requirements. The Diploma in Accounting and Business is awarded on the completion of the exams: Accountant in Business (FAB), Management Accounting (FMA) and Financial Accounting (FFA), and the Foundations in Professionalism module. The Diploma will also be available to ACCA registered students who register directly for and pass the Fundamentals Knowledge module papers: F1, Accountant in Business; F2, Management Accounting; and F3, Financial Accounting; and who successfully complete the Foundations in Professionalism module. Who is the Diploma aimed at? The Diploma is suitable for those aspiring to work, or already working, in the following types of roles:

basic bookkeeping trainee accountant in a commercial organisation or accounting practice accounts clerk in the public sector.

The Diploma in Accounting and Business is broadly equivalent to HND level/ the first year of a degree. How is the Diploma structured? The Diploma in Accounting and Business consists of three exams: FAB, Accountant in Business FMA, Management Accounting FFA, Financial Accounting These three exams will also be the same exams as: Paper F1, Accountant in Business Paper F2, Management Accounting

2011 ACCA

2 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Paper F3, Financial Accounting This is illustrated below in Figure 1: Figure 1: Alternative routes to the ACCA Diploma in Accounting and Business

Who is eligible to take the new Diploma? 1. Existing Certified Accounting Technician (CAT) students who take at least one of Papers FAB, FMA and FFA from December 2011. 2. Existing MSER students who take at least one of Papers F1/FAB, F2/FMA or F3/FFA from December 2011. 3. FIA registered students who take at least one of Papers FAB, FMA and FFA from December 2011. 4. ACCA registered students who take at least one of Papers F1, F2, F3 from December 2011. To be awarded the Diploma, all three of Papers FAB (F1), FMA (F2), and FFA (F3) must be passed or exempted, with at least one of the three papers having been taken and passed from December 2011 onwards. In addition, the Foundations in Professionalism module must also be successfully completed before the Diploma can be awarded. The first Diploma certificates will be awarded from February 2012.

3 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Syllabus and exam structure changes for existing students The new syllabuses for the FIA Diploma in Accounting and Business are being introduced to reflect updates to national occupational standards in technicianlevel curricula and to take into account employer needs as obtained from consultation surveys with key stakeholders. The new syllabuses are also being re-aligned to more effectively underpin studies at higher levels within the ACCA Qualification. In addition to syllabus changes, there are also exam structure changes that students need to be aware of. Which students will be affected? 1. Existing CAT students who have taken Paper 5, Managing Systems and People; Paper 6, Drafting Accounting Statements; and Paper 7, Planning Control and Performance Management; and those who will be taking FAB, FFA and FMA, respectively, as the equivalent exams from December 2011. 2. Existing and newly registered ACCA students who are taking the existing Paper F1, F2 and F3 exams during the transitional period (between February and November 2011) and who will be taking the new Paper F1, F2 and F3 exams from December 2011 onwards. 3. Existing MSER students who take Papers MMA and/or MFA before August 2011 or Papers F1/TT5, F2/TT7 and F3/TT6 after August 2011, but who will be taking the new Paper F1/FAB, F2/FMA and F3/FFA exams from December 2011 onwards. 4. All FIA students who can take the existing Papers TT5 (FAB), TT7 (FMA) and TT6 (FFA) exams during the transitional period, which follow the syllabi for the existing Paper F1, F2 and F3 exams respectively (between February and November 2011), and who will be taking new FAB, FMA and FFA, respectively, as the equivalent exams from December 2011 onwards. What changes do the above students need to be aware of? The specific syllabus and exam structure changes explained in this article cover four areas: 1. Syllabus areas no longer examined from the existing CAT equivalent exams Papers 5, 6 and 7. 2. New syllabus areas and changes in the exam structures in the new FAB, FMA and FFA exams as compared with the CAT equivalent exams in (1) above.

4 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 3. Syllabus areas no longer examined from the existing Fundamentals Knowledge exams Papers F1, F2 (MMA) and F3 (MFA) 4. New syllabus areas and changes in the exam structures in the new Paper F1, F2 and F3 exams as compared with the ACCA and MSER equivalent exams in (3) above. Note: All these tables are to assist students who may have to retake an exam, or for tutors preparing to teach towards the new exam. However, in all cases, it is important to refer to the Study Guide for full details Table 1: Syllabus areas no longer examined in FAB, FMA and FFA, which are currently examined in CAT equivalent exam syllabuses Papers 5, 6 and 7
Paper 5 syllabus areas removed* None Paper 6 syllabus areas removed* 1a) Discuss the shortcomings of historical cost accounting and how they might be overcome 2a) Preparation of partnership financial statements, admission and dissolution of a partnership Paper 7 syllabus areas removed* 6d) Alternative approaches to budgeting

9a) Session 27 pricing and demand ALL

9b) Session 28a(i) and (ii) ie. the calculations element have been removed 9c) Session 28d(i) Discuss the link between target costing and pricing 9d) Session 28 d(iii) Discuss the role of value engineering in target costing
* The references given are to the Syllabus and study sessions within these syllabuses

5 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Table 2: Exam structure changes between CAT Advanced level and the new Diploma papers:
Paper 5, Managing Systems and People Paper 6, Drafting Financial Statements Paper 7, Planning Control and Performance Management Old exam structure: Section A: 10 x 2 mark MCQ questions Section B: 4 x 20 mark questions FMA, Management Accounting New exam structure*: 50 x 2-mark objective test questions

Old exam structure: Section A: 12 x 2 mark MCQ questions Section B: 4 x 14 mark and 1 x 20 mark questions FAB, Accountant in Business New exam structure*: 50 x 2-mark objective test questions

Old exam structure: Section A: 10 x 2 mark MCQ questions Section B: One x 40 mark and 2 x 20 mark questions FFA, Financial Accounting New exam structure*: 50 x 2-mark objective test questions

* The new exam structure will apply until students become accustomed to the new syllabus. It is planned to introduce longer type objective test questions to the new papers at a later stage and adequate notice of any new exam structure changes will be given.

6 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Table 3: Syllabus areas no longer examined in the new Paper F1, F2 and F3 exams, which are examined in the existing Fundamentals Knowledge module exam syllabuses Papers F1, F2 and F3.
Paper F1, Accountant in Business syllabus areas removed** A5d) Identify different sources of internal and external information A5e) Describe the main features of information systems A7b) Identify influences that determine whether behaviour and decisions are ethical or unethical Paper F2, Management Accounting syllabus areas removed** C1 Dealing with uncertainty ALL F1 Cost volume profit analysis ALL Paper F3, Financial Accounting syllabus areas removed** B2 Alternative bases used in the preparation of financial information C3 Accounting systems and the impact of information technology on financial reporting F4 Accounting for partnerships. The old syllabus did not cover detailed accounting for admissions and dissolution, only simple allocation of profits

C1a) and b) History and role of accounting in business F2a) Explain the purposes of personal development plans F3a) Define communications

F2b) Calculate relevant costs for materials, labour and overheads and c) Calculate the relevant costs associated with non current assets F3 Limiting factors ALL except: 3a) Identify single limiting factor

** The syllabus references refer to the existing study guides

Table 4: Exam structure changes between existing Papers F1, F2 and F3 and the new Paper F1, F2 and F3 exams:
Paper F1, Accountant in Business Old exam structure: 40 x 2 and 10 x 1 mark MCQ questions F1/FAB, Accountant in Business New exam structure*: 50 x 2 mark objective test questions Paper F2, Management Accounting Old exam structure: 40 x 2 and 10 x 1 mark MCQ questions F2/FMA, Management Accounting New exam structure*: 50 x 2 mark objective test questions Paper F3, Financial Accounting Old exam structure: 40 x 2 and 10 x 1 mark MCQ questions F3/FFA, Financial Accounting New exam structure*: 50 x 2 mark objective test questions

7 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Table 5: New syllabus areas examinable in the FAB, FMA and FFA syllabuses as compared to Papers 5, 6 and 7
FAB new syllabus areas added as compared to the Paper 5 syllabus A4 Macroeconomics in more detail FFA new syllabus areas added as compared to the Paper 6 syllabus A5 Duties and responsibilities of those charged with governance FMA new syllabus areas added as compared to the Paper 7 syllabus A3 Cost classification all except: h) high low analysis and; i) explain the structure of linear functions and equations B1 Accounting for material, labour and overheads ALL B3 Cost accounting methods ALL C5 Capital budgeting and discounted cash flow ALL

A5 Micro economics ALL A8 Environmental factors ALL A9 c) Porters five forces model B4 Committees in the business organisation ALL C4a) Explain the various purposes for which the following financial information is required: (i) IS (ii) SOCF (iii) SOFP b) Describe the main purposes of the following types of management accounting reports: i) Cost schedules ii) Budgets iii) Variance reports E3 Competency frameworks ALL F1 Fundamental principles of ethical behaviour ALL F3 Corporate codes of ethics ALL F4 Ethical conflicts and dilemmas ALL

E1 Prepare a trial balance from ledger accounts

8 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Table 6: New syllabus areas examinable in the new Papers F1, F2, and F3 syllabuses as compared to the existing Papers F1, F2 and F3
F1 new syllabus areas added as compared to the old F1 syllabus A1 Purpose and types of business organisation ALL A5 Micro economics ALL F3 new syllabus areas added as compared to the old F3 syllabus A5 Duties and responsibilities of those charged with governance F3 Disclosure notes (explain purpose, draft non-current asset, provision, events after the reporting period and inventory note) G1 Accounting for subsidiaries G2 Awareness of what associates are and equity accounting H1 Importance and purpose of analysis of financial statements F2 new syllabus areas added as compared to the old F2 syllabus A2 Sources of data ALL

A4 Presenting information ALL

A8 Environmental factors ALL A9c) Porters five forces model C4a) Explain the various purposes for which the following financial information is required: (i) IS (ii) SOCF (iii) SOFP b) Describe the main purposes of the following types of management accounting reports: i) Cost schedules ii) Budgets iii) Variance reports E3 Competency frameworks ALL F1 Fundamental principles of ethical behaviour ALL

B4 Alternative costing principles ALL C1 i) Time series analysis which are included in j) k), l), m) and n) C2b) Prepare cash budget and e) Prepare master budgets

H2 Ratios

C5 Capital budgeting and discounted cash flow ALL C6 e) Explain concept of controllable and uncontrollable costs f) Prepare control reports suitable for presentation to management C7 Behavioural aspects of budgeting ALL Performance measurement overview ALL Performance measurement application ALL Cost reduction and value enhancement ALL Monitoring performance and reporting ALL

H3 Analysis of financial statements

F3 Corporate codes of ethics ALL F4 Ethical conflicts and dilemmas ALL

9 CHANGES TO THE CAT AND ACCA KNOWLEDGE MODULE EXAMS WITH THE LAUNCH OF ACCAS DIPLOMA IN ACCOUNTING AND BUSINESS JUNE 2011 Transitional arrangements The changes referred to in this article apply with effect from December 2011. Computer-based exams (CBE) and paper exams following new syllabuses and structures will be available from December 2011. Up until December 2011, existing CAT students can take the CBE versions of the F1 (TT5), F2 (TT7) and F3 (TT6) exams from February until November. Existing ACCA or MSER students may also take the CBE versions of the existing syllabuses until November. Conversion arrangements for existing CAT and MSER students In August 2011, when results and conversion notices are issued, those students who have passed any or all of Paper 5 (F1), Paper 6 (F3/MFA*) and Paper 7 (F2/MMA*) exams including the computer-based equivalents of TT5, TT6 and TT7 will be given like-for-like exemptions when they convert to the new Foundations in Accountancy register. *This includes existing MSER students. However, it is most important for all students to be fully aware that if they take any CBE exams TT5, TT6 and/or TT7 between August and November, they will be examined on the existing syllabuses of Papers F1 to F3, so the changes referred to in this article will not apply to any exams sat before December 2011.

RELEVANT TO FOUNDATIONS IN ACCOUNTANCY PAPER FMA MANAGEMENT ACCOUNTING

Process costing
Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes. Examples of this include the manufacture of erasers, chemicals or processed food. In process costing it is the process that is costed (unlike job costing where each job is costed separately). The method used is to take the total cost of the process and average it over the units of production. Cost per unit = Cost of inputs Expected output in units

Important terms to understand In a manufacturing process the number of units of output may not necessarily be the same as the number of units of inputs. There may be a loss. Normal loss This is the term used to describe normal expected wastage under usual operating conditions. This may be due to reasons such as evaporation, testing or rejects. Abnormal loss This is when a loss occurs over and above the normal expected loss. This may be due to reasons such as faulty machinery or errors by labourers. Abnormal gain This occurs when the actual loss is lower than the normal loss. This could, for example, be due to greater efficiency from newly-purchased machinery. Work in progress (WIP) This is the term used to describe units that are not yet complete at the end of the period. Opening WIP is the number of incomplete units at the start of a process and closing WIP is the number at the end of the process. Scrap value Sometimes the outcome of a loss can be sold for a small value. For example, in the production of screws there may be a loss such as metal wastage. This may be sold to a scrap merchant for a fee.
2011 ACCA

2 PROCESS COSTING JUNE 2011 Equivalent units This refers to a conversion of part-completed units into an equivalent number of wholly-completed units. For example, if 1,000 cars are 40% complete then the equivalent number of completed cars would be 1,000 x 40% = 400 cars. Note: If 1,000 cars are 60% complete on the painting, but 40% complete on the testing, then equivalent units will need to be established for each type of cost. (See numerical example later.) How to approach process accounting questions Step 1 Draw up a T account for the process account. (There may be more than one process, but start with the first one initially.) Fill in the information given in the question.
Units X $ X X X X X Units X X X X $ X X X X

Process account
Opening WIP Materials Labour Overheads Abnormal gain Normal loss Transfer to Process 2 or Finished goods Abnormal loss Closing WIP

Step 2 Step 3 Step 4 Step 5 Step 6

Calculate the normal loss in units and enter on to the Process account. (The value will be zero unless there is a scrap value see Step 4). Calculate the abnormal loss or gain (there wont be both). Enter the figure on to the Process account and open a T account for the abnormal loss or gain. Calculate the scrap value (if any) and enter it on to the Process account. Open a T account for the scrap and debit it with the scrap value. Calculate the equivalent units and cost per unit. Repeat the above if there is a second process.

Note: Although this proforma includes both losses and WIP, the Paper F2/FMA syllabus specifically excludes situations where both occur in the same process. Therefore, dont expect to have to complete all of the steps in the questions.

3 PROCESS COSTING JUNE 2011 Normal loss example Mr Beans chocolate Wiggly bars pass through two processes. The data for the month just ended are:
Process 1 Ingredients Labour and overhead $ 5,000 6,000 kg 4,000 Process 2 Packaging Labour and overhead $ 10,000 9,000

Mr Bean allows the staff to eat 5% of the chocolate as they work on Process 1. There was no work in progress at the month end. Prepare the two process accounts and calculate the cost per kg. Process 1 account
Ingredients Labour and overheads kg 4,000 4,000 $ 5,000 6,000 11,000 Normal loss (W1) Transfer to Process 2 (W2) kg 200 3,800 4,000 11,000 $ 11,000

Q = figure taken straight from the information given in the question. Workings (1) The staff normally eat 5% of the chocolate, so the normal loss is 4,000 x 5% = 200kg There is no work in progress or scrap value or abnormal losses or gains, so we can now balance the account to obtain the amounts transferred to Process 2. (2) Number of kg transferred = kg input less normal loss = 4,000 200 = 3,800kg

4 PROCESS COSTING JUNE 2011 Process 2 account

Transfer from Process 1 (above) Packaging Labour and overheads kg 3,800 $ 11,000 10,000 9,000 3,800 Cost per kg = 30,000 3,800 30,000 Finished goods (balancing figure) kg 3,800 $ 30,000

Total costs = $30,000 = $7.89 per kg Number of expected kg 3,800

Abnormal gain example There is a heatwave and staff have eaten less chocolate. At the end of Process 1, 3,810 units are transferred to Process 2. Process 1 account
Ingredients Labour and overheads Abnormal gain (W1+2) kg 4,000 10 4,010 $ 5,000 6,000 29 11,029 4,010 11,029 Normal loss Transfer to Process 2 (W2) kg 200 3,810 $ 11,029

Workings (1) (2) As the T account should balance, the abnormal gain = 4,010kg 4,000kg = 10kg Cost per kg = Costs incurred = 11,000 = $2.89 Expected output in kgs 4,000 x 95%

Cost of units transferred to Process 2 = $2.89 3,810 = $11,029 (using $2.894736842 to avoid rounding differences). Cost of abnormal gain = $2.89 10 = $29. [Remember to open an abnormal gain T account and credit it with $29]

5 PROCESS COSTING JUNE 2011 Process 2 account

Transfer from Process 1 (above) Packaging Labour and overheads kg 3,810 $ 11,029 10,000 9,000 3,810 30,029 3,810 30,029 Finished goods (balancing figure) kg 3,810 $ 30,029

Cost per kg = $30,029 = $7.88/kg 3,810

Scrap value example Mr Bean can no longer afford to give his staff 5% of the bars. He decides to offer the bars to his staff at a discount. They pay 40c for every kg that they eat. As a result of this, there is another abnormal gain of 10kg, so 3,810 units are transferred to Process 2. Process 1 account
Ingredients Labour and overheads Abnormal gain (11,000 80) / 4,000 kg 4,000 $ 5,000 6,000 27 11,027 4,010 11,027 Normal loss (W1) Transfer to Process 2 kg 200 3,810 $ 80 10,947

10 4,010

Workings Here we need to calculate the scrap value. The value of units transferred to Process 2 is a balancing figure. (1) Number of kg of normal loss scrap amount per kg = 200 [Dr Scrap A/C $80, Cr Process A/C $80] 0.4 = $80

Be careful here! The scrap value also affects the abnormal gain or loss accounts. Since the staff didnt eat the number of bars that they were entitled to, the scrap value (the 40c per bar) is lower than 200 40c. In fact, it is 10 40c = $4 lower (the abnormal gain). This needs to be reflected in the scrap account and the abnormal gain account.

6 PROCESS COSTING JUNE 2011 Scrap account

Process 1 80 80 Abnormal gain Bank 4 76 80

Abnormal gain A/C

Scrap A/C Income statement 4 23 27 Process 1 27 27

Process 2 account
Transfer from Process 1 (above) Packaging Labour and overheads kg 3,810 $ 10,947 10,000 9,000 3,810 29,947 3,810 29,947 Finished goods (balancing figure) kg 3,810 $ 29,947

Cost per kg = $29,947 = 7.86/kg 3,810

Work in progress example Assuming at the month end there are now part-completed bars (work-inprogress). Assuming also that he stopped charging staff for the bars that they had eaten. The data for Process 2 was as follows: Opening WIP Input $235 Materials (Ingredients) $520 Labour and overheads $8,405 Materials (Packaging) $6,200 Labour and overheads 100% 60% 100kgs 3,500kgs 3,100kgs 100% 20% 500kgs

Transferred to finished goods Closing WIP Materials Labour and overheads

For questions that include WIP, we need to calculate equivalent units. First, we need to choose the method of valuing WIP. In an exam, use the first in first out (FIFO) method if the percentage completion of each element of opening WIP is given. Use the weighted average (WA) method if the value of each element of opening WIP is given. [Note that the two methods give different valuations for the closing WIP.]

7 PROCESS COSTING JUNE 2011 In the weighted average method, no distinction is made between units of opening inventory and new units introduced to the process during the accounting period. Step 1 Prepare a statement of equivalent units. Note that opening inventory units count as a full equivalent unit of production when the weighted average cost system is applied. Kilograms
Weighted average Material kg 100 3,000 Lab and O/hd kg 100 3,000 FIFO Material kg Opening WIP (100 x 40%) Started and completed (3,100 less op WIP) Closing WIP Equivalent units 3,000 Lab and O/hd kg 40 3,000

Opening WIP Started and completed (3,100 less op WIP) Closing WIP 500 100% 500 20% Equivalent units

500 3,600

100 3,200

500 3,500

100 3,140

Step 2 Prepare a statement of costs per equivalent unit Costs

Weighted average Material $ 235 8,405 8,640 Cost per equivalent unit 8,640/3,600 = $2.40 Total cost per kg = $4.50 Lab and O/hd $ 520 6,200 6,720 6,720/3,200 = $2.10 Cost per equivalent unit FIFO Material $ Input 8,405 8,405 8,405/3,500 = $2.40 Total cost per kg = $4.375 Lab and O/hd $ 6,200 6,200 6,200/3,140 = $1.975

Op WIP Input

8 PROCESS COSTING JUNE 2011 Step 3 Prepare a statement of evaluation

Weighted average Completed kgs 3,100 x $4.50 $13,950 FIFO Op WIP cost + Lab + O/h to finish op WIP: 755 + ($1.975 x 100 x 40%) Current production $4.375 x 3,000 Closing WIP 500 x 20% x $2.10 500 x $2.40 Closing WIP 500 x 20% x $1.975 500 x $2.40

$834 $13,128*

$1,410 $15,360

$1,398 $15,360

* Slight difference due to rounding $4.375 Step 4 Prepare the Process 2 accounts Weighted average Process 2 account
Opening WIP Materials Labour and overheads kg 100 3,500 $ 755 8,405 6,200 15,360

3,000 = $13,125

Completed output (3,100 x $4.50) Closing WIP

kg 3,100 500

$ 13,950 1,410

3,600

3,600 15,360

FIFO Process 2 account

Opening WIP Materials Labour and overheads kg 100 3,500 ______ 3,600 $ 755 8,405 6,200 15,360 Completed output (834 + 13,128) Closing WIP kg 3,100 500 3,600 15,360 Heather Freer is management accounting technical author at BPP Learning Media $ 13,962 1,398

RELEVANT TO ACCA QUALIFICATION PAPER F4 (ENG), (GLO), (SCT)

Bribery Act
The Bribery Act 2010 was passed in April 2010 and will be examinable from June 2012. The Act repeals old UK bribery laws and is aimed at dealing with the risk of bribery and corruption, which undermines corporate governance, the rule of law and damages economic development. Bribery offences There are four offences of bribery under the Act: s.1 Offences of bribing another person It is an offence to offer a financial or other advantage to another person to perform improperly a relevant function or activity, or to reward a person for the improper performance of such a function or activity. s.2 Offences relating to being bribed It is an offence where a person receives or accepts a financial or other advantage to perform a relevant function or activity improperly. Relevant function or activity includes any function of a public nature, any activity connected with a business, any activity performed in the course of a persons employment, and any activity performed by or on behalf of a body of persons. The activity may be performed in a country outside the UK. s.6 Bribery of foreign public officials It is an offence directly, or though a third party, to offer a financial or other advantage to a foreign public official (FPO) to influence them in their capacity as a FPO, and to obtain relevant business, or an advantage in the conduct of business. FPO means an individual who holds a legislative, administrative or judicial position of any kind outside the UK, or who exercises a public function outside the UK, or is an official or agent of a public international organisation. s.7 Failure of commercial organisations to prevent bribery It is an offence for a commercial organisation (a UK company or partnership) if a person associated with it bribes another person intending to obtain or retain business, or to obtain or retain an advantage in the conduct of the business for the organisation. This could take place outside the UK. S.8 defines associated persons as someone who performs services for or on behalf of the commercial organisation, and, therefore, could be an employee, agent or subsidiary.

2011 ACCA

2 BRIBERY ACT JUNE 2011 An organisation does, however, have a defence under s.7 if it can prove it had in place adequate procedures designed to prevent bribery. S.9 requires the Secretary of State to publish guidance about adequate procedures. The guidance, which was published in March 2011, states that what counts as adequate will depend on the bribery risks faced by an organisation, and the nature, size and complexity of the business. Further, if there is no risk of bribery, then an organisation will not require any procedures to prevent bribery. The guidance is not prescriptive and is based around six guiding principles. The six principles 1. Proportionate procedures The procedures taken by an organisation should be proportionate to the risks it faces and the nature, scale and complexity of its activities. A small organisation would require different procedures to a large multinational organisation. 2. Top-level commitment The top-level management should be committed to prevent bribery and foster a culture within the organisation in which bribery is unacceptable. 3. Risk assessment Organisations should assess the nature and extent of its exposure to risks of bribery, including potential external and internal risks of bribery. For example, some industries are considered higher risk than others, such as the extractive industries; some overseas markets may be higher risk where there is an absence of anti-bribery legislation. 4. Due diligence The organisation should apply due diligence procedures in respect of persons who perform services for or on behalf of the organisation in order to mitigate bribery risks. 5. Communication The organisation should ensure its bribery prevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training, proportionate to the risks it faces. Communication and training enhances awareness and helps to deter bribery. 6. Monitoring and review

3 BRIBERY ACT JUNE 2011 The organisation should monitor and review procedures designed to prevent bribery and make improvements where necessary. The risks an organisation faces may change and, therefore, an organisation should evaluate the effectiveness of its anti-bribery procedures and adapt where necessary. The question of whether an organisation had adequate procedures in place to prevent bribery is a matter that will be determined by the courts by taking into account the circumstances of the case. The onus will, however, be on the organisation to prove it had adequate procedures in place. It should be noted that genuine hospitality that is reasonable and proportionate is not prohibited by the Act. Penalties An individual found guilty is liable to imprisonment for a maximum of 10 years. (This has been increased from seven years.) An organisation found guilty is liable to an unlimited fine. The obvious further damage to the organisation is reputational damage and the consequences of this, as well as potential civil claims against directors for the failure to maintain adequate procedures. Conclusion The Bribery Act 2010 aims to combat bribery and encourage free and fair competition. It replaces outdated and criticised laws on bribery. All of the offences have extra-territorial application. Of most significance is the introduction of a new offence against commercial organisations that fail to prevent a bribe being paid on their behalf, subject to the statutory defence. Organisations will be responsible for putting adequate procedures in place to prevent bribery; the core principle behind these being proportionality. It is likely accountants will be key to the organisation reviewing risks relating to bribery and implementing adequate procedures and controls. Sally McQueen is ACCA examinations content manager

RELEVANT TO ACCA QUALIFICATION PAPER F9

Analysing the suitability of financing alternatives

The requirement to analyse suitable financing alternatives for a company has been common in Paper F9 over the years. Indeed, it was examined again in December 2010 and will, I am sure, be examined again in the future. This is a key area in the Paper F9 syllabus and the requirement can be worth a significant amount of marks for example, 15 marks in Question 2 of the December 2010 exam. Unfortunately, many students struggle with questions of this nature and do not seem to know how to produce a good answer. This article will suggest an approach that students could use and will then finish with a worked example to demonstrate the technique discussed. Financial performance and position When considering the source of finance to be used by a company, the recent financial performance, the current financial position and the expected future financial performance of the company needs to be taken into account. Within an exam question, the ability to do this will be restricted by the information available. In some questions, details of recent performance and the current situation may be provided, while in other questions the current situation and forecasts may be provided. Evaluating financial performance Whether you are evaluating recent or forecast financial performance, key areas to consider include the growth in turnover, the growth in operating profit, the growth in profit after or before tax and the movement in profit margins. Return on capital employed and return on equity could be calculated. A key point for students to remember is that they only have limited time and it is better to calculate a few key ratios and then move on and complete the question than it is to calculate all possible ratios and fail to satisfy the requirement. Evaluating the current financial position The key consideration when evaluating the current financial position is to establish the financial risk of the company. Hence, the key ratios to calculate are the financial gearing, which shows the financial risk using data from the statement of financial position and interest cover, which shows the financial risk using data from the income statement. Equally, the split between short and long-term financing, and the reliance of the company on overdraft finance, should also be considered.

2011 ACCA

2 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 When evaluating financial performance and financial position, due consideration should be given to any comparative sector data provided. Indeed, if no such data is provided, I would recommend that you state in your answer that you would want to consider such comparative data. This is what you would do in real life and stating it shows that you are aware of this. If the examiner has not provided such data, it is simply because he is constrained by the need to examine many topics in just three hours. Recommendation of a suitable financing method When recommending a financing method, consideration should be given to a number of factors. These factors are key to justifying your choice of method and the examiner has in the past asked students to discuss these factors in an exam question. The factors include: Cost Debt finance is cheaper than equity finance and so if the company has the capacity to take on more debt, it could have a cost advantage. Cash flows While debt finance is cheaper than equity finance, it places on the company the obligation to pay out cash in the form of interest. Failure to pay this interest can result in action being taken to wind up the company. Hence, consideration should be given to the ability of the company to generate cash. If the company is currently cash-generating, then it should be able to pay its interest and debt finance could be a good choice. If the company is currently using cash because it is investing heavily in research and development for example, then the cash may not be available to service interest payments and the company would be better to use equity finance. The equity providers may be willing to accept little or no cash return in the short term, but will instead hope to benefit from capital growth or enhanced dividends once the investment currently taking place bears fruit. Also, equity providers cannot take action to wind up a company if it fails to pay the dividend expected. Risk The directors of the company must control the total risk of the company and keep it at a level where the shareholders and other key stakeholders are content. Total risk is made up of the financial risk and the business risk. Hence, if it is clear that the business risk is going to rise for example, because the company is diversifying into riskier areas or because the operating gearing is increasing then the company may seek to reduce its financial risk. The reverse is also true if business risk is expected to fall, then the company may be happy to accept more financial risk. Security and covenants If debt is to be raised, security may be required. From the data given it should be possible to establish whether suitable

3 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 security may be available. Covenants, such as those that impose an obligation on the company to maintain a certain liquidity level, may be required by debt providers and directors must consider if they will be willing to live with such covenants prior to taking on the debt. Availability The likely availability of finance must also be considered when recommending a suitable finance source. For instance, a small or mediumsized unlisted company will always find raising equity difficult and, if you consider that the company requires more equity, you must be able to suggest potential sources, such as venture capitalists or business angels, and be aware of the drawbacks of such sources. Furthermore, if the recent or forecast financial performance is poor, all providers are likely to be wary of investing. Maturity The basic rule is that the term of the finance should match the term of the need (the matching principle). Hence, a short-term project should be financed with short-term finance. However, this basic rule can be flexed. For instance, if the project is short term but other short-term opportunities are expected to arise in the future the use of longer term finance could be justified. Students should always consider the maturity dates of debt finance in questions of this nature as it is an area the Paper F9 examiner likes to explore. For instance, in Question 2 of the December 2010 exam the company was considering raising more finance but at the same time the existing long-term borrowings were scheduled to mature in just two years and, hence, consideration needed to be given to this issue. Equally, in previous questions, a company had been considering raising finance for a period of perhaps eight years and an examination of the companys statement of financial position shows that the existing debt of the company would also mature in eight years. Obviously it is unwise for a company to have all its debt maturing at once as repayment would put a considerable cash strain on the company. If the debt could not be repaid, but was to be refinanced, this could be problematic if the economic conditions prevailing made refinancing difficult. Control If debt is raised then there will be no change in control. However, if equity is raised control may change. Students should also recognise that a rights issue will only cause a change in control if shareholders sell their rights to other investors. Costs and ease of issue Debt finance is generally both cheaper and easier to raise than equity and, hence, a company will often raise debt rather than equity. Raising equity is often difficult, time-consuming and costly.

4 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 The yield curve Consideration should be given to the term structure of interest rates. For instance, if the curve is becoming steeper this shows an expectation that interest rates will rise in the future. In these circumstances, a company may become more wary of borrowing additional debt or may prefer to raise fixed rate debt, or may look to hedge the interest rate risk in some way. While this list is not meant to be exhaustive, it hopefully provides much for students to think about. Students should not necessarily expect to use all the factors in an answer. Suitable financing sources Students must ensure that they can suggest suitable financing sources. For each source, students should know how and when it could be raised, the nature of the finance and its potential advantages and disadvantages. Combined with a consideration of the factors given above, this knowledge will allow students to recommend and justify a source of finance for any particular scenario. A discussion of each finance source is outside the scope of this article, but students can read up on this area in any good study manual. Worked example The following forecast financial position statement as at 31 May 2012 refers to Refgun Co, a stock exchange-listed company, which is seeking to spend $90m in cash on a permanent expansion of its existing trade. $m Assets Non-current assets Current assets Total assets Equity and liabilities Share capital Retained earnings Total equity Non-current liabilities Long-term borrowings Current liabilities Trade payables Total liabilities Total equity and liabilities $m 130 104 234 60 86 146 70 18 88 234

The forecast results for Refgun Co, assuming the expansion occurs from 1 June 2012, are as follows:

5 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 Year ending 31 May 2012 2013 2014 2015 $m $m $m $m Revenue 71.7 79.2 91.3 98.6 Operating profit 24.4 28.5 33.7 37.1 Notes: 1. The long-term borrowings are 8% bonds that were issued in 1996 with a 20-year term 2. The current assets include $18m of cash, of which $15m is held on deposit 3. Refgun Co has consistently grown its profits and dividends in real terms 4. No new finance has been raised in recent years 5. The sector average financial gearing (debt/equity on a book value basis) is currently 85% 6. The sector average interest cover is currently 2.9 times 7. The company estimates that it could borrow at a pre-tax rate of 7.2% per year 8. The company pays tax on its pre-tax profits at a rate of 28% Required: Recommend a suitable method of raising the finance required by Refgun Co, supporting your evaluation with both analysis and critical discussion. Prior to reading the suggested solution students should carry out their own evaluation of the forecast financial performance and the current and forecast financial position. A consideration of the factors discussed earlier should lead students to a justified recommendation. Suggested solution Refgun Co is seeking to spend $90m on a permanent expansion of its existing trade. It should be noted that the company has significant retained earnings, $15m of which is held in cash on deposit. This could presumably be used to help fund the expansion and, if this is the case, the need for additional finance would be reduced to $75m. However, the company may have a reason for holding cash for example, to meet budgeted cash payments in the near future. Forecast financial performance The forecast financial performance of Refgun Co will be a key consideration to potential finance providers. Analysis of the forecast performance of Refgun Co gives the following information: Geometric average growth in turnover = (98.6/71.7)(1/3) 1 = 11.2% Geometric average growth in operating profit = (37.1/24.4)(1/3) 1 = 15.0%

6 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 Year ending 31 May 2012 2013 2014 2015 Operating profit margin 34.0% 36.0% 36.9% 37.6% The forecast income statements for the years ending 31 May 2012 and 2015 are shown below. Two income statements have been prepared for 2015, one assuming the expansion is funded by debt and the other assuming the expansion is funded by equity: Year ending 31 May 2012 2015 debt 2015 equity $m $m $m Operating profit 24.4 37.1 37.1 Interest (5.6) (11.0) (5.6) Profit before tax 18.8 26.1 31.5 Tax 28% (5.3) (7.3) (8.8) Profit after tax 13.5 18.8 22.7 The interest charge for 2012 is assumed to be (70 x 8%) = $5.6m If debt finance is used the interest charge from 2013 onwards is assumed to be (70 x 8%) + (75 x 7.2%) = $11.0m Note: While it would be good to forecast the income statement for each year, time pressure may mean this is not possible. This analysis shows that the growth in revenue caused by the expansion is exceeded by the growth in operating profit due to a steady rise in the operating margin of the company. This may be a result of the company benefiting from economies of scale as a result of the expansion. Whether debt finance or equity finance is used, both the returns to all investors (operating profit) and the return to the equity investors (profit after tax) both show considerable growth. Current and forecast financial position The gearing (D/E) is currently 70/146 = 47.9% on a book value basis. If debt finance is raised this would rise to (70+75)/146 = 99.3%, while if equity finance was used it would fall to 70/(146+75) = 31.7%. Even if debt finance was raised the gearing level would rapidly fall again as the company makes and retains profits. The interest cover is currently 24.4/5.6 = 4.4 times. If debt finance is used then this would fall to 28.5/11.0 = 2.6 times in 2013. However, by 2015 it would have recovered to 37.1/11.0 = 3.4 times. If equity finance were to be used the interest cover would consistently improve.

7 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 Refgun Co currently has less financial risk than the sector average and the financial risk would decline even further if equity finance was used. If debt finance is used then the financial risk would initially rise slightly above the sector average but would soon return to the sector average level or below. Factors that Refgun Co should consider prior to choosing a financing method Cost and cash flows Refgun Co would seem to have the capacity to raise more debt as the non-current assets exceed the existing debt by $60m. Furthermore, the company seems to be cash-generative in that it is currently holding $15m on deposit, despite not having raised any finance for several years. Hence, the company may be wise to take advantage of cheaper debt. Risk As the company is expanding its existing trade there should be no material change in business risk. If debt finance is chosen the directors should ensure that the shareholders are happy with the extra financial risk. Given the analysis above, this seems likely. Security and covenants As long as the expansion involves investing in some non-current assets there should be sufficient security available for potential lenders. The company should check what potential covenants might be imposed and ensure that they would be happy to live with them. Availability and maturity Given the recent performance and the good forecasts, the company is likely to have many finance sources available to it. Debt providers should be willing to lend and shareholders would be likely to support a rights issue. Equally, other investors may well wish to invest in the equity of the company. As the finance is required to finance a permanent expansion of the company, long-term finance should be raised. To the extent that the expansion requires investment in additional working capital, some short-term finance could be raised. Consideration should also be given to the fact that the existing bonds of the company are due to be repaid in 2016. Subject to early redemption penalties, it may be worth looking into refinancing this debt at the same time as raising the new debt especially as the cost of new debt appears lower. Control If debt is issued, no change would occur to control. A rights issue would also have little impact on control while the issue of shares to new investors may cause control issues. Costs and ease of issue A debt issue is likely to be cheaper and easier than an equity issue and, hence, may well be favoured by the directors.

8 ANALYSING THE SUITABILITY OF FINANCING ALTERNATIVES JUNE 2011 Yield curve The directors of Refgun Co should consider the yield curve if it is decided to raise debt. Recommendation of a suitable financing method From the analysis and discussion above, it would seem that Refgun Co should seek to finance the expansion by raising long-term debt secured on the existing non-current assets of the company and the new non-current assets acquired during the expansion. At the same time as raising the new debt, the refinancing of the existing debt should also be considered. If shareholders and other key stakeholders are concerned about the financial risk exceeding the industry average, then Refgun Co could raise some short-term debt with the aim of repaying it as soon as more cash is earned. The impact on gearing could also be reduced by acquiring some assets on operating leases, or by the sale and lease back of some existing assets. The directors should take action to manage the interest rate risk that Refgun Co will suffer. I hope that this article has provided students with an approach that they can use when answering a question of this nature. All too often students have a feel for the type of finance that may be suitable for a company, but cannot support or justify what they are proposing and, hence, cannot earn the marks that are available. William Parrott is a lecturer at Kaplan Financial