Transcript FAE 2013 Mock Exam - the Chartered Grind School

FAE 2013 Mock Exam
Primary Indicators
• Prepare a comprehensive and motivating one
page summary of MIL’s mission strategy
• Prove that the group do not see the full value of
MIL
• Prepare an assessment of what impact the
possible sale of 30% of MIL may have on the
share price of the Mayflower Group
• Calculate the impact of the sale of the 30% stake
of MIL will have on the group financial
statements including journal entries
Primary Indicators
• Classify the Internal Audit findings and explain
your logic for each
• Consider the issue with regard to the staff
who have a moral dilemma (three step
approach; identify the issue; clarify and
evaluate; action and review)
• Consider the position of the MIL board
• Provide advice on which MIS we should go for
True economic performance of MIL
• PBT per forecast results
€600
• Reverse the allocation of R&D – there’s a strong
argument for reversing all of the €2,100 as we’re
told on page 10 that the group don’t do any R&D
for MIL
• Group administration costs should be allocated
based on something like turnover rather than
employee numbers as we don’t subcontract out
staff costs – therefore add back approx €1,500
True economic performance of MIL
• Transfer pricing
– 50% of consulting sales is intercompany priced at
VC + 10% (€2,420 *50% * 110*) = €1,331
– Total sales = €3,993 meaning that the other half of
sales are charged out at (3,993-1,331) €2,662
– As a result we’re undercharging the intercompany
sales by €1,300
Economic value of MIL
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Profit per management accounts
Group R&D
Administration costs
Transfer pricing
True profitability
€600
€2,100
€1,500
€1,300
€5,500
Impact on the share price of a 30%
disposal of MIL
• Current market value of MIL (using PE of 8)
– €600*.8*8 = €3,840 (pre tax profit 600, tax rate 20%)
• Realistic value of MIL (based on AME and a PE of 22);
– (€5,500)*.8*22 = €96,800
• Current value of MG equity = 400m shares at €1 = €400,000
– Take out the €3,840
– Increase it by the cash we receive on selling 30% of MIL (30% *
96,800) = €29,040 less 20% CGT = €23,232
– Add back the value of the remaining 70% of MIL (96,800*.70) =
€67,760
– Total = €487,152 (or €1.22 per share)
– (error in solution, uses 400 as current earnings instead of 600)
Mission Statement
• Not excessive in length! (one page summary
MAX – as per the case)
– Part of a plc
– Aim to be leading RCV manufacturer in Europe
– Will invest in R&D
– Will attract best people
– Will invest as necessary
– Link with manufacturing
– Importance of consulting
Internal Audit considerations
Point
No Disaster Recovery plan in
place
Significant
Routine
Urgent
x
Non urgent
x
Automatic reversing journals
are not retrospectively reviewed
x
x
FAR does not record purchase invoice
number
x
x
Reconcile all major supplier statements
monthly
x
x
GRNI account balances older than one
year
x
x
Register of Directors
x
x
Staff mapping by department
x
x
Balances with group companies to be
reconciled on
a monthly basis
x
x
Misstated bills of materials
x
x
Customers payments in advance
x
x
Accounting for disposal
• IFRS 10 – didn’t lose control, continue to consolidate
• Based on my earlier valuation (ignoring tax charge)
€32,208
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–
–
–
Dr Bank (less transaction costs of 200) 32,008
Cr Payables 200
Cr NCI (net asset value * 30%) 900
Cr equity 30,908
• No impact on earnings
• Transaction costs go to equity
• Disclosures re NCI on face of SOCI and SOFP