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With the introduction of CIMA’s new syllabus in May 2010, there are some important changes to the way financial strategy is examined. The purpose of this article is to draw your attention to the most significant changes. In particular, I will look at changes to:

• the format of the exam paper • the syllabus • the formula sheet, including amended presentation of exchange rates.

I will also draw your attention to examples in the specimen paper relating to a change in approach in calculations with respect to:

• calculation of tax relief on finance lease payments • adjusting for partial years when discounting or applying compound growth.

Finally, I will offer some specific tips with regard to preparing students for the F3 paper

Changes in the format of the exam paper

The main change in the format of the exam paper is the addition of pre-seen material as preparation for question one - the case study question. The strategic level pre-seen material is aimed at allowing students to familiarise themselves with the organisation (s) and industry which will be the basis for Section A of all three strategic exams. It will help them to prepare for the process they have to follow when preparing for and sitting the final T4 Part B Case Study exam. When preparing for the F3 exam, students need to familiarise themselves with the facts of the pre-seen. However, although it is important to be familiar with this material, it should also be noted that the exam itself is unlikely to require detailed analysis of the pre-seen data.

An example of how the pre-seen/unseen materials might be used in F3 is as follows.

For example if balance sheet analysis is required, it is likely that an additional ‘forecast’ balance sheet for a subsequent year will be provided as part of the unseen material. Similarly, any modelling required in the exam may use base data provided in the pre-seen but the modelling process itself will largely rely on new data provided in the unseen material.

There will be ‘hooks’ in the pre-seen material that will be useful to tutors and students alike in providing an indication of some of the main areas of the syllabus that are likely to appear in one or more strategic papers across two examination diets.

From P9 to F3 by the examiner

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Changes in the syllabus

The main change in the syllabus is one of structure rather than of content.

In P9, there were four main syllabus areas as follows:

Syllabus area Study weighting A Formulation of Financial Strategy 20% B Financial Management 30% C Business Valuation & Acquisitions 25% D Investment Decisions and Project

Control 25%

By comparison, F3 has just three main syllabus areas:

Syllabus area Study weighting A Formulation of Financial Strategy 25% B Financing Decisions 30% C Investment Decisions and Project

Control 45%

The main change is the aggregation of the final two sections into a single new section headed ‘Investment Decisions and Project Control’. This has important implications for the content of the exam. The examiner is no longer constrained by the need to give equal weighting to both Business Valuation & Acquisitions and to Investment Decisions and Project Control. The new upper limit of 45 marks in this section provides greater flexibility for the examiner in setting questions from this area of the syllabus. Covering of, for example, an acquisition, is no longer restricted to 25 marks and so a longer question with a broader scope can now be set within this area of the syllabus.

The study weighting for Formulation of Financial Strategy has been increased slightly from 20% to 25%. The weighting of Financing Decisions remains unaltered at 30% but the content has been expanded slightly to include the financing of investments that had previously been covered under Project Appraisal.

Changes to the formula sheet

Several minor changes have been made to formula sheet to provide more consistency of presentation. One change to note is the presentation of exchange rates which will now follow internationally accepted standard format with the first named currency as the base currency and the 2nd currency as the variable currency.

For example, A$/B$ 3.4000 means that A$1 = B$ 3.4000.

It is important to note that this means that this means that the order in which currencies are listed is now the opposite way round in F3 to that previously used in P9.

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In F3 and other strategic level papers, we will also gradually introduce internationally recognised currency codes for major world currencies. The currency codes themselves do not need to be memorised as the relevant country and its currency code will be stated in the question. International currency symbols include:

Country Currency Country Currency USA USD China CNY United Kingdom GBP India INR Europe EUR Brazil BRL Switzerland CHF Singapore SGD Japan JPY Australia AUD South Africa ZAR Hong Kong HKD

Changes to calculations (as demonstrated in the specimen paper)

For F3, a more accurate approach will be expected in the calculation of cash flows arising on finance leases. Candidates will now be expected to be able to calculate the finance charge element within the finance lease payment and restrict corporate tax relief to that part of the lease payments. This approach will be familiar from F1 and ensures consistency of approach across the Financial Pillar.

Either the sum-of-digits method or the actuarial method are acceptable. Both methods are set out in the CIMA learning system and in question 2 of the F3 November 2009 specimen paper. Note, however, that if the actuarial method is used, candidates will be expected to calculate the implied interest rate; this is a change from F1 where the interest rate is provided. Also note that lease payments may be payable either in arrears or in advance according to the scenario provided and an up-front deposit may sometimes be payable.

A second change in F3 is that students may occasionally be expected to work with partial year when adjusting exchange rate data. For example, an exchange rate may be provided that is relevant to the exam date of, say, 20 May but investment appraisal may be required based on whole calendar years starting 1 January of the following year. In such a case, the student would be expected estimate the likely appreciation or depreciation of the local currency in the period from 20 May to 1 January.

A full worked example of such a calculation is provided in question 1 of the F3 November 2009 specimen paper.

Where the growth in a figure of Y is required at a (compounded) annual rate of r% for t days, the calculation is:

Y x (1 + r)t/365

Similarly, where Y is to be discounted by t days at the same annual rate, the calculation to use is:

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Examiner’s tips for preparing students for the F3 exam

In terms of preparing students for the exam:

• It will clearly be sensible to ‘teach’ the pre-seen material so that students enter the exam hall fully aware of the information and types of financial data that are available and might be useful in answering question one.

• You may also wish to teach broad issues arising from the syllabus areas that the pre-seen case material touches on.

• Emphasise the need to be extra vigilant in answering the question set rather than questions that might have been set as mock exams in the same syllabus areas.

• Emphasise the need to read the pre-seen material carefully – students can expect to find a large proportion of material required for answering question one from this new material and a clear head to required to absorb and process this information.

• It is also important to remind students that over-preparation in a limited number of syllabus areas may limit their ability to come into the exam hall with an open mind, ready to respond to the new information presented in the exam paper itself.

Other changes that might affect tuition on revision days:

• Although we have seen improvement in recent diets, some students still make errors in processing exchange rates. There is a risk that the change in format will add to their problems during the changeover, especially if they are working from old exam papers that follow the previous format. Extra exercises and calculations in this area, including the application of currency revaluation and devaluation estimates could be particularly important for the 2010 exams.

• The finance lease tax calculations may also need some careful revision for the 2010 exams. The actuarial method is probably easier and faster than the sum-of-digits method. However, the sum-of-digits method is perfectly acceptable and you may prefer to teach this method instead, especially as students are likely to be more familiar with this method from their F1 studies.

• With the integration of syllabus areas C and D in the 2010 syllabus, it is now possible to include a broader acquisition-type question that might initially take students by surprise. In P9, questions in syllabus sections C and D tended to focus on just one of two key areas due to the upper limit of 25 marks from this syllabus area. By raising this upper limit to 45, questions of greater scope are possible in F3 in syllabus section C. Students may need some preparation for the more integrated style of question that is now possible.