[Byron]

P6 (MLA) – 51 marks
P7 – 67 marks

Affiliate :DD

Congrats to all those who passed! As for those who did not make it, try harder next time (and don’t believe any of the link theories – I could not access any one of them, and I got all worried for nothing!)

[Byron]

@Gabriel: Seems like you are in the same panicked mode as I am – both of us are adamant that we failed both papers!

For P7, whether I pass or fail depends on Q1, particularly the audit risks (part (b)). This part carries 17 marks, and during the exam I expected the marking scheme would allocate 1.5 marks per audit risk identified and explained, so I explained around 12 audit risks. Luckily, the published marking scheme allocates 1 mark per materiality calculation and 1.5 marks per audit risk, so (quite prudently) assuming I got 4 marks for materiality calculations, and I have 9 correctly explained audit risks (9 x 1.5 = 13.5), I should be able to get 17 out of 17 from this part.

For part (a) of Q1 I thought the examiner was after ISA 315, so I explained the usual 6 items (control enviroment, structure of entity, accounting policies, etc), but according to the marking shceme I would only get 1.5 marks out of 6. For audit procedures I’m expecting around 4/5 out of 8 marks (again being prudent) and 2 or 3 professional marks (1 for the introduction, 1 for splitting my answer into paragraphs, and maybe 1 mark for the conclusion, if it’s good enough).

With respect to Q2 I’m expecting 6 out of 16 marks for part (a) – this was extremely easy but I over ran on Q1 and then I panicked throughout the rest of the paper, and 4 out of 9 for part (b).

For Q5 on audit reports, I’m expecting 3 for (a), 4 for (b) and 3 for (c) to a total of 10 marks out of 20.

With regards to Q3, I attempted half of it (left out 10 marks) and I’m expecting from 4 to 5 marks here – 2/3 for the part on audit skepticism and 2 for the procedures on goodwill.

Total for paper:
– Minimum: 48.5 marks
– Maximum: 51.5 marks
…hopefully if I get 48 they would review the paper (as they say on the website).

I also sat for Paper P6 (MLA). This was a rollercoaster of feelings – during the exam I thought I messed up, three hours later I had thought I might have made it, but after the examiner’s answers were issued, my hopes are not that high.

And as a side note, I cannot access any of the links posted on this thread and my ERS is dated 13th July.

GOOD LUCK EVERYONE!

[Byron]

@Gabriel but could you argue that since the client could repurchase it for the market value at that time, it is an operating lease? Not sure about this but.

[Byron]

In my opinion, the paper was very fair, provided one had a very sound knowledge of the financial reporting topics covered in Papers F7 and P2, in particular for Q2. Having said that, I still missed out on time management and only managed to complete 90% of the paper, mainly due to the level of detail I wrote for audit risk in Q1 (where I had an overrun of – wait for it – 30 mins!)

QUESTION 1
Part (a) on matters to consider when developing the audit strategy for an initial audit engagement

When I read the requirement, I immediately thought of ISA 510 but then changed my mind and discussed the following 6 issues (for 6 marks): business risk and strategy, internal control, accounting policies, nature of entity, measurement of performance and legal, regulatory and other extrnal forces.

Part (b) on audit risks:
I identified 12 risks (not sure whether 1 risk carries 1.5 or 2 marks because the marking schemes are not consistent) for 17 marks.
The risk in relation to the licence was quite tricky – I discussed that as per IAS 18, the income derived from the sale of the licences should not be deferred since Ted transferred the risks and rewards upon sale.

I also discussed a risk re related party transactions since the family of Dougle (or whatever his name was) held 30% of the equity shares, but I doubt this is relevant.

Part (c) on procedures re portfolio of short-term investments and EPS:
Found some probles coming up with procedures for EPS (especially because by this time I was well into the second hour of the exam), but I thought about obtaining tax charge since earnings figure was based on profit before tax.

Question 2
Part (a) (i) on sale and leaseback transaction:
Here I discussed both sale and finance leaseback and operating leaseback, since one of the conditions was that the client could repurchase the complex at the market value at that time at the end of the lease term (which was equal to the useful life) – I doubt whether this is relevant, however.

Part (a) (ii) on subsidiary not consolidated:
Discussed issues of control, and also went into impairment of subsidiary in parent’s individual FS as the subsidiary made a loss.

Part (b) on laws and regulations:
Wrote some points about ISA 250 and recommended the auditors should first understand the issue, discuss with those charged with governance, consider confidentiality if they feel they should report due to public interest and seek legal advice. Also identified the intimidation threat, but I don’t expect more than 4 marks out of the 9 at hand.

QUESTION 5
Part (a) on construction contracts:
Discussed briefly the non-compliance with IAS 11 and went on to discuss that audit report should be qualifed “except for” due to a material misstatatement which was not pervasive – brief answer due to time pressure so I only expect 3 marks out of 8.

Part (b) on contingent liability:
I discussed that the auditor should first seek legal advice from its own lawyer since the assessment as payment of fine being ‘possible’ was coming from the client’s lawyer. I was not sure about this scenario but I faintly remembered that one of the uses of an emphasis of matter paragraph was to highlight exceptional litigation, so I issued an unqualified report with EOM. Then I explored the scenario whereby the advice was wrong and that the $40m had to be paid, which brought about a significant doubt on going concern given that the client only had cash of $3m, although then I discussed the fact that the client had sufficient assets ($340m I think) which could be liquidated.

Part (c) on material inconsistency:
I discussed that if the misstatement was in the integrated report, an ‘other matter’ paragraph would suffice, but if the misstatement was in the FS, a qualified “except for” would be issued.

Over all, I think I messed up in this question and I think I only managed to pick up 7 out of 20 marks.

QUESTION 3
Only attempted part (a) and part (b) (ii) – 10 marks in total – on professional skepticism and the audit of impairment of goodwill. Hopefully I managed to get 5 marks.

I just wish I managed to scrape through! I hope the extra time I spent on the first question pays off. :S

[Byron]

Got 71 – very disappointed, was expecting an 82-85.

[Byron]

F9: 82% – 85%
P1: 57% – 66%

Good luck everyone! *fingers crossed*

[Byron]

I know I am being somewhat fussy here, but I will not put my mind at rest until I get this!

Despite the differences in the wording in these two questions, the TERP calculation in BOTH questions does not deduct issue costs from the cash raised from the rights issue (unless I’m overseeing something).

In my opinion, what you explained above is only relevant to determine the actual amount available for investment from the rights issue (for instance, in NG Co, the amount left over from the rights issue which will be used to develop the storage and packing network).

My concern is about the amount which should be used in the TERP calculation:
(a) total cash raised from rights issue, or
(b) cash raised from rights issue after deducting issue costs

Let me explain further. I will simplify the workings to highlight my point.

In THP (June 2008 – examiner’s answer):
TOTAL cash raised from rights issue = $3,840,000
Issue costs = $320,000
=> Cash available to buy CRX = $3,520,000

TERP = (Pre-rights MV + $3,840,000) / Ex-rights no of shares = X
(i.e. TERP ignores issue costs, as opposed to the actual amount used to buy CRX)

BUT then (and here comes in the unclear reasoning to me),
Market capitalisation after rights issue = Pre-rights MV + ($3,840,000 – $320,000) = X

I remember that my tutor had said that the examiner has calculated two share prices:
one showing the fall in share price due to the rights issue ($4.56) and another showing the fall in share price due to the issue costs ($4.48), treating the two events separately. In fact, the examiner puts down the following at the end of this part:
“The issue costs result in a decrease in the market value of the company and therefore a decrease in the wealth of shareholdersequivalent to 8c per share.”

[It is for this reason I ignored issue costs in the exam.]

In NG Co (December 2009 – examiner’s answer):
Cash needed for investment = $5,000,000
Issue costs = $312,000
=> TOTAL cash raised from rights issue = $5,312,000

TERP = (Pre-rights MV + *$5,312,000) / Ex-rights no of shares = X
(i.e. TERP ignores issue costs, as opposed to the actual amount used to invest in the storage, packing and distribution network)
*The examiner arrives at this figure like this: 1.6m shares x $3.32

HOWEVER, in MFZ Co (June 2014 – examiner’s answer):
Cash needed for investment = $9,200,000
Issue costs = $200,000
=> TOTAL cash raised from rights issue = $9,400,000

TERP = (Pre-rights MV + *$9,400,000 – $200,000) / Ex-rights no of shares = X
(i.e. TERP is adjusted for issue costs AS WELL, unlike the above two scenarios)
*The examiner arrives at this figure like this: 2.5m shares x $3.76

Having gone thoroughly through all past papers, during the exam I instantly remembered the approach used in previous questions, so I wrote down the following to be on the safe side:

TERP = (Pre-rights MV + $9,400,000) / Ex-rights no of shares = X
Market capitalisation after rights issue = Pre-rights MV + ($9,400,000 – $200,000) = X

Needless to say, my second working will not be given credit whatsoever as only TERP was required.

I hope you got the point I am trying to make here, unless I’m so dumb I’m overlooking something. Apologies for being a nuisance, picking on minor technical details, however I feel that the June 2014 answer is inconsistent with the other two. In Paper F6 (Maltese variant), one of the difficulties me and my friends encountered was having to straighten out (many!) inconsistencies apart from those due to changes in legislation. Actually, there are two other F9 past exam discussion questions which are inconsistent, related to receivables management (can’t remember references) – they were actually after each other in the BPP Revision Kit, and the answers (identical to the examiner’s answer) were different.

Thank you for reading this.

[Byron]

@cardine
Re Q4(b): In the DGM formula, the growth rate is subtracted from the cost of equity, not added. The equity market value given by the DGM would be $58.92m.

[Byron]

Thanks for your quick reply! 🙂

Re Q1, EDCA gives an NPV of $3,050 whereas EBCA gives an NPV of $2,980.

Q2: So even if I put the same 11% as risk premium in part (b) and used the correct calculated equity beta, I will get the full four marks? That’s great! 😀 Re the CAPM formula, last Friday I went through all marking schemes (yes, I am that fussy about marks, haha) and I noticed that whenever CAPM came up, the cost of equity always carried 2 marks. Hopefully only one of them will be attributed to the risk premium.

Re Q4, I only got enough time to write something on the lines of:

“MFZ can finance the $9.4m through an issue of bonds which are loans split up into negotiable parts of normally $100 each. They can also be convertible, in which case the holder will be given the option to convert them into ordinary shares on a predetermined date. Bonds can also be in a foreign currency.

An example of this is Eurobonds, which are long-term finance in a foreign currency, they are unsecured (no covenants) since they are issued by companies with a high credit rating. Moreover, they are cheap since they are very liquid – investors can sell them on.

Another source of finance is bank loans.”

Hopefully I managed to pick up at least 2 marks! Of course, I knew a lot more detail but as I told you earlier on I was out of time as a result of giving a lot of detail on other theoretical parts of the exam.

In Q2(d), are the following methods of internal hedging correct:
– open bank account in foreign country
– lagging and leading
– invoice in foreign currency and create costs in foreign currency, by for example opening up factories in the countries where goods will be sold

Sorry for being so fussy, but frankly this was the easiest F9 paper, so a mark below 85 would not do for me, given the amount of effort I put in – I went through all past exam papers for a third time two days before the exam!

[Byron]

@Kevin:
Q1: The only tax savings were on three capital allowances (at T2, 3 and 4) and on the balancing allowance at T5 (which we should have calculated using the scrap value i.e.:
[(Initial investment – accumulated capital allowances) – Scrap value] x Tax

Q2: I argued that the cash operating cycle can be both positive and negative since it depends on the the working capital investment policy (if aggressive, could be negative and if conservative, it is positive) and on the business industry (e.g. manufacturing companies have positive, service companies have negative cycles)….not sure about this though.

[Byron]

@ajmal:
I basically discussed soft capital rationing as follows for Q1(c):
– avoiding dilution of EPS by issuing equity
– avoiding dilution of control by issuing equity
– avoiding higher financial risk by issuing debt
– promoting competition between projects
– covenant restrictions in bond borrowing agreements
– issue costs

This came out recently in the June 2011 sitting Q1(d), quoting from the examiner’s answer:

“Soft capital rationing may be due to reluctance by a company to raise finance. For example, the amount of funds needed may be small in relation to the costs of raising the finance: or the company may wish to avoid dilution of control or earnings per share by issuing new equity; or the company may wish to avoid a commitment to paying fixed interest because it believes future economic conditions may put its profitability under pressure. Alternatively, the company may limit the funds available for capital investment in order to encourage competition between potential investment projects, so that only robust investment projects are accepted. This is the ‘internal capital market’ reason for soft capital rationing.”

[Byron]

@kutiez2005:
Best of luck! I have P1 left for this session, next Wednesday and here I am procrastinating 🙁 …certainly not in the mood to plunge down in an abyss of boredom!

[Byron]

@Abbi:
Question 3 was broken down as follows:
(a) WACC calculation – 7 marks
(b) Project-specific cost of equity – 4 marks
(c) Systematic, unsystematic risk – 6 marks
(d) Efficient market hypothesis – 8 marks

[Byron]

@kutiez2005:
The EMH one was for 8 marks:
2 for weak form efficiency
2 for semi-strong for efficiency
2 for strong form efficiency
2 for relevance to finance managers

[Byron]

@anuj428:
We were given the revised working capital ratios for 2015 and the revised sales and cost of sales for the same period. We were also given the expected current ratio of 1.4.

So I first calculated the expected inventory, receivables and payables, then I used algebra:

1.4 = (inventory + receivables) / (payables + overdraft)

[Byron]

@ismaeelt:
We were also required to discuss the change in working capital financing policy. In the first period, I got 51% of current assets financed by current liabilities and this had increased to 76% in the second period, which shows a move from a conservative to an aggressive working capital financing policy.

[Byron]

@Ahmed: Haha! Sorry my bad, it was a typo…God forbid we had 5 questions 😛

[Byron]

@Kuzco: 3 internal methods x 2 marks = 6

I suggested:
– opening a foreign bank account
– creating costs in foreign currency, like opening up a factory in the foreign country
– invoicing in the domestic currency
– leading receipts and lagging payments

Hope I got all of them right.

[Byron]

@kutiez2005:
Great! Thank you so much….although I think we will have been expected to consider the other combination as well to gain full marks.

[Byron]

For Q4(a), the one with the three objectives, I got:
– Objective 1: not achieved in both 2013 and 2014, but moving towards target, perhaps will be helped by expansion
– Objective 2: achieved in 2014 only
– Objective 3: total shareholder return exceeded target of 5% in both years, but the target was rot in line with the cost of equity which was 12%

Didn’t manage to write a lot like the examiner’s answers though as I was heavily pressed for time.

[Byron]

@kutiez2005:
But did you take Project E into consideration, therefore limiting the remaining funds to $5m before choosing between the others?

[Byron]

@Gabriel:
Thank you, and best wishes for you as well.

Not so sure about Project D though, because If memory serves me right, I had read an answer to a theoretical question at the end of the BPP Study Text which said that the profitability index approach gives sub-optimal decisions when projects are mutually exclusive.

As for past papers, the last two sittings were not that bad neither (I guess the examiner is running out of ideas xD) but I believe this one was better.

[Byron]

It was undoubtedly the easiest exam set for Paper F9 ever – all of the requirements, except the capital rationing part, had come up in past exam papers.

Having said that, I gave loads of detail for all the theoretical parts and I ended up with just 5 minutes to scribble something for Q4(d) for 8 marks about sources of finance – I only managed to describe Eurobonds and wrote something about bonds (so I’m hoping to at least garner 2 marks there).

However I’m so pissed off right now because I did not subtract the 4% risk-free rate from the 11% market return for both CAPM calculations – I got WACC of around 12%, so from the comments above I assume I am not the only one who stumbled on this easiest part. So there go 4 “easy marks”.

Also, some of my friends said that for Q1(b), we had to choose Project B instead of D, even though the latter had a higher PI, since the NPV from the combination including B was higher. I eliminated B, so I guess I’m missing 2 marks from there as well.

Hoping to at least get an 82 – 85!

[Byron]

Got 86 for Paper F6 Maltese Variant 🙂

[Byron]

Hi,
Can anyone confirm whether the following were relevant for Q2(c), about the overall review of FS:
– Analytical procedures (I’m sure of this)
– Written procedures
– Subsequent events

I think I confused overall review of FS with overall review of audit.

[Author]

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