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Is it possible that we could be told that manager does not have control over certain assets or certain liabilities.
For example, could we be told, in the exam, that managers do not control cash balances and then subsequently be asked to calculate an ROI and provide a justification for the figures we do and do not include in the ROI calculation?
If this is possible, how could we isolate those figures, which we’re told that the manager does not have control over when putting our ROI figure together?
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On a related note – how can we determine when we should use average investment/TALCL figures as opposed to opening or closing investment/TALCL figures?
Sometimes the examiners do not seem to give guidance here?
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Last question.
Sometimes we are told that we’re dealing with an investment centre and no more about how capital is raised and then we’ll be asked to calculate the ROI and/or RI and they’ll be an ‘interest expense’, but it’s unclear whether this should or should not be included in the ROI calculation.
What would you advise we do to try to determine whether or not interest expenses should be deducted from the profit figure or whether we should use NPBIT?
1. If the question asks you to assess the performance of the manager, then you only include those things over which the manager has control when calculating the RI or ROI. This could certainly be asked in the exam.
2. In sections A and B of the exam, it will be made clear. In section C of the exam it will probably be made clear, but if not then state your assumption and you will get the marks.
3. Divisions do not raise capital – they are not separate companies. The funds are provided by the head office. Interest is a notional expense used when calculating the RI.
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