strategic business management webinar 2021

Strategic Business Management – Webinar 2021

PHIL ORMRODADVANCED LEVEL EXAMINER

KATY PILKINGTONADVANCED LEVEL EXAMINER

© ICAEW 2017

Agenda

• Progression from Certificate and Professional Levels

• Overview of SBM

• What’s new for 2021?

• Setting the questions and marking

• Advice for candidates

• How did candidates perform in 2020?

BREAK

• November 2020 exam

Progression

Certificate Level

ADVANCED

LEVEL

Case Study

Corporate ReportingStrategic Business

Management

PROFESSIONAL

LEVEL

Business Planning:Business Strategy

Audit and Assurance

Financial

Accounting and

Reporting

Financial

ManagementTax Compliance

CERTIFICATE

LEVELAccounting Assurance

Business

and FinanceLaw

Management

Information

Principles of

Taxation

Self study bookkeeping module

Professional Level

ADVANCED

LEVEL

Case Study


Management

PROFESSIONAL

LEVEL

Business PlanningBusiness Strategy

Audit and Assurance

Financial

Accounting and

Reporting

Financial


CERTIFICATE


Business

and FinanceLaw

Management

Information

Principles of

Taxation


Advanced Level

ADVANCED

LEVEL

Case Study


Management

PROFESSIONAL

LEVEL

Business PlanningBusiness Strategy

Audit and Assurance

Financial

Accounting and

Reporting

Financial


CERTIFICATE


Business

and FinanceLaw

Management

Information

Principles of

Taxation


Progression to Strategic Business Management (SBM)

• Technical progression – new topics

• Skills progression

• Ethics (grey areas)

• Importance of brought forward knowledge

SBM – Overview

• Exam format (3½ hours)

• 2 questions (100 marks)

• Each exam will contain questions requiring integration of

knowledge and skills, including ethics

• Open book exam

An overview

Strategic Business Management– Syllabus

Topic Weighting

Strategy 30 - 40%

Finance, financial risks, valuations for

businesses and securities, investment and

distribution decisions

25 - 35%

Ethics 5 - 10%

Corporate reporting issues 15 - 20%

Assurance issues 10%

Strategic Business Management

Question

Approximate

mark

allocation

Description

1 60%

Mini case.

Scenario based question in context of

business and financing issues. Can include

corporate reporting and/or assurance.

2 40%

Scenario based question in context of

financing and business issues. Can include

corporate reporting and/or assurance.

Ethics may feature in either question

Strategic Business ManagementMain syllabus areas

FR and Assurance

Business

Finance

QuestionsSkills

Ethics

Assimilating and

using information

Applying

judgement

Structuring

problems and

solutions

Q1 – mini case

Approx. 60%

Q2

Approx. 40%

Conclusions,

recommendations

and

communication

Brought forward

(e.g. BS & FM)

Brought forward knowledge

• Business Strategy

• Financial Management

• Financial Accounting and Reporting

• Audit and Assurance

SBM Syllabus – Business topics

• Business strategy

• Performance management and measurement

• Management information

• Strategic marketing and brand management

• Business risk management

• Corporate governance (structure & strategy)

• Data analysis (eg Big Data; data analytics, visualisations)

• Statistics - new (eg normal distribution, SD, CoV)

• Information strategy

• HRM

• Supply chain management (upstream & downstream)

• Operations management

SBM Syllabus – Finance topics

• Business and securities valuation (equity and bonds)

• Capital structure

• Financial reconstruction and financial distress

• Equity instruments

• Fixed interest (bond pricing; bond yields, effective interest rates)

• Derivatives (forwards, futures, options)

• Financial risk management (FOREX, interest rate, commodities)

• International financial management

• Investment appraisal (including multi currency appraisal)

• Leasing (ST v LT leases; lease or buy)

• Treasury and working capital management (short-term financing)

SBM Syllabus – Financial Reporting

• FR will relate to business and financing issues

• SBM LMs are stand alone from CR – guide to detail

required

• Brought forward knowledge relevant from FAR

• Specific questions (eg financial instruments; leasing;

impairment, disposals (IFRS5), revenue recognition;

annual report disclosures)

• General questions (eg CEO wants to know about all FR

implications of a business decision)

SBM Syllabus - Assurance

• Forward looking

• Assurance - rather than statutory audit

• Due diligence

• Forecast information (e.g. share issue or loan application)

• Going concern

• Agreed upon procedures

• Assurance issue will arise from business or finance context

Ethics (SBM)

• Ethical dilemma(s)

• Ethical issues for specific individuals and/or organisations

• Identify ethical issues/principles

• Identify ethical actions

• Balanced approach

• SBM – Role typically the accountant in business

Ethics

• Apply professional scepticism (questioning mind)

• Ethics can be embedded in scenario – but requirement will refer to

ethical issues

• Use ethical language and principles (not just generalised opinions)

• Refer to ethical codes where appropriate

• Weak answers:

- identify one issue only

- fail to identify the perspective(s)

- Take a one-sided view (unbalanced)

- do not use ethical framework

- do not use ethical language

Ethical principles

• Transparency, Effect, Fairness model usually of limited value

• Other ethical principles:

- Self interest

- Conflict of interest

- Self review

- Intimidation

- Honesty & integrity

- Objectivity and independence

- Confidentiality

- Familiarity

Taxation - SBM

• No specific UK tax.

• Tax treatment for the jurisdiction in the scenario will be

given in the question where relevant.

EXAMPLES

• Tax treatment for investment decision could be given in

question for candidates to determine cash flows for

investment appraisal.

Professional skills

5 key professional themes:

- Adaptability

- Insight

- Collaboration

- Perspective

- Learning and reflection

Updated professional development skills

Skills

The exams form part of the bigger professional skills picture.

• Assimilating and using information (qualitative and quantitative)

• Structuring problems and solutions

• Applying judgement

• Concluding, recommending and communicating

At SBM (and CR) these skills are:

• Part of the formulation and fabric of the question design

• Identified explicitly in the marking of the candidates’ answers

Skills in summary

Skill Can the candidate:

Assimilating and using information Use information, provide analysis,

appreciate its significance.

Structuring problems and solutions Define the problem, develop

solutions to fix it.

Applying judgement Identify significant factors/issues,

apply a sceptical and critical

approach.

Drawing conclusions and making

recommendations

Formulate reasoned

recommendations and opinions, set

out advice, options, reservations

based on valid evidence.

Steps in writing the paper

Team of writers and reviewers

Academics and practitioners

Student moderators

ICAEW exam review board with the Case Study team

Away days and moderation

First draft circulated

Syllabus and skills

Scenario - circulated by writers

What’s new for 2021?

Additions to syllabus for 2021

4b …..and climate change

6h analyse, structure and assimilate data provided to evaluate business risks under a range of complex scenarios using statistical tools

8a undertake appropriate quantitative and qualitative data analysis, statistical analysis, business analysis and financial statement analysis;

8e apply professional scepticism to data sources and data capture in interpreting quantitative and qualitative information

8f analyse, structure and assimilate data provided to evaluate performance using relevant statistical tools.

23a recognise and explain ethical and professional conduct issues

Data Analysis and Statistics

• Spreadsheets in the new platform (limited for 2021)

• Statistics (limited for 2021)

• Basic principles

- Professional scepticism with data and data analysis

- Data bias

• Understanding and interpretation (limited calculations)

• Move beyond descriptive statistics and means

“I don’t believe much in statistics” Pep Guardiola

Statistics

• Data distributions

• Standard deviation

• Normal distribution

• Coefficient of variation

• Correlation v causation

• Covariance

• Discrete v continuous probabilities

Question styles – what’s new

• Change by evolution – not revolution

• More numbers/data

• More calculations

• More capability to deal with numbers – better tools (ie

better spreadsheet in new platform)

Setting questions and marking

Marking process

• New platform for online marking.

• Design of papers is a joint process.

• Two separate marking teams – common examiner and

moderator.

• Marking grid refined on the basis of initial assessment of

student performance – later published as the ‘tutor marker

guide’.

• Markers’ meeting - mark 2 pre-meeting scripts, then 1

common script marked at the meeting.

• Standardisation and seeding scripts.

During the marking process

• Markers have no information regarding centres.

• Marginal scripts and random scripts second

marked by examiner.

• Seeding and standardisation scripts.

• ICAEW provide limited information during the

process – statistics on variation from average by

marker and seeding performance by marker.

After the marking process is completed

Data made available to the examiner to prepare a report for the

assessment committee including:

• Average marks per question for each marker

• Average mark for each marker

• Mark distribution for each marker

• Pass rate for each centre

• Pass rate for first/second attempt candidates

• Alpha student pass rates (discriminator)

Advice to candidates

• Identify the big issues.

• Look for links between issues.

• Look for embedded points (gateway marks).

• Apply professional scepticism.

• Apply realism.

• Answer requirements in order within a question.

• Answer the question; the whole question; and nothing but the

question.

Advice for candidates

How to approach Advanced Level exams

Skills

“It’s not so much what you know – it’s what you do with what you

know”

• Marks available for demonstrating knowledge and understanding;

but….

• More marks for using knowledge, applying skills in context of

scenario.

• Open book – examiners know this! – avoid “knowledge dumping”

How to approach Data Analysis questions• Tabulate the data (adds structure)

• Types of calculations:

- Percentage changes (horizontal – % changes between two years)

- Financial & operating ratios (vertical – ratio of two numbers in same year)

• Use the spreadsheet (eg growth, discounting, NPV, cash flows, FOREX)

• Interpret visualisations (eg trends, relationships, outliers)

• Link data – (tables, visualisations, narrative) – consistent story?

• What-How-Why-When-SoWhat? (WHWWsW analysis)

• Make the numbers speak – more marks for discussion

• If there are numbers in the question; there should be numbers in the answer

• Professional scepticism and data bias

• Alternative perspectives

Professional scepticism

• ‘Professional scepticism’ – a questioning mind

• Applied to quantitative and qualitative information in the scenario. (but

don’t unreasonably disbelieve everything – use judgement.)

• Includes questioning of: actions, documents and what we are told by

characters in the scenario.

• This involves being curious. Identify red flags - what are the

motivations/incentives for characters in scenario?

• Issue(s) may be embedded – grey areas.

• Applying professional scepticism can involve management challenge

Should candidates use models?

• Progression from BST

• From foreground to background (guide content, but not to be used

woodenly)

• Problem solving

• Models that ‘break in our hands’:

- TEF in ethics (transparency, effect, fairness)

- SAF (desirable, acceptable, feasible)

How to fail

• Poor layout.

• Disorganised workings – use headings.

• No conclusions (sitting on fence) or concluding by assertion without justification.

• Generic answers unrelated to the scenario.

• Accept at face value assertions made by characters in the question (professional scepticism).

• Merely repeating information given in question (no added value).

How to fail

• Missing out parts of questions (if you write nothing, you get

nothing).

• Inability to link information/data to resolve a problem.

• Inappropriate use of models to resolve an issue.

• Answering requirements within a question in random order – the

order of the requirements are designed to help candidates.

• Lack of realism in giving advice.

• Conclusion by assertion.

• Identifying generic risks – not using the word ‘because’ to explain.

How to fail

• Significant gaps in brought forward knowledge.

• Very brief explanations – and limited identification of range of

issues.

• Not seeing ethical issues from different perspectives – or seeing

the ethical issue from the wrong perspective.

• Not following the suggested layout of the answer given in the

question.

• Poor time management.

• Failing to read all requirements and all of scenario before starting

to write.

Chinese proverbs

“Time spent sharpening your axe, is not time wasted

in cutting down the forest.” (ie plan your answer before

starting writing)

"When reading, don’t let a single word escape your

attention; one word may be worth a thousand pieces

of gold.“ (ie read the requirement very, very carefully)

Candidates’ performance in 2020

Review of 2020 - August and November 2020 pass rates

Corporate Reporting Strategic Business

Management

August 2020 (n = 2,697 )

82.7%

(n = 2,617

83.9%

November 2020 (n = 1,791)

79.8%

(n = 1,764)

88.0%

Average marks by Question 2020 – SBM

Q1 Q2 Total

August 2020 62.2% 59.2% 61.1%

November 2020 61.8% 60.5% 61.2%

The November 2020 exam

Question 1: Agroc Inc - Summary

Agroc manufactures farm vehicles, farm equipment and small components for the agricultural industry. It has two geographical divisions, E&A and US.

The board wants to understand better the relative performance of each product category and each division. Data and visualisations are provided.

There are also concerns relating to the upstream supply chain and production scheduling. Three proposals for improvement have been made.

• Proposal 1 - Centralised management.

• Proposal 2 - Upstream supply chain information system.

• Proposal 3 - Global production of farm vehicles. (proposal by CEO for concentrating global production of tractor engines in one factory).

Downstream supply chain proposals - level production and level sales. Customer loans to increase out-of-season sales. There are FR effects.

Ethical issue - faulty parts from suppliers causing product recalls. However, there are problems in identifying which products have been affected.

Q1 Agroc Inc - Requirements

1. Using the data in Exhibit 2 and other information available:

• Explain and evaluate the relative performance of each product category and each

division in the year ended 30 September 2020.

• Briefly explain the trends in performance of each product category for the five

years ended 30 September 2020 and set out the implications for performance

after this date. Ignore the changes proposed in the recovery plan.

2. In respect of the upstream supply chain and production scheduling (Exhibit 3) set

out and explain the benefits and risks of each of the following proposals:

• Proposal 1 - Centralised management.

• Proposal 2 - Upstream supply chain information system.

• Proposal 3 - Global production of farm vehicles. (Include an evaluation of the

suggestion of the chief executive).

Q1 Agroc Inc Ltd – Requirements (cont)

3. In respect of the downstream supply chain (Exhibit 4):

• Explain the operational efficiencies that could be gained by Agroc if the policy of

equal monthly production and sales could be successfully implemented.

• Using the example provided, set out and explain the financial reporting treatment

of the loan financing incentive for Geller in the year ended 30 September 2022

using:

o the finance director’s proposal

o the marketing director’s proposal.

Show supporting calculations.

4. Set out any ethical issues for Agroc and the finance director which arise from the

product recall (Exhibit 5). Recommend actions that Agroc and the finance director

should take.

Q1: Req (1) – Relative performance & TrendsHow did candidates perform?

Generally well attempted.

Common errors of weaker candidates:

• Did not use data table

• Lacked depth in explaining why relative performance

differed

• Produced limited calculations

• Merged cross-section and time series trend performance

Q1: Req (1) – Calculations: Good student answer

Q1: Req (2) - Upstream supply chain & production scheduling

How did candidates perform?



• Did not apply knowledge to scenario

• CEO’s globalisation suggestion – answers rather

thin or omitted

Q1: Req (2) – good answer to third proposal

Q1: Req (3) – Downstream supply chainHow did candidates perform?

Both elements had a weak performance.

Common errors or weaknesses:

• Little insight in solving the dilemma of seasonal

sales and level production

• Financial reporting generally poor (eg recognition of

interest element; treating the arrangement as a lease)

Q1: Req (3) – Poor answer to FR element

Q1: Req (4) – Ethics How did candidates perform?



• Failure to identify ethical principles

• Failure to separate ethical issues for Agroc and FD

• Woodenly using transparency, effect, fairness

framework

• Actions often impractical

Q1: Req (4) – Ethical principles Good but strays into commercial issues

Question 2 – Zatter plcSummary of scenario

Zatter plc develops and manufactures chemical products for

industrial use.

A potential acquisition by Zatter of Minix, a small innovative private

company which develops and produces chemical products.

A value needs to be established for Minix and there are three

alternative proposals to acquire: 100%; 80%; or 15% of Minix’s

ordinary share capital.

Data and working assumptions are provided.

Preliminary due diligence procedures on Minix have revealed three

issues relating to: failure of R&D projects; possible retirement of a

key director; and an audit report modification on R&D capitalisation.

Zatter plc - Requirements

1. Using the working assumptions (Exhibit 3), determine

an amount that Zatter should offer for:

• Proposal 1 – 100% shareholding in Minix

• Proposal 2 – 80% shareholding in Minix.

2. Without further calculations, evaluate the three

proposals (Exhibit 2) explaining the benefits and risks of

each. Provide a reasoned recommendation regarding

which proposal the Zatter board should adopt.

Zatter plc – Requirements (cont)

3. Explain the financial reporting treatment of the 15%

shareholding in Minix in Zatter’s financial statements, assuming

that Proposal 3 is selected. Explain any factors that Zatter

should consider in making accounting policy choices or

elections regarding the financial reporting treatment of the 15%

shareholding in Minix.

4. For each of the three concerns identified by Zatter staff

during preliminary due diligence (Exhibit 4), set out the risks

and describe the additional due diligence procedures that FFF

should perform.

Q2: Req (1) – Valuation for 100% or 80%How did candidates perform?

Answers generally poor to moderate.

Weaknesses included:

• No attempt to calculate EBITDA

• 12%/20% growth rates not applied

• Terminal value calculation poor

• Debt not deducted to get to equity value

• Debt deducted and intertest cash flows

• Mechanical calculation – eg no control premium adjustment

Q2: Req (1) – Valuation for 100%

Q2: Req (2) – Benefits and risks of three proposals


Generally, well attempted.


• narrow focus on just Zatter’s or just the directors’

perspective

• only addressed two of the three proposals.

Q2: Req (2) – reasonable answer to 15% shareholding

Q2: Req (3) - FR treatment of 15% shareholding in Minix


Answers tended to polarise.

Weaknesses included:

• Identified as a JV or associate

• Used equity accounting

• No mention of IFRS 9 or financial asset

• No consideration of FVTPL and/or FVTOCI

Q2: Req (3) – weak answerAFVTPL and FVTOCI wrong way around

Q2: Req (4) – Risks and due diligenceHow did candidates perform?

In general, candidates performed well.


• Very general answers, listing various types of due

diligence

• Failure to describe due diligence procedures

Q2: Req (4) – Risks and due diligenceGood answer – key risks identified; active verbs used

strategic business management webinar 2021

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