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EXECUTIVE TRAINING COMPANY(INTERNATIONAL) LTD
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HKICPA Module B Seminar
Module Preparation Seminar onMajor or Difficult Syllabus Topics (Part I)
-Ethics, executive management and management reporting
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About the Lecturer
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More than 10 years working experience in managerial role
Currently working in an overseas bank
Notes writer, HKICPA speaker, QP marker and Mentor
A qualified Enhanced QP facilitator in the HKICPA
Regular speaker for HKICPA’s seminar
A mentor under a mentorship programme in a well-known professional accountancy body
Mr William Ng (MB, FE (MB))ACA (UK), FCCA and FCPA, Master of Accountancy,Master of Corporate Finance, BA (Business Studies)
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Basic technique• Narrow the scope when answering questions by scanning through
topics in tutorial notes and/or CLP.
• Being a smart for ‘copy and paste’ skill by referring to the question when applying the knowledge from tutorial notes and LP.
• Proper time management, including identification of those easy and difficult question.
• Remember to write the answer in memo format if such format is being asked.
• Neat and tidy handwritten answers are required.
• Double check for accuracy of calculation to secure high marks
• Answer the key points, and you are not expected for long answer
• Separate the points into different paragraph for earning marks
• Give assumption for unknown elements
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- ETHICS (LP CHP.1)
- EXECUTIVE MANAGEMENT (LP CHP. 2)
- MANAGEMENT REPORTING (LP CHP. 4,5,6)
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REFERENCES TO LP
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ETHICS (LP CHP.1)
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FIRST TOPIC
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LOGOEthicsFundamental principles for Professional Accountants
Professional accountants are required to observe and abide by the Code of Ethics as promulgated by the HKICPA
Section 110 - Integrity
Being honest and straightforwardAvoid conflict of interest between personal gain and business investment plan
Section 120 - Objectivity
Being unbaised, avoiding undue influence or any conflicting of interestDisallow personal bias to influence objective analysis of investment proposal
Section 130 – Professional competence & due care
Requires both continuous awareness and understanding of relevant technical professional and business development for attainment and maintenance of professional competence.
Apply professional knowledge in accordance with applicable technical and professional standard
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LOGOEthics
Section 140 - Confidentiality
Respect confidentiality of information.Largely related to the case of insider dealing.
Section 150 – Professional behaviour
Abide by all laws, rules and regulationAvoid any actions that discredits the professional
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LOGOEthics
Ethical model – The American Accounting Association Model (7-steps)
Determine the facts
Define the ethical issues
Identify the major principles, rules and values
Specify the alternatives
Compare values and alternatives
Assess the consequences
Make your decision
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QP exam topic related to Ethics
Insider dealing
The trading of a corporation’s stocks or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company.
Relevant code of ethics to breach
Integrity
Objectivity
Confidentiality
Professional behaviour
P.S. Also consider violating the law
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LOGOEthicsQP exam topic related to Ethics
Fraud accounting
Overstate the profit in order to improve the profitability and liquidity of the company for ease to access of credit facility
Relevant code of ethics to breach
Integrity
Objectivity
Professional competence & due care
Professional behaviour
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Corporate social responsibility (CSR) and sustainable reporting
Definition : CSR is operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business. It is the way in which organizations achieve sustainable developments.
Benefits of pursuing CSR
Lower cost base from being energy efficient
Opportunities to attract ethical customers
Increase staff loyalty and morale
Protection or enhancement of reputation
Retention of licences to operate
Competitive advantage
Development in technology which improve the economies of alterative energy might generate opportunities to develop new business
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Corporate social responsibility (CSR) and substainability reporting
Also named as ‘social and environmental reporting’ and ‘sustainability reporting’
Linked in conjunction with triple bottom line reports (TBL)
TBL provides a quantitative summary of a corporation’s performance over a previous time period in terms of its economic or financial impact, environmental quality, and social performance
Companies report on three aspects of performance : economic, environmental and social aspects
This reporting is advocated by the Global Reporting Initiative
Adopted by a number of global companies
Corporation’s true performance must be measured in terms of a balance between economic (profits), environmental (planet) and social (people) factors, with no one factor growing at the expense of the others
Each aspect can be assessed by use of a number of proxies
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LOGOEthicsCorporate social responsibility (CSR) and substainability reporting
Each aspect can be assessed by use of a number of proxies
Economic aspects:
Operating profitGearing level Debtor collection period
Social aspect
Working conditionsFair payAppropriate labour force by employee numberSafety at work by number of accidents at workTraining days
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Corporate social responsibility (CSR) and substainability reporting
Each aspect can be assessed by use of a number of proxies
Environmental aspects:
Ecological footprintEmissions to airUse of energy and waterInvestment in renewable resources
With quantified target for CSR policies, it is useful for measuring actual performance and compare with the target level.
CSR reporting is more common in countries where institutional investors are major shareholders, such as the US, and lesson common where many large companies are family-owned or family-controlled, such as HK.
Energy company, CLP Group is one of few HK companies that produce CSR reports. These reports are mainly narrative in form, but contain some quantified performance that are independently verified by an external auditing agency
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EXECUTIVE MANAGEMENT (LP CHP.2)
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SECOND TOPIC
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LOGOExecutive ManagementOverviews of steps involved in formulation of strategies
Conduct corporate environmental appraisal analysis such as SWOT, and Porter’s Five Forces Model
Setting of organizational mission and objectives
Gap analysis, by performance variance measurement in order to compare actual performance against potential performance
Strategic choice, which involves generation and evaluation of various alternatives, and finally pick up the potential one that achieve organizational goals, such as adoption of Porter’s Generic Strategies, and Ansoff Matrix.
Strategy implementation, which involves the carrying out of pre-determined strategic plan at corporate, business and operational/functional levels
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LOGOExecutive Management
Corporate Appraisal : Environmental analysis
PESTEL Model
P – Political environment
E – Economic environment
S – Socio-cultural environment
T – Technological environment
E – Environmental protection
L – Legal environment
The model helps to analyze the potential problem, and develop SWOT analysis with reference to these individual elements.
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LOGOExecutive Management
Corporate Appraisal : Environmental analysis
Porter’s Five Forces Model
Threat of new entrants
Bargaining power of suppliers
Bargaining power of customers
Threat of substitutes
Rivalry between existing producers
The sixth force : Complementarity
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LOGOExecutive Management
Corporate Appraisal : Environmental analysis
SWOT analysis
Strengths
Economies of scaleLeadership and management skillProduct differentiationCost leadershipMarket share/market leaderSound profitability and liquidity position
Weaknesses
Lack of innovationInsufficient cashflow
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LOGOExecutive ManagementCorporate Appraisal : Environmental analysis
SWOT analysis
Weaknesses
Lack of technical/expertise skillHigh gearing levelPoor quality product/services
Opportunities
New market segmentStable political environmentSound economic environmentLow interest rate environmentHigh threat for new entrants
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LOGOExecutive Management
Corporate Appraisal : Environmental analysis
SWOT analysis
Threats
Intense competitionBarrier to tradeEconomic downturnChange in political and legal environmentTechnological threat
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LOGOExecutive Management
Corporate Appraisal : Product/Service Portfolio Model
Product life cycle
Introduction
Launch of new productSlow growth in salesHeavy expenses on research and developmentHigh unit cost
Growth
New products gain market acceptanceHigh growth rate Product start to make profitLower unit cost
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LOGOExecutive ManagementCorporate Appraisal : Product/Service Portfolio Model
Product life cycle
Growth
Heavy expenses on promotionPossibility of overtrading issue
Maturity
Growth rate slow downThe longest period of product’s lifeProfit is stablePrice-based strategy is adopted in order to capture market share
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Corporate Appraisal : Product/Service Portfolio Model
Product life cycle
Decline
Change in customer preference and lack of technical supportSales begin to declineProfits fallIntense competition leading to drop in priceProducers consider searching alternative market segments
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LOGOExecutive Management
Strategic choice : Ansoff Matrix
Current products or current markets : market penetration
Present products and new markets : market development
New products and present markets : product development
New products and new markets (diversification)
Horizontal integration
Vertical integration
Geographical integration
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LOGOExecutive ManagementStrategic choice : Porter’s generic strategies
Cost leadership or price-based strategies
Capture market shareCut cost in order to maintain profitabilityReduction in cost may sacrifice in product qualityProfit margin would be decreased
Product differentiation strategies
Tailor-made, and unique productFocus on providing high quality standard of product or servicesSeek to provide high perceived value justifying a substantial price premium
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LOGOExecutive ManagementStrategic choice : Porter’s generic strategies
Focus strategies
Concentrate on one or fewer market segmentsConcentrate on one or fewer product typeConcentrate on one or fewer geographical region
Hybrid strategies
Combination of price-based strategies and product differentiation strategies
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LOGOExecutive ManagementTechnique related to Executive Management
Scan through questions to determine whether the questions are related to environmental analysis, strategy determination, or focus on particular model
Underline key wordings in case study in order to capture point when answering question for application of case.
Read questions carefully in order to differentiate whether one strategy or multiple strategies being asked
Remember to weight the content with marks allocated in order to ensure proper time management
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LOGOExecutive Management
Common questions appearing in exam
Identify the strategies that company is currently adopted.
What are the strategic reasons for such acquisition?
What are the strengths (merit, advantages, contribution) for adoption of strategy?
What are the weaknesses (demerit, disadvantages, drawback) for adoption of strategy?
What are the potential business risks?
Suggest some managerial control to reduce the risk involved
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Third Topic
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Management Reporting (LP CHP. 4,5,6)
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LOGOManagement ReportingAbsorption Costing
Fixed and variable costs are allotted to cost unitsTotal overheads are absorbed according to activity level
Variable Costing (or marginal costing)
Only variable costs are allotted to cost unitsIt treats fixed overhead as period cost
Traditional Costing system
Use of one or fewer allocation bases to allocate individual production departments’ overhead costs to productOne or fewer indirect cost poolsIt has more indirect costsIt focuses on product/services as the cost object
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Activity Based Costing System (ABC)
It identifies various activities performed in an organization, collects costs on the basis of underlying nature and extent of those activities, and assigns costs to products and services based on those activities based on appropriate cost driver
Attempt to allocate overheads to product or services more accurately
ABC System has multiple indirect cost pools
It classifies many indirect costs as direct costs
ABC System focuses on activities as fundamental cost object
ABC System uses cost of activities as the basis for assigning cost, resulting in more accurate costing
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LOGOManagement Reporting
Stages to implement ABC System
Conduct interviews to determine appropriate activity centres and cost drivers
Establish the interrelationship between key activities and the resources consumed
Construct a process map to illustrate these relationships
Put costs under various costs pool and identify the cost of each activity and the related cost driver
Assign costs to products and services on the basis of the mix of activities needed to produce each product or service
Purchase of advanced software to carry out the mechanism of ABC.
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Benefits for ABC System
Better understanding of company activities
More accurate overhead cost allocation
Cost driver rates can be used as a measure of performance
Assist in setting the budget
More realistic product costs and better resource allocation decisions
Raised profile of overhead costs and improves control by linking costs to the activities that cause them
Enhanced the credibility of the costing system
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LOGOManagement ReportingDrawback for ABC System
Encounter difficulties in identifying cost pools, activities and subsequent cost driver rates for the range of products and services
Considerable time and effort are required
Adequate computer software may not be available to support the complexities of the ABC system
There may be inadequate human resources to undertake the research and analysis
The administration of the ABC system results in additional cost such that cost may be outweigh the benefit
The implementation of ABC system must be supported by senior management which might not be as smooth as one think.
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LOGOManagement Reporting
Pricing Decisions
Demand based pricing
Assumes that there exists a relationship between the selling price of the product and the demand.
Relationship can be described by an inverse, linear relationship Optimum price is set at marginal revenue equals to marginal cost
Cost plus pricing
Adding an amount to the cost of the item Simple to calculate Ignores the market Difficult to establish and decide actually which cost may be recovered Different absorption methods give rise to different costs and hence
different selling prices
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LOGOManagement Reporting
Pricing Decisions
Target cost pricing
Involve setting a target cost by subtracting a desired profit margin from a competitive price
Easy to justify the price change Encourage price stability, if all competitors have similar cost structure and
use a similar mark-up Staff may be demoralised if production costs cannot be reduced to meet
the target profit
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LOGOManagement Reporting
Pricing Decisions
Life cycle pricing
Tracks and accumulates costs and revenues attributable to each product over the entire product life cycle
A product life cycle can be divided into five phases: development, introduction, growth, maturity and decline The company can determine the price according to its stage in the product life cycle
Non-production costs are traced to individual products over complete life cycles, and hence more accurate feedback information is available
No simple formula for selling price can be set because it requires a lot of judgement from the management
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LOGOManagement Reporting
Customer Profitability Analysis
Total sales revenue from the customer group less than all costs incurred in servicing that customer group, ie., contribution margin
Customers are grouped according to behaviour
By understanding the cost implications of different customer types’ consumption of activities, measures can be put in place to modify their behaviour
The use of charges or increased services to modify behaviour can achieve this outcome
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LOGOManagement Reporting
Attempt Past Paper , please refer to the attached :
May 2010 Question 2
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Benefit of Customer Profitability Analysis
Improved profitability Efficient resources allocation Improve customer service Better negotiation with customers Retention of customers and highlight unprofitable
customers Comparative analysis between customers
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LOGOManagement ReportingFinancial performance indicator
Profitability Gross profit margin Net profit margin Return on equity
Gearing Gearing ratio Interest cover
Liquidity Current ratio Quick ratio Accounts receivable period Accounts payable period Inventory turnover period Use of average balance figures for calculation of ratio if the data is
available, say three-year data for two-year ratio comparison
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Non-Financial performance indicator
Reasons for increasing importance :
Monetary terms based on performance measurement system concentrates for a few variables
Lack of information on quality
Change in cost structure
Change in competitive environment
Change in manufacturing environment
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LOGOManagement Reporting
Non-Financial performance indicator
Samples for non-financial performance indicators
Occupancy rate in restaurant and hotel
Number of customers being served by one staff
Total units sold versus total units sold by competitors (indicating market share)
Warranty claims per month
Customer satisfaction rating by survey
Number of complaints over a certain period of time
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LOGOManagement Reporting
The Balance Scorecard (BSC)
Provides an organisation with a comprehensive framework that translates the organisation’s vision and strategy into a coherent set of performance measures
Both financial and non financial information is included
To implement the BSC, company must identify its vision, it then identifies all key and relevant performance measurement which lead to the achievement of the vision
The performance measures are grouped into 4 perspectives
Financial (eg., revenue growth, profitability) Customer (eg., market share, customer satisifaction) Internal business processes (eg., time to complete job, number of
pollution complaints) Innovation and learning (eg., skill levels of employees, hours of employee
training)
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The Balance Scorecard (BSC)
Each perspective has a short-term goal with one or more critical success factors identified with that goal
These factors are structured into a linked set of understandable and measurable operational targets and key performance indicators
The BSC can lead to consensus on organizational priorities, clear specification of goals, rigorous planning and improvement processes, alignment of strategy goals with shorter term actions, clearer communication, team working and knowledge sharing and clearer accountability for results
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LOGOManagement Reporting
Responsibility Accounting
A system if account that segregates revenues and costs into area of separate responsibility which are then assigned to managers, who are then evaluated on performance compared to budget.
Cost centre – focus on cost control
Revenue centre – focus for revenue generation
Profit centre – revenue generation and cost control
Investment centre – control over capital expenditure decision
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LOGOManagement Reporting
Responsibility Accounting
Measurement for investment centres
Return on Investment (ROI)
Profit/Capital Employed
where capital employed : Total assets – Current liabilities
Relative measurement as expressed in terms of percentage
Residual income
= Profit – an imputed interest charge on controllable investment
Absolute measurement
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Responsibility Accounting
Measurement for investment centres
Economic value added (EVA)
Net operating profit after tax – (Capital employed * WACC)
Make use of economic profit concept by adjustment from accounting profit:
Replacement cost of net assets included in EVA
Costs which would normally be treated as expenses be considering within EVA such as research and development cost
Adjustment for depreciation charge by means of amortisation cost
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LOGOManagement Reporting
Responsibility Accounting
Measurement for investment centres
Economic value added (EVA)
Advantages of EVA
Reflects the real wealth for shareholders Involves less distortion of accounting policies Generates absolute value which would be easily understandable by managers Treatment of certain costs as investments thereby encouraging expenditure
Disadvantages of EVA
Focus on short term performance Depend upon historical data, which might not be indicator for future use Involve efford for adjustments for deriving the EVA Comparison within industry is difficult as it involves absolute amount only
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LOGOManagement Reporting
Exam questions related to investment centre
Involves calculation of different division by EVA, ROI, and residual income
Analysis of divisional performance by means of numerical support
Discuss the strengths and weaknesses under different investment performance measurement
EVA is a better indicator for investment performance measurement
Qualitative factors should also be considered
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LOGOManagement Reporting
Transfer pricing
Definition
Price at which goods or services are sold by one division within an entity to another division in the same entity
Involve decision whether to buy/sell products to outsider or within the same group
The general rule is that price should equal the outgoing cost, ie variable cost (if no production constraint) plus the opportunity cost in the selling organisation (if with production constraint)
Objectives
Motivation of divisional managers Goal congruence Divisional autonomy
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Transfer pricing
Factors to be considered when setting of transfer price
Tax consideration
Fund positioning
Risk and uncertainty
Government policies
Management incentives and performance evaluation
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Attempt Past Paper , please refer to the attached :
Sept 2007 Question 2
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Exam questions related to transfer pricing
Optimal decisions for various scenario related as to whether production constraint or not
Concept of variable cost, opportunity cost, and fixed cost is critical for determination of transfer price
Link with the concept of residual income/ROI for calculation of bonus under different scenario for determination of transfer price
Staff morale problem should be considered when involved improper transfer price setting
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you.Thank you!!!
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