FAE 2013 Mock Exam.

Presentation on theme: "FAE 2013 Mock Exam."— Presentation transcript:

FAE 2013 Mock Exam

Primary Indicators Prepare a comprehensive and motivating one page summary of MIL’s mission strategy Prove that the group do not see the full value of MIL Prepare an assessment of what impact the possible sale of 30% of MIL may have on the share price of the Mayflower Group Calculate the impact of the sale of the 30% stake of MIL will have on the group financial statements including journal entries

Primary Indicators Classify the Internal Audit findings and explain your logic for each Consider the issue with regard to the staff who have a moral dilemma (three step approach; identify the issue; clarify and evaluate; action and review) Consider the position of the MIL board Provide advice on which MIS we should go for

True economic performance of MIL
PBT per forecast results €600 Reverse the allocation of R&D – there’s a strong argument for reversing all of the €2,100 as we’re told on page 10 that the group don’t do any R&D for MIL Group administration costs should be allocated based on something like turnover rather than employee numbers as we don’t subcontract out staff costs – therefore add back approx €1,500

True economic performance of MIL
Transfer pricing 50% of consulting sales is intercompany priced at VC + 10% (€2,420 *50% * 110*) = €1,331 Total sales = €3,993 meaning that the other half of sales are charged out at (3,993-1,331) €2,662 As a result we’re undercharging the intercompany sales by €1,300

Economic value of MIL Profit per management accounts €600
Group R&D €2,100 Administration costs €1,500 Transfer pricing €1,300 True profitability €5,500

Impact on the share price of a 30% disposal of MIL
Current market value of MIL (using PE of 8) €600*.8*8 = €3,840 (pre tax profit 600, tax rate 20%) Realistic value of MIL (based on AME and a PE of 22); (€5,500)*.8*22 = €96,800 Current value of MG equity = 400m shares at €1 = €400,000 Take out the €3,840 Increase it by the cash we receive on selling 30% of MIL (30% * 96,800) = €29,040 less 20% CGT = €23,232 Add back the value of the remaining 70% of MIL (96,800*.70) = €67,760 Total = €487,152 (or €1.22 per share) (error in solution, uses 400 as current earnings instead of 600)

Mission Statement Not excessive in length! (one page summary MAX – as per the case) Part of a plc Aim to be leading RCV manufacturer in Europe Will invest in R&D Will attract best people Will invest as necessary Link with manufacturing Importance of consulting

Internal Audit considerations
Point Significant Routine Urgent Non urgent No Disaster Recovery plan in place x Automatic reversing journals are not retrospectively reviewed FAR does not record purchase invoice number Reconcile all major supplier statements monthly GRNI account balances older than one year Register of Directors Staff mapping by department Balances with group companies to be reconciled on a monthly basis Misstated bills of materials Customers payments in advance

Accounting for disposal
IFRS 10 – didn’t lose control, continue to consolidate Based on my earlier valuation (ignoring tax charge) €32,208 Dr Bank (less transaction costs of 200) 32,008 Cr Payables 200 Cr NCI (net asset value * 30%) 900 Cr equity 30,908 No impact on earnings Transaction costs go to equity Disclosures re NCI on face of SOCI and SOFP