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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.

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Presentation on theme: "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."— Presentation transcript:

1 FAE 2013 Mock Exam

2 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

3 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

4 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

5 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

6 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

7 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)

8 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

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

10 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


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