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Module A, Paper DA2 (project)
Incorporating subject areas:

• Interpretation of Financial Statements
• Performance Management.

General comments

Overall performance remained good with an encouraging number of candidates achieving a pass mark. It is also good to note that some candidates had taken heed of the comments in the December 2003 report - and an article in finance matters - and ensured that their comments were set in the context of the specific company. Reference to the marking scheme for this project (and indeed for previous projects) will indicate that this is the key to achieving good marks.

The main reason why some candidates did not gain sufficient marks to pass was that they offered general comments which could have been applied to any company and did not specifically assess the stated objectives of the company. It may be helpful to candidates at future sittings if this point is expanded a little. The Study Guides for both subject areas include outcomes which require calculations to be carried out.

However, the main purpose of the project was not to test candidates' ability to carry out such calculations. Rather the main purpose was to allow candidates to develop their analysis of what the calculations mean and how they can be used by investors and managers. This means that marks were not awarded for presenting a list of ratios and other measures of performance which could be found in any textbook, but rather for considering how performance could be assessed using appropriate measures.

When assessing performance it is essential to have an appropriate standard against which to assess performance. Industry averages or the performance of competitors (if available) often provide such a standard. However the company's strategy and objectives are always relevant. It seems obvious that the company's performance ought to be assessed by considering what the directors sought to achieve, and then selecting relevant ratios and other measures for the analysis. These ratios may then be assessed against the standard provided by industry averages or competitors' results.

Question 1A

This question was designed to encourage candidates to consider the company's strategy and objectives. Most candidates recognised the fact that, like any other policy, environmental and ethical policies form part of the company's strategy. Such candidates scored good marks. However, there were a number of candidates who chose to discuss the nature of such policies. In some cases this included discussion of the importance of environmental and ethical policies in the current business context. While some of these discussions were interesting, they did not address the question asked, and no marks could be awarded.

Question 1B

This question required candidates to identify and explain measures which could be used to assess performance. Those candidates who recognised the importance of placing their analysis in context by providing an explanation of the importance of the measures they identified achieved good marks. However, once again a number of candidates provided a list of measures in the hope that quantity (in the form of a large number of measures) would compensate for a lack of analysis (in the form of carefully selected measures).

Question 1C

There were two aspects of this question that were important. The first is that the assessment of performance was required from the perspective of a potential investor. The second is that the assessment should be based on the policies and objectives as stated in the annual report. These aspects set the context for the analysis.

Those candidates who showed a direct link between the ratios and measures included in their discussion and the policies and objectives as stated in the annual report, and developed their comments, scored high marks. On the other hand, candidates who simply listed a number of ratios and offered descriptive comments did not gain many marks.

Most interesting however, is the category of candidates who referred to the policies and objectives, and then went on to discuss a number of ratios, but did not state clearly why the ratios they had selected were relevant. This approach did not maximise marks. Unless the candidate clearly states why the ratio has been selected, it is not possible to award marks. In some cases, the candidate may think that the link is obvious. However, it is essential that candidates develop their arguments clearly and explicitly. It cannot be left to the marker to deduce what the candidate was thinking. Candidates should not avoid stating what they feel is obvious in the mistaken hope that the marker will instinctively see the connection they have made.

Question 1D

Many of the comments above could be made with reference to this question, which sought to test candidates' ability to identify relevant management information for performance measurement. In a question such as this, there is no obvious list of measures which can be used. If the candidate was a manager in the company, the key would be to understand the strategy and objectives of the company, to identify the information needed to track the achievement of that strategy and then to ensure that the management information system reported that information. Of course the final step in that process is not possible when undertaking the project, therefore good answers completed the first two steps, and clearly linked the measures identified with the strategy and objectives. Such answers obtained good marks.

Some candidates used the balanced scorecard as a structure. While this was a useful technique, it was not the prime focus of the question. Where such answers justified the measures identified, good marks were achieved. However, few marks could be awarded for answers which simply described the balanced scorecard approach and structure, rather than analysed what measures should be in the scorecard.

Another problem was that some candidates described high-level measures of performance, suggesting for example that health and safety performance should be assessed, but no specific measures were suggested.

Finally, some candidates included only measures which the company had reported. While there may be some value in considering the company's measures, it is essential to also include evidence of analysis (why these measures may - or may not - be important) and creative thinking (some additional measures - which should, of course, be justified).

Question 1E

This question related to the influence of the UK accounting framework on the assessment of performance. It was important to note that this was not a general question, but like all the other questions was prefaced by the introductory phrase: 'Based on the 2002 Annual Report of The BOC Group'. Those candidates who recognised this were able to develop their analysis and provide good examples drawn from the financial statements of the group. Those candidates who simply discussed the UK accounting framework in general did not gain as many marks.

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