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

Interpretation of Financial Statements

Performance Management.

At this sitting, the project was based on a case study on the retail motor industry. Because this allowed for a high level of integration between the two subject areas, there was only one question, which was broken down into six sub-parts. The sub-parts did not carry equal marks.

The requirements of the question may be summarised as follows:

1. consider the information needs of shareholders, and the implications of these needs for managers
2. assess the company’s recent performance
3. examine the impact of an employee share ownership trust on the financial results
4. propose an appropriate strategy and mission statement
5. propose an appropriate organisational structure
6. identify and justify appropriate critical success factors (CSFs).

Overall performance was good with a number of candidates presenting very good answers.

In the main, answers that scored high marks were characterised by a logical thought process, comments that were rigorously linked to the specific requirements of the question, and ideas that were developed to provide analysis.

In contrast, candidates who did not obtain good marks, tended to restrict their comments to description, and did not answer the questions fully. The predominant tendencies in this regard were to ignore the requirement for the significance of each measure to be clearly explained, and failing to provide a clear justification for the CSFs identified and/or an indication of how the CSFs would actually be measured. This is considered further in the comments below on Parts (b) and (f) of the question.

Other reasons for candidates failing to obtain marks were:

Not answering questions in full
The most obvious example of this was the lack of justification for ratios selected as noted above. However, in Part (d), some candidates only gave either a statement of strategic intent or a mission statement, but not both as required by the question. Indeed, a few candidates took this omission further, and did not answer all the questions, omitting Part (d) entirely.

Not answering the question set
Some candidates discussed other (in some cases, unrelated) issues. This is considered further in the detailed question comments below.

There is continuing evidence that some candidates are not using the mark allocation as a guide to how much discussion is required. For example, Part (b) was worth 34 marks. This would represent about 1,700 words, 34% of the permitted 5,000. Many candidates wrote less than 1,000 words in this section, with some writing less than 300. It should, of course, be noted that while brevity is a useful skill in business, it is highly improbable that any candidate will obtain sufficient marks to pass if their answer is as far away from the benchmark as those referred to above. Equally, the material included in the answer must address the question, if any marks are to be gained.

Some submissions were characterised by poor proof-reading, with numerous typographical errors. This is unprofessional, and would not be acceptable in a commercial situation. In this instance, this did not lead to a lower mark, because no marks had been allocated to the overall quality of the material. However, candidates at future sittings should be aware that it is possible that marks will be allocated for the quality of the material submitted.

A new, and irritating, tendency was for a few candidates to use language that is more appropriate for use on a mobile phone SMS. For example, when citing sources a number of candidates referred to the study text by use of the term ‘TxT’. This is not acceptable and is strongly discouraged.

Part (a)

There were some excellent answers to this part of the question, with some candidates obtaining full marks. However, some candidates made the mistake of not answering the question that was actually set, and instead provided material that although factually correct, was irrelevant to the question, and could not attract marks. There were three main examples of this. The first is describing the workings of the stock market, and the rules for stock market listing. While it was acceptable to note that as a listed company, the directors are now required to comply with the rules of the stock market, this reference was sufficient. There was no need to provide an exhaustive list of the rules. Where such a list was provided, candidates had obviously simply copied this from a source document. In a project such as this, simply copying material will not attract marks. The project seeks to provide an opportunity for candidates to develop their analytical skills and demonstrate an awareness of how the material might be used by managers of the company on which the project is based. The second was that in some cases, answers included a detailed discussion of corporate governance. In many cases this would have been good material – if required by the question. Because it was not relevant, no marks could be awarded. Finally, some candidates described the legal differences between private companies and public companies. Once again this was not required by the question, and attracted no marks.

Part (b)

There were a number of extremely good answers to this part of the question, and again some answers attracted maximum marks. Such answers clearly indicated why the chosen measure was relevant for this company. In the main this was done by referring to the goals and strategy of the company. However, as noted above, a number of candidates did not provide any justification for the measures chosen. This is particularly disappointing, because the need to explain why a measure was chosen has been referred to in reports for previous sittings, has been the topic of an article in the March 2004 issue of finance matters and was explicitly included in the requirement of the question. Candidates should note that the wording of questions is the subject of much thought, discussion and debate. The wording that appears on the question paper should therefore be considered carefully when developing answers. Candidates should also note that justification is not simply providing a general comment about the significance of a measure, such as ‘gearing provides a measure of financial risk’. Although this is correct, it does not explain why the measure was chosen in this instance. A statement such as ‘The company is seeking to grow, and it will therefore require additional funding. Care must be taken to ensure that unnecessary risk is not introduced as a result of the method of funding’. This is more appropriate and will attract marks because it links the analysis to the company’s strategy and clearly shows why the measure is significant for this company. In future, projects will require even more in-depth consideration of which measures should be used to assess performance, and will provide less (or perhaps very little) financial data in an effort to motivate candidates to discuss, rather than describe ratios.

Part (c)

Those candidates who read the question carefully and based their answers on the requirement scored good marks. This was achieved by considering how the accounting treatment of an ESOT would affect the measures discussed in Part (b).

In many ways this was a very straightforward question. Unfortunately, some candidates seem only to have read certain words in the question, and therefore produced material that was much more technical than was required. A number of candidates provided a detailed discussion of various UITF abstracts and traced the development of the accounting treatment of ESOTs. While this provided very interesting reading, it did not gain any marks, because it was not what was required by the question. Once again the advice is – read the question carefully – and then answer that question.

Part (d)

In some respects, this question provided a blank canvas for candidates. It is pleasing to note that a good number of candidates accepted the challenge, and showed a clear link between the existing strategy, the company’s current position, and the stated aspirations. This was done by careful selection of material from the case, and often led to full marks. In contrast, those answers that were underdeveloped simply provided a statement of strategic intent and a mission statement which was not supported by any analysis. This approach did not maximise the number of marks gained.

Part (e)

Once again, the key to obtaining marks in this part of the question was to ensure that comments followed logically from the preceding analysis. Those candidates who did this, and clearly illustrated how responsibility centres could be used by Motorsayles and justified the types of responsibility centres to be used in the context of the company’s strategy and goals, gained good marks. Those candidates who simply described different types of responsibility centre, often by reproducing material from a textbook, did not gain marks. With regard to the proposed organisational structure, where the structure was discussed and justified in terms of strategy and goals, candidates gained high marks. Those candidates who simply described a structure, or provided an organisational chart without any discussion or justification, predictably did not score high marks.

Part (f)

The requirement of this part of the question was to use the preceding analysis to identify the key factors that the company must control if it is to be successful. The greater the extent to which the CSFs chosen were justified, the more marks were obtained. Once again, a number of candidates rose to the challenge and obtained full marks. Those candidates who did not score high marks tended to either provide a list of possible CSFs that could have been taken from a textbook. The key point about CSFs is that they measure important outcomes for a specific company. As such, they must be closely aligned with the company’s strategy. It is perhaps this need to align strategy and CSFs which contributed to some candidates going down one of two incorrect paths. The first of these was to discuss strategic objectives, rather than CSFs. CSFs are operational outcomes that can be tracked by staff at an operational level. The link to strategy is that achieving the identified operational outcomes will lead to achieving strategic goals. A second mistake was to create a balanced scorecard, and to discuss the merits of the balanced scorecard. While a balanced scorecard will report the same outcomes that would be measured by CSFs, the question did not require a balanced scorecard to be developed. It is a matter of concern that some candidates chose to take this approach, as it indicates, at best, a lack of thought, and at worst, a replication of answers to previous projects. Neither of these approaches is likely to lead to success.

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