Association of Corporate Treasurers (ACT) Qualifications Financial Reporting, Tax and Treasury Performance Syllabus

Financial Reporting, Tax and Treasury Performance syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Financial Reporting, Tax and Treasury Performance in Association of Corporate Treasurers (ACT) Qualifications, not a summary of it.

1. 1

   Accounting for Treasury Activities

   4 topics

   • Financial statements and treasury
     • Statement of cash flows construction and interpretation
     • Balance sheet presentation of debt and derivatives
   • Accounting for financial instruments
     • IFRS 9 classification and measurement
     • Amortised cost vs. fair value through P&L/OCI
   • Debt vs. equity classification
     • IAS 32 presentation principles
     • Compound instruments split accounting
   • Impairment and expected credit losses
2. 2

   Financial Analysis and Ratios

   4 topics

   • Profitability and efficiency analysis
     • Margins, return on capital and asset turnover
   • Liquidity and solvency ratios
     • Current, quick and cash ratios
     • Gearing, interest cover and net debt/EBITDA
   • Cash flow-based analysis
     • Free cash flow and cash conversion
     • Debt service and fixed charge cover
   • Credit analysis from a lender's perspective
3. 3

   Treasury and Taxation

   4 topics

   • Tax considerations in financing
     • Interest deductibility and thin capitalisation rules
     • Withholding tax on interest and dividends
   • Transfer pricing for intercompany funding
     • Arm's length pricing of intercompany loans
     • Guarantee fees and cash pooling tax aspects
   • Cross-border tax efficiency
     • Double tax treaties and treaty relief
     • Treasury centre tax regimes
   • Tax risk and governance in treasury
4. 4

   Treasury Performance and Reporting

   4 topics

   • Measuring treasury performance
     • Benchmarks and key performance indicators
     • Cost of funds and hedging performance attribution
   • Management and board reporting
     • Treasury dashboards and exception reporting
     • Communicating risk and exposure positions
   • Treasury budgeting and cost control
   • Continuous improvement and benchmarking

Financial Reporting, Tax and Treasury Performance flashcards for Association of Corporate Treasurers (ACT) Qualifications

22 of 50 cards from the Financial Reporting, Tax and Treasury Performance deck — real questions with worked answers.

1. What are the primary financial statements relevant to treasury analysis, and what does each show?

   The statement of financial position (balance sheet) shows assets, liabilities and equity at a point in time; the statement of profit or loss (income statement) shows performance over a period; the statement of cash flows shows cash movements (operating, investing, financing); and the statement of changes in equity reconciles opening and closing equity.

2. Under IFRS 9, what are the three classification categories for financial assets?

   Amortised cost; fair value through other comprehensive income (FVOCI); and fair value through profit or loss (FVTPL). Classification depends on the entity's business model for managing the asset and the contractual cash flow (SPPI) characteristics.

3. What is the SPPI test under IFRS 9?

   The 'Solely Payments of Principal and Interest' test. A financial asset can only be measured at amortised cost or FVOCI if its contractual cash flows are solely payments of principal and interest on the principal outstanding; otherwise it is measured at FVTPL.

4. Under IFRS 9, how are most financial liabilities measured?

   Most financial liabilities are measured at amortised cost using the effective interest method. A liability designated at FVTPL is the exception, with own-credit-risk changes presented in OCI.

5. What is the effective interest rate (EIR) method?

   A method of allocating interest income or expense over the relevant period so that a constant rate is applied to the carrying amount. The EIR is the rate that exactly discounts estimated future cash flows to the gross carrying amount of the asset (or amortised cost of the liability).

6. What is the key principle distinguishing debt from equity under IAS 32?

   Substance over form: a financial instrument is a liability if the issuer has a contractual obligation to deliver cash or another financial asset (or to exchange on potentially unfavourable terms). It is equity only if there is no such obligation and it represents a residual interest in net assets.

7. How is a mandatorily redeemable preference share classified under IAS 32, and why?

   As a financial liability, because the issuer has a contractual obligation to deliver cash (redeem the share) at a fixed or determinable date, regardless of the 'share' label.

8. What is a compound financial instrument and how is it accounted for under IAS 32?

   An instrument with both liability and equity components (e.g. a convertible bond). It is split-accounted: the liability component is measured first at the fair value of a similar liability without conversion, and the residual is allocated to equity.

9. Why does the debt/equity classification matter for treasury and reported gearing?

   Liabilities increase reported gearing and interest expense (reducing profit), while equity does not. Classification therefore affects leverage ratios, covenant compliance, credit ratings, EPS and the cost of capital.

10. What is the expected credit loss (ECL) model under IFRS 9?

    A forward-looking impairment model requiring recognition of expected credit losses based on probability-weighted outcomes, the time value of money, and reasonable and supportable forward-looking information, rather than waiting for an incurred loss event.

11. What are the three stages of the IFRS 9 ECL impairment model?

    Stage 1: performing assets, recognise 12-month ECL. Stage 2: assets with a significant increase in credit risk since initial recognition, recognise lifetime ECL. Stage 3: credit-impaired assets, recognise lifetime ECL with interest on the net carrying amount.

12. Give the basic formula for expected credit loss (ECL).

    $$ECL = PD \times LGD \times EAD$$ where $PD$ is probability of default, $LGD$ is loss given default, and $EAD$ is exposure at default.

13. What distinguishes 12-month ECL from lifetime ECL?

    12-month ECL is the portion of lifetime ECL from default events possible within 12 months of the reporting date. Lifetime ECL covers all possible default events over the expected life of the instrument.

14. State the gross profit margin formula and what it measures.

    $$\text{Gross profit margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\%$$ It measures profitability after direct costs of sales, indicating pricing power and production efficiency.

15. State the operating (net) profit margin formula.

    $$\text{Operating margin} = \frac{\text{Operating profit (EBIT)}}{\text{Revenue}} \times 100\%$$ It measures profitability after operating expenses but before interest and tax.

16. What is Return on Capital Employed (ROCE) and its formula?

    A key efficiency/profitability ratio measuring return generated from total long-term capital: $$ROCE = \frac{\text{EBIT}}{\text{Capital employed}} \times 100\%$$ where capital employed = total assets − current liabilities (or equity + non-current liabilities).

17. State the Return on Equity (ROE) formula.

    $$ROE = \frac{\text{Profit attributable to shareholders}}{\text{Shareholders' equity}} \times 100\%$$ It measures the return generated on the owners' investment.

18. What is asset turnover and what does it indicate?

    $$\text{Asset turnover} = \frac{\text{Revenue}}{\text{Total assets (or capital employed)}}$$ It measures how efficiently assets are used to generate sales; higher turnover indicates greater efficiency.

19. State the current ratio formula and a commonly cited benchmark.

    $$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$ A ratio around $2:1$ is often cited as healthy, though the ideal varies by industry.

20. State the quick (acid-test) ratio formula and why it differs from the current ratio.

    $$\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$ It excludes inventory because inventory is the least liquid current asset, giving a stricter liquidity measure.

21. What is the gearing (leverage) ratio and one common formula?

    A measure of solvency showing the proportion of debt in the capital structure: $$\text{Gearing} = \frac{\text{Net debt}}{\text{Net debt} + \text{Equity}} \times 100\%$$ or alternatively debt/equity. Higher gearing means greater financial risk.

22. State the interest cover (interest coverage) ratio and what it assesses.

    $$\text{Interest cover} = \frac{\text{EBIT}}{\text{Interest expense}}$$ It assesses solvency/ability to service debt; higher cover means interest payments are more comfortably met. It is a common loan covenant.

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