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

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.

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.

What is the cash conversion cycle (CCC) and its formula?

The time between paying for inputs and collecting cash from sales: $$CCC = \text{DIO} + \text{DSO} - \text{DPO}$$ (days inventory outstanding + days sales outstanding − days payables outstanding). A shorter cycle frees working capital.

Why is cash flow-based analysis often preferred over profit-based analysis by lenders?

Cash flow is harder to manipulate than accruals-based profit, and debt is serviced from cash, not accounting profit. Cash flow reveals the true ability to repay interest and principal.

What is free cash flow (FCF) and a common formula?

Cash available after maintaining/expanding the asset base: $$FCF = \text{Operating cash flow} - \text{Capital expenditure}$$ Free cash flow to firm (FCFF) is often: $EBIT(1-t) + \text{depreciation} - \text{capex} - \Delta\text{working capital}$.

What is the cash flow to debt (debt service coverage) concept used in credit analysis?

It compares cash generated to debt obligations, e.g. the Debt Service Coverage Ratio: $$DSCR = \frac{\text{Cash available for debt service}}{\text{Principal} + \text{Interest due}}$$ A DSCR above 1 indicates sufficient cash to meet obligations.

What are the three sections of the statement of cash flows?

Operating activities (core trading cash flows), investing activities (purchase/sale of long-term assets), and financing activities (changes in debt and equity, dividends). Treasury cash flows largely appear in financing.

What does the '5 Cs of credit' framework assess in lender credit analysis?

Character (track record/integrity), Capacity (ability to repay from cash flow), Capital (the borrower's own equity stake), Collateral (security pledged), and Conditions (loan purpose and the economic environment).

From a lender's perspective, why is the quality and sustainability of earnings important?

Lenders rely on recurring, sustainable cash-generating earnings to service debt. One-off gains, aggressive revenue recognition or accruals reversals inflate profit without providing reliable cash for repayment.

What is structural subordination in credit analysis?

When debt is raised at a holding company while operating assets and cash flows sit in subsidiaries, the holdco creditors rank behind the subsidiaries' own creditors for those assets, making the holdco debt structurally subordinated and riskier.

What is the tax shield (debt tax advantage) in financing, and its value formula?

Interest on debt is generally tax-deductible, reducing taxable profit. The annual tax shield is $$\text{Interest} \times t$$ where $t$ is the marginal tax rate; the present value of the shield lowers the effective cost of debt.

How does the tax deductibility of interest affect the cost of debt in WACC?

It reduces the effective cost: the after-tax cost of debt is $$K_d(1-t)$$ where $K_d$ is the pre-tax cost of debt and $t$ is the corporate tax rate. This makes debt cheaper than equity, all else equal.

What are common restrictions on interest deductibility that treasury must consider?

Thin capitalisation rules, fixed-ratio interest limitation rules (e.g. UK Corporate Interest Restriction / OECD BEPS Action 4 capping net interest at typically 30% of tax-EBITDA), and anti-hybrid rules. These can disallow part of the interest deduction.

What is transfer pricing in the context of intercompany funding?

The setting of prices (here, interest rates and fees) on financing transactions between related group entities. For tax purposes these must follow the arm's length principle, as if the parties were independent.

What is the arm's length principle for intercompany loans?

Intercompany loan terms (interest rate, amount, tenor, fees) must reflect what independent parties would agree under comparable conditions, considering the borrower's standalone creditworthiness, so that profit is not artificially shifted between jurisdictions.

Which factors determine an arm's length interest rate on an intercompany loan?

The borrower's credit rating/standalone risk, currency, loan tenor, security/seniority, prevailing market rates, and any implicit group support (halo effect). Comparable Uncontrolled Price (CUP) data is the preferred method.

What is a withholding tax and why is it relevant to cross-border treasury funding?

A tax deducted at source by the payer on cross-border payments such as interest or dividends. It can increase the effective cost of intercompany or external funding; treaties and directives may reduce or eliminate it.

How can double tax treaties improve cross-border tax efficiency for treasury?

They allocate taxing rights between countries, reduce or eliminate withholding taxes on interest/dividends, and provide relief from double taxation (via exemption or credit methods), lowering the overall group tax cost of financing.

What is BEPS and why does it matter to treasury structuring?

Base Erosion and Profit Shifting — the OECD/G20 project countering arrangements that shift profits to low-tax jurisdictions. It constrains interest deductions, hybrid mismatches and treaty shopping, limiting aggressive cross-border funding structures.

What is tax risk in a treasury context and what are its main categories?

The risk of adverse tax outcomes. Categories include transactional risk (new deals), operational/compliance risk (incorrect filings), financial accounting risk (misstated tax provisions), and reputational risk (public perception of tax avoidance).

What is a tax control framework / good tax governance in treasury?

A documented system of policies, roles, controls and oversight ensuring tax is managed within the board-approved risk appetite. It promotes transparency, compliance, proper documentation (e.g. transfer pricing files) and alignment with the group's tax strategy.

What are common quantitative measures of treasury performance?

Actual vs benchmark borrowing/investment rates, FX hedging effectiveness and cost, cash forecasting accuracy, interest cost savings, return on cash, counterparty exposure within limits, and adherence to the treasury policy.

Why should treasury performance often be measured against benchmarks rather than absolute profit?

Treasury is typically a cost/risk-management centre, not a profit centre. Measuring against benchmarks (e.g. market rates, budgeted rates) isolates the value added by treasury decisions from uncontrollable market movements and discourages speculation.

What is the difference between a treasury cost centre and a profit centre?

A cost centre focuses on managing financial risk and minimising costs at minimal risk, measured against benchmarks. A profit centre is permitted to take positions to generate profit and is measured on returns, carrying higher risk and requiring stronger controls.

What should effective management and board treasury reporting include?

Cash and liquidity position, funding/maturity profile, covenant headroom, FX and interest rate exposures and hedging, counterparty/credit risk, compliance with policy and limits, and performance against benchmarks — concise, timely and decision-useful.

What is the purpose of a treasury policy in reporting and governance?

It sets the board-approved framework: objectives, risk appetite, authorised instruments, counterparty and exposure limits, delegated authorities, and reporting requirements. Reporting then demonstrates compliance and exceptions against this policy.

What is treasury budgeting and what does it typically cover?

The process of forecasting and setting financial targets for treasury, covering expected interest income/expense, banking and transaction fees, FX costs, headcount and systems costs, and funding needs, against which actual performance is monitored.

What is variance analysis in treasury cost control?

Comparing actual results to budget and investigating differences. Variances are split into price/rate effects (e.g. interest rates differ from forecast) and volume effects (e.g. debt balances differ), to identify controllable causes and corrective action.

What is benchmarking in treasury and what types exist?

Comparing treasury performance, costs and practices against a reference point. Types include internal (period-on-period), competitive (versus peers), and best-practice/process benchmarking (versus industry leaders) to drive continuous improvement.

What is continuous improvement in treasury and which approaches support it?

An ongoing effort to enhance processes, controls and efficiency. Supported by KPIs, benchmarking, automation/straight-through processing, treasury management system upgrades, and frameworks such as Plan-Do-Check-Act and Lean/Six Sigma to reduce errors and cost.