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FinancialManagement(FM)

Syllabus and study guide

September 2018toJune 2019

Financial Management (FM)

© ACCA 2018-2019 All rights reserved.

Guide to structure of thesyllabus and study guide

Overall aim of the syllabus

This explains briefly the overall objectiveof the syllabus and indicates in thebroadest sense the capabilities to bedeveloped within the exam.

Relational diagram of linkingFinancial Management (FM) withother ACCA exams

This diagram shows direct and indirectlinks between this exam and otherexams preceding or following it. Itindicates where you are expected tohave underpinning knowledge andwhere it would be useful to reviewprevious learning before undertakingstudy.

Main capabilities

The aim of the syllabus is broken downinto several main capabilities whichdivide the syllabus and study guide intodiscrete sections.

Relational diagram of the maincapabilities

This diagram illustrates the flows andlinks between the main capabilities(sections) of the syllabus and should beused as an aid to planning teaching andlearning in a structured way.

Syllabus rationale

This is a narrative explaining how thesyllabus is structured and how the maincapabilities are linked. The rationalealso explains in further detail what theexamination intends to assess and why.

Detailed syllabus

This shows the breakdown of the maincapabilities (sections) of the syllabusinto subject areas. This is the blueprintfor the detailed study guide.

Approach to examining the syllabus

This section briefly explains thestructure of the examination and how itis assessed.

Study Guide

This is the main document that students,education and content providers shoulduse as the basis of their studies,instruction and materials. Examinationswill be based on the detail of the studyguide which comprehensively identifieswhat could be assessed in anyexamination session. The study guide isa precise reflection and breakdown ofthe syllabus. It is divided into sectionsbased on the main capabilities identifiedin the syllabus. These sections aredivided into subject areas which relate tothe sub-capabilities included in thedetailed syllabus. Subject areas arebroken down into sub-headings whichdescribe the detailed outcomes thatcould be assessed in examinations.These outcomes are described usingverbs indicating what exams mayrequire students to demonstrate, and thebroad intellectual level at which thesemay need to be demonstrated(*see intellectual levels below).



Intellectual Levels

The syllabus is designed toprogressively broaden and deepen theknowledge, skills and professionalvalues demonstrated by the student ontheir way through the qualification.

The specific capabilities within thedetailed syllabuses and study guides areassessed at one of three intellectual orcognitive levels:

Level 1: Knowledge andcomprehension

Level 2: Application and analysisLevel 3: Synthesis and evaluation

Very broadly, these intellectual levelsrelate to the three cognitive levels atwhich the Applied Knowledge,the Applied Skills and the StrategicProfessional examsare assessed.

Each subject area in the detailed studyguide included in this document is givena 1, 2, or 3 superscript, denotingintellectual level, marked at the end ofeach relevant line. This gives anindication of the intellectual depth atwhich an area could be assessed withinthe examination. However, while level 1broadly equates with AppliedKnowledge , level 2 equates to AppliedSkills and level 3 to StrategicProfessional, some lower level skills cancontinue to be assessed as the studentprogresses through each level. Thisreflects that at each stage of study therewill be a requirement to broaden, as wellas deepen capabilities. It is alsopossible that occasionally some higherlevel capabilities may be assessed atlower levels.

Learning Hours andEducation Recognition

The ACCA qualification does notprescribe or recommend any particularnumber of learning hours forexaminations because study andlearning patterns and styles vary greatlybetween people and organisations. Thisalso recognises the wide diversity ofpersonal, professional and educationalcircumstances in which ACCA studentsfind themselves.

As a member of the InternationalFederation of Accountants, ACCA seeksto enhance the education recognition ofits qualification on both national andinternational education frameworks, andwith educational authorities and partnersglobally. In doing so, ACCA aims toensure that its qualifications arerecognised and valued by governments,regulatory authorities and employersacross all sectors. To this end, ACCAqualifications are currently recognisedon the education frameworks in severalcountries. Please refer to your nationaleducation framework regulator forfurther information.

Each syllabus contains between 20 and35 main subject area headingsdepending on the nature of the subjectand how these areas have been brokendown.



Guide to ACCAExamination Structure

The structure of examinations varieswithin and between levels.

The Applied Knowledge examinationscontain 100% compulsory questions toencourage candidates to study acrossthe breadth of each syllabus. These areassessed by a two-hour computer basedexamination.

The Corporate and Business Law examis a two-hour computer-based objectivetest examination for English and Global,and available as a paper based versionfor all variants.

The other Applied Skills examinations(PM, TX-UK, FR, AA, and FM)contain a mix of objective and longertype questions with a duration of threehours for 100 marks; these questionsdirectly contribute towards the candidateresult. These exams are available incomputer-based and paper-basedformats. Prior to the start of each examthere will be time allocated for studentsto be informed of the exam instructions.

Computer-based exams

For the Applied Skills (PM, TX-UK, FR,AA and FM) computer-based examscandidates will be delivered an extra 10marks of objective test content (eitherfive single OT questions or five OTquestions based around a singlescenario), for which candidates aregiven an extra 20 minutes. Thesequestions are included to ensurefairness, reliability and security ofexams. These questions do not directlycontribute towards the candidate’sscore. Candidates will not be able todifferentiate between the questions thatcontribute to the result and those that donot. All questions have been subject to

ACCA’s regulatory approved qualityassurance process.

The total exam time is therefore 3 hoursand 20 minutes. Prior to the start of theexam candidates are given an extra 10minutes to read the exam instructions.

Paper-based exams

For paper-based exams 15 minutes areadded to the three hours to reflect themanual effort required as compared tocomputer-based exams. All paper-based and computer-based questionshave been subject to the same qualityassurance process. There will be timeawarded by the invigilator to read theexam instructions.

Strategic Business Leader is ACCA’scase study examination at the StrategicProfessional level and is examined as aclosed book exam of four hours,including reading, planning andreflection time which can be usedflexibly within the examination. There isno pre-seen information and all examrelated material, including caseinformation and exhibits are availablewithin the examination. StrategicBusiness Leader is an exam based onone main business scenario whichinvolves candidates completing severaltasks within which additional materialmay be introduced. All questions arecompulsory and each examination willcontain a total of 80 technical marks and20 Professional Skills marks. The detailof the structure of this exam is describedin the Strategic Business Leadersyllabus and study guide document.

The other Strategic Professional examsare all of three hours and 15 minutesduration. All contain twoSections and all questions arecompulsory. These exams all containfour professional marks. The detail of



the structure of each of these exams isdescribed in the individual syllabus andstudy guide documents.

ACCA encourages students to take timeto read questions carefully and to plananswers but once the exam time hasstarted, there are no additionalrestrictions as to when candidates maystart writing in their answer books.

Time should be taken to ensure that allthe information and exam requirementsare properly read and understood.

The pass mark for all ACCAQualification examinations is 50%.



Guide to ACCAExamination Assessment

ACCA reserves the right to examineanything contained within the studyguide at any examination session. Thisincludes knowledge, techniques,principles, theories, and concepts asspecified. For the financial accounting,audit and assurance, law and tax examsexcept where indicated otherwise,ACCA will publish examinabledocuments once a year to indicateexactly what regulations and legislationcould potentially be assessed withinidentified examination sessions.

For examinations, regulation issued orlegislation passed on or before 31August annually, will be examinablefrom 1 September of the following yearto 31 August of the year after that.Please refer to the examinabledocuments for the exam (whererelevant) for further information.

Regulation issued or legislation passedin accordance with the above dates maybe examinable even if the effective dateis in the future.

The term issued or passed relates towhen regulation or legislation has beenformally approved.

The term effective relates to whenregulation or legislation must be appliedto an entity transactions and businesspractices.

The study guide offers more detailedguidance on the depth and level atwhich the examinable documents will beexamined. The study guide shouldtherefore be read in conjunction with theexaminable documents list.



Syllabus

Financial Management (FM) Syllabus and study guide

This syllabus and study guide is designed to help with planning study and to providedetailed information on what could be assessed in any examination session.

Aim

To develop the knowledge and skillsexpected of a finance manager, inrelation to investment, financing, anddividend policy decisions.

Relational diagram

This diagram shows direct and indirectlinks between this exam and otherexams preceding or following it. Someexams are directly underpinned by otherexams such as Advanced FinancialManagement by Financial Management.These links are shown as solid linearrows. Other exams only have indirect relationships with each other such as linksexisting between the accounting and auditing exams. The links between these areshown as dotted line arrows. This diagram indicates where you are expected tohave underpinning knowledge and where it would be useful to review previouslearning before undertaking study.



Main capabilities

On successful completion of this exam, candidates should be able to:

A Discuss the role and purpose of the financial management function

B Assess and discuss the impact of the economic environment on financialmanagement

C Discuss and apply working capital management techniques

D Carry out effective investment appraisal

E Identify and evaluate alternative sources of business finance

F Discuss and apply principles of business and asset valuations

G Explain and apply risk management techniques in business.

This diagram illustrates the flows and links between the main capabilities (sections)of the syllabus and should be used as an aid to planning teaching and learning in astructured way.



Rationale

The syllabus for Financial Managementis designed to equip candidates with theskills that would be expected from afinance manager responsible for thefinance function of a business. Itprepares candidates for more advancedand specialist study in AdvancedFinancial Management.

The syllabus, therefore, starts byintroducing the role and purpose of thefinancial management function within abusiness. Before looking at the threekey financial management decisions ofinvesting, financing, and dividend policy,the syllabus explores the economicenvironment in which such decisions aremade.

The next section of the syllabus is theintroduction of investing decisions. Thisis done in two stages - investment in(and the management of) workingcapital and the appraisal of long-terminvestments.

The next area introduced is financingdecisions. This section of the syllabusstarts by examining the various sourcesof business finance, including dividendpolicy and how much finance can beraised from within the business. It alsolooks at the cost of capital and otherfactors that influence the choice of thetype of capital a business will raise. Theprinciples underlying the valuation ofbusiness and financial assets, includingthe impact of cost of capital on the valueof business, is covered next.

The syllabus finishes with anintroduction to, and examination of, riskand the main techniques employed inmanaging such risk.



Detailed syllabus

A Financial management function

1. The nature and purpose of financialmanagement

2. Financial objectives and relationshipwith corporate strategy

3. Stakeholders and impact oncorporate objectives

4. Financial and other objectives in not-for-profit organisations

B Financial managementenvironment

1. The economic environment forbusiness

2. The nature and role of financialmarkets and institutions

3. The nature and role of moneymarkets

C Working capital management

1. The nature, elements andimportance of working capital

2. Management of inventories,accounts receivable, accountspayable and cash

3. Determining working capital needsand funding strategies

D Investment appraisal

1. Investment appraisal techniques

2. Allowing for inflation and taxation ininvestment appraisal

3. Adjusting for risk and uncertainty ininvestment appraisal

4. Specific investment decisions (leaseor buy; asset replacement, capitalrationing)

E Business finance

1. Sources of, and raising, businessfinance

2. Estimating the cost of capital

3. Sources of finance and their relativecosts

4. Capital structure theories andpractical considerations

5. Finance for small- and medium-sized entities

F Business valuations

1. Nature and purpose of the valuationof business and financial assets

2. Models for the valuation of shares

3. The valuation of debt and otherfinancial assets

4. Efficient market hypothesis (EMH)and practical considerations in thevaluation of shares

G Risk management

1. The nature and types of risk andapproaches to risk management

2. Causes of exchange rate differencesand interest rate fluctuations

3. Hedging techniques for foreigncurrency risk

4. Hedging techniques for interest raterisk



Approach to examining the syllabus

The syllabus is assessed by a three-hour examination available in both computer-based and paper-based formats.*

*For paper-based exams there is an extra 15 minutes to reflect the manual effortrequired.

All questions are compulsory. The exam will contain both computational anddiscursive elements.

Some questions will adopt a scenario/case study approach.

Computer-based exams

*For computer-based exams an extra 20 minutes is provided to candidates to reflectthe additional content as per below. The total exam time is therefore 3 hours and 20minutes. Prior to the start of the exam candidates are given an extra 10 minutes toread the exam instructions.

Section A of the computer-based exam comprises 15 objective test questions of 2marks each plus additional content as per below.

Section B of the computer-based exam comprises three questions each containingfive objective test questions plus additional content as per below.

For the computer-based exam candidates will be delivered an extra 10 marks ofobjective test content (either five single OT questions OR five OT questions basedaround a single scenario), for which candidates are given an extra 20minutes. These questions are included to ensure fairness, reliability and security ofexams. These questions do not directly contribute towards the candidate’sscore. Candidates will not be able to differentiate between the questions thatcontribute to the result and those that do not.

Section C of the exam comprises two 20 mark constructed response questions.The two 20-mark questions will mainly come from the working capital management,investment appraisal and business finance areas of the syllabus. The section A andsection B questions can cover any areas of the syllabus.

Candidates are provided with a formulae sheet and tables of discount and annuityfactors

Paper-based exams

*For paper-based exams an extra 15 minutes is provided to candidates to reflect themanual effort required as compared to the time needed for the computer-basedexams. The total exam time is therefore three hours and 15 minutes. Prior to the



start of the exam candidates are given an extra 10 minutes to read the examinstructions.

Section A of the paper-based exam comprises 15 multiple choice questions of 2marks each

Section B of the exam comprises three scenarios consisting of 15 multiple choicequestions of 2 marks each

Section C of the exam comprises two 20 mark questions.

The two 20-mark questions will mainly come from the working capital management,investment appraisal and business finance areas of the syllabus. The section A andsection B questions can cover any areas of the syllabus.

Candidates are provided with a formulae sheet and tables of discount and annuityfactors



Study Guide

A. Financial managementfunction

1. The nature and purpose offinancial management

a) Explain the nature and purpose offinancial management.[1]

b) Explain the relationship betweenfinancial management and financialand management accounting.[1]

2. Financial objectives and therelationship with corporatestrategy

a) Discuss the relationship betweenfinancial objectives, corporateobjectives and corporate strategy.[2]

b) Identify and describe a variety offinancial objectives, including: [2]

i) shareholder wealth maximisation

ii) profit maximisation

iii) earnings per share growth.

3. Stakeholders and impact oncorporate objectives

a) Identify the range of stakeholdersand their objectives [2]

b) Discuss the possible conflictbetween stakeholder objectives [2]

c) Discuss the role of management inmeeting stakeholder objectives,including the application of agencytheory.[2]

d) Describe and apply ways ofmeasuring achievement of corporateobjectives including:[2]

i) ratio analysis, using appropriateratios such as return oncapital employed, return onequity, earnings per share anddividend per share

ii) changes in dividends and shareprices as part of totalshareholder return

e) Explain ways to encourage theachievement of stakeholderobjectives, including: [2]

i) managerial reward schemessuch as share options andperformance-related pay

ii) regulatory requirements such ascorporate governance codes ofbest practice and stockexchange listing regulations

4. Financial and other objectives innot-for-profit organisations

a) Discuss the impact of not-for-profitstatus on financial and otherobjectives.[2]

b) Discuss the nature and importanceof Value for Money as an objectivein not-for-profit organisations.[2]

c) Discuss ways of measuring theachievement of objectives in not-for-profit organisations.[2]

B. Financial managementenvironment

1. The economic environment forbusiness

a) Identify and explain the mainmacroeconomic policy targets.[1]

b) Define and discuss the role of fiscal,monetary, interest rate andexchange rate policies in achievingmacroeconomic policy targets.[1]



c) Explain how government economicpolicy interacts with planning anddecision-making in business.[2]

d) Explain the need for, and theinteraction with, planning anddecision-making in business of: [1]

i) competition policyii) government assistance for

businessiii) green policiesiv) corporate governance

regulation.[2]

2. The nature and role of financialmarkets and institutions

a) Identify the nature and role of moneyand capital markets, both nationallyand internationally.[2]

b) Explain the role of financialintermediaries.[1]

c) Explain the functions of a stockmarket and a corporate bondmarket.[2]

d) Explain the nature and features ofdifferent securities in relation to therisk/return trade-off.[2]

3. The nature and role of moneymarkets

a) Describe the role of the moneymarkets in:[1]

i) providing short-term liquidity tothe private sector and the publicsector

ii) providing short-term tradefinance

iii) allowing an organisation tomanage its exposure to foreigncurrency risk and interest raterisk.

b) Explain the role of banks and otherfinancial institutions in the operationof the money markets.[2]

c) Explain the characteristics and roleof the principal money marketinstruments:[2]

i) interest-bearing instrumentsii) discount instrumentsiii) derivative products.

C. Working capitalmanagement

1. The nature, elements andimportance of working capital

a) Describe the nature of workingcapital and identify its elements.[1]

b) Identify the objectives of workingcapital management in terms ofliquidity and profitability, and discussthe conflict between them.[2]

c) Discuss the central role of workingcapital management in financialmanagement.[2]

2. Management of inventories,accounts receivable, accountspayable and cash

a) Explain the cash operating cycle andthe role of accounts payable andaccounts receivable.[2]

b) Explain and apply relevantaccounting ratios, including: [2]

i) current ratio and quick ratioii) inventory turnover ratio, average

collection period and averagepayable period

iii) sales revenue/net workingcapital ratio.

c) Discuss, apply and evaluate the useof relevant techniques in managinginventory, including the Economic



Order Quantity model and Just-in-Time techniques.[2]

d) Discuss, apply and evaluate the useof relevant techniques in managingaccounts receivable, including:i) assessing creditworthiness [1]

ii) managing accounts receivable [1]

iii) collecting amounts owing [1]

iv) offering early settlementdiscounts [2]

v) using factoring and invoicediscounting [2]

vi) managing foreign accountsreceivable.[2]

e) Discuss and apply the use ofrelevant techniques in managingaccounts payable, including:i) using trade credit effectively [1]

ii) evaluating the benefits ofdiscounts for early settlementand bulk purchase [2]

iii) managing foreign accountspayable.[1]

f) Explain the various reasons forholding cash, and discuss and applythe use of relevant techniques inmanaging cash, including:[2]

i) preparing cash flow forecasts todetermine future cash flows andcash balances

ii) assessing the benefits ofcentralised treasurymanagement and cash control

iii) cash management models, suchas the Baumol model and theMiller-Orr model

iv) investing short-term.

3. Determining working capitalneeds and funding strategies

a) Calculate the level of working capitalinvestment in current assets anddiscuss the key factors determiningthis level, including:[2]

i) the length of the working capitalcycle and terms of trade

ii) an organisation’s policy on thelevel of investment in currentassets

iii) the industry in which theorganisation operates.

b) Describe and discuss the key factorsin determining working capitalfunding strategies, including:[2]

i) the distinction betweenpermanent and fluctuatingcurrent assets

ii) the relative cost and risk of short-term and long-term finance

iii) the matching principleiv) the relative costs and benefits of

aggressive, conservative andmatching funding policies

v) management attitudes to risk,previous funding decisions andorganisation size.[1]

D. Investment appraisal

1. Investment appraisal techniques

a) Identify and calculate relevant cashflows for investment projects.[2]

b) Calculate payback period anddiscuss the usefulness of paybackas an investment appraisalmethod.[2]

c) Calculate discounted payback anddiscuss its usefulness as aninvestment appraisal method.[2]

d) Calculate return on capitalemployed (accounting rate ofreturn) and discuss its usefulnessas an investment appraisalmethod.[2]

e) Calculate net present value anddiscuss its usefulness as aninvestment appraisal



method.[2]

f) Calculate internal rate of return anddiscuss its usefulness as aninvestment appraisalmethod.[2]

g) Discuss the superiority ofdiscounted cash flow (DCF)methods over non-DCF methods.[2]

h) Discuss the relative merits of NPVand IRR.[2]

2. Allowing for inflation andtaxation in DCF

a) Apply and discuss the real-termsand nominal-terms approaches toinvestment appraisal.[2]

b) Calculate the taxation effects ofrelevant cash flows, including thetax benefits of tax-allowabledepreciation and the tax liabilities oftaxable profit.[2]

c) Calculate and apply before- andafter-tax discount rates.[2]

3. Adjusting for risk and uncertaintyin investment appraisal

a) Describe and discuss the differencebetween risk and uncertainty inrelation to probabilities andincreasing project life.[2]

b) Apply sensitivity analysis toinvestment projects and discuss theusefulness of sensitivity analysis inassisting investment decisions.[2]

c) Apply probability analysis toinvestment projects and discuss theusefulness of probability analysis inassisting investment decisions.[2]

d) Apply and discuss other techniquesof adjusting for risk and uncertaintyin investment appraisal, including:i) simulation [1]

ii) adjusted payback [1]

iii) risk-adjusted discount rates [2]

4. Specific investment decisions(Lease or buy; assetreplacement; capital rationing)

a) Evaluate leasing and borrowing tobuy using the before-and after-taxcosts of debt.[2]

b) Evaluate asset replacementdecisions using equivalent annualcost and equivalent annualbenefit.[2]

c) Evaluate investment decisionsunder single-period capitalrationing, including:[2]

i) the calculation of profitabilityindexes for divisible investmentprojects

ii) the calculation of the NPV ofcombinations of non-divisibleinvestment projects

iii) a discussion of the reasons forcapital rationing.

E. Business finance

1. Sources of and raising businessfinance

a) Identify and discuss the range ofshort-term sources of financeavailable to businesses, including:[2]

i) overdraftii) short-term loaniii) trade creditiv) lease finance.

b) Identify and discuss the range oflong-term sources of financeavailable to businesses, including:[2]



i) equity financeii) debt financeiii) lease financeiv) venture capital.

c) Identify and discuss methods ofraising equity finance, including:[2]

i) rights issueii) placingiii) public offeriv) stock exchange listing.

d) Identify and discuss methods ofraising short and long termIslamic finance, including[1]

i) major difference between Islamicfinance and the other forms ofbusiness finance.

ii) The concept of riba (interest) andhow returns are made byIslamic financial securities.

iii) Islamic financial instrumentsavailableto businessesincluding:i) murabaha (trade credit)ii) ijara (lease finance)iii) mudaraba equity finance)iv) sukuk (debt finance)v) musharaka (venture

capital).(note: calculations are not required)

e) Identify and discuss internalsources of finance, including:[2]

i) retained earningsii) increasing working capital

management efficiencyiii) the relationship between

dividend policy and the financingdecision

iv) the theoretical approaches to,and the practical influences on,the dividend decision, includinglegal constraints, liquidity,shareholding expectations andalternatives to cash dividends.

2. Estimating the cost of capital

a) Estimate the cost of equityincluding:[2]

i) application of the dividendgrowth model and discussion ofits weaknesses.

ii) explanation and discussion ofsystematic and unsystematicrisk.

iii) relationship between portfoliotheory and the capital assetpricing model (CAPM)

iv) application of the CAPM, itsassumptions, advantages anddisadvantages.

b) Estimating the cost of debt:i) irredeemable debtii) redeemable debtiii) convertible debtiv) preference sharesv) bank debt.

c) Estimating the overall cost of capitalincluding:[2]

i) distinguishing between averageand marginal cost of capital

ii) calculating the weighted averagecost of capital (WACC) usingbook value and market valueweightings.

3. Sources of finance and theirrelative costs

a) Describe the relative risk-returnrelationship and the relative costs ofequity and debt.[2]

b) Describe the creditor hierarchy andits connection with the relative costsof sources of finance.[2]

c) Identify and discuss the problem ofhigh levels of gearing.[2]

d) Assess the impact of sources offinance on financial position,



financial risk and shareholderwealth using appropriate measures,including:[2]

i) ratio analysis using statement offinancial position gearing,operational and financial gearing,interest coverage ratio and otherrelevant ratios

ii) cash flow forecastingiii) leasing or borrowing to buy.

e) Impact of cost of capital oninvestments including:[2]

i) the relationship betweencompany value and cost ofcapital.

ii) the circumstances under whichWACC can be used ininvestment appraisal

iii) the advantages of the CAPMover WACC in determining aproject-specific cost of capital.

iv) the application of CAPM incalculating a project-specificdiscount rate.

4. Capital structure theories andpractical considerations

a) Describe the traditional view ofcapital structure and itsassumptions.[2]

b) Describe the views of Miller andModigliani on capital structure, bothwithout and with corporate taxation,and their assumptions.[2]

c) Identify a range of capital marketimperfections and describe theirimpact on the views of Miller andModigliani on capital structure.[2]

d) Explain the relevance of peckingorder theory to the selection ofsources of finance.[1]

5. Finance for small and mediumsized entities (SMEs)

a) Describe the financing needs ofsmall businesses.[2]

b) Describe the nature of the financingproblem for small businesses interms of the funding gap, thematurity gap and inadequatesecurity.[2]

c) Explain measures that may be takento ease the financing problems ofSMEs, including the responses ofgovernment departments andfinancial institutions.[1]

d) Identify and evaluate the financialimpact of sources of finance forSMEs, including sources alreadyreferred to in syllabus section E1and also [2]

i) Business angel financingii) Government assistanceiii) Supply chain financingiv) Crowdfunding / peer-to-peer

funding.

F Business valuations

1. Nature and purpose of thevaluation of business andfinancial assets

a) Identify and discuss reasons forvaluing businesses and financialassets.[2]

b) Identify information requirements forvaluation and discuss the limitationsof different types of information.[2]


a) Discuss and apply asset-basedvaluation models, including:[2]

i) net book value (statement offinancial



position) basisii) net realisable value basisiii) net replacement cost basis.

b) Discuss and apply income-basedvaluation models, including:[2]

i) price/earnings ratio methodii) earnings yield method.

c) Discuss and apply cash flow-basedvaluation models, including:[2]

i) dividend valuation model and thedividend growth model

ii) discounted cash flow basis.


a) Discuss and apply appropriatevaluation methods to:[2]

i) irredeemable debtii) redeemable debtiii) convertible debtiv) preference shares.

4. Efficient Market Hypothesis (EMH)and practical considerations inthe valuation of shares

a) Distinguish between and discussweak form efficiency, semi-strongform efficiency and strong formefficiency.[2]

b) Discuss practical considerations inthe valuation of shares andbusinesses, including:[2]

i) marketability and liquidity ofshares

ii) availability and sources ofinformation

iii) market imperfections and pricinganomalies

iv) market capitalisation.

c) Describe the significance of investorspeculation and the explanations ofinvestor decisions offered bybehavioural finance.[1]

G Risk Management

1. The nature and types of risk andapproaches to risk management

a) Describe and discuss different typesof foreign currency risk:[2]

i) translation riskii) transaction riskiii) economic risk.

b) Describe and discuss different typesof interest rate risk:[1]

i) gap exposureii) basis risk.

2. Causes of exchange ratedifferences and interest ratefluctuations

a) Describe the causes of exchangerate fluctuations, including:i) balance of payments [1]

ii) purchasing power parity theory [2]

iii) interest rate parity theory [2]

iv) four-way equivalence.[2]

b) Forecast exchange rates using:[2]

i) purchasing power parityii) interest rate parity.

c) Describe the causes of interest ratefluctuations, including: [2]

i) structure of interest rates andyield curves

ii) expectations theoryiii) liquidity preference theoryiv) market segmentation.

3. Hedging techniques for foreigncurrency risk

a) Discuss and apply traditional andbasic methods of foreign currencyrisk management, including:i) currency of invoice [1]

ii) netting and matching [2]

iii) leading and lagging [2]

iv) forward exchange contracts [2]



v) money market hedging [2]

vi) asset and liability management.[1]

b) Compare and evaluate traditionalmethods of foreign currency riskmanagement.[2]

c) Identify the main types of foreigncurrency derivatives used to hedgeforeign currency risk and explainhow they are used in hedging.[1]

(No numerical questions will be set onthis topic)

4. Hedging techniques for interestrate risk

a) Discuss and apply traditional andbasic methods of interest rate riskmanagement, including:i) matching and smoothing [1]

ii) asset and liability management [1]

iii) forward rate agreements.[2]

b) Identify the main types of interestrate derivatives used to hedgeinterest rate risk and explain howthey are used in hedging.[1]

(No numerical questions will be set onthis topic)



Summary of changes to Financial Management (FM)

ACCA periodically reviews its qualification syllabuses so that they fully meet the needs ofstakeholders such as employers, students, regulatory and advisory bodies and learning providers.

Amendments /additions

There have been no amendments to the Financial Management (FM) study guide from the 2017 –2018 study guide.

Table 1 – Amendments to Financial Management

Section and subject area Syllabus content

F2 andF3

Verbs added to learningoutcomes to clarify that studentsare expected to be able todiscuss and apply these methods


a) Discuss and apply asset-basedvaluation models, including:[2]

i) net book value (statement offinancialposition) basis

ii) net realisable value basisiii) net replacement cost basis.

b) Discuss and apply income-basedvaluation models, including:[2]

i) price/earnings ratio methodii) earnings yield method.

c) Discuss and apply cash flow-basedvaluation models, including:[2]

i) dividend valuation model and thedividend growth model

ii) discounted cash flow basis.


a) Discuss and apply appropriatevaluation methods to:[2]

i) irredeemable debtii) redeemable debtiii) convertible debtiv) preference shares.

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